-----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, VGey3WgnP2zqICk+sUD54cVrscAGNMhMOgVd7/c3Xp+/opWq4OFjXF2RwOUbdxiX uJo2EQqOwdCrAxoITOjh3w== 0000891618-97-003847.txt : 19970924 0000891618-97-003847.hdr.sgml : 19970924 ACCESSION NUMBER: 0000891618-97-003847 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970923 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYCHEM CORP CENTRAL INDEX KEY: 0000082206 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 941369731 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08341 FILM NUMBER: 97684117 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-K405 1 FORM 10-K FOR FYE JUNE 30, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER 2-15299 RAYCHEM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-1369731 (STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION) 300 CONSTITUTION DRIVE, MENLO PARK, CA 94025-1164 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 361-3333 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED - --------------------------------------------- --------------------------------------------- Common Stock, $1 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the registrant) as of August 18, 1997, (based on the closing sale price as reported on the New York Stock Exchange on such date) was $4,050,898,709. Number of shares of Common Stock outstanding as of August 18, 1997: 42,992,280 DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV: Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1997 Part III: Portions of the Proxy Statement dated September 23, 1997 ================================================================================ 2 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Raychem Corporation, founded in 1957, is a broadly based materials science company serving both domestic and international markets. The terms "company" or "Raychem" mean Raychem Corporation and its consolidated subsidiaries. The company utilizes its expertise in materials science, product design and process engineering to develop, manufacture and market a variety of high-performance products for applications in electronics, telecommunications, transportation, infrastructure, and energy networks markets. For information regarding the company's restructuring actions, see the Note entitled "Restructuring and Divestitures" in the notes to consolidated financial statements, and the section entitled "Financial Review" of the company's 1997 Annual Report to Stockholders (the "1997 Annual Report"), which are incorporated herein by reference and are included in this filing as Exhibit 13. This annual report on Form 10-K contains a number of forward-looking statements, including without limitation those relating to litigation matters, availability of raw materials, backlog, and manufacturing capacity. Actual results may differ materially from the results anticipated in the statements made due to a variety of factors. For information regarding these risk factors, see the section entitled "Forward-Looking Statements and Risk Factors" contained within "Financial Review" of the 1997 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS During 1997, the company realigned its segment reporting to more closely reflect the company's management structure. The company's financial results are now reported as three business segments: electronics OEM components, telecommunications and energy networks, and commercial and industrial infrastructure. The electronics OEM components segment serves original equipment manufacturers (OEMs) in transportation, defense, and a wide range of commercial electronics industries. The telecommunications and energy networks segment serves telephone operating companies, cable television providers, electric utilities, and industrial customers. The commercial and industrial infrastructure segment serves customers who build and maintain the world's commercial and industrial infrastructure, including industrial plants and pipelines, gas and water utilities, and commercial construction. The company's business segments, along with the corporate group, is referred to as the "core business." During the third quarter of fiscal 1996, the company and LM Ericsson reorganized their Ericsson Raynet joint venture. Following the reorganization, effective January 1, 1996, the company's interest in the joint venture is accounted for using the cost basis of accounting and the company no longer shares in ongoing operating losses of the joint venture. For information regarding the amendment, see the Note entitled "Ericsson Raynet" of the 1997 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. For financial and other information concerning the company's industry segments, see the Note entitled "Business Segments" and the section entitled "Financial Review" of the 1997 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. (c) NARRATIVE DESCRIPTION OF BUSINESS For information regarding operating results, principal products produced, and industries served by the company's industry segments, see the Note entitled "Business Segments" and the section entitled "Financial Review" of the 1997 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. 1 3 Methods of Distribution The products of the company's industry segments are marketed primarily through Raychem's worldwide sales force as well as through outside distribution channels both within and outside the United States. Sources and Availability of Raw Materials Although the company has not experienced any significant delays in obtaining the materials needed to satisfy its requirements, in the past, supplies of certain raw materials the company uses have become limited. In addition, certain components purchased by the company are presently available from only one or a few sources of supply. In response, the company is identifying alternative materials and technologies for such raw materials and components, and developing alternative sources of supply. Patents and Proprietary Information The company applies for patents in the United States and other countries, as appropriate, to protect its significant patentable developments. As of June 30, 1997, the company had in force 831 U.S. patents and 3,469 foreign patents, and had pending 255 U.S. patent applications and 3,158 foreign patent applications. Patents held by the company in the aggregate are of material importance in the operation of the company's business. Certain patents are the subject of litigation. Management, however, does not believe that any single patent, or group of related patents, is essential to the company's business as a whole or to that of any of its industry segments. Additionally, the company owns and uses in its business a substantial body of proprietary information and numerous trademarks. In the normal course of business, the company from time to time makes and receives inquiries with regard to possible patent infringement. The company believes that it is unlikely that the outcome of these inquiries will have a material adverse effect on the company's financial position. The company is active and intends to continue to be active in the protection of its intellectual property, including its patents. Working Capital Information relative to working capital is included in the section entitled "Financial Review" of the 1997 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. Customers The company's industry segments sell to many customers. Management does not believe that the loss of any one customer would have a material adverse effect on the business of the company. During 1997, there was no single customer that accounted for 10% or more of the company's revenues. Backlog The company's business is characterized by short lead times and the absence of a significant backlog. The company expects that substantially all of the backlog at June 30, 1997, will be shipped in fiscal 1998. Unfilled orders may be canceled by customers prior to shipment of goods; however, such cancellations historically have not been material. Set forth below is the backlog at June 30, 1997 and 1996, for each of the company's industry segments.
JUNE 30 -------------- 1997 1996 ----- ----- (IN MILLIONS) Electronics OEM components.................................... $ 167 $ 150 Telecommunications and energy networks........................ 102 111 Commercial and industrial infrastructure...................... 22 15 ---- ---- Total............................................... $ 291 $ 276 ==== ====
2 4 Government Contracts No material portion of the company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. Competition The company's key competitive elements in its core business include: developing products that provide innovative solutions to customers' technical problems; providing high product quality and performance; continually introducing new products as well as improvements to existing products; and providing ongoing customer support. The products of the company's industry segments are sold in highly competitive markets. The company's total sales are often a small fraction of total sales within the markets in which it operates. Raychem's products compete with those of a large number of companies and divisions within companies that are both larger and smaller than Raychem. Research and Development For financial information on research and development expense, see the sections entitled "Consolidated Statement of Operations" and "Financial Review" of the 1997 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. Environmental Regulations For information regarding the effect of environmental regulations on the company, see the section entitled "Financial Review," the Note entitled "Summary of Significant Accounting Policies," and the Note entitled "Contingencies" of the 1997 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. Additional information regarding environmental administrative and judicial proceedings is set forth in Part I, Item 3 of this Form 10-K under the caption "Legal Proceedings." Employees As of June 30, 1997, the company employed 8,650 people. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The company's international operations are conducted primarily through wholly owned subsidiaries that are responsible for sales, distribution and, in some cases, research, development, and manufacturing activities. At June 30, 1997, these operations employed approximately 4,436 people, representing 51% of the company's total work force. For additional information regarding the company's international and domestic operations and export sales, see the Note entitled "Worldwide Operations" and the section entitled "Financial Review" of the 1997 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. ITEM 2. PROPERTIES The company's principal domestic facilities are located in Menlo Park and Redwood City, California, and in Fuquay-Varina, North Carolina. Additional facilities of significant size are located in Belgium, France, Germany, Ireland, Japan, Mexico, the People's Republic of China, and the United Kingdom. The company owns approximately 213 acres of land in the United States and 239 acres abroad for a total of 452 acres. The company owns or leases approximately 5,533,000 square feet of manufacturing, distribution, research and development, and sales and administrative facilities worldwide. Of this total, electronics OEM components uses approximately 37%; telecommunications and energy networks, 38%; commercial and 3 5 industrial infrastructure, 7%; and corporate, 18%. None of the property owned by the company is held subject to any major encumbrances. The company's facilities are suitable for their respective uses and, in general, are adequate to support the current and anticipated volume of business. In recent quarters there have been occasional capacity constraints in a few of the rapidly growing product lines. The company is reviewing various short and long term measures to address these constraints. Also, the company conducts continuing reviews of its facilities under improvement programs aimed at modernization and cost reduction. For information on capital expenditures, see the section entitled "Financial Review" of the 1997 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. For information regarding leased properties, see the Note entitled "Commitments" of the 1997 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 3: LEGAL PROCEEDINGS I. The company and its subsidiaries are parties to lawsuits, or may in the future become parties to lawsuits, involving various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, and intellectual property matters. The principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze protection products. However, the company sells its products into applications (including, for example, aerospace and automotive) where product liability issues could be material. Certain major cases, which do not necessarily meet the disclosure threshold of Item 103 of Regulation S-K, include the following: A. On March 7, 1995, a complaint entitled All Alaskan Seafoods, Inc., AAS-DMP Management Partnership, L.P. by Kodiak Marine Protein, Inc., General Partner, Holding Company Dalmoreproduct, Sandra Kegley, and Shin Nihon Global Co., Ltd. v. Raychem Corporation and Rubatex Corporation was filed in the United States District Court, Western District of Washington at Seattle, asserting liability against the company for alleged fire damage to a ship and its cargo and the death of one crew member. Subsequently, the plaintiffs filed an amended complaint adding Marine Electric, Inc. and Westinghouse Electric Supply Co. as additional defendants; Rubatex Corporation and Westinghouse Electric Supply Co. were dismissed from the case; and Minnesota Mining and Manufacturing Corporation was added as another additional defendant. In March 1997, the company settled the wrongful death portion of this claim. The ship owner plaintiff has claimed damages in excess of $150 million. On June 2, 1996, the District Court granted the company's motion to limit compensatory damages claimed by the ship owner plaintiff to the value of the cargo lost/destroyed (alleged to be between $1 million and $3 million) on account of the incident. On June 2, 1997, the U.S. Supreme Court reversed the Ninth Circuit's decision in Saratoga Fishing v. J.M. Marinac & Co., Marco Seattle, Inc., a case that the company had relied on in its motion to limit compensatory damages and that the District Court had relied on in its decision granting the company's motion. Due to the U.S. Supreme Court's decision, the District Court vacated the company's summary judgment on plaintiffs' damage claims arising from the loss of the vessel, and granted the company leave to refile the company's summary judgment motion to conform to the new standard established by the U.S. Supreme Court. The company anticipates filing a new motion, revised in light of the U.S. Supreme Court decision, during the first quarter of fiscal 1998. B. On September 26, 1996, the Ninth Circuit Court of Appeals affirmed the dismissal by the United States District, Northern District of California, of related lawsuits filed against the company on August 19, 1993, Creole Engineering Co. v. Raychem Corporation, et al., and on June 19, 1996, Unit Process Company, et al. v. Raychem Corporation, et al. Four similar state actions brought by the plaintiffs based on essentially the same facts alleged in the federal action, which had previously been consolidated in the Superior Court of San Mateo County, California, and the District Court of Jefferson County, Colorado, had been stayed pending resolution of the Ninth Circuit appeal. The plaintiffs have agreed to consolidate all of these state court actions in the Superior Court of San Mateo County, California. The company's motion to dismiss this lawsuit on the basis that the federal judgment is dispositive of the plaintiffs' state law antitrust claims is currently under consideration by the Court. 4 6 C. On December 19, 1994, the company filed a complaint entitled Raychem Corporation and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior Court of the State of California, County of San Mateo, which alleged, among other claims, misappropriation of trade secrets and breach of contract. Mr. Hogge has filed a crosscomplaint against the company alleging interference with the pursuit of a lawful occupation and unfair competition. On May 2, 1995, a complaint entitled Bourns, Inc. v. Raychem Corporation was filed in the United States District Court, Central District of California. Bourns' action alleges various violations of federal antitrust laws by the company. Neither the federal complaint filed by Bourns nor Mr. Hogge's counterclaim state a specific amount of their claim for monetary damages, although in other documents Bourns has stated a damage claim which would be material to the company. The company has successfully moved to bring two of its state court misappropriation claims as counterclaims in the antitrust action brought by Bourns. Substantial discovery has taken place in this case. The trial date for the federal court action is set for 1998. D. On May 10, 1995, a decision was rendered on an appeal of a judgment in the company's favor in a lawsuit originally filed on September 9, 1988, in the Supreme Court of Newfoundland, Canada, Trial Division, Bow Valley, et al. v. Saint John Shipbuilding and Raychem. The Court of Appeal found the company 20% responsible for property damage of approximately $3.7 million. On May 2, 1996, the Supreme Court of Canada granted plaintiffs' appeal petition to hear the case, and heard arguments on this case on June 19, 1997. The Supreme Court of Canada has not issued an opinion on this case. The plaintiffs had alleged claims for damages arising out of a fire on an offshore drilling platform and made allegations attributing the cause and spread of the fire to heat-tracing and cladding products manufactured by the company. On November 30, 1993, a Petition by joint venturers of the plaintiffs in the Bow Valley lawsuit making similar claims was filed in the Supreme Court of Newfoundland, Canada, Trial Division and was served on the company on March 25, 1994. This action is stayed. A New Brunswick lawsuit filed by Saint John Shipbuilding against Raychem Canada, Ltd. arising out of the same incident has also been stayed by prior agreement of the parties. E. On March 31, 1997, the company was named by the former owner/operator of a landfill in Pittsburg, California as a defendant in a private cost recovery action entitled Members of the GBF/Pittsburg Landfill(s) Respondents Group v. Contra Costa Waste Service, Inc., et al., in the U.S. District Court for the Northern District of California, Case No. C 96-03147. In its complaint, the former owner/operator alleges that the company generated wastes that were disposed of at the GBF/Pittsburg Landfill(s). The company was a de minimus contributor of waste at the Pittsburg landfill site and believes that any liability the company may have for clean-up costs at this site will not be material. II. Legal proceedings tend to be unpredictable and costly and may be affected by events outside the control of the company. Based on currently available information, however, the company's management believes that the resolution of pending claims, regulatory inquiries, and legal proceedings will not have a material adverse effect on the company's operating results or financial position. The company maintains various levels of insurance to apply to product liability and certain other 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. 5 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None in the fourth quarter. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of all executive officers of the company as of June 30, 1997, their positions with the company, and the date each was first elected as, or otherwise deemed to be, an executive officer of the registrant. This table is included as an unnumbered item in Part I of this Form 10-K.
DATE APPOINTED NAME AGE POSITION AN OFFICER - ------------------- ---- -------------------------------- -------------- Deidra D. Barsotti 41 Vice President and Controller 1991 L. Frans Berthels 52 Senior Vice President 1995 Peter L. Brooks 51 Vice President 1995 Timothy J. Burch 46 Vice President 1996 Karen O. Cottle 48 Vice President, General Counsel 1996 and Secretary Ralph H. Harnett 49 Senior Vice President 1993 Timothy S. Jenks 42 Vice President 1995 Richard A. Kashnow 55 Chairman of the Board, President 1995 and Chief Executive Officer John D. McGraw 50 Senior Vice President 1995 Arati Prabhakar 38 Senior Vice President and Chief 1997 Technology Officer Andrew F. Roake 45 Vice President 1995 Raymond J. Sims 46 Senior Vice President and Chief 1988 Financial Officer Hus Tigli 43 Vice President 1995 Eric Van Zele 49 Vice President 1994
There are no family relationships between any executive officers. All of the executive officers except Dr. Kashnow, Dr. Prabhakar and Mr. Burch have been employed by or associated with the company in their present or other managerial and executive capacities for more than five years. Dr. Kashnow joined Raychem in 1995 as Chairman of the Board, President, and Chief Executive Officer. Before joining Raychem, Dr. Kashnow was President of Schuller International Group, a subsidiary of Manville Corporation, from 1991 to 1995. Dr. Kashnow holds a Ph.D. in Physics from Tufts University. Dr. Prabhakar joined Raychem in 1997 as Senior Vice President and Chief Technology Officer. Before joining Raychem, Dr. Prabhakar served as Director of the U.S. National Institute of Standards and Technology from 1993 to 1997. Dr. Prabhakar holds a Ph.D. in Applied Physics from the California Institute of Technology. Mr. Burch joined Raychem in 1996 as Vice President of Human Resources. Before joining Raychem, Mr. Burch served in various human resource management positions for General Electric Company from 1973 through 1996. Mr. Burch holds a B.A. in Sociology from Lafayette College. 6 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The section entitled "Quarterly Financial Data (Unaudited)" of the 1997 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA In the calculation of the ratio of earnings to fixed charges, "earnings" consist of income before income taxes, adjusted to add back fixed charges (excluding capitalized leases). "Fixed charges" consist of interest on all indebtedness, including both amounts expensed and amounts capitalized. A table setting forth the computation of the Ratio of Earnings to Fixed Charges for each of the five years in the period ended June 30, 1997, is included in this filing as Exhibit 12. The company's ratio of earnings to fixed charges for the year ended June 30, 1997, was 11.21. For additional selected financial data, see the section entitled "Ten-Year Summary" of the 1997 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section entitled "Financial Review" of the 1997 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The section entitled "Market Risk Discussion" contained within "Financial Review" of the 1997 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, together with the Notes thereto and the report thereon of Price Waterhouse LLP, dated July 16, 1997, and the sections entitled "Subsequent Event-Common Stock Split (Unaudited)" and "Quarterly Financial Data (Unaudited)" of the 1997 Annual Report are incorporated herein by reference and are included in this filing as Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 7 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the company's directors is presented in the subsection entitled "Nominees" appearing on page 2 of the Proxy Statement dated September 23, 1997 (the "1997 Proxy Statement"), which page is incorporated herein by reference. Information regarding the company's executive officers is set forth in Part I of this Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information regarding the company's compensation of its executive officers is set forth on pages 5 to 10 of the 1997 Proxy Statement, which pages are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is set forth on pages 3 to 4 of the 1997 Proxy Statement, which pages are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding transactions with the company's directors and executive officers is set forth on page 12 of the 1997 Proxy Statement, which page is incorporated herein by reference. 8 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements
PAGE IN 1997 ANNUAL REPORT* -------------- Financial Review..................................... 8-16 Report of Independent Accountants.................... 17 Consolidated Balance Sheet at June 30, 1997 and 1996............................................... 18 Consolidated Statement of Operations for the three years ended June 30, 1997.......................... 19 Consolidated Statement of Cash Flows for the three years ended June 30, 1997.......................... 20 Consolidated Statement of Stockholders' Equity for the three years ended June 30, 1997................ 21 Notes to Consolidated Financial Statements........... 22-38 Subsequent Event-Common Stock Split (Unaudited)...... 38 Quarterly Financial Data (Unaudited)................. 39 Ten-Year Summary..................................... 40-41
- --------------- * Incorporated herein by reference and included in this filing as Exhibit 13. (2) Financial Statement Schedules
PAGE IN 1997 FORM 10-K -------------- Report of Independent Accountants on Financial Statement Schedule................................. 14 Schedule II Valuation and Qualifying Accounts........ 15
The financial statement schedule should be read in conjunction with the financial statements in the 1997 Annual Report to Stockholders. All other Financial Statement Schedules are omitted because they are not required or are not applicable, or the required information is included in the Consolidated Financial Statements or the Notes. (3) Index to Exhibits
EXHIBIT NO. DESCRIPTION ----------- ----------------------------------------------------------------------------- 2(a) Ericsson Raynet Formation Agreement dated as of October 10, 1994(9) 2(b) Amendment to Ericsson Raynet Formation Agreement dated as of November 16, 1994(9) 2(c) Reorganization Agreement dated as of March 27, 1996(14) 2(d) Amendment and Restated Joint Venture Agreement dated as of March 29, 1996(14) 3(a) Amended and Restated Certificate of Incorporation(5) 3(b) Bylaws(1) 3(c) Certificate of Merger(1) 4(a) Rights Agreement(4) 4(b) Credit Agreement dated as of September 12, 1996(16) 10(a) Executive Long Term Incentive Plan(2) 10(b) Bonus Deferral Plan(2) 10(c) Amended and Restated 1987 Directors Stock Option Plan(7) 10(d) Supplemental Executive Retirement Plan(3)
9 11
EXHIBIT NO. DESCRIPTION ----------- ----------------------------------------------------------------------------- 10(e) Amended and Restated 1990 Incentive Plan(7) 10(f) Consulting Agreement dated as of April 1, 1990, between the company and Paul M. Cook(5) 10(g) Description of Bonus Plan(6) 10(h) Consulting Agreement dated as of April 18, 1994, between Raynet Corporation and Robert M. Halperin(8) 10(i) 1995 Executive Deferred Compensation Plan(10) 10(j) Executive Termination Compensation Policy dated as of June 1, 1995(11) 10(k) Consulting/Employment Agreement dated as of June 7, 1995, between the company and Robert J. Saldich(11) 10(l) Employment letter between the company and Dr. Richard Kashnow dated August 11, 1995(12) 10(m) Supplemental agreement between the company and Dr. Richard Kashnow dated February 5, 1996(13) 10(n) Agreement and release between the company and Mr. Harry O. Postlewait dated November 16, 1995(13) 10(o) Participation Agreement between the company and U.S. Bancorp Leasing & Financial dated April 11, 1996(15) 10(p) Participation Agreement between the company and Metlife Capital Limited Partnership dated April 11, 1996(15) 10(q) Headlease Agreement A between the company and Fleet National Bank dated April 11, 1996(15) 10(r) Headlease Agreement B between the company and Fleet National Bank dated April 11, 1996(15) 10(s) Lease Agreement A between the company and Fleet National Bank dated April 11, 1996(15) 10(t) Lease Agreement B between the company and Fleet National Bank dated April 11, 1996(15) 10(u) Agreement and release between the company and Mr. Michael T. Everett dated July 22, 1996(15) 10(v) Consulting Agreement dated as of August 16, 1996, between the company and Isaac Stein and Waverley Associates, Inc.(16) 10(w) Consulting Agreement dated as of December 12, 1996, between the company and James F. Gibbons(17) 10(x) 1996 Directors Stock Option Plan 10(y) Supplemental agreement between the company and Dr. Richard Kashnow dated June 30, 1997 12 Computation of Ratio of Earnings to Fixed Charges 13 Portions of the 1997 Annual Report to Stockholders 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule 99(a) List of subsidiaries whose employees are participating in the Amended and Restated 1984 Employee Stock Purchase Plan for United States employees and employees of certain domestic and foreign subsidiaries. 99(b) List of subsidiaries whose employees are participating in the 1985 Supplemental Employee Stock Purchase Plan for employees of certain subsidiaries.
- --------------- (1) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987, (File No. 2-15299) and incorporated by reference. (2) Filed as an exhibit to the company's Proxy Statement dated September 12, 1988, mailed to stockholders in connection with the 1988 Annual Meeting of Stockholders and incorporated by reference. 10 12 (3) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1988, (File No. 2-15299) and incorporated by reference. (4) Filed as an exhibit to the Registration Statement on Form 8-A filed by the company on February 3, 1989, (File No. 2-15299) and incorporated by reference. (5) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, (File No. 2-15299) and incorporated by reference. (6) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, (File No. 2-15299) and incorporated by reference. (7) Filed as an exhibit to the company's Registration Statement on Form S-8 filed by the company on October 25, 1993, (Registration No. 33-50737) and incorporated by reference. (8) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, (File No. 2-15299) and incorporated by reference. (9) Filed as an exhibit to the company's Form 8-K dated November 16, 1994, (File No. 2-15299) and incorporated by reference. (10) Filed as an exhibit to the company's Registration Statement on Form S-8 filed by the company on April 5, 1995, (Registration No. 33-58437) and incorporated by reference. (11) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, (File No. 2-15299) and incorporated by reference. (12) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, (File No. 2-15299) and incorporated by reference. (13) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, (File No. 2-15299) and incorporated by reference. (14) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, (File No. 2-15299) and incorporated by reference. (15) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, (File No. 2-15299) and incorporated by reference. (16) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, (File No. 2-15299) and incorporated by reference. (17) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, (File No. 2-15299) and incorporated by reference. (b) Reports on Form 8-K None. 11 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYCHEM CORPORATION Registrant By /s/ RICHARD A. KASHNOW ------------------------------------ Richard A. Kashnow President and Chief Executive Officer Date: September 23, 1997 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Richard A. Kashnow and Raymond J. Sims, or either of them, as his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ---------------------------- ------------------- /s/ RICHARD A. KASHNOW President, September 23, 1997 - --------------------------------------------- Chairman of the Board and Richard A. Kashnow Chief Executive Officer (Principal Executive Officer) /s/ RAYMOND J. SIMS Senior Vice President and September 23, 1997 - --------------------------------------------- Chief Financial Officer Raymond J. Sims (Principal Financial Officer) /s/ DEIDRA D. BARSOTTI Vice President and September 23, 1997 - --------------------------------------------- Controller (Principal Deidra D. Barsotti Accounting Officer) /s/ RICHARD DULUDE Director September 23, 1997 - --------------------------------------------- Richard Dulude /s/ JAMES F. GIBBONS Director September 23, 1997 - --------------------------------------------- James F. Gibbons /s/ JOHN P. MCTAGUE Director September 23, 1997 - --------------------------------------------- John P. McTague
12 14
SIGNATURE TITLE DATE - --------------------------------------------- ---------------------------- ------------------- /s/ DEAN O. MORTON Director September 23, 1997 - --------------------------------------------- Dean O. Morton /s/ ISAAC STEIN Director September 23, 1997 - --------------------------------------------- Isaac Stein /s/ CHANG-LIN TIEN Director September 23, 1997 - --------------------------------------------- Chang-Lin Tien /s/ CYRIL J. YANSOUNI Director September 23, 1997 - --------------------------------------------- Cyril J. Yansouni
13 15 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Raychem Corporation: Our audits of the consolidated financial statements referred to in our report dated July 16, 1997 appearing on page 17 of the 1997 Annual Report to Stockholders of Raychem Corporation (which report and consolidated financial statements are incorporated herein by reference and included in this filing as Exhibit 13) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP San Jose, California July 16, 1997 14 16 SCHEDULE II RAYCHEM CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS* YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO FOREIGN BALANCE BEGINNING COSTS AND ACCOUNTS CURRENCY AT END DESCRIPTION OF YEAR EXPENSES, NET WRITTEN OFF TANSLATION OF YEAR -------------------- ---------- ------------- ----------- ----------- ------- 1997: Accounts receivable................ $ 10,033 $ 1,449 $ 2,244 $(441) $ 8,797 ------- ------ ------ ----- ------- 1996: Accounts receivable................ $ 10,348 $ 3,145 $ 3,204 $(256) $10,033 ------- ------ ------ ----- ------- 1995: Accounts receivable................ $ 11,599 $ 2,857 $ 4,509** $ 401 $10,348 ------- ------ ------ ----- -------
- --------------- * Allowances are deducted from assets to which they apply. ** Includes $1,044 effect of deconsolidation of certain Raychem subsidiaries. 15 17 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------------------------------------------------------------------------- 2(a) Ericsson Raynet Formation Agreement dated as of October 10, 1994(9) 2(b) Amendment to Ericsson Raynet Formation Agreement dated as of November 16, 1994(9) 2(c) Reorganization Agreement dated as of March 27, 1996(14) 2(d) Amendment and Restated Joint Venture Agreement dated as of March 29, 1996(14) 3(a) Amended and Restated Certificate of Incorporation(5) 3(b) Bylaws(1) 3(c) Certificate of Merger(1) 4(a) Rights Agreement(4) 4(b) Credit Agreement dated as of September 12, 1996(16) 10(a) Executive Long Term Incentive Plan(2) 10(b) Bonus Deferral Plan(2) 10(c) Amended and Restated 1987 Directors Stock Option Plan(7) 10(d) Supplemental Executive Retirement Plan(3) 10(e) Amended and Restated 1990 Incentive Plan(7) 10(f) Consulting Agreement dated as of April 1, 1990, between the company and Paul M. Cook(5) 10(g) Description of Bonus Plan(6) 10(h) Consulting Agreement dated as of April 18, 1994, between Raynet Corporation and Robert M. Halperin(8) 10(i) 1995 Executive Deferred Compensation Plan(10) 10(j) Executive Termination Compensation Policy dated as of June 1, 1995(11) 10(k) Consulting/Employment Agreement dated as of June 7, 1995, between the company and Robert J. Saldich(11) 10(l) Employment letter between the company and Dr. Richard Kashnow dated August 11, 1995(12) 10(m) Supplemental agreement between the company and Dr. Richard Kashnow dated February 5, 1996(13) 10(n) Agreement and release between the company and Mr. Harry O. Postlewait dated November 16, 1995(13) 10(o) Participation Agreement between the company and U.S. Bancorp Leasing & Financial dated April 11, 1996(15) 10(p) Participation Agreement between the company and Metlife Capital Limited Partnership dated April 11, 1996(15) 10(q) Headlease Agreement A between the company and Fleet National Bank dated April 11, 1996(15) 10(r) Headlease Agreement B between the company and Fleet National Bank dated April 11, 1996(15) 10(s) Lease Agreement A between the company and Fleet National Bank dated April 11, 1996(15) 10(t) Lease Agreement B between the company and Fleet National Bank dated April 11, 1996(15)
18
EXHIBIT NO. DESCRIPTION ----------- ----------------------------------------------------------------------------- 10(u) Agreement and release between the company and Mr. Michael T. Everett dated July 22, 1996(15) 10(v) Consulting Agreement dated as of August 16, 1996, between the company and Isaac Stein and Waverley Associates, Inc.(16) 10(w) Consulting Agreement dated as of December 12, 1996, between the company and James F. Gibbons(17) 10(x) 1996 Directors Stock Option Plan 10(y) Supplemental agreement between the company and Dr. Richard Kashnow dated June 30, 1997 12 Computation of Ratio of Earnings to Fixed Charges 13 Portions of the 1997 Annual Report to Stockholders 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule 99(a) List of subsidiaries whose employees are participating in the Amended and Restated 1984 Employee Stock Purchase Plan for United States employees and employees of certain domestic and foreign subsidiaries. 99(b) List of subsidiaries whose employees are participating in the 1985 Supplemental Employee Stock Purchase Plan for employees of certain subsidiaries.
- --------------- (1) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987, (File No. 2-15299) and incorporated by reference. (2) Filed as an exhibit to the company's Proxy Statement dated September 12, 1988, mailed to stockholders in connection with the 1988 Annual Meeting of Stockholders and incorporated by reference. (3) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1988, (File No. 2-15299) and incorporated by reference. (4) Filed as an exhibit to the Registration Statement on Form 8-A filed by the company on February 3, 1989, (File No. 2-15299) and incorporated by reference. (5) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, (File No. 2-15299) and incorporated by reference. (6) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, (File No. 2-15299) and incorporated by reference. (7) Filed as an exhibit to the company's Registration Statement on Form S-8 filed by the company on October 25, 1993, (Registration No. 33-50737) and incorporated by reference. (8) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, (File No. 2-15299) and incorporated by reference. (9) Filed as an exhibit to the company's Form 8-K dated November 16, 1994, (File No. 2-15299) and incorporated by reference. (10) Filed as an exhibit to the company's Registration Statement on Form S-8 filed by the company on April 5, 1995, (Registration No. 33-58437) and incorporated by reference. (11) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, (File No. 2-15299) and incorporated by reference. (12) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, (File No. 2-15299) and incorporated by reference. (13) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, (File No. 2-15299) and incorporated by reference. 19 (14) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, (File No. 2-15299) and incorporated by reference. (15) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, (File No. 2-15299) and incorporated by reference. (16) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, (File No. 2-15299) and incorporated by reference. (17) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, (File No. 2-15299) and incorporated by reference. EX-10.X 2 1996 DIRECTORS STOCK OPTION PLAN 1 Exhibit 10(x) RAYCHEM CORPORATION 1996 DIRECTORS STOCK OPTION PLAN 1. Purpose. The purpose of the 1996 Directors Stock Option Plan (the "Plan") of Raychem Corporation (the "Company") is to supplement the cash compensation of nonemployee members of the Company's Board of Directors (the "Board") and to provide a means for such directors to increase their holdings of Company stock. 2. Definitions. The following definitions shall apply to this Plan: (a) "Annual Grant Date" shall mean, for each calendar year, the date on which the stockholders of the Company have their regular annual meeting. (b) "Board" shall mean the Board of Directors of the Company. (c) "Committee" shall mean the Committee referred to in Section 3(a), or the Board in its capacity as administrator of the Plan in accordance with Section 3. (d) "Eligible Director" shall mean any person who is a member of the Board and who is not a full or part-time employee of the Company or of any subsidiary or affiliate of the Company. (e) "Grant Date" shall mean the Initial Grant Date or the Annual Grant Date, as appropriate. (f) "Initial Grant Date" shall mean (i) in the case of an Eligible Director who was not an employee of the Company immediately prior to the date such person became an Eligible Director, the date such Eligible Director is first elected as a member of the Board, or (ii) in the case of an Eligible Director who was an employee of the Company immediately prior to the date such person became an Eligible Director, the date such Eligible Director resigned as an employee of the Company. (g) "Option" shall mean an option to purchase Shares granted under this Plan. (h) "Option Agreement" shall mean the written agreement described in Section 6. 2 (i) "Shares" shall mean shares of common stock of the Company. 3. Administration. (a) General. This Plan shall be administered by the Board or, upon delegation by the Board, by a committee of the Board. (b) Powers of Committee. The Committee shall have full and complete authority to adopt such rules and regulations and to make all such other determinations not inconsistent with the Plan as may be necessary for the administration of the Plan. 4. Shares Subject to Plan. (a) Aggregate Number. Subject to adjustment in accordance with Section 6(h), an aggregate of 200,000 Shares is reserved for issuance under this Plan. Shares sold under this Plan may be unissued Shares or reacquired Shares, but all Shares issued under the Plan, regardless of source, shall be counted against the 200,000-Share limitation. (b) Rights as Stockholder. An Eligible Director shall have no rights as a stockholder with respect to Shares acquired by exercise of an option until the issuance (as evidenced by the appropriate entry on the books of the Company or a duly authorized transfer agent) of a stock certificate evidencing the Shares. Subject to Section 6(h), no adjustment shall be made for dividends or other events for which the record date is prior to the date the certificate is issued. 5. Nondiscretionary Grants. (a) Initial Grants. On the Initial Grant Date, each Eligible Director shall receive the grant of an Option to purchase 5,000 Shares. (b) Regular Annual Grants. On each Annual Grant Date, immediately after the annual election of directors, each Eligible Director then in office shall receive the grant of an Option to purchase 1,250 Shares. (c) One Time Grant. On November 1, 1996, each Eligible Director then in office shall receive the grant of an Option to purchase 2,000 Shares. (d) Adjustment. The number of Shares for which Options are granted in accordance with this Section 5 and the number of Shares subject to any option shall be subject to adjustment in accordance with Section 6(h). -2- 3 6. Terms of Option Agreements. Upon the grant of each Option, the Company and the Eligible Director shall enter into an Option Agreement which shall specify the Grant Date and the exercise price, and shall include or incorporate by reference the substance of all of the following provisions and such other provisions consistent with this Plan as the Board may determine: (a) Term. The term of the Option shall be ten years from its Grant Date, subject to earlier termination in accordance with Sections 6(f) or 6(i). (b) Exercise Schedule. The Option shall be exercisable on the following schedule: Beginning on the first anniversary of the Grant Date, for up to 25% of the Shares covered by the option; beginning on the second anniversary of the Grant Date, for up to 50% of such Shares; beginning on the third anniversary of the Grant Date, for up to 75% of such Shares; and beginning on the fourth anniversary of the Grant Date, and, thereafter until the earlier of expiration of the Option's term or termination of the Option in accordance with Section 6(g) or 6(i), for up to 100% of such Shares. Notwithstanding the foregoing, an Option held by an Eligible Director shall become immediately exercisable in full upon the death or disability of such Eligible Director, upon retirement of such Eligible Director from the Board, or upon an unsuccessful attempt by such Eligible Director to win reelection to the Board, or upon the adoption by the Company of a plan for a liquidation, dissolution, merger, consolidation or reorganization as described in clause (x), (y) or (z) of Section 6(i). (c) Purchase Price. The purchase price of the Shares subject to each Option shall be the closing sales price for Shares as reported by the Wall Street Journal, New York Stock Exchange Composite Transactions, on the Grant Date of such Option, or on the last preceding business day if such Grant Date is not a business day. (d) Payment of Purchase Price. The purchase price of Shares acquired pursuant to an Option shall be paid in full at the time the Option is exercised in cash or by delivery of any property other than cash (including Shares, or other securities of the Company), so long as such property constitutes valid consideration for the Shares purchased under applicable law and is surrendered in good form for transfer, or by some combination of cash and such property; provided, however, that Options may not be exercised by the delivery of Shares more frequently than at six-month intervals. Exercise of an Option may also be made pursuant to a "cashless exercise/sale" procedure pursuant to which funds to pay for exercise of the Option are delivered to the issuer by a broker upon receipt of stock certificates from the issuer, or pursuant to which participants obtain margin loans from brokers to fund the exercise of the Option. -3- 4 (e) Tax Withholding. A participant may make an election to have the Shares to be obtained upon exercise of the Option withheld by the Company on behalf of the participant, to pay the amount of tax that the Committee, in its discretion, determines to be required to be withheld by the Company. Any Shares tendered to or withheld by the Company shall be valued at Fair Market Value on such date. The value of the Shares tendered or withheld may not exceed the required federal, state, local and foreign withholding tax obligations as computed by the Company. The participant shall pay to the Company in cash or by delivery of any valid consideration other than cash (including Shares, or other securities of the Company), promptly when the amount of such obligations becomes determinable, all applicable federal, state, local and foreign withholding taxes that the Committee, in its discretion, determines to result upon exercise of an Option or from a transfer or other disposition of Shares upon exercise of an Option or otherwise related to the Option or Shares acquired in connection with an Option. (f) Transferability. Except as approved by the Board, no Option shall be transferable otherwise than by will or the laws of descent and distribution, and, an Option shall be exercisable during the Eligible Director's lifetime only by the Eligible Director. (g) Termination of Membership on the Board. Except in the case of death, disability, retirement from the Board, or an unsuccessful attempt to win reelection to the Board, if an Eligible Director's membership on the Board terminates for any reason, an Option held at the date of termination (but only to the extent exercisable at the time of such termination in accordance with Section 6(b)) may be exercised in whole or in part at any time within one year after the date of such termination (but in no event after the term of the Option expires) and shall thereafter terminate. If an Eligible Director's membership terminates because of death, disability, retirement from the Board, or an unsuccessful attempt to win reelection to the Board, an Option held at the date of such termination may be exercised for up to 100% of the Shares covered by such Options at any time within one year after the date of such termination (but in no event after the term of the Option expires) and shall thereafter terminate. (h) Capitalization Changes. If any change is made in the Shares subject to the Plan or subject to any Option granted under the Plan, through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise, the Committee shall make appropriate adjustments as to the maximum number of Shares subject to the Plan, the number of Shares covered by any Option Grant, the maximum number of Shares for which Options may be granted to any Eligible Director, and the number of Shares and price per Share covered by outstanding Options. -4- 5 (i) Change of Ownership. In the event of (x) a dissolution or liquidation of the Company, (y) a merger or consolidation in which the Company is not the surviving corporation, or (z) any other capital reorganization in which more than 50% of the shares of the Company entitled to vote are exchanged, the Company shall give to the Eligible Director, at the time of adoption of the plan for liquidation, dissolution, merger, consolidation or reorganization, either (i) a reasonable time thereafter within which to exercise the Option prior to the effectiveness of such liquidation, dissolution, merger, consolidation or reorganization, at the end of which time the Option shall terminate, or (ii) the right to exercise the Option as to an equivalent number of shares of stock of the corporation succeeding the Company or acquiring its business by reason of such liquidation, dissolution, merger, consolidation or reorganization. 7. Use of Proceeds. Proceeds from the sale of Shares pursuant to this Plan shall be used by the Company for general corporate purposes. 8. Legal Requirements. The Company shall not be obligated to offer or sell any Shares except in compliance with all applicable federal and state securities laws and any rules and regulations thereunder. Any certificates representing shares purchased upon exercise of an Option shall bear appropriate legends. 9. Amendment of Plan. The Board may amend the Plan at any time, provided, however, that any amendment that increases the number of shares as to which Options may be granted or reduces the exercise price below the price provided in the Plan shall be subject to the approval of the Company's stockholders. No other amendment shall require stockholder approval except to the extent (a) required by applicable laws, regulations or rules or (b) the Board otherwise concludes that stockholder approval is advisable. No amendment shall affect the rights of the holder of any Option, except with that holder's consent. 10. Termination or Suspension of Plan. The Board at any time may suspend or terminate this Plan. This Plan, unless sooner terminated, shall terminate on the tenth anniversary of its adoption by the Board. No Option may be granted under this Plan while this Plan is suspended or after it is terminated. Suspension or termination of this Plan shall not affect the rights of the holder of any Option, except with that holder's consent. -5- 6 11. Stockholder Approval. This Plan is subject to approval at the annual meeting of stockholders on November 1, 1996, by the affirmative vote of the holders of a majority of the voting power of the shares of the Company represented in person or by proxy and entitled to vote at the meeting. -6- EX-10.Y 3 SUPPLEMENTAL AGREEMENT 1 Exhibit 10(y) SUPPLEMENTAL AGREEMENT This Supplemental Agreement is made and entered into as of June 30, 1997 by and between Raychem Corporation and Richard Kashnow to amend paragraph 6 of the letter agreement dated as of August 11, 1995 between the parties (the "Letter Agreement"), and to clarify certain matters in accordance with paragraph 7(h) thereof. 1. Capitalized terms used without definition in this Agreement have the meanings assigned in the Letter Agreement. 2. Paragraph 6 of the Letter Agreement is amended as follows: Raychem has lent Dr. Kashnow $1,000,000 in accordance with said paragraph 6. The loan is interest free and is secured by a deed of trust second only to the primary lender on Dr. Kashnow's Bay Area home. The current principal amount of the Raychem loan is $800,000 (the "Remaining Principal"). Unless Dr. Kashnow's employment is earlier terminated, the Remaining Principal will be due and payable on October 1, 2000. Raychem will pay Dr. Kashnow a bonus equal to the Remaining Principal on September 19, 2000 if he is employed at such date; such bonus will be in addition to any bonus to which Dr. Kashnow may be entitled under Raychem's officer bonus program as in effect at the time. It is anticipated that Dr. Kashnow will use the bonus to repay the Remaining Principal. If Dr. Kashnow's employment with Raychem is terminated by Raychem in a Covered Termination of Employment (as defined in the Termination Policy) or if his employment is terminated because of his disability by reason of physical or mental incapacity to perform his duties, the Remaining Principal shall be due and payable 24 months from the date of his employment termination; the Remaining Principal will bear interest during such 24-month period at the prime rate as in effect from time to time at Raychem's principal bank, and shall be due and payable with the Remaining Principal payment. In addition, under these circumstances Raychem will pay Dr. Kashnow a bonus equal to $200,000 for each September 19, beginning September 19, 1997 and ending September 19, 2000, on which Dr. Kashnow was employed by Raychem and/or which occurs during the Full Salary Period. Such bonus shall be payable no later than two weeks prior to the date at which the Remaining Principal is due and payable. It is anticipated that Dr. Kashnow will use the bonus to repay the Remaining Principal. If Dr. Kashnow terminates his employment in a Voluntary Termination (as defined in the Termination Policy), the Remaining Principal shall be due and payable 12 months from the date of his employment termination; the Remaining Principal will bear interest during 2 such 12-month period at the prime rate, and shall be due and payable with the Remaining Principal payment. If Dr. Kashnow's employment is terminated by Raychem in a Termination for Cause (as defined in the Termination Policy), the Remaining Principal shall be due and payable 24 months from the date of his employment termination. The Remaining Principal shall bear interest during such 24-month period at the prime rate, and interest shall be due and payable with the Remaining Principal. In addition, under these circumstances Raychem will pay Dr. Kashnow a bonus equal to $200,000 for each September 19, beginning September 19, 1997 and ending September 19, 2000, on which Dr. Kashnow was employed by Raychem. Such bonus shall be payable no later than two weeks prior to the date at which the Remaining Principal payment is due and payable. Dr. Kashnow will use the bonus to repay the Remaining Principal. 3. Notwithstanding any contrary provision of the Raychem Corporation Supplemental Executive Retirement Plan, Dr. Kashnow's benefit thereunder shall be calculated as if his benefit under Raychem's defined benefit pension plan (the "Basic Plan") is calculated by taking into account six additional years of service for Raychem ending September 29, 1995 for which he was paid no less than $650,000 per year and provided, however, that the amount of the increased benefit otherwise attributable to such additional years of service shall be reduced by the actuarial equivalent (as determined under the Basic Plan) of $55,428 payable annually to Dr. Kashnow for the rest of his life beginning on the first day of the month following his 65th birthday (4/1/2007). 4. Except as expressly provided otherwise in this Agreement, all of the terms and conditions of the Letter Agreement remain in full force and effect. Raychem Corporation By /s/ Isaac Stein ------------------------------------------- Its Chairman, Organization Committee Board of Directors By /s/ Richard A. Kashnow ------------------------------------------- Richard Kashnow - 2 - EX-12 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in thousands) (Unaudited)
YEARS ENDED JUNE 30, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Income before income taxes, extraordinary item, and change in accounting principle $227,740 $146,130 $ (270) $33,745 $39,584 add: Interest expense 12,455 19,216 20,434 22,318 26,991 Portion of rents representative of interest factor(a) 9,804 11,550 11,550 12,870 12,870 Equity in net losses of Ericsson Raynet joint venture -- 29,818 85,946 -- -- less: Capitalized interest (393) (660) (724) (1,172) (362) ------------------------------------------------------------ Income as adjusted $249,606 $206,054 $116,936 $67,761 $79,083 ============================================================ Fixed Charges: Interest expense $ 12,455 $ 19,216 $ 20,434 $22,318 $26,991 Portion of rents representative of interest factor(a) 9,804 11,550 11,550 12,870 12,870 Debt prepayment penalty(b) -- -- 7,814 -- -- ------------------------------------------------------------ Fixed Charges $ 22,259 $ 30,766 $39,798 $35,188 $39,861 ============================================================ Ratio of earnings to fixed charges 11.21 6.70 2.94 1.93 1.98 ============================================================
(a) Calculated as approximately one-third of rental expense, representing a reasonable approximation of such rentals attributable to interest. (b) Represents effective interest charged on the early retirement of debt. Recorded as an extraordinary loss on the income statement. EX-13 5 PORTIONS OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 FINANCIAL REVIEW RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- OVERVIEW
YEARS ENDED JUNE 30 (in millions, except per share data) 1997 1996 1995 ------- ------- ------- Revenues $ 1,765 $ 1,672 $ 1,531 ------- ------- ------- Core business "ongoing" pretax income(a) $ 263 $ 230 $ 146 Unusual items: Provision for restructuring and divestitures (53) (44) (24) Insurance settlement -- 7 -- Gain on sale of assets 23 3 5 Severance, plant consolidation, and other charges (6) (18) (9) ------- ------- ------- Core business pretax income 227 178 118 (Benefit) provision for income taxes (26) (2) 21 ------- ------- ------- Core business net income 253 180 97 Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items -- (2) (32) Equity in net loss of Ericsson Raynet -- (30) (86) ------- ------- ------- Income (loss) before extraordinary item and change in accounting principle 253 148 (21) Extraordinary item -- -- (6) Change in accounting principle -- -- (2) ------- ------- ------- Net income (loss) $ 253 $ 148 $ (29) ======= ======= ======= Earnings (loss) per share $ 5.54 $ 3.22 $ (0.67) ======= ======= =======
- ----------------- (a) Core business refers to the company, excluding Ericsson Raynet; "ongoing" refers to the core business, excluding unusual items. The company reported record revenues, net income, and earnings per share in 1997. Revenues increased 6% to $1.8 billion in 1997 from $1.7 billion in 1996. Net income and earnings per share in 1997 were both up significantly from prior years. Key components of the company's profitability are summarized in the table above. Raychem's core business "ongoing" pretax income was $263 million in 1997, up 14% from 1996, which was up 58% from 1995. As a percentage of core business revenues, "ongoing" pretax income was 15% in 1997 compared to 14% in 1996 and 10% in 1995. [CHART OMITTED] The increase in "ongoing" pretax income between 1996 and 1997 was driven by higher sales volume and greater operating efficiency, partially offset by adverse currency effects. During the second half of 1997, the U.S. dollar and the British pound appreciated significantly against most European currencies compared to their 1996 levels. These currency movements reduced "ongoing" pretax income by approximately $12 million in the second half of 1997. If exchange rates remain at June 30, 1997 levels, the company expects further downward pressure on profitability during the first half of fiscal 1998. The increase in "ongoing" pretax income between 1995 and 1996 was driven by higher sales volume and benefits of earlier restructuring actions. Provisions for restructuring and divestitures are more fully described on page 11. The 1996 insurance settlement of $7 million related to insurance proceeds received in connection with a previously settled shareholder lawsuit. Gain on sale of assets included a gain of $23 million in 1997 from the sale of intellectual property; a gain of $3 million in 1996 from the sale of the company's shape memory metals components business; and a gain of $5 million in 1995 from the sale of the company's minority interest in Menlo Care, Inc. Income taxes in 1997 were a net benefit of $26 million compared to a net benefit of $2 million in 1996 and a provision of $21 million in 1995. The income tax benefits in 1997 and 1996 arose from the company's reassessment of the valuation allowance related to its deferred tax assets. These reassessments of the valuation allowance were based on changes in the company's outlook for future U.S. taxable income. As a result of these reassessments the company recorded discrete tax benefits of $55 million in 1997 and $25 million in 1996. The provision for income taxes in 1995 resulted primarily from profitable non-U.S. operations. 8 2 Profitability for 1996 and 1995 was adversely impacted by losses related to Ericsson Raynet, a joint venture formed in 1995 with LM Ericsson. In 1995, Raychem incurred losses of $28 million upon formation of the joint venture, $4 million of other Raynet items, and $86 million of equity in net losses of the joint venture. Effective January 1, 1996, the joint venture agreement was amended to provide that Raychem would no longer share in the ongoing operating losses of the joint venture. Therefore, Raychem now accounts for the venture on the cost basis. In 1996, Raychem's equity in net losses of Ericsson Raynet through December 31, 1995, was $30 million and the company incurred $2 million of charges in connection with the reorganization of the joint venture. The results for 1995 included an extraordinary loss of $6 million, or $0.15 per share, for the prepayment of debt. For details, see "Extraordinary Item--Loss Related to Early Retirement of Debt" in the notes to consolidated financial statements. In addition, the company adopted, effective July 1, 1994, Financial Accounting Standards Board (FASB) Statement No. 112, "Employers' Accounting for Postemployment Benefits." This statement changed the method of accounting for certain postemployment benefits from a cash basis to an accrual basis. The cumulative effect of this accounting change was a charge of $1 million, or $0.03 per share. The following discussion of the results of operations is based on the company's core business, including the impact of the previously mentioned unusual items. CORE BUSINESS OPERATIONS REVENUES AND REVENUE GROWTH Core business revenues were $1.8 billion in 1997, up 6% from 1996; revenues in 1996 were $1.7 billion, up 9% from $1.5 billion in 1995. If foreign exchange rates had remained constant in those years, the company's growth would have been 9% in 1997, and 8% in 1996. Reported revenues and growth were also impacted by price reductions in several product lines due to volume discounts and competitive pressures as shown in the table below.
YEARS ENDED JUNE 30 (percent change over prior year) 1997 1996 ------ ------ Components of reported revenue growth: Growth in unit volumes, net of product mix changes 13% 12% Effect of price reductions(a) (4%) (4%) --- --- Constant currency revenue growth 9% 8% Effect of exchange rate changes (3%) 1% --- --- Total reported revenue growth 6% 9% === ===
- ----------------- (a) A management estimate based on year-over-year changes in revenues at constant volume and mix. On a regional basis, revenues in 1997 compared to 1996 in constant currencies were up 22% in Asia, 8% in North America, and 5% in Europe, and declined slightly in Latin America. Within Europe, revenues in the Eastern European countries grew 47%, but were relatively flat in Western Europe. During the latter part of the fiscal year, some of the markets in Germany, the United Kingdom, and Italy began to strengthen, which helped to increase the Western European growth rate in the fourth quarter to 7% over the prior-year quarter. Revenues in 1996 compared to 1995 in constant currencies were up 23% in Latin America, 14% in Asia, and 12% in North America. European revenues were flat compared to 1995, reflecting 34% growth in Eastern Europe offset by a slight decline in Western Europe. GROSS PROFIT AND OPERATING EXPENSES
YEARS ENDED JUNE 30 (percent of revenues) 1997 1996 1995 ------ ------ ------ Gross profit 50% 51% 50% Selling, general, and administrative (SG&A) expense 28% 30% 32% Research and development (R&D) expense 7% 7% 8%
Gross profit as a percent of revenues was 50% in 1997, compared to 51% in 1996, and 50% in 1995. The decline in gross profit margin from 1996 to 1997 was primarily due to adverse currency movements and a mix shift to newer product lines that currently have lower margins than the corporate average. The increase in gross profit margin between 1995 and 1996 was due principally to the benefits of past restructuring actions. SG&A expense as a percent of revenues declined to 28% in 1997 from 30% in 1996 and 32% in 1995. SG&A expense included charges for severance and other costs of $6 million in 1997 and $12 million in 1996. The reduction in SG&A costs as a percent of revenues is largely the result of benefits from recent restructuring actions. R&D expense as a percent of revenues remained at 7% for 1997 and 1996, down from 8% in 1995. 9 3 BUSINESS SEGMENTS During 1997, the company realigned its segment reporting to more closely reflect the company's management structure. The company's financial results are now reported as three business segments, described below, and the corporate group. ELECTRONICS OEM COMPONENTS This business segment serves original equipment manufacturers (OEMs) in transportation, defense, and a wide range of commercial electronics industries. It was previously reported as the electronics business segment.
YEARS ENDED JUNE 30 (dollars in million) 1997 1996 1995 -------- -------- -------- Revenues $ 758 $ 671 $ 611 Constant currency growth 16%(a) 10% 13%
- ------------------- (a) Includes TouchPanel Systems, a Japanese joint venture in the Elo TouchSystems Division previously accounted for under the equity method. On a comparable constant currency basis, segment growth was 12% in 1997. 1997 revenues for the electronics OEM components business segment were $758 million, up 16% in constant currencies over 1996. During 1997, the company combined the leadership of the Electronics, PolySwitch, and Elo TouchSystems divisions to strengthen the company's presence in growth markets and to lower operating costs. Revenues in the segment increased significantly over the prior year with solid performance across all markets. Sales of PolySwitch circuit protection devices were up 27% compared to 1996, reflecting an increase of 42% in unit volumes, partially offset by an 8% price reduction and a mix shift toward lower-priced devices. Sales of electronic interconnect products were up 14% in commercial markets and up slightly in defense markets. Elo TouchSystems' revenues, including TouchPanel Systems in both years, on a constant currency basis increased 19% in 1997 with strong sales of touchscreen products. Gross profit as a percent of revenues remained essentially unchanged, as a decrease in prices was offset by improved manufacturing efficiencies. Revenues in 1996 were $671 million, up 10% in constant currencies from 1995. Electronic interconnect products sales were up sharply and accounted for the majority of the segment's growth. Sales of PolySwitch devices were up only 2% despite a 25% unit volume growth, as planned price reductions impacted revenue. Elo TouchSystems experienced strong growth in sales of its touchscreen products. Gross profit as a percent of revenues for the electronics OEM components business segment remained essentially unchanged. TELECOMMUNICATIONS AND ENERGY NETWORKS This business segment serves telephone operating companies, cable television providers, electric utilities, and industrial customers. It was previously reported as the Telecom Division, which was included in the telecommunications business segment, and as the Electrical Products Division, which was included in the industrial business segment.
YEARS ENDED JUNE 30 (dollars in millions) 1997 1996 1995 -------- -------- -------- Revenues $ 752 $ 757 $ 690 Constant currency growth 2% 8% (0%)
1997 revenues for the telecommunications and energy networks business segment were $752 million, up 2% on a constant currency basis. Strong sales growth of transmission electronics and fiber-optic products more than offset a 6% decline in sales of copper cable accessories. Sales of electrical products declined due to lower surge arrester sales, principally in Canada. Gross profit as a percent of revenues declined 1% compared to 1996, primarily reflecting a mix shift from copper closures to transmission electronics products that currently have lower margins. Segment revenues were $757 million in 1996, up 8% in constant currencies from 1995. Sales of transmission electronics products in North America were up strongly from 1995 levels. Telecom products also had strong growth in Latin America, notably in Peru where the company won several large projects, while revenues actually declined in Europe. Sales of electrical products grew in all geographic regions. Prices generally declined in the segment's markets in 1996. In addition, the shift away from traditional copper closures put downward pressure on profit margins. Despite the price and margin impacts, gross profit as a percent of revenues increased slightly, reflecting benefits of current and prior-year restructuring actions. COMMERCIAL AND INDUSTRIAL INFRASTRUCTURE This business segment serves customers who build and maintain the world's commercial and industrial infrastructure, including industrial plants and pipelines, gas and water utilities, and commercial construction. It was previously reported as the Chemelex Division, which was included in the industrial business segment.
YEARS ENDED JUNE 30 (dollars in millions) 1997 1996 1995 -------- -------- -------- Revenues $ 255 $ 244 $ 230 Constant currency growth 9% 4% (1%)
1997 revenues for the commercial and industrial infrastructure business segment were $255 million, up 9% in constant currencies over 1996. Revenue growth was led by strong sales of heat-tracing products while sales of corrosion prevention products remained essentially flat. The segment experienced strong revenue growth in Europe and North America. Gross profit as a percent of revenues improved slightly over the prior year, reflecting benefits of earlier restructuring actions. The segment's revenues for 1996 were $244 million, up 4% over 1995 on a constant currency basis, reflecting higher sales of heat-tracing products. Prices were lower in 1996, causing a decline in the segment's gross profits. 10 4 PROVISION FOR RESTRUCTURING AND DIVESTITURES Over the past several years, the company has strengthened its core businesses and improved its results of operations through a series of initiatives. These actions were designed to streamline the company's operations, reduce operating costs, and position the company for profitable growth. The company incurred a pretax restructuring charge of $53 million in the third quarter of 1997 to implement several streamlining programs and eliminate approximately 500 positions (the 1997 restructuring). The charge impacted the operating income of the business segments as follows: electronics OEM components--$12 million; telecommunications and energy networks--$29 million; commercial and industrial infrastructure--$3 million; and the corporate group--$9 million. A significant portion of the restructuring expenses was for consolidating the Telecom and Electrical Products divisions to achieve greater sales, manufacturing, and product development efficiencies in their cable accessories businesses. Additional one-time costs were incurred to consolidate the Electronics and PolySwitch divisions, to streamline the worldwide operations of the commercial and industrial infrastructure business segment and to restructure the R&D organization in the United Kingdom. Approximately $36 million of the 1997 restructuring charge is cash in nature and is expected to be funded through operating cash flow. The 1997 restructuring is expected to be substantially completed by the end of the next fiscal year. The core business incurred a pretax restructuring charge of $44 million in the third quarter of 1996 as the company moved to simplify operations and reduce costs (the 1996 restructuring). The charge impacted operating income of the company's business segments as follows: electronics OEM components--$14 million; telecommunications and energy networks--$13 million; commercial and industrial infrastructure--$15 million; and the corporate group--$2 million. The restructuring charge included $38 million for employee severance costs and approximately 600 positions have been eliminated. The bulk of these actions affected 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 1996 restructuring was substantially completed by June 30, 1997. The charge, excluding $4 million in net asset writedowns, was cash in nature and funded through operating cash flow. The core business incurred a pretax charge of $24 million in the first quarter of 1995 for the restructuring of the Telecom Division (the 1995 restructuring). The restructuring charge included $13 million for severance costs related to a net workforce reduction of 340 employees, resulting from the closure of the division's manufacturing operations in Germany and the restructuring of its North American activities. The remaining charge of $11 million related to plant consolidations and the shutdown of unprofitable product lines. The charge, excluding $8 million of asset writedowns, was cash in nature and was funded through operating cash flow. The 1995 restructuring was substantially completed by June 30, 1995. The company expects each of the 1997 and 1996 restructuring charges to be recovered over an 18 to 24 month period. Each restructuring action is expected to result in an annual run-rate savings in the range of $35-$40 million. The 1995 restructuring actions resulted in approximately $24 million of annualized savings; approximately $10 million of these savings were realized in 1995, and the full amount was realized in 1996. Substantially all of these restructuring savings are cash related. See "Restructuring and Divestitures" in the notes to consolidated financial statements for further details on these restructuring actions. OTHER (INCOME) EXPENSE, NET Other (income) expense, net, consists primarily of net foreign exchange gains and losses, bank charges, gains and losses on the disposition of fixed assets and investments, and certain other nonoperating items. Other (income) expense, net, was net income of $14 million in 1997 and $3 million in 1996, and net expense of $4 million in 1995. The change from 1996 to 1997 was due principally to the $23 million pretax gain arising from the sale of a portfolio of patents and intellectual property to Medtronic, Inc. The change from 1995 to 1996 was due principally to the $7 million insurance settlement, the $3 million gain from the sale of the shape memory metals components business, and lower foreign exchange losses. NEW ACCOUNTING STANDARDS In February 1997, the FASB issued Statement No. 128, "Earnings Per Share" (FAS 128). The statement simplifies the standards for computing earnings per share (EPS) previously found in Accounting Principles Board (APB) Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. FAS 128 must be adopted for the second quarter of fiscal 1998. See "Earnings Per Share" in the notes to consolidated financial statements for further description and pro forma disclosures in accordance with FAS 128. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" (FAS 130), and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). For a description of these statements see "Summary of Significant Accounting Policies" in the notes to consolidated financial statements. The disclosures prescribed by FAS 130 must be made beginning with the first quarter of fiscal 1999. The disclosures prescribed by FAS 131 will first be adopted in the company's 1999 annual report. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- The company's financial position continues to be strong. At June 30, 1997, the company had $87 million in cash and cash equivalents and $567 million in unused credit facilities, of which $439 million are committed facilities. On July 16, 1997, the company filed a shelf registration with the Securities and Exchange Commission to enable it to issue up to $400 million in debt securities; this registration statement became effective on July 24, 1997. In connection with the shelf registration, the company received preliminary investment-grade ratings from the two principal credit rating agencies. The combination of cash and cash equivalents, available lines of credit, public debt issuance capabilities, and future cash flows from operations is expected to be sufficient to satisfy substantially all of the company's needs for anticipated capital expenditures, working capital, dividends and share repurchases, and for potential acquisitions. 11 5 The following table presents certain measures of liquidity and capital resources: YEARS ENDED JUNE 30 (dollars in millions) 1997 1996 1995 ------ ------ ------ Debt net of cash $ 137 $ 79 $ 175 Increase (decrease) in debt net of cash $ 58 $ (96) $ (22) Debt net of cash as a percent of stockholders' equity 16% 9% 23% Days' sales outstanding (DSO) 59 60 61 Days' sales in inventory (DSI) 99 104 109
The $58 million increase in debt net of cash in 1997 was principally due to increased share repurchases. The $96 million decrease in debt net of cash in 1996 resulted primarily from improved profitability in the core business and reduced funding requirements for Raynet losses. DSI improved in 1997 and 1996, reflecting ongoing efforts by the company to reduce the number of locations holding inventory and the levels of inventory being held. The company will continue to focus on further reducing DSI during the next year. The table below summarizes the company's cash flows from operating, investing, and financing activities:
YEARS ENDED JUNE 30 (dollars in millions) 1997 1996 1995 ------ ------ ------ Cash provided by (used in): Operating activities $ 220 $ 224 $ 129 Investing activities (60) (101) (112) Financing activities (294) (11) 18 Effect of exchange rate changes on cash and cash equivalents (4) (6) 5 ------ ------ ------ (Decrease) increase in cash and cash equivalents $ (138) $ 106 $ 40 ====== ====== ======
OPERATING ACTIVITIES Cash flows from operating activities in 1997 remained approximately level with 1996. Improvements in pretax profitability were offset by additional tax payments and increased levels of inventory and accounts receivable. The increase in cash flows from operating activities in 1996 from 1995 resulted primarily from improved profitability. Net cash payments for restructuring and divestitures were $24 million in 1997, $17 million in 1996, and $16 million in 1995. At June 30, 1997, $32 million of accrued severance liability remained, which is expected to be substantially paid in cash in 1998. Also, in 1997 and 1996, the company reported deferred tax benefits based on the likelihood of future realization of U.S. income. The majority of these tax benefits are expected to generate cash flow in the range of $40-$50 million per year from 1999 through 2001. INVESTING ACTIVITIES The company spent $60 million on investment activities in 1997, compared to $101 million in 1996 and $112 million in 1995. In 1997, the company received $25 million from the sale of intellectual property and $8 million from liquidations of other investments, and invested $10 million in Superconducting Core Technologies, Inc. In 1996, the company made a cash advance of $23 million to Ericsson Raynet. Also, in 1996, the company received $7 million in cash proceeds from the sale of its shape memory metal components business. In 1995, the company received $4 million in cash proceeds from the sale of its minority interest in Menlo Care, Inc. Capital expenditures were $90 million in 1997, $79 million in 1996, and $94 million in 1995. Capital expenditures are expected to increase moderately in 1998 as manufacturing capacity is added to support anticipated revenue growth. In November 1994, the company completed the transactions related to the formation of the Ericsson Raynet joint venture. In forming the joint venture, Raychem sold certain specified assets of its Raynet subsidiary to LM Ericsson in exchange for $40 million in cash. In January 1995, the company entered into a revolving credit agreement with the joint venture. Through June 30, 1995, the company made net advances to Ericsson Raynet of $62 million, of which $4 million was under the above credit agreement and the remaining $58 million was capitalized as an investment in the joint venture. In 1996, the company made advances to Ericsson Raynet of $23 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 the last of three annual $10 million payments to BSE in November 1996. FINANCING ACTIVITIES Cash outflows from financing activities were $294 million in 1997, up significantly from 1996 due to additional share repurchases and payments on long-term debt. In 1997, the company repurchased 3.4 million shares of the company's Common Stock for $247 million. The company repurchased 1.5 million shares in 1996 for $95 million and 0.7 million shares in 1995 for $26 million. In July 1997, the board of directors authorized management to spend up to $300 million during any fiscal year, commencing with fiscal 1998, to repurchase the company's stock. The company's philosophy is to repurchase its common stock to offset the dilutive effects of the company's stock purchase and stock option plans. 12 6 In September 1996, the company entered into a new syndicated five-year revolving credit agreement for $400 million, replacing an existing $250 million revolving credit facility. Borrowings under the revolving credit agreement bear interest at variable spreads over LIBOR. The revolving credit agreement includes covenants that, among other things, specify a maximum leverage limit and a minimum fixed charge coverage ratio. In April 1996, the company entered into a lease financing secured by the majority of its manufacturing equipment in the United States. The company has the option of terminating the transaction for a fixed amount in 10 years. The arrangement is accounted for as 10-year partially amortizing secured debt with interest that varies periodically with LIBOR. Cash proceeds from the financing were approximately $113 million and were used in roughly equal proportions for reduction of long-term debt and for other corporate purposes. The arrangement lowers the company's long-term borrowing costs. Net interest expense was $5 million in 1997 compared to $10 million in 1996 and $13 million in 1995. The decrease in 1997 is principally due to lower average debt levels during the year and the prepayment of higher-cost long-term debt. The decrease in 1996 resulted from higher interest income on larger cash balances and lower interest costs due to the effect of declining interest rates on variable rate debt. Proceeds from the issuance of Common Stock to employees participating in the company's employee stock purchase plan and stock option plans amounted to $62 million in 1997 down from $81 million in 1996, when a larger number of stock options were exercised. The company's quarterly cash dividend has been paid consistently since the second quarter of 1978. In the third quarter of 1996, the quarterly dividend was increased 25% to $0.10 per share. During 1996, the company paid $16 million in dividends to its stockholders. Effective in the third quarter of 1997, the company increased the quarterly dividend an additional 40% to $0.14 per share. During 1997, the company paid $21 million in dividends to its stockholders. The company expects to continue to pay cash dividends in the foreseeable future. MARKET RISK DISCUSSION - -------------------------------------------------------------------------------- The company's cash flow and earnings are subject to fluctuations due to exchange rate variation. The company attempts to limit its exposure to changing foreign currency exchange rates through both operational and financial market actions. The company manufactures its products in a number of locations around the world, and hence has a cost base that is well diversified over a number of European and Asian currencies as well as the U.S. dollar. This diverse base of local currency costs serves to partially counterbalance the earnings effect of potential changes in value of the company's local currency denominated revenues. Also, the company denominates its third-party export sales in the currency of the selling Raychem entity, whenever possible. Short-term exposures to changing foreign currency exchange rates are managed by financial market transactions, principally through the purchase of forward foreign exchange contracts (with maturities of six months or less) to offset the earnings and cash flow impact of the non-functional currency denominated receivables and payables of the company's operating units. Forward foreign exchange contracts are denominated in the same currency as the receivable or payable being covered, and the term of the forward foreign exchange contract matches the term of the underlying receivable or payable. The company covers all known and measurable exposed receivables and payables denominated in currencies that have a liquid, cost-effective forward foreign exchange market. The receivables and payables being covered arise from trade and intercompany transactions of and among the company's operating units and intercompany loans between the company's operating units. The company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on the company's consolidated net income. The company does not have significant exposure to changing interest rates because of the low levels of both marketable securities and debt on the company's balance sheet. The company does not undertake any specific actions to cover its exposure to interest rate risk and the company is not a party to any interest rate risk management transactions. The company does not purchase or hold any derivative financial instruments for trading purposes. INTEREST RATE SENSITIVITY A 55 basis point move in interest rates (10% of the company's weighted average worldwide interest rate) affecting the company's floating financial instruments, including both debt obligations and investments, would have an immaterial effect on the company's pretax earnings over the next fiscal year. The 55 basis point move in interest rates would also have an immaterial effect on the fair value of the company's fixed rate financial instruments. 13 7 EXCHANGE RATE SENSITIVITY The table below provides information about the company's derivative financial instruments and related balance sheet items by currency and presents such information in U.S. dollar equivalents. The table summarizes information on instruments and related underlying transactions that are sensitive to foreign currency exchange rates, including foreign currency forward exchange contracts and non-functional currency-denominated receivables and payables. The net amount that is exposed to changes in foreign currency rates is then subjected to a 10% change in the value of the foreign currency versus the U.S. dollar. The company has no material sensitivity to changes in foreign currency exchange rates on its net exposed derivative financial instrument position. The following table presents the impact on the company's earnings of a 10% appreciation and 10% depreciation of the U.S. dollar against the indicated foreign currencies:
JUNE 30, 1997 U.S.DOLLAR NET UNDERLYING FOREIGN FOREIGN (dollars in millions) VALUE OF NET FOREIGN NET EXPOSED EXCHANGE GAIN EXCHANGE LOSS FOREIGN CURRENCY LONG/(SHORT) FROM 10% FROM 10% EXCHANGE TRANSACTION CURRENCY APPRECIATION OF DEPRECIATION OF CURRENCY CONTRACTS EXPOSURES POSITION U.S. DOLLAR U.S. DOLLAR - -------- ------------ -------------- ------------ --------------- --------------- Belgian Franc $ 1.6 $ 8.1 $ (6.6) $ 0.6 $ (0.7) German Mark 9.0 9.4 0.4 -- -- French Franc 13.3 11.1 (2.2) 0.2 (0.3) British Pound 1.7 1.2 (0.4) -- -- Italian Lira 9.4 10.2 0.8 -- -- Japanese Yen 35.4 34.6 (0.9) -- -- Others 41.6 39.0 (2.8) 0.3 (0.3) ------------ ------------ ------------ ------------ ------------ Total $ 112.0 $ 113.6 $ (11.7) $ 1.1 $ (1.3) ============ ============ ============ ============ ============
FORWARD-LOOKING STATEMENTS AND RISK FACTORS - -------------------------------------------------------------------------------- Statements made in this financial review or elsewhere in this annual report or other communications (including press releases and analyst calls) that are not statements of historical fact are forward-looking statements, including without limitation those relating to anticipated product and alliance plans, litigation matters, restructuring actions, expected tax position, currency effects, dividends, profitability, and other financial, economic, and growth-related commitments, targets, trends, or goals. 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 below. The company is in the process of implementing a number of complex restructuring actions. Implementation difficulties or market factors could reduce the estimated benefit of these actions, and timelines could be longer than anticipated. The company's revenues, operating results, and financial condition could also be adversely affected by its ability to effectively manage the transition to the new organizational structures and to outsource certain activities. 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. The company has historically achieved part of its revenue growth by developing or acquiring new and innovative materials science technologies and products. The company remains committed to continued internal research and development efforts, although the company will continue to pursue the acquisition of new or compatible technologies and businesses as an important part of the company's growth strategy. In addition, the company has entered, and in the future may enter, into arrangements with other companies to expand product offerings and to enhance its own manufacturing capabilities. The success of the company's research and development efforts, acquisitions of new technologies and products, or arrangements with third parties, is not predictable and there can be no assurance that the company will be successful in realizing its objectives, or that realization may not take longer than anticipated, or that there will not be unintended adverse consequences from these actions. Approximately two-thirds of the company's revenues result from sales outside the United States, a significant portion of which are denominated in foreign currencies. In addition, the company has several production facilities located outside the United States. The company's financial results therefore can be affected by changes in foreign currency rates. To mitigate these effects, the company hedges its transaction exposure (i.e. the effect on earnings and cash flows of changes in foreign exchange rates on receivables and payables denominated in foreign currencies). The company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on the company's consolidated net income. Accordingly, the company's reported revenue and net income have been and in the future may be affected by changes in foreign exchange rates. See "Market Risk Discussion" above and "Financial Instruments" in the notes to consolidated financial statements for a description of the company's policies towards hedging foreign currency exposures. In addition, because of the extensive nature of the company's foreign business activities, the company's financial results can also be adversely affected by changes in worldwide economic conditions, changes in trade policies or tariffs, changes in interest rates, and political unrest overseas. 14 8 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 income tax provision is determined by the company's level of profitability in each jurisdiction in which it is subject to tax. The geographic distribution and level of profitability are difficult to predict and may vary from forecasts, which could result in changes in estimates of the annual effective tax rate and could cause the estimated tax rate in interim quarters to vary from the actual annual effective tax rate for the year. In addition, the company has a deferred tax asset valuation allowance that is primarily attributable to U.S. federal and state deferred tax assets. Realization of the deferred tax asset is dependent on the likelihood of generating sufficient future U.S. taxable income to utilize deductions and credits prior to their expiration. Management believes sufficient uncertainty exists regarding the realization of a portion of these deferred tax assets that a valuation allowance is required. The amount of the valuation allowance is periodically reassessed and may be adjusted depending on the company's outlook for future U.S. taxable income. During the latter half of the fiscal year, the company develops its strategic and annual business plans. These plans provide additional insight into the outlook for the company's future U.S. taxable income and, when combined with other factors (such as recent operating results), may serve as the basis for a future adjustment of the valuation allowance. A portion of any future reduction in the valuation allowance would reduce the income tax provision. A significant portion of the remaining valuation allowance relates to deductions arising from the company's stock plans. Any reduction of the valuation allowance related to stock plan deductions would be reported as an increase to equity rather than as a reduction of the income tax provision. The company anticipates a fiscal 1998 tax rate in the mid-twenty percent range. The company does not expect to report a significant discrete tax benefit in fiscal 1998 or thereafter. Commencing in fiscal 1999, the company anticipates a normalized tax rate in the low- to mid-thirty percent range. 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 may occur again in the future. In addition, certain components purchased by the company are presently available from only one or a few sources of supply. In such cases, disruptions of established supply channels could result in increased prices, rationing, and shortages. In response, the company tries to identify alternative materials and technologies for such raw materials and components and to develop alternative sources of supply. In addition, from time to time, the company experiences other capacity constraints in its manufacturing operations. Disruptions in the supply of raw materials and components and other capacity constraints can adversely affect financial results. From time to time, the company and/or its subsidiaries become involved in lawsuits arising from various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, and intellectual property matters. Currently, the principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company sells its products in several markets where product liability issues could be material, for example, the aerospace and automotive markets. Litigation tends to be unpredictable and costly and may be affected by events outside the company's control. There is no assurance that litigation will not have an adverse effect on the company's future financial position or results of operations. The company has a substantial investment in intellectual properties--consisting of patents, trademarks, copyrights, and trade secrets--and relies significantly on the protection these intellectual property rights provide. Accordingly, the company protects these rights and from time to time becomes involved in issues of infringement or theft by third parties and related counterclaims, including unfair competition or infringement claims, by such third parties. The company has been involved, as both a defendant and a plaintiff, in intellectual property lawsuits and could become involved in others in the future. Litigation can be unpredictable and costly. It is possible that an unfavorable outcome in a suit related to intellectual property could be material to the company's future financial position or results of operations. 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 type and 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. There can be no assurance that insurance coverage will continue to be available to the company under all circumstances at commercially reasonable rates or, if available, will be adequate in amount. A portion of the company's research and development activities, its corporate headquarters, and other critical business operations are located near major earthquake faults. The ultimate impact of a major earthquake 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. 15 9 The company's products are sold in competition with other products or technologies. The company's competitors include some of the largest companies in the world, many of which have financial, technical and other resources substantially greater than the company's. Even when the company has strong intellectual property protection for its products, its products face competition from products based on other, sometimes lower-cost, technologies. In some of the company's markets, prices trend downward over time, requiring improvements in manufacturing and design to remain competitive. In addition, operating results are subject to fluctuations in demand and the seasonal activity of certain product lines. The company also sells certain of its products to customers in industries and countries that are experiencing periods of rapid change, which can adversely affect demand for the company's products. For example, the telecommunications industry is going through a period of rapid technological change, and customers in this industry may delay purchases of the company's products until technology issues are more clearly resolved. In addition, many electric power utilities in foreign countries are being privatized, which may affect the purchasing policies of these utility companies. A shortfall in revenue could result from a number of other factors, including but not necessarily limited to overall economic conditions, lower than expected demand, or supply constraints. In addition, changes in the geographic or product mix of sales may impact gross profits. 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 company's financial results for the following quarter. In addition, occurrences of any of the foregoing risks discussed in this section could have an impact on cash flow. From time to time the company identifies (for itself, its divisions, and its strategic alliances) expectations, commitments, targets, trends, and goals related to various product, financial, economic, and operating matters, such as the company's growth, profitability, cash flow, capital spending, income statement and balance sheet items, tax position, share repurchases and cash dividends, currency movements, geographic trends, product plans, and alliances. These expectations, commitments, targets, trends and goals are not projections and there can be no assurance as to their accuracy. Whether these expectations, commitments, targets, trends, or goals will be fulfilled is subject to a variety of factors, including those listed above and those appearing in all documents filed with the Securities and Exchange Commission. Because of the foregoing factors, in addition to other factors that 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, can have an adverse impact on the company's stock price. The company does not undertake an obligation to update its forward-looking statements or risk factors to reflect future events or circumstances. 16 10 REPORT OF MANAGEMENT Responsibility for the preparation, integrity, and objectivity of the financial information presented in this annual report rests with Raychem management. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments as required. Raychem maintains a system of internal accounting controls designed to be cost-effective while providing reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are properly recorded in the financial records. Internal control effectiveness is supported through written communication of policies and procedures, careful selection and training of personnel, quarterly financial reviews with divisions and major subsidiaries, and audits by a professional staff of internal auditors. The company's control environment is further enhanced through a formal Statement of Corporate Values, which sets standards of professionalism and integrity for employees worldwide. Price Waterhouse LLP, independent accountants, are retained to examine Raychem's financial statements. Their accompanying report is based on an examination conducted in accordance with generally accepted auditing standards, including a review of financial controls and tests of accounting procedures and records as deemed necessary. The Audit Committee of the Board of Directors is composed solely of nonemployee directors, and is responsible for recommending to the Board the independent accounting firm to be retained for the coming year, subject to stockholder approval. The Audit Committee meets periodically and privately with the independent accountants, with our internal auditors, and with Raychem management, to review accounting, auditing, financial control, and financial reporting matters. /s/ RICHARD A. KASHNOW /s/ RAYMOND J. SIMS Richard A. Kashnow Raymond J. Sims President and Chief Senior Vice President and Executive Officer Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS [LOGO] PRICE WATERHOUSE LLP To the Board of Directors and Stockholders of Raychem Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, cash flows, and stockholders' equity present fairly, in all material respects, the financial position of Raychem Corporation and its subsidiaries at June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in the notes to consolidated financial statements, the company changed its method of accounting for postemployment benefits in 1995. /s/ PRICE WATERHOUSE LLP San Jose, California July 16, 1997 17 11 CONSOLIDATED BALANCE SHEET
JUNE 30 (in thousands except share data) 1997 1996 ----------- ----------- Assets Current assets: Cash and cash equivalents $ 86,583 $ 224,115 Accounts receivable, net of allowances for doubtful accounts of $8,797 and $10,033, respectively 339,142 308,341 Inventories: Raw materials 82,008 86,562 Work in process 54,677 50,965 Finished goods 111,154 91,796 ----------- ----------- Total inventories 247,839 229,323 Prepaid taxes 42,998 50,312 Other current assets 89,541 95,765 ----------- ----------- Total current assets 806,103 907,856 ----------- ----------- Property, plant, and equipment: Land 35,706 39,314 Buildings 348,836 364,494 Machinery and equipment 689,528 657,951 Leasehold improvements 44,607 42,887 ----------- ----------- Total property, plant, and equipment 1,118,677 1,104,646 Less accumulated depreciation and amortization 645,229 613,207 ----------- ----------- Net property, plant, and equipment 473,448 491,439 ----------- ----------- Deferred tax assets 136,325 56,203 ----------- ----------- Other assets 93,384 95,118 ----------- ----------- Total assets $ 1,509,260 $ 1,550,616 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Notes payable to banks $ 54,063 $ 35,011 Accounts payable 88,625 69,230 Compensation and benefits 87,735 86,735 Other accrued liabilities 102,861 112,437 Income taxes 40,598 27,721 Current maturities of long-term debt 5,752 119,618 ----------- ----------- Total current liabilities 379,634 450,752 ----------- ----------- Long-term debt 164,004 148,352 ----------- ----------- Deferred tax liabilities 25,827 23,722 ----------- ----------- Other long-term liabilities 86,017 80,422 ----------- ----------- Minority interests 8,759 6,162 ----------- ----------- Commitments and contingencies (See notes) ----------- ----------- Stockholders' equity: Preferred Stock, $1.00 par value Authorized: 15,000,000; Issued: none -- -- Common Stock, $1.00 par value Authorized: 72,150,000 Issued: 45,044,515 and 44,890,881 shares, respectively 45,045 44,891 Additional contributed capital 413,208 408,866 Retained earnings 540,623 361,876 Currency translation (9,336) 25,137 Treasury Stock, at cost (2,082,423 and 115,753 shares, respectively) (143,106) (8,630) Other (1,415) 9,066 ----------- ----------- Total stockholders' equity 845,019 841,206 ----------- ----------- Total liabilities and stockholders' equity $ 1,509,260 $ 1,550,616 =========== ===========
See accompanying notes to consolidated financial statements. 18 12 CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED JUNE 30 (in thousands except share data) 1997 1996 1995 ------------ ------------ ------------ Revenues $ 1,764,706 $ 1,671,561 $ 1,530,573 Cost of goods sold 880,928 815,352 758,566 Research and development expense 119,336 122,137 118,762 Selling, general, and administrative expense 492,879 508,206 495,537 Provision for restructuring and divestitures 52,812 43,571 23,900 Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items -- 2,103 32,032 Equity in net losses of affiliated companies -- 27,280 84,758 Interest expense, net 4,651 9,631 13,046 Other (income) expense, net (13,640) (2,849) 4,242 ------------ ------------ ------------ Income (loss) before income taxes, extraordinary item, and change in accounting principle 227,740 146,130 (270) (Benefit) provision for income taxes (25,604) (1,782) 21,178 ------------ ------------ ------------ Income (loss) before extraordinary item and change in accounting principle 253,344 147,912 (21,448) 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) $ 253,344 $ 147,912 $ (29,243) ============ ============ ============ Earnings (loss) per share before extraordinary item and change in accounting principle $ 5.54 $ 3.22 $ (0.49) Earnings (loss) per share on extraordinary item -- -- (0.15) Earnings (loss) per share on change in accounting principle -- -- (0.03) ------------ ------------ ------------ Earnings (loss) per share $ 5.54 $ 3.22 $ (0.67) ============ ============ ============ Average number of shares outstanding 45,724,198 45,908,894 43,538,028 ============ ============ ============
See accompanying notes to consolidated financial statements. 19 13 CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED JUNE 30 (in thousands) 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss) $ 253,344 $ 147,912 $ (29,243) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provisions for restructuring and divestitures, net of payments 28,510 26,992 7,620 Loss on reorganization/formation of Ericsson Raynet joint venture -- 2,103 14,517 Equity in net losses of affiliated companies -- 27,280 84,758 Extraordinary loss related to early retirement of debt -- -- (1.043) Change in accounting principle -- -- 1,477 Gain on sale of intellectual property (23,601) -- -- Depreciation and amortization 78,557 79,427 74,798 Deferred income tax (benefit) provision (81,114) (45,353) 3,465 Other 2,574 108 (1,558) 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 (38,574) (18,375) (12,911) Inventories (24,686) (9,380) (1,107) Accounts payable and accrued liabilities 47,133 7,761 (1,166) Income taxes 9,840 12,537 (14,822) Other assets and liabilities (31,572) (6,564) 4,479 ---------- ---------- ---------- Net cash provided by operating activities 220,411 224,448 129,264 ---------- ---------- ---------- Cash flows from investing activities: Investment in property, plant, and equipment (90,485) (78,589) (94,041) Disposition of property, plant, and equipment 6,934 3,973 6,342 Proceeds from sale of specified Raynet assets -- -- 40,000 Advances to affiliated companies (2,500) (33,001) (63,427) Cost of acquisitions, net of cash acquired -- -- (3,930) Proceeds from sale of investments and other 33,538 7,443 4,387 Purchase of investments (7,652) (1,075) (1,000) ---------- ---------- ---------- Net cash used in investing activities (60,165) (101,249) (111,669) ---------- ---------- ---------- Cash flows from financing activities: Net proceeds from short-term debt 11,023 7,618 5,031 Proceeds from long-term debt 39,090 119,277 225,498 Payments of long-term debt (138,479) (108,802) (213,100) Common Stock repurchased (246,964) (95,184) (26,139) Common Stock issued under employee benefit plans 61,999 81,378 39,877 Proceeds from repayments of stockholder notes receivable 383 428 320 Cash dividends (21,379) (16,038) (13,950) ---------- ---------- ---------- Net cash (used in) provided by financing activities (294,327) (11,323) 17,537 ---------- ---------- ---------- Effect of exchange rate changes on cash and cash equivalents (3,451) (5,828) 4,845 ---------- ---------- ---------- (Decrease) increase in cash and cash equivalents (137,532) 106,048 39,977 Cash and cash equivalents at beginning of year 224,115 118,067 78,090 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 86,583 $ 224,115 $ 118,067 ========== ========== ========== Supplemental Disclosures Cash paid for: Interest (net of amounts capitalized) $ 16,116 $ 20,312 $ 25,710 Income taxes (net of refunds) 47,413 29,436 25,623
See accompanying notes to consolidated financial statements. 20 14 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ADDITIONAL COMMON CONTRIBUTED RETAINED CURRENCY (in thousands except share data) STOCK CAPITAL EARNINGS TRANSLATION ----------- ----------- ----------- ----------- Balance June 30, 1994 $ 43,006 $ 354,660 $ 319,905 $ 16,077 ----------- ----------- ----------- ----------- Net loss -- -- (29,243) -- Common Stock issued (891,490 shares) 891 25,467 -- -- Cash dividends ($0.32 per share of Common Stock) -- -- (13,950) -- Currency translation -- -- -- 45,869 Treasury Stock purchased (700,000 shares), net of issuances (473,360 shares) -- -- (4,055) -- Additions to notes receivable from sale of stock -- -- -- -- Repayments of notes receivable from sale of stock -- -- -- -- ----------- ----------- ----------- ----------- Balance June 30, 1995 43,897 380,127 272,657 61,946 ----------- ----------- ----------- ----------- Net income -- -- 147,912 -- Common Stock issued (993,606 shares) 994 28,739 -- -- Cash dividends ($0.36 per share of Common Stock) -- -- (16,038) -- Currency translation -- -- -- (36,809) Treasury Stock purchased (1,500,000 shares), net of issuances (1,610,887 shares) -- -- (42,655) -- Unrealized gain on available-for-sale marketable securities -- -- -- -- Additions to notes receivable from sale of stock -- -- -- -- Repayments of notes receivable from sale of stock -- -- -- -- ----------- ----------- ----------- ----------- Balance June 30, 1996 44,891 408,866 361,876 25,137 ----------- ----------- ----------- ----------- Net income -- -- 253,344 -- Common Stock issued (153,634 shares) 154 4,342 -- -- Cash dividends ($0.48 per share of Common Stock) -- -- (21,379) -- Currency translation -- -- -- (34,473) Treasury Stock purchased (3,400,000 shares), net of issuances (1,433,330 shares) -- -- (53,218) -- Unrealized loss on available-for-sale marketable securities -- -- -- -- Additions to notes receivable from sale of stock -- -- -- -- Repayments of notes receivable from sale of stock -- -- -- -- Deferred compensation--restricted stock -- -- -- -- ----------- ----------- ----------- ----------- Balance June 30, 1997 $ 45,045 $ 413,208 $ 540,623 $ (9,336) =========== =========== =========== ===========
TREASURY (in thousands except share data) STOCK OTHER TOTAL ----------- ----------- ----------- Balance June 30, 1994 $ -- $ (724) $ 732,924 ----------- ----------- ----------- Net loss -- -- (29,243) Common Stock issued (891,490 shares) -- -- 26,358 Cash dividends ($0.32 per share of Common Stock) -- -- (13,950) Currency translation -- -- 45,869 Treasury Stock purchased (700,000 shares), net of issuances (473,360 shares) (8,330) -- (12,385) Additions to notes receivable from sale of stock -- (235) (235) Repayments of notes receivable from sale of stock -- 320 320 ----------- ----------- ----------- Balance June 30, 1995 (8,330) (639) 749,658 ----------- ----------- ----------- Net income -- -- 147,912 Common Stock issued (993,606 shares) -- -- 29,733 Cash dividends ($0.36 per share of Common Stock) -- -- (16,038) Currency translation -- -- (36,809) Treasury Stock purchased (1,500,000 shares), net of issuances (1,610,887 shares) (300) -- (42,955) Unrealized gain on available-for-sale marketable securities -- 9,861 9,861 Additions to notes receivable from sale of stock -- (586) (586) Repayments of notes receivable from sale of stock -- 430 430 ----------- ----------- ----------- Balance June 30, 1996 (8,630) 9,066 841,206 ----------- ----------- ----------- Net income -- -- 253,344 Common Stock issued (153,634 shares) -- -- 4,496 Cash dividends ($0.48 per share of Common Stock) -- -- (21,379) Currency translation -- -- (34,473) Treasury Stock purchased (3,400,000 shares), net of issuances (1,433,330 shares) (134,476) -- (187,694) Unrealized loss on available-for-sale marketable securities -- (9,097) (9,097) Additions to notes receivable from sale of stock -- (1,011) (1,011) Repayments of notes receivable from sale of stock -- 384 384 Deferred compensation--restricted stock -- (757) (757) ----------- ----------- ----------- Balance June 30, 1997 $ (143,106) $ (1,415) $ 845,019 =========== =========== ===========
See accompanying notes to consolidated financial statements. 21 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of all wholly owned and majority owned subsidiaries and entities of which the company has control. Investments in entities of which the company owns between 20% and 50% and entities on which the company has the ability to exercise significant influence, but not control, are accounted for under the equity method. Other investments are accounted for using the cost method. All significant intercompany accounts and transactions are eliminated. FOREIGN CURRENCY TRANSLATION Assets and liabilities of operations outside the United States, except for operations in highly inflationary economies (principally in Latin America), are translated into U.S. dollars using the exchange rate in effect at each period end. Revenues and expenses are translated at the average exchange rate prevailing during the period. The effects of foreign currency translation adjustments arising from differences in exchange rates from period to period are deferred and included as a component of "Stockholders' equity." The effects of foreign currency transactions, and of remeasuring the financial position and results of operations into the functional currency, are included in "Other (income) expense, net." CASH EQUIVALENTS All highly liquid investments with a maturity of three months or less at the date of purchase are classified as cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally using the first-in, first-out method and includes materials, direct and indirect labor, and manufacturing overhead. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are carried at cost. Effective July 1, 1990, the company adopted the straight-line method of depreciation for property, plant, and equipment placed in service on or after that date. Fixed assets placed in service prior to 1991 continue to be depreciated using principally accelerated methods. Property, plant, and equipment are depreciated over the estimated useful lives of the individual assets and, for leasehold improvements, over the terms of their respective leases, if shorter. The estimated useful lives of major classes of depreciable assets are as follows: Buildings and improvements 10--45 years Machinery and equipment 3--10 years Leasehold improvements Term of lease or life of asset
INTANGIBLE ASSETS Goodwill represents the excess of purchase price over the fair value of identifiable net assets of businesses acquired and is amortized on a straight-line basis over periods not exceeding 20 years. Patents and trademarks are amortized on a straight-line basis over their legal or estimated useful lives, whichever is shorter. The company reviews the carrying value of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. REVENUE RECOGNITION Revenue from product sales is recognized when the earnings process is complete. This generally occurs at the time product is shipped. Other revenues are principally from licensing and royalty arrangements and are recognized according to the terms of the specific agreements. ENVIRONMENTAL COSTS Environmental liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. INCOME TAXES Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement bases and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets to that portion that is likely to be realized based on expectations of future profitability. EARNINGS (LOSS) PER SHARE Primary earnings per share is computed by dividing net income by the weighted average number of shares outstanding after giving effect to stock options considered to be dilutive common stock equivalents. Shares outstanding includes issued shares less shares held in treasury. In the case that fully diluted earnings per share is materially different from primary earnings per share, fully diluted earnings per share is calculated by dividing net income by the sum of the weighted average number of shares outstanding, dilutive stock options, and shares 22 16 issuable under the company's Employee Stock Purchase Plan at the end of the period. Common stock equivalents would be excluded from both the primary and fully diluted calculations if a net loss was incurred for the period as they would be anti-dilutive. TREASURY STOCK 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. In April 1996, the board of directors increased this authorization to repurchase up to 2.0 million shares of the company's stock during any one fiscal year, effective July 1, 1996. In April 1997, the board of directors further increased this authorization to repurchase up to 3.0 million shares of the company's stock during any rolling 12-month period commencing on or after April 16, 1997. In July 1997, the board of directors modified its share repurchase authorization. Commencing with fiscal 1998, management is permitted, at its discretion, to repurchase up to $300 million of the company's stock during any fiscal year. Shares repurchased under the board of directors' authorization are used to offset the dilution caused by the company's employee stock purchase and stock option plans. The company's repurchases of shares of Common Stock are recorded as "Treasury Stock" and result in a reduction of "Stockholders' equity." When treasury shares are reissued, the company uses a first-in, first-out method and the excess of repurchase cost over reissuance price is treated as a reduction of "Retained earnings." NEW ACCOUNTING STANDARDS In the first quarter of 1997, the company adopted the Financial Accounting Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121). 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 Accounting Principles Board (APB) Opinion No. 30. There was no impact on the company's results of operations or financial condition upon adoption of Statement No. 121. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This statement encourages, but does not require, companies to recognize compensation expense for grants of stock options, and other equity instruments based on a fair-value method of accounting. Companies that do not adopt the new expense recognition rules of FAS 123 will continue to apply the existing accounting rules contained in APB Opinion No. 25, "Accounting for Stock Issued to Employees," and are required to provide pro forma disclosures of the compensation expense determined under the fair-value provisions of FAS 123. APB Opinion No. 25 does not require recognition of compensation expense for most of the stock-based compensation arrangements by the company, namely employee stock purchase plans and option grants where the exercise price is equal to the market price at the date of grant. The company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25. See "Stock" in the notes to consolidated financial statements for pro forma disclosures in accordance with FAS 123. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for reporting and display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income as defined includes all changes in equity (net assets) during a period from nonowner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities. The disclosures prescribed by FAS 130 must be made beginning with the first quarter of fiscal 1999. In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The company is in the process of reassessing current business segment reporting to determine if changes in reporting will be required in adopting this new standard. The disclosures prescribed by FAS 131 will first be adopted in the company's 1999 annual report. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to financial statements. Changes in such estimates may affect amounts reported in future periods. FINANCIAL PRESENTATION Certain prior-year amounts have been reclassified to conform with the 1997 financial statement presentation. 23 17 FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- Currently, the company is not a party to any interest rate risk management transactions. The company does not hold any derivative financial instruments for trading purposes. The company has written policies that place all foreign currency forward transactions under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The company operates in more than 85 countries worldwide, with approximately two-thirds of its revenues occurring outside the United States. The company attempts to limit its exposure to changing foreign currency exchange rates through both operational and financial market actions. The company manufactures its products in a number of locations around the world, and hence has a cost base that is well diversified over a number of European and Asian currencies as well as the U.S. dollar. This diverse base of local currency costs serves to partially counterbalance the income effect of potential changes in the value of the company's local currency denominated revenues. Also, the company denominates its third-party export sales in the currency of the selling Raychem entity, whenever possible. FORWARD FOREIGN EXCHANGE CONTRACTS Short-term exposures to changing foreign currency exchange rates are managed by financial market transactions, principally through the purchase of forward foreign exchange contracts (with maturities of six months or less) to offset the earnings and cash flow impact of the non-functional currency denominated receivables and payables of the company's operating units. Forward foreign exchange contracts are denominated in the same currency as the receivable or payable being covered, and the term of the forward foreign exchange contract matches the term of the underlying receivable or payable. Forward foreign exchange contracts are revalued monthly at balance sheet foreign exchange translation rates and the resultant realized and unrealized gains and losses are included in "Other (income) expense, net." The company is subject to credit risk exposure from nonperformance by the counterparties to these transactions, typically large international financial institutions. Net gains and losses from forward foreign exchange contracts used to cover receivables and payables totaled a $3 million loss, a $5 million gain, and a $4 million gain for the years ended June 30, 1997, 1996, and 1995, respectively. The company incurred total net foreign exchange losses of $2 million, $1 million, and $4 million for 1997, 1996, and 1995, respectively. The net amount of foreign exchange exposure covered was $112 million and $163 million at June 30, 1997 and 1996, respectively. The company covers exposures that arise from trade and intercompany receivables and payables, and intercompany loans in non-functional currencies. These exposures are primarily in Japanese yen (32% of net contract value), French francs (12%), Italian lire (8%), and German marks (8%). The company does not cover 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 June 30, 1997, included $6 million in net intercompany payables in non-functional currencies and $5 million of net monetary assets in foreign countries with the U.S. dollar as functional currency. The company has periodically entered into forward foreign exchange contracts to hedge a portion of its equity in foreign subsidiaries. The gains and losses on these contracts were included in "Currency translation" as a component of "Stockholders' equity." There were no such hedges of foreign equity outstanding at June 30, 1997 and 1996. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the company to significant concentrations of credit risk consist primarily of cash and trade accounts receivable. The company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. These financial institutions are located throughout the world, and the company's policy is designed to limit exposure to any one institution. The company's periodic evaluations of the relative credit standing of these financial institutions are considered in the company's investment strategy. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities comprising the company's customer base and their dispersion across many different industries and countries. Credit risk to certain countries is further limited through the use of irrevocable letters of credit and bank guarantees. As of June 30, 1997 and 1996, the company had no significant concentrations of credit risk. FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the company's financial instruments, including cash and cash equivalents, accounts receivable, notes payable to banks, accounts payable, and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Consequently, such instruments are not included in the following table, which provides information regarding the estimated fair values of other financial instruments. The fair value of long-term debt is estimated using discounted cash flow analysis, based on the incremental borrowing rates currently available to the company for loans with similar terms and maturities. The estimated fair value of forward foreign exchange contracts is primarily based on quoted market prices of comparable contracts. 24 18
1997 1996 JUNE 30 ---------------------------- ---------------------------- ASSET (LIABILITY) CARRYING FAIR CARRYING FAIR (in thousands) AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- Long-term debt, including current maturities, and accrued interest of $2,998 and $1,056 in 1997 and 1996, respectively $ (172,754) $ (173,477) $ (269,026) $ (269,212) Forward foreign exchange contracts included in: Other current assets 694 694 594 594 Other accrued liabilities (463) (463) (494) (494)
MARKETABLE SECURITIES - -------------------------------------------------------------------------------- Marketable securities are classified as available for sale and carried at fair value as determined by quoted market prices. The aggregate fair value of the marketable securities held at June 30, 1997 and 1996, was $6 million and $12 million, respectively. Gross unrealized holding gains were $1 million and $10 million as of June 30, 1997 and 1996, respectively, and are included as a separate component of "Stockholders' equity." RETIREMENT BENEFITS - -------------------------------------------------------------------------------- The company has noncontributory defined benefit pension plans that cover substantially all U.S. employees and a number of its employees in foreign countries. The benefits for these plans are based primarily on years of service and employee compensation. The company funds these pension plans when legally or contractually required, or earlier. Plan assets for the U.S. and non-U.S. defined benefit pension plans generally consist of publicly traded securities, bonds, and cash investments. Amortization of prior service cost is calculated on a straight-line basis over the expected future years of service of the plans' active participants. On July 1, 1997, the company amended its U.S. defined benefit pension plan by converting it from a career-average-pay plan to a final-pay plan. The amendment generated an unrecognized prior service cost of $7.3 million. On July 1, 1997, the company amended its 401(k) pension plan. The company's contribution to this plan is based upon the amount of the employees' contribution to the plan. The estimated cost of this plan in fiscal 1998 is approximately $3 million. On January 1, 1996, the U.S. defined benefit pension plan was amended to update the years used to calculate past service benefits. The amendment generated an unrecognized prior service cost of $5.8 million. Effective January 1, 1995, the company adopted amendments to the International Pension Plan to expand benefit coverage to include more employees. This change resulted in an increase of $0.2 million in pension expense for 1995 and an increase of approximately $2.5 million in the projected benefit obligation. In 1995, the U.S. plan recognized a curtailment loss of $1.2 million related to a transfer of Raynet employees to the Ericsson pension plan. The assumptions used to measure the projected benefit obligation and to compute the expected long-term return on assets for the company's defined benefit pension plans are as follows: 1997 1996 1995 ---------- ---------- ---------- U.S. plans: Discount rate 7.75% 7.75% 7.75% Average increase in compensation levels 4.75% 4.75% 4.75% Expected long-term return on assets 9.0% 8.5% 8.5% ---------- ---------- ---------- Non-U.S. plans: Discount rates 4.5--9.0% 5.5--9.0% 5.5--9.3% Average increase in compensation levels 4.0--6.3% 4.0--6.9% 3.0--6.9% Expected long-term return on assets 7.0--9.5% 7.5--9.5% 7.5--10.0% ---------- ---------- ----------
25 19 Net periodic pension cost includes the following components:
U.S. PLANS NON-U.S. PLANS YEARS ENDED JUNE 30 -------------------------------------- -------------------------------------- (in thousands) 1997 1996 1995 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- ---------- Service cost--benefits earned during the period $ 6,632 $ 6,319 $ 6,105 $ 8,244 $ 9,151 $ 9,584 Interest cost on projected benefit obligation 9,902 9,206 9,009 13,451 14,113 13,161 Actual (return) loss on plan assets (24,910) (23,936) (16,342) (21,168) (24,706) (3,969) Net amortization and deferral 15,411 18,367 9,820 6,059 12,805 (6,241) ---------- ---------- ---------- ---------- ---------- ---------- Net periodic pension cost $ 7,035 $ 9,956 $ 8,592 $ 6,586 $ 11,363 $ 12,535 ========== ========== ========== ========== ========== ==========
The following table sets forth the funded status of the plans:
ASSETS EXCEED ACCUMULATED BENEFITS ---------------------------------------------------- U.S. PLANS NON-U.S. PLANS JUNE 30 ------------------------ ------------------------ (in thousands) 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Actuarial present value of benefit obligations: Vested benefit obligation $ (123,894) $ (115,852) $ (85,116) $ (64,461) ---------- ---------- ---------- ---------- Accumulated benefit obligation $ (128,143) $ (118,120) $ (87,489) $ (65,434) ---------- ---------- ---------- ---------- Projected benefit obligation $ (130,991) $ (126,976) $ (137,305) $ (116,374) Plan assets at fair value 131,737 122,169 172,430 142,693 ---------- ---------- ---------- ---------- Plan assets more (less) than projected benefit obligation 746 (4,807) 35,125 26,319 Unrecognized net (gain) loss (4,246) 10,312 (32,223) (27,326) Unrecognized net transition (asset)liability -- (127) (6,423) (6,967) Unrecognized prior service cost 16,241 10,599 2,622 2,728 Adjustment required to recognize additional minimum liability -- -- -- -- ---------- ---------- ---------- ---------- Prepaid (accrued) pension cost $ 12,741 $ 15,977 $ (899) $ (5,246) ========== ========== ========== ==========
ACCUMULATED BENEFITS EXCEED ASSETS ---------------------------------------------------- U.S. PLANS NON-U.S. PLANS JUNE 30 ------------------------ ------------------------ (in thousands) 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Actuarial present value of benefit obligations: Vested benefit obligation $ (3,293) $ (3,107) $ (44,266) $ (42,288) ---------- ---------- ---------- ---------- Accumulated benefit obligation $ (3,376) $ (3,107) $ (45,816) $ (44,038) ---------- ---------- ---------- ---------- Projected benefit obligation $ (5,543) $ (6,641) $ (51,664) $ (51,387) Plan assets at fair value -- -- -- -- ---------- ---------- ---------- ---------- Plan assets more (less) than projected benefit obligation (5,543) (6,641) (51,664) (51,387) Unrecognized net (gain) loss (1,567) (504) (3,043) (5,931) Unrecognized net transition (asset)liability 584 614 (335) (444) Unrecognized prior service cost 5,502 6,237 -- -- Adjustment required to recognize additional minimum liability (2,520) (2,813) -- -- ---------- ---------- ---------- ---------- Prepaid (accrued) pension cost $ (3,544) $ (3,107) $ (55,042) $ (57,762) ========== ========== ========== ==========
OTHER POSTRETIREMENT BENEFITS - -------------------------------------------------------------------------------- The company provides postretirement health care benefits to U.S. employees who qualify for the company's defined benefit pension plan and retire on or after age 55, until the employees reach age 65. Such benefits are limited to allowing retirees to continue their participation in the company's group medical plan. Eligible retirees pay monthly premiums, thus reducing the cost to the company. The cost of providing medical and dental benefits to early retirees was $0.4 million, comprised of a service cost of $0.2 million and interest cost of $0.2 million, in each of 1997, 1996, and 1995. The assumed discount rate used to measure the accumulated postretirement benefit obligation was 7.75% at June 30, 1997 and 1996. The assumed health care cost trend rate for 1997 is 8.0%, declining to an ultimate rate in 2001 of 6%. A one percentage point increase in the assumed health care cost trend rate for each future year increases annual net periodic postretirement benefit cost and the accumulated postretirement benefit obligation as of June 30, 1997, by $0.1 million and $0.3 million, respectively. The following table sets forth components of the accumulated postretirement benefit obligation:
JUNE 30 (in thousands) 1997 1996 -------- -------- Accumulated postretirement benefit obligation attributable to: Retirees $ 740 $ 803 Fully eligible employees 634 689 Other active employees 1,530 1,614 -------- -------- Accumulated postretirement benefit obligation 2,904 3,106 Unrecognized net gain 770 399 -------- -------- Accrued postretirement benefit obligation $ 3,674 $ 3,505 ======== ========
26 20 DEBT STRUCTURE - -------------------------------------------------------------------------------- Long-term debt consists of the following:
JUNE 30 (in thousands) 1997 1996 ---------- ---------- 2.90% to 9.66% notes payable to banks and other debt requiring payments in varying amounts through 2017 $ 53,764 $ 35,325 Secured debt requiring varying semi-annual payments from January 1997 through December 2006. The interest rate fluctuates semi-annually and was 5.51% at June 30, 1997 115,992 114,645 Syndicated term loan requiring varying quarterly payments beginning December 1996. The interest rate fluctuates periodically and was 5.86% at June 30, 1996 -- 118,000 ---------- ---------- Total long-term debt 169,756 267,970 Less current maturities 5,752 119,618 ---------- ---------- Long-term portion $ 164,004 $ 148,352 ========== ==========
In September 1996, the company entered into a new syndicated five-year revolving credit agreement providing for borrowings of up to $400 million, replacing an existing $250 million revolving credit facility. Borrowings under the revolving credit agreement bear interest at variable spreads over LIBOR. The revolving credit agreement includes covenants that, among other things, specify a maximum leverage limit and a minimum fixed charge coverage ratio. In April 1996, the company entered into a lease financing covering the majority of its manufacturing equipment in the United States. The arrangement is accounted for as 10-year partially amortizing secured debt with interest that varies periodically with LIBOR. The proceeds of approximately $113 million were used in roughly equal portions for prepayment of a portion of the outstanding term loan and for other corporate purposes. On September 29, 1994, the company entered into syndicated loan agreements providing for a five-year partially amortizing loan of $225 million, and a renewable 364-day revolving credit facility of $200 million. Interest on the term loan and revolving credit facility was at variable spreads over LIBOR. Proceeds from the term loan were drawn on November 1, 1994, and used for retirement of the company's 9.55% privately placed senior notes and for general corporate purposes. The prepayment of the privately placed senior notes resulted in an extraordinary loss of $6 million (see note "Extraordinary Item--Loss Related to Early Retirement of Debt"). The revolving credit facility replaced existing committed credit facilities. The syndicated loan agreements included covenants that, among other things, specified a minimum net worth requirement, a maximum leverage limit, a minimum fixed charge coverage ratio, and limits on further advances to fund Raynet operations. On September 28, 1995, the company amended its syndicated loan agreements. The revolving credit facility was increased to $250 million and extended to a term of four years. Variable pricing terms for both the term loan and revolving credit facility were improved, and certain restrictive covenants were relaxed. In May 1996, a portion of the lease financing proceeds was used to prepay $57 million of the outstanding term loan principal. Additional term loan prepayments of $50 million each were made in both June and July 1996, and the remaining balance was prepaid in August 1996. Long-term debt maturing during the five years subsequent to June 30, 1997, is as follows: 1998--$6 million; 1999--$44 million; 2000--$6 million; 2001--$6 million; 2002--$13 million; and thereafter--$95 million. Assets pledged as security for long-term debt totaled $45 million at June 30, 1997. On July 16, 1997, the company filed a shelf registration with the Securities and Exchange Commission to enable it to issue up to $400 million in debt securities; this registration statement became effective on July 24, 1997. In addition to short-term borrowings, lines of credit are used for letters of credit, bank guarantees, and other purposes. The company had no significant compensating balance requirements or capital lease obligations at June 30, 1997. Information regarding short-term debt is as follows:
JUNE 30 (dollars in thousands) 1997 1996 ---------- ---------- Total lines of credit $ 631,373 $ 484,702 Available unused credit lines $ 567,382 $ 433,197 ---------- ---------- Worldwide weighted average interest rate 5.5% 9.8% ---------- ----------
27 21 STOCK - -------------------------------------------------------------------------------- EMPLOYEE STOCK PURCHASE PLANS The company's employee stock purchase plans provide that eligible employees may contribute up to 15% of their base earnings toward the quarterly purchase of the company's Common Stock. The employees' purchase price is derived from a formula based on the fair market value of the Common Stock. No compensation expense is recorded in connection with the plans. Shares issued under the plans were 461,000 in 1997; 767,000 in 1996; and 905,000 in 1995. At June 30, 1997, a total of 3,974 of the 7,676 eligible employees were participants in the plans. On November 9, 1994, the stockholders approved an amendment to the employee stock purchase plans to increase the aggregate number of shares issuable under the plans by 700,000. Also, on each of November 1, 1995, and November 1, 1996, the stockholders approved plan amendments to increase issuable shares by 1,000,000. The total number of shares reserved for future issuance under the plans was 1,505,000 at June 30, 1997. STOCK OPTION AND INCENTIVE PLANS The company has various stock option and management incentive plans for selected employees, officers, directors, and consultants. The plans provide for awards in the form of stock options, restricted stock, and performance shares. As of June 30, 1997, only stock options and restricted stock had been awarded under the plans. Options to purchase Common Stock have been granted at no less than fair market value on the date of grant. Substantially all of these options have a 10-year term and vest over a four-year period. On November 1, 1995, and November 1, 1996, the stockholders approved amendments to the 1990 Incentive Plan to increase the aggregate number of shares issuable under the plan by 1,250,000 and 2,800,000 respectively. Also, on November 1, 1996, the stockholders approved an amendment to the 1990 Incentive Plan to increase the limit on shares that may be granted to any one individual in any one year to 500,000 and to include performance shares within that limit. During 1997, 17,200 shares of restricted stock were awarded under the 1990 Incentive Plan. Of these shares 1,000 shares were forfeited and the balance of 16,200 shares remains outstanding at June 30, 1997. The difference between par value and fair market value on the date the restricted stock was awarded will be amortized over the 3-year restriction period as compensation expense. Approximately $0.3 million of compensation expense was recognized during 1997 related to restricted stock. During 1996, 37,500 shares of restricted stock were issued under the 1990 Incentive Plan resulting in compensation expense totaling $1.65 million as the restrictions lapsed during the year. At June 30, 1997, 889 optionees held options for the purchase of Common Stock with expiration dates occurring between August 1, 1997 and June 30, 2007, with an average exercise price of $49 a share. The following table summarizes the company's option activity during the years ending June 30, 1997, 1996, and 1995:
1997 1996 1995 -------------------------- ------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTION SHARES, JUNE 30 EXERCISE EXERCISE EXERCISE (in thousands except exercise price) SHARES PRICE SHARES PRICE SHARES PRICE ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 4,815 $ 39.38 5,588 $ 33.74 5,211 $ 32.81 Granted 1,015 $ 77.56 1,443 $ 50.54 1,051 $ 35.56 Exercised (1,144) $ 35.14 (1,909) $ 31.48 (466) $ 25.80 Canceled (211) $ 49.79 (307) $ 38.98 (208) $ 37.51 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at end of year 4,475 $ 48.59 4,815 $ 39.38 5,588 $ 33.74 ========== ========== ========== ========== ========== ========== Exercisable at end of year 2,085 $ 36.56 2,295 $ 33.87 3,256 $ 32.53 ========== ========== ========== ========== ========== ==========
28 22 The weighted average fair market value of options granted in 1997 was $32.08, approximately 41% of the average exercise price of $77.56. The weighted average fair market value of options granted in 1996 was $21.33, approximately 42% of the average exercise price of $50.54. The fair market value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: risk free interest rate of 6.30% and 6.01%; dividend yield of 0.54% and 0.67%; volatility of 29.9% and 32.07%; and expected life of 6 years in both years. The following table summarizes information on outstanding and exercisable stock options as of June 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES (IN THOUSANDS) (YEARS) PRICE (IN THOUSANDS) PRICE - --------------- ------------ ---------------- -------- ------------ -------- $ 5.03--$10.66 22 5.98 $ 8.62 22 $ 8.62 $ 16.50--$25.00 159 3.43 $ 24.45 159 $ 24.45 $ 26.75--$34.50 519 4.62 $ 30.51 518 $ 30.51 $ 35.00--$47.38 2,590 6.90 $ 41.03 1,332 $ 39.42 $ 62.63--$86.00 1,185 9.29 $ 77.03 54 $ 72.44 - --------------- ------------ ---------------- -------- ------------ -------- $ 5.03--$86.00 4,475 7.14 $ 48.59 2,085 $ 36.56 =============== ============ ================ ======== ============ ========
The company has elected to continue to follow APB Opinion No. 25 for accounting for its employee stock options and stock purchase plans. Fair values of the options and employee stock purchase plan shares were calculated using the methodology prescribed by FAS 123. The pro forma effects of using these fair values are presented below:
YEARS ENDED JUNE 30 (in thousands except per share data) 1997 1996 ----------- ----------- Net income - as reported $ 253,344 $ 147,912 Net income - pro forma $ 237,616 $ 139,641 Earnings per share - as reported $ 5.54 $ 3.22 Earnings per share - pro forma $ 5.38 $ 3.04
29 23 EARNINGS PER SHARE - -------------------------------------------------------------------------------- In February 1997, the FASB issued Statement No. 128, "Earnings Per Share" (FAS 128). The statement simplifies the standards for computing earnings per share (EPS) previously found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the financial statements for all entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS under APB Opinion No. 15. FAS 128 must be adopted for the second quarter of fiscal 1998. The following table represents pro forma disclosures of basic and diluted earnings per share in accordance with FAS 128 assuming the standard was applied during all periods presented below:
EARNINGS (LOSS) PER SHARE--PRO FORMA BASIC DILUTED ------------------------------ ------------------------------ YEARS ENDED JUNE 30 1997 1996 1995 1997 1996 1995 - ------------------- -------- -------- -------- -------- -------- -------- Earnings (loss) per share before extraordinary item and change in accounting principle $ 5.70 $ 3.33 $ (0.49) $ 5.54 $ 3.22 $ (0.49) Earnings (loss)per share on extraordinary item -- -- (0.15) -- -- (0.15) Earnings (loss) per share on change in accounting principle -- -- (0.03) -- -- (0.03) -------- -------- -------- -------- -------- -------- Earnings (loss) per share $ 5.70 $ 3.33 $ (0.67) $ 5.54 $ 3.22 $ (0.67) ======== ======== ======== ======== ======== ========
The company has reported earnings per share data in accordance with APB Opinion No. 15 as follows:
EARNINGS (LOSS) PER SHARE--AS REPORTED PRIMARY ------------------------------------ YEARS ENDED JUNE 30 1997 1996 1995 - ------------------- ---------- ---------- ---------- Earnings (loss) per share before extraordinary item and change in accounting principle $ 5.54 $ 3.22 $ (0.49) Earnings (loss) per share on extraordinary item -- -- (0.15) Earnings (loss) per share on change in accounting principle -- -- (0.03) ---------- ---------- ---------- Earnings (loss) per share $ 5.54 $ 3.22 $ (0.67) ========== ========== ==========
RESTRUCTURING AND DIVESTITURES - -------------------------------------------------------------------------------- Over the past several years, the company has strengthened its core businesses and improved its results of operations through a series of initiatives. These actions were designed to streamline the company's operations, reduce operating costs, and position the company for profitable growth. The company incurred a pretax restructuring charge of $53 million in the third quarter of 1997 to implement several streamlining programs and eliminate approximately 500 positions (the 1997 restructuring). A significant portion of the restructuring expenses was for consolidating the Telecom and Electrical Products divisions to achieve greater sales, manufacturing, and product development efficiencies in their cable accessories businesses. Additional one-time costs were incurred to consolidate the Electronics and PolySwitch divisions, to streamline the worldwide operations of the commercial and industrial infrastructure business segment, and to restructure the R&D organization in the United Kingdom. Approximately $36 million of the 1997 restructuring charge is cash in nature and is expected to be funded through operating cash flow. The 1997 restructuring is expected to be substantially completed by the end of the next fiscal year. The remaining $17 million represents asset writedowns of inventory, facilities, and machinery and equipment related to discontinued products and consolidation of manufacturing and distribution activities. As a result of the 1997 restructuring, approximately 170 employees have separated from the company as of June 30, 1997. The core business incurred a pretax restructuring charge of $44 million in the third quarter of 1996 as the company moved to simplify operations and reduce costs (the 1996 restructuring). The bulk of these actions affected 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 charge, excluding $4 million in net asset writedowns, was cash in nature, substantially paid in 1997, and funded through operating cash flow. Approximately 700 positions were to be eliminated, some portion of which might be replaced elsewhere. As of June 30, 1997, approximately 600 employees have separated from the company as a result of the 1996 restructuring. The core business incurred a pretax charge of $24 million in the first quarter of 1995 for the restructuring of the Telecom Division. The restructuring charge included $13 million for severance costs related to net workforce reduction of 30 24 340 employees, resulting from the closure of the division's manufacturing operations in Germany and the restructuring of its North American activities. The remaining charge of $11 million related to plant consolidations and the shutdown of unprofitable product lines. The charge, excluding $8 million of asset writedowns, was cash in nature and was funded through operating cash flow. The 1995 restructuring was substantially completed by June 30, 1995. The following table sets forth components of the company's "Provision for restructuring and divestitures" for the years ended June 30, 1997, 1996, and 1995:
PROVISION FOR RESTRUCTURING AND DIVESTITURES YEARS ENDED JUNE 30 EMPLOYEE ASSET (in thousands) COSTS WRITEDOWNS LEASES OTHER TOTAL - ------------------- -------- ---------- -------- -------- -------- 1997 Employee severance and related costs $ 35,533 $ -- $ -- $ -- $ 35,533 Discontinued products -- 4,806 -- -- 4,806 Machinery and equipment writedowns -- 5,075 -- -- 5,075 Vacated buildings -- 6,798 600 -- 7,398 -------- -------- -------- -------- -------- Total 1997 $ 35,533 $ 16,679 $ 600 $ -- $ 52,812 ======== ======== ======== ======== ======== 1996 Employee severance $ 37,907 $ -- $ -- $ -- $ 37,907 Assets to be sold -- 5,887 -- -- 5,887 Discontinued product inventory -- 250 -- -- 250 Vacated buildings -- -- 821 -- 821 Other -- -- -- 615 615 Adjustment to prior year reserves -- (2,470) -- 561 (1,909) -------- -------- -------- -------- -------- Total 1996 $ 37,907 $ 3,667 $ 821 $ 1,176 $ 43,571 ======== ======== ======== ======== ======== 1995 Employee severance $ 13,200 $ -- $ -- $ -- $ 13,200 Assets to be sold -- 5,680 -- 1,000 6,680 Discontinued product inventory -- 2,600 -- -- 2,600 Vacated buildings -- -- 620 -- 620 Other -- -- -- 800 800 -------- -------- -------- -------- -------- Total 1995 $ 13,200 $ 8,280 $ 620 $ 1,800 $ 23,900 ======== ======== ======== ======== ========
The following table sets forth the company's restructuring reserves as of June 30, 1995, 1996, and 1997:
RESTRUCTURING RESERVES EMPLOYEE ASSET (in thousands) COSTS WRITEDOWNS LEASES OTHER TOTAL - ---------------------- -------- ---------- -------- -------- -------- Balance June 30, 1994 $ 1,338 $ 852 $ 30 $ 452 $ 2,672 -------- -------- -------- -------- -------- Provision for restructuring and divestitures 13,200 8,280 620 1,800 23,900 Adjustment to reserves 1,300 (1,300) -- -- -- Cash payments (13,676) -- (650) (1,237) (15,563) Non-cash items -- (7,832) -- -- (7,832) -------- -------- -------- -------- -------- Balance June 30, 1995 $ 2,162 $ -- $ -- $ 1,015 $ 3,177 -------- -------- -------- -------- -------- Provision for restructuring and divestitures 37,907 3,667 821 1,176 43,571 Adjustment to reserves (9) -- 75 (66) -- Cash payments (15,442) -- (30) (1,425) (16,897) Non-cash items (885) (2,621) (39) -- (3,545) -------- -------- -------- -------- -------- Balance June 30, 1996 $ 23,733 $ 1,046 $ 827 $ 700 $ 26,306 -------- -------- -------- -------- -------- Provision for restructuring and divestitures 35,533 16,679 600 -- 52,812 Adjustment to reserves -- (246) (21) 267 -- Cash payments (23,432) -- (372) (498) (24,302) Non-cash items (3,815) (15,643) (363) (164) (19,985) -------- -------- -------- -------- -------- Balance June 30, 1997 $ 32,019 $ 1,836 $ 671 $ 305 $ 34,831 ======== ======== ======== ======== ========
31 25 ERICSSON RAYNET - -------------------------------------------------------------------------------- FORMATION OF ERICSSON RAYNET JOINT VENTURE On November 16, 1994, the company and LM Ericsson (Ericsson), a Swedish telecommunications company, formed a joint venture for the development, manufacture, and marketing of fiber-optic communications systems for telephone access networks worldwide. The joint venture, called "Ericsson Raynet," took over the operations of the company's Raynet subsidiary. Ericsson Raynet is organized as a partnership under Delaware law; the company's Raynet subsidiary holds the company's interest in the joint venture. Ericsson is the managing general partner of the joint venture. In forming the joint venture, Raychem sold certain specified assets of its Raynet subsidiary to Ericsson in exchange for $40 million in cash. Ericsson contributed the purchased assets to the joint venture, and Raynet contributed substantially all of its remaining assets and liabilities to the joint venture. Funding of the joint venture was initially provided by the partners, generally 51% by Ericsson and 49% by Raynet, subject to Ericsson's loss allocation limit described below. During the first five to eight years of operation, subject to various conditions, substantially all of the profits of the joint venture up to $156 million (plus incremental losses borne by Raynet on account of the loss cap) were to be allocated to Raynet; thereafter, profits of the joint venture were to be shared 51/49 by Ericsson and Raynet, respectively. Ericsson's share of the joint venture's losses were capped at $25 million for the fiscal year ended June 30, 1995. In addition, restructuring costs in 1995 were shared 51/49 by Ericsson and Raynet, respectively, without consideration of Ericsson's previously mentioned loss allocation cap. During the fiscal year ended June 30, 1996, up to $19.6 million of losses were allocated to Ericsson and Raynet in a 51/49 ratio; additional losses of up to $10 million were allocated 100% to Raynet; and additional losses were allocated to Ericsson and Raynet in a 51/49 ratio. BellSouth Enterprises Inc. (BSE) had financed a portion of the software development work at Raynet and held a royalty interest in the software related revenues of Raynet. The royalty was based on a variable rate subject to meeting certain annual royalty payment levels. With the creation of the joint venture, this royalty payment was reconfigured. Raychem paid BSE $10 million in each of November 1994, 1995, and 1996. Raychem agreed to make other royalty payments to BSE contingent upon the revenues and earnings performance of the joint venture. The company's loss resulting from these transactions, a pretax charge of $28 million, was included in the line item "Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items" in 1995. For purposes of recording its loss, the company discounted its obligations to BSE to their present value as of November 16, 1994, using a 7.97% discount rate. AMENDMENT TO ERICSSON RAYNET JOINT VENTURE During the third quarter of fiscal 1996, Raychem and Ericsson amended their joint venture agreement. Raychem's equity in net loss of $30 million for the year ended June 30, 1996, represents its share of Ericsson Raynet losses through December 31, 1995. Effective January 1, 1996, Raychem no longer shares in ongoing operating losses of the joint venture (other than potential warranty claims if they are in excess of reserves that have been previously established). Through December 31, 2000, Raychem may receive a modest income allocation from the venture. BSE is entitled to receive a portion of any income or distributions that Raychem receives. The reorganization of Ericsson Raynet resulted in a $2 million pretax charge that was included in the line item "Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items" in 1996. REVOLVING CREDIT AGREEMENT On January 2, 1995, the company entered into a revolving credit agreement with Ericsson Raynet. The company committed to make available to the joint venture a maximum of $50 million, due in full on December 20, 1995, or earlier if the revolving credit arrangement were terminated at the company's discretion. At June 30, 1995, Ericsson Raynet had borrowed $4 million from the company under the revolving credit agreement, which amount was included in "Other current assets." In 1996, the company made advances to Ericsson Raynet of $23 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. INTEREST - -------------------------------------------------------------------------------- Interest expense, net, consisted of the following components:
YEARS ENDED JUNE 30 (in thousands) 1997 1996 1995 ------- ------- ------- Interest expense incurred $12,455 $19,216 $20,434 Interest expense capitalized (393) (660) (724) Interest income (7,411) (8,925) (6,664) ------- ------- ------- Interest expense, net $ 4,651 $ 9,631 $13,046 ======= ======= =======
32 26 SALE OF ASSETS - -------------------------------------------------------------------------------- In the first quarter of 1997, the company recorded a $23 million pretax gain arising from the sale of intellectual property relating to the use of nickel titanium for medical applications to Medtronic, Inc. for $25 million. In the fourth quarter of 1996, the company sold its shape memory metals components business to Memry Corporation resulting in a pretax gain of $3 million. In the fourth quarter of 1995, Johnson & Johnson acquired, in a tax-free reorganization, all of the outstanding common stock of Menlo Care, Inc., a company in which Raychem held a minority interest. This transaction resulted in a pretax gain of $5 million. These gains were included in "Other (income) expense, net." As proceeds from the Menlo Care transaction, the company received cash and shares of Johnson & Johnson common stock valued on the closing date at approximately $6 million. These shares were subsequently sold in 1996, and resulted in a $1 million gain which was included in "Other (income) expense, net." EXTRAORDINARY ITEM--LOSS RELATED TO EARLY RETIREMENT OF DEBT - -------------------------------------------------------------------------------- On November 1, 1994, the company prepaid the holders of its 9.55% privately placed senior notes. Accordingly, the company recorded an extraordinary loss of $6 million related to the early retirement of debt. The extraordinary loss comprised a $7 million prepayment penalty and deferred debt issuance costs, net of a $1 million deferred gain resulting from the termination of a related interest rate swap agreement. There was no tax benefit recognized for the extraordinary item because it increased U.S. losses. INCOME TAXES - -------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and change in accounting principle consisted of the following components:
YEARS ENDED JUNE 30 (in thousands) 1997 1996 1995 -------- -------- --------- U.S. operations, including Puerto Rico $ 95,692 $ 57,203 $(89,868) Non-U.S. operations 132,048 88,927 89,598 -------- -------- -------- Income (loss) before income taxes, extraordinary item, and change in accounting principle $227,740 $146,130 $ (270) ======== ======== ========
The (benefit) provision for income taxes included:
YEARS ENDED JUNE 30 (in thousands) 1997 1996 1995 -------- -------- --------- Current provision for income taxes: U.S. federal, including Puerto Rico $ 3,476 $ 5,383 $ 547 U.S. state and local 4,994 2,990 510 Non-U.S 50,448 35,198 16,656 --------- --------- -------- Total current provision for income taxes 58,918 43,571 17,713 --------- --------- -------- Deferred (benefit) provision for income taxes: U.S. federal, including Puerto Rico (67,835) (39,789) (12) U.S. state and local (9,205) (5,243) -- Non-U.S (7,482) (321) 3,477 --------- --------- -------- Total deferred (benefit) provision for income taxes (84,522) (45,353) 3,465 --------- --------- -------- (Benefit) provision for income taxes $(25,604) $ (1,782) $ 21,178 ========= ========= ========
33 27 The company has provided for U.S. federal income taxes and foreign withholding taxes on the portion of the undistributed earnings of non-U.S. subsidiaries expected to be remitted. Undistributed earnings intended to be reinvested indefinitely in foreign subsidiaries were approximately $309 million at June 30, 1997. If these earnings were distributed, foreign withholding taxes would be imposed; however, foreign tax credits would become available to substantially reduce any resulting U.S. income tax liability. Income from operations in certain countries is subject to reduced tax rates as a result of satisfying certain commitments regarding employment and capital investment. The exemption grants for these operations will expire at various dates through 2010. The income tax benefits related to the tax status of these operations are estimated to be $3 million for 1997, $4 million for 1996, and $3 million for 1995. The company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes, extraordinary item, and change in accounting principle as follows:
YEARS ENDED JUNE 30 (in thousands) 1997 1996 1995 -------- -------- -------- (Benefit) provision for income taxes determined by applying U.S. statutory rate to income (loss) before income taxes, extraordinary item, and change in accounting principle $ 79,709 $ 51,146 $ (95) (Benefit) provision for income taxes related to deferred deductions, net operating losses, foreign tax credits, minimum tax credits, and changes in valuation allowance, net (106,754) (51,140) 32,994 Tax rate differences (2,394) (6,809) (11,722) State and local taxes, net of federal income tax benefits 3,251 1,635 338 Adjustment of prior years' taxes 1,570 1,056 230 Other items, net (986) 2,330 (567) --------- --------- --------- (Benefit) provision for income taxes $(25,604) $ (1,782) $ 21,178) ========= ========= =========
Future expirations of U.S. federal credit carryforwards, if not utilized, are as follows: 1998--$0.5 million; 1999--$2.3 million; 2000--$2.0 million; 2001--$0.5 million; 2002--$0.3 million; 2003--$2.0 million; 2004--$6.8 million; 2005--$4.3 million; 2006--$4.3 million; and $8.0 million with no expiration. U.S. federal tax return examinations have been completed for years through 1993. The company believes adequate provisions for income tax have been recorded for all years. Deferred tax assets (liabilities) comprised the following:
JUNE 30 (in thousands) 1997 1996 --------- --------- Assets: Difference between book and tax bases of assets $ 64,938 $ 54,401 Compensation and benefits accrual 7,927 6,205 Retirement benefits 4,600 4,307 Asset reserves 11,693 10,558 Restructuring and divestitures accruals 21,344 10,802 Capitalization of research and experimental costs, net of amortization 121,925 157,381 Difference between book and tax bases of investments 14,011 14,477 Net operating loss carryforwards 1,535 7,660 General business credits 26,005 30,406 Minimum tax credit 4,902 5,332 Other 15,555 12,821 --------- --------- Gross deferred tax assets 294,435 314,350 Less: valuation allowance (104,132) (213,271) --------- --------- Net deferred tax assets before tax liabilities 190,303 101,079 --------- --------- Liabilities: Difference between book and tax bases of assets (32,473) (34,445) Compensation and benefits accrual (2,310) (1,602) Retirement benefits (14,873) (6,161) Other (12,227) (20,628) --------- --------- Gross deferred tax (liabilities) (61,883) (62,836) --------- --------- Net deferred tax assets, net of tax liabilities $ 128,420 $ 38,243 ========= =========
34 28 Balance sheet classification of the net deferred tax assets is as follows:
JUNE 30 (in thousands) 1997 1996 --------- --------- Current assets $ 20,187 $ 11,000 Noncurrent assets 136,325 56,203 Current liabilities (2,265) (5,238) Noncurrent liabilities (25,827) (23,722) --------- --------- Net deferred tax assets $ 128,420 $ 38,243 ========= =========
The deferred tax asset valuation allowance is primarily attributed to U.S. federal and state deferred tax assets. Management believes sufficient uncertainty exists regarding the realizability of a portion of these assets that a valuation allowance is required. The decrease in the valuation allowance of $109 million in 1997 and $80 million in 1996 was due primarily to a reassessment of the company's likelihood of realizing its net deferred tax assets in the future. Approximately $49 million of the valuation allowance at June 30, 1997, relates to tax benefits arising from stock plans, which will be reported as an increase to additional paid-in-capital when the final portion of the valuation allowance related to the U.S. deferred tax asset is eliminated. 35 29 WORLDWIDE OPERATIONS - --------------------------------------------------------------------------
UNITED REST OF CONSOLIDATED (in thousands) STATES EUROPE ASIA WORLD CONSOLIDATION TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Revenues from unaffiliated customers(a) 1997 $ 661,208 $ 694,722 $ 269,228 $ 139,548 $ -- $ 1,764,706 1996 612,435 684,661 220,586 153,879 -- 1,671,561 1995 539,518 653,221 198,845 138,989 -- 1,530,573 - -------------------------------------------------------------------------------------------------------------------------------- Revenues between geographic areas(b) 1997 282,545 148,156 18,207 1,392 (450,300) -- 1996 243,120 130,581 11,677 1,485 (386,863) -- 1995 220,267 117,188 13,729 138 (351,322) -- - -------------------------------------------------------------------------------------------------------------------------------- Total revenues 1997 943,753 842,878 287,435 140,940 (450,300) 1,764,706 1996 855,555 815,242 232,263 155,364 (386,863) 1,671,561 1995 759,785 770,409 212,574 139,127 (351,322) 1,530,573 - -------------------------------------------------------------------------------------------------------------------------------- Operating income before provision for 1997 99,671 139,441 15,595 16,855 -- 271,562 restructuring and divestitures, and loss on reorganization/formation of Ericsson 1996 91,964 115,825 9,627 8,450 -- 225,866 Raynet joint venture and other Raynet items 1995 43,664 103,926 4,809 5,309 -- 157,708 - -------------------------------------------------------------------------------------------------------------------------------- Operating income including provision for 1997 74,626 112,845 14,552 16,727 -- 218,750 restructuring and divestitures, and loss on reorganization/formation of 1996 79,836 83,961 9,138 7,257 -- 180,192 Ericsson Raynet joint venture and other Raynet items 1995 6,532 85,126 4,809 5,309 -- 101,776 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, 1997 95,692 106,441 11,249 14,358 -- 227,740 extraordinary item, and change in accounting principle 1996 57,203 55,186 21,534 12,207 -- 146,130 1995 (89,868) 60,983 18,583 10,032 -- (270) - -------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 1997 439,772 392,707 154,699 52,919 -- 1,040,097 1996 380,349 427,527 128,067 57,907 -- 993,850 1995 335,609 487,079 150,511 60,492 -- 1,033,691 - -------------------------------------------------------------------------------------------------------------------------------- Corporate assets 1997 319,844 89,899 38,723 20,697 -- 469,163 1996 373,846 124,590 33,447 24,883 -- 556,766 1995 186,911 177,809 40,445 15,889 -- 421,054 - -------------------------------------------------------------------------------------------------------------------------------- Total assets 1997 759,616 482,606 193,422 73,616 -- 1,509,260 1996 754,195 552,117 161,514 82,790 -- 1,550,616 1995 522,520 664,888 190,956 76,381 -- 1,454,745 - --------------------------------------------------------------------------------------------------------------------------------
- ------------ (a) Revenues from unaffiliated customers in each geographic area reflect only shipments originating locally and exclude direct exports from other geographic areas. (b) Revenues between geographic areas are recorded on the basis of arm's-length prices established by the company. 36 30 BUSINESS SEGMENTS - ------------------------------------------------------------------------------- During 1997, the company realigned its segment reporting to more closely reflect the company's management structure. The company's financial results are now reported as three business segments, described below, and the corporate group. ELECTRONICS OEM COMPONENTS This business segment serves original equipment manufacturers (OEMs) in transportation, defense, and a wide range of commercial electronics industries. It was previously reported as the electronics business segment. TELECOMMUNICATIONS AND ENERGY NETWORKS This business segment serves telephone operating companies, cable television providers, electric utilities, and industrial customers. It was previously reported as the Telecom Division, which was included in the telecommunications business segment, and as the Electrical Products Division, which was included in the industrial business segment. COMMERCIAL AND INDUSTRIAL INFRASTRUCTURE This business segment serves customers who build and maintain the world's commercial and industrial infrastructure, including industrial plants and pipelines, gas and water utilities, and commercial construction industries. It was previously reported as the Chemelex Division, which was included in the industrial business segment. Certain amounts previously reported as corporate group costs, notably certain legal and patent and information technology costs, are now being allocated to the business segments. Accordingly, previously reported amounts for the business segments have been restated to conform to the fiscal 1997 presentation.
TELE- ELECTRONICS COMMUNICATIONS COMMERCIAL OEM AND ENERGY AND INDUSTRIAL CORPORATE CONSOLIDATED (in thousands) COMPONENTS NETWORKS INFRASTRUCTURE GROUP TOTAL - --------------------------------------------------------------------------------------------------------------------------- Revenues(a) 1997 $757,356 $752,213 $255,137 $ -- $1,764,706 1996 670,595 757,215 243,751 -- 1,671,561 1995 611,036 689,343 230,194 -- 1,530,573 - -------------------------------------------------------------------------------------------------------------------------- Operating income (loss) before provision for 1997 153,060 149,931 54,026 (85,455) 271,562 restructuring and divestitures, and loss on reorganization/formation of Ericsson Raynet 1996 119,963 160,323 36,891 (91,311) 225,866 joint venture and other Raynet items 1995 94,506 111,106 27,008 (74,912) 157,708 - -------------------------------------------------------------------------------------------------------------------------- Operating income (loss) including provision for 1997 140,590 120,998 51,497 (94,335) 218,750 restructuring and divestitures, and loss on reorganization/formation of Ericsson Raynet 1996 106,400 148,114 21,623 (95,945) 180,192 joint venture and other Raynet items 1995 94,506 87,206 27,008 (106,944) 101,776 - -------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, 1997 -- -- -- -- 227,740 extraordinary item, and change in accounting principle 1996 -- -- -- -- 146,130 1995 -- -- -- -- (270) - -------------------------------------------------------------------------------------------------------------------------- Total assets 1997 493,256 433,285 113,556 469,163 1,509,260 1996 438,926 436,717 118,207 556,766 1,550,616 1995 448,858 452,436 132,397 421,054 1,454,745 - -------------------------------------------------------------------------------------------------------------------------- Capital expenditures 1997 33,003 32,145 5,556 19,781 90,485 1996 30,503 25,763 4,685 17,638 78,589 1995 37,179 33,680 9,637 13,545 94,041 - -------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 1997 30,474 26,654 4,271 17,158 78,557 1996 32,326 27,450 5,429 14,222 79,427 1995 27,020 29,994 6,335 11,449 74,798 - --------------------------------------------------------------------------------------------------------------------------
- ------------ (a) Revenues between segments are immaterial. 37 31 COMMITMENTS - -------------------------------------------------------------------------------- Total rental expense was $29 million in 1997 and $35 million in both 1996 and 1995. The company had commitments at June 30, 1997, to expend approximately $24 million for the construction or acquisition of additional property, plant, and equipment. Annual future minimum lease payments at June 30, 1997, under noncancelable operating leases, are as follows: 1998--$23 million; 1999--$17 million; 2000--$12 million; 2001--$9 million; 2002--$5 million; and thereafter--$30 million. CONTINGENCIES - -------------------------------------------------------------------------------- The company and its subsidiaries are parties to lawsuits, or may in the future become parties to lawsuits, involving various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, and intellectual property matters. Legal proceedings tend to be unpredictable and costly and may be affected by events outside the control of the company. The company maintains various levels of insurance to apply to product liability and certain other claims in excess of deductibles. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. Currently, the company's principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company's experience to date is that losses, if any, from such claims have not had a material effect on the company's financial position or results of operations. However, the company sells its products into applications (including, for example, aerospace and automotive) where product liability issues could be material. Effective March 31, 1996, the company increased its insurance deductible for heat-tracing products. The company's insurance deductible for claims arising from events prior to March 31, 1996, remains unchanged. The company's major litigation matters as of June 30, 1997, are described below. These and certain other litigation matters with which the company is involved are more fully described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission. The company is a defendant in a product liability case in the United States District Court in Seattle, All Alaskan Seafoods, Inc., et al. v. Raychem Corporation, Minnesota Mining and Manufacturing Corporation and Marine Electric, Inc., et al. The action arises out of a cargo vessel fire allegedly caused by a heat-tracing product. Plaintiffs are seeking in excess of $150 million in damages. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. Four separate state actions based on essentially the same facts, alleging wrongful distributor termination and antitrust claims, have been consolidated in the Superior Court of San Mateo County, California, Unit Process Company, et al. v. Raychem Corporation, et al. The dismissal in the United States District Court, Northern District of California, of an action alleging essentially the same facts was affirmed by the Ninth Circuit Court of Appeals in 1996. A motion to dismiss the state claims is pending. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. On December 19, 1994, the company filed a complaint entitled Raychem Corporation and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior Court of the State of California, County of San Mateo, which alleged, among other claims, misappropriation of trade secrets. On May 2, 1995, a complaint entitled Bourns, Inc. v. Raychem Corporation was filed in the United States District Court, Central District of California, alleging antitrust law violations. Neither complaint specifies the amount of monetary damages claimed, although Bourns has stated its damage claim in an amount which would be material to the company. Many of the claims asserted in the company's state action will be tried with the federal action. The company believes that it has meritorious claims and defenses in these cases and intends to vigorously litigate this matter. Additionally, the company has been named, among others, as a potentially responsible party in administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. At all of these 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. SUBSEQUENT EVENT--COMMON STOCK SPLIT (Unaudited) - -------------------------------------------------------------------------------- On August 15, 1997, the company's board of directors approved a two-for-one split of the company's outstanding Common Stock and an increase in the company's authorized number of shares of Common Stock to 150 million shares (up from 72,150,000 authorized shares). Subject to shareholder approval, this stock split and share authorization increase will become effective November 7, 1997. The following table represents unaudited pro forma EPS data assuming the stock split is approved:
AS REPORTED PRO FORMA EARNINGS (LOSS) PER SHARE -------------------------- ---------------------------- YEARS ENDED JUNE 30 1997 1996 1995 1997 1996 1995 - ------------------- -------------------------- ---------------------------- Earnings (loss) per share before extraordinary item and change in accounting principle $5.54 $3.22 $(0.49) $2.77 $1.61 $(0.25) Earnings (loss) per share on extraordinary item -- -- (0.15) -- -- (0.07) Earnings (loss) per share on change in accounting principle -- -- (0.03) -- -- (0.02) ----- ----- ------- ----- ----- ------- Earnings (loss) per share $5.54 $3.22 $(0.67) $2.77 $1.61 $(0.34) ===== ===== ====== ===== ===== ======
38 32 QUARTERLY FINANCIAL DATA (Unaudited) - --------------------------------------------------------------------------------
QUARTER ENDED (in thousands except share data) SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- -------- ------- FISCAL 1997: Revenues $ 430,311 $ 441,047 $ 427,878 $ 465,470 Gross profit 221,235 225,366 208,882 228,295 Provision for restructuring and divestitures -- -- 52,812 -- Income before income taxes 88,683(a) 62,106 8,288 68,663 Net income 72,720(a) 52,435 68,453(b) 59,736 --------- ------------- --------- ------------- Per share data: Earnings per share $ 1.58(a) $ 1.14 $ 1.49(b) $ 1.34 Cash dividends per share 0.10 0.10 0.14 0.14 Price range of Common Stock(c) 59-76 1/2 70 3/8-86 3/8 79-89 1/2 60 1/2-83 3/4 --------- ------------- --------- ------------- FISCAL 1996: Revenues $ 410,515 $ 411,051 $ 417,819 $ 432,176 Gross profit 215,601 214,390 210,242 215,976 Provision for restructuring and divestitures -- -- 43,571 -- Loss on reorganization of Ericsson Raynet joint venture -- -- 2,103 -- Equity in Ericsson Raynet net loss(d) 11,124 18,694 -- -- Income before income taxes 45,440 35,311 10,946 54,433 Net income 32,430 25,102 41,708(b) 48,672 --------- ------------- --------- ------------- Per share data: Earnings per share $ 0.72 $ 0.55 $ 0.89(b) $ 1.05 Cash dividends per share 0.08 0.08 0.10 0.10 Price range of Common Stock(c) 36 1/2-47 43 3/8-59 3/4 52-69 3/4 63-80 1/2 --------- ------------- --------- -------------
- ------------ (a) Includes a $23 million pretax gain in the quarter ended September 30, 1996, related to the sale of intellectual property. (b) Includes a discrete tax benefit of $55 million and $25 million in the quarter ended March 31, 1997 and 1996, respectively, related to the reassessment of the company's deferred tax asset valuation allowance. (c) The price range of Common Stock is as reported on the New York Stock Exchange composite tape. (d) Ericsson Raynet results are presented on the equity basis of accounting through December 31 in fiscal 1996. Following the reorganization of Ericsson Raynet, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis. Raychem Corporation Common Stock is listed on the New York Stock Exchange. The number of stockholders as of August 18, 1997, was 6,342. Dividends have been paid quarterly since the second quarter of fiscal 1978. The closing price of the company's Common Stock on the New York Stock Exchange composite tape on August 18, 1997, was $94 1/2 per share. 39 33 TEN-YEAR SUMMARY - --------------------------------------------------------------------------------
YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- RAYCHEM CORPORATION Consolidated (a) INCOME DATA Revenues $ 1,764,706 $ 1,671,561 $ 1,530,573 Provision for restructuring and divestitures $ 52,812 $ 43,571 $ 23,900 Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items $ -- $ 2,103 $ 32,032 Equity in net loss of Ericsson Raynet $ -- $ 29,818 $ 85,946 Income (loss) before income taxes, extraordinary item, and changes in accounting principles $ 227,740 $ 146,130 $ (270) Net income (loss) $ 253,344 $ 147,912 $ (29,243) - ------------------------------------------------------------------------------------------------------------------- SHARE DATA Earnings (loss) per share $ 5.54 $ 3.22 $ (0.67) Cash dividends per share $ 0.48 $ 0.36 $ 0.32 Weighted average number of shares outstanding 45,724,198 45,908,894 43,538,028 - ------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Total assets $ 1,509,260 $ 1,550,616 $ 1,454,745 Long-term debt $ 164,004 $ 148,352 $ 263,552 Total debt $ 223,819 $ 302,981 $ 293,226 Stockholders' equity $ 845,019 $ 841,206 $ 749,658 Increase (decrease) in debt net of cash $ 58,370 $ (96,293) $ (22,299) - ------------------------------------------------------------------------------------------------------------------- OTHER SIGNIFICANT MEASURES Gross profit as a percent of revenues 50.1% 51.2% 50.4% Research and development expense as a percent of revenues 6.8% 7.3% 7.8% Selling, general, and administrative expense as a percent of revenues 27.9% 30.4% 32.4% Net debt as a percent of stockholders' equity 16.2% 9.4% 23.4% Number of employees 8,650 8,697 9,496 Revenues per average number of employees $ 203 $ 184 $ 151 - ------------------------------------------------------------------------------------------------------------------- RAYNET CORPORATION Revenues $ -- $ -- $ -- Net (loss) income $ -- $ -- $ -- - -------------------------------------------------------------------------------------------------------------------
- ------------ (a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1995 and through December 31 in fiscal 1996 versus consolidated in prior years. Following the reorganization of Ericsson Raynet, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis. (b) Restated to reflect reclassification of royalty and licensing income from "Other expense, net" to "Revenues." (c) Reflects reclassification of litigation settlement to "Other expense, net." (d) Cash exceeded debt at June 30. 40 34
1994 1993 1992 1991 1990 1989 1988 - ---------------------------------------------------------------------------------------------------------- $ 1,461,532 $ 1,385,730 $ 1,301,601(b) $ 1,250,772(b) $ 1,114,713(b) $ 1,083,028 $ 1,094,733 $ -- $ -- $ 43,300 $ 3,697 $ 90,000 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 33,745 $ 39,584 $ 12,585(c) $ (3,109) $ (86,261) $ 63,767 $ 169,304 $ 1,679 $ 9,625 $ (24,808) $ (23,429) $ (111,398) $ 36,347 $ 125,285 - ---------------------------------------------------------------------------------------------------------- $ 0.04 $ 0.23 $ (0.64) $ (0.63) $ (3.12) $ 1.04 $ 3.69 $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.30 $ 0.22 43,290,797 42,232,289 39,030,049 37,134,161 35,708,523 34,928,935 33,979,365 - ---------------------------------------------------------------------------------------------------------- $ 1,399,015 $ 1,332,270 $ 1,392,606 $ 1,234,860 $ 1,270,834 $ 1,172,783 $ 1,148,975 $ 244,681 $ 233,853 $ 229,768 $ 233,347 $ 31,087 $ 29,029 $ 35,458 $ 275,548 $ 275,562 $ 257,763 $ 265,340 $ 212,954 $ 130,294 $ 129,246 $ 732,924 $ 689,504 $ 715,188 $ 651,973 $ 690,467 $ 734,286 $ 722,155 $ 55,842 $ 32,715 $ (57,610) $ 90,589 $ 98,633 $ (19,132) $ (80,857) - ---------------------------------------------------------------------------------------------------------- 46.6% 48.7% 48.4% 48.6% 49.6% 52.8% 54.3% 9.3% 9.3% 10.8% 11.2% 11.0% 11.1% 7.7% 33.6% 34.6% 33.6% 35.8% 37.5% 36.7% 32.8% 26.9% 20.5% 15.2% 25.5% 11.0% (d) (d) 10,769 10,772 11,187 11,406 11,065 11,451 10,909 $ 136 $ 126 $ 115 $ 111 $ 99 $ 97 $ 105 - ---------------------------------------------------------------------------------------------------------- $ 57,784 $ 9,671 $ 16,594 $ 11,500 $ 7,625 $ 2,960 $ 25,160 $ (102,993) $ (92,551) $ (89,334) $ (73,959) $ (64,484) $ (54,307) $ 2,562 - ----------------------------------------------------------------------------------------------------------
41 35 Exhibit 13 Appendix OMITTED GRAPHIC MATERIAL The following graphic material, included in the original paper format, has been excluded from the electronic filing of the 1997 Annual Report (Exhibit 13 to this filing). This graph appears in the section entitled "Financial Review" of the 1997 Annual Report. "ONGOING" PRETAX INCOME (excludes Ericsson Raynet and unusual items) A bar chart (dollars in millions) depicting: $146 in 1995; $230 in 1996 and $263 in 1997. EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT
ORGANIZED UNDER SUBSIDIARY NAME THE LAWS OF - --------------- ----------- Compagnie Francaise des Isolants ................... France Elo TouchSystems, Inc. ............................. Tennessee K.K. Raychem ....................................... Japan Raychem (Australia) Proprietary, Ltd. .............. Australia (New South Wales) Raychem (Delaware) Ltd ............................. Delaware Raychem (Nederland) Besloten Vennootschap .......... The Netherlands Raychem A/S ........................................ Denmark Raychem A/S ........................................ Norway Raychem AG ......................................... Switzerland Raychem Aktiebolag ................................. Sweden Raychem Canada Limited ............................. Canada Raychem Gesellschaft m.b.H. ........................ Austria Raychem GmbH ....................................... Germany Raychem Industries N.V. ............................ Belgium Raychem International Corporation .................. California Raychem International Manufacturing Corporation .... California Raychem International .............................. Cayman Islands, B.W.I. Raychem Korea Limited .............................. Korea Raychem Limited .................................... United Kingdom Raychem N.V. ....................................... Belgium Raychem OY ......................................... Finland Raychem Produtos Irradiados Limitada ............... Brazil Raychem RPG Limited ................................ India Raychem S.A. ....................................... France Raychem S.A. Industrial y Comercial ................ Argentina Raychem S.p.A. ..................................... Italy Raychem Saudi Arabia Limited ....................... Saudi Arabia Raychem Shanghai Cable Accessories Ltd. ............ People's Republic of China RAYCHEM SINGAPORE PTE. LIMITED ..................... Singapore Raychem Taiwan Limited ............................. Taiwan Raychem Technologies Ltd. .......................... Cyprus Raychem Tecnologias, S.A. de C.V. .................. Mexico RAYCHEM VENTURES, INC. ............................. California Raychem S.A. ....................................... Spain RTP Development Corporation ........................ Delaware SHG Strahlenchemie Holding Gesellschaft mit beschrankter Haftung ............................. Germany Sigmaform GmbH .................................... Germany Sigmaform U.K. Limited ............................. United Kingdom
EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-00353, No. 333-00355, No. 333-00925, No. 33-15116, No. 333-18125, No. 333-21959, No. 33-15117, No. 33-23856, No. 33-29215, No. 33-29216, No. 33-37579, No. 33-37580, No. 33-45986, No. 33-50737, No. 33-58437, No. 33-58869, No. 33-58871, and No. 33-59600) of Raychem Corporation of our report dated July 16, 1997, appearing on page 17 of the 1997 Annual Report to the Stockholders, portions of which are incorporated as Exhibit 13 to this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, listed in Item 14(a)(2) of this Form 10-K. /s/ PRICE WATERHOUSE LLP San Jose, California September 22, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 86,583 3,746 347,939 8,797 247,839 806,103 1,118,677 645,229 1,509,260 379,634 164,004 0 0 45,045 799,974 1,509,260 1,762,308 1,764,706 878,325 880,928 119,336 1,449 4,651 227,740 (25,604) 253,344 0 0 0 253,344 $5.54 0
EX-99.A 9 PARTICIPATING SUBSIDIARIES IN THE 1984 PLAN 1 Exhibit 99(a) Participating subsidiaries in the Amended and Restated 1984 Employee Stock Purchase Plan for United States employees and employees of certain domestic and foreign subsidiaries. The following subsidiaries of Raychem Corporation have been designated by the Administrator to participate in the Plan: Compagnie Francaise des Isolants K.K. Raychem Raychem A.G. Raychem A/S (Denmark) Raychem (Australia) Proprietary, Ltd. Raychem Gesellschaft m.b.H. Raychem GmbH Raychem (H.K.) Limited Raychem International Corporation Raychem Korea Limited Raychem Limited Raychem (Nederland) B.V. Raychem New Zealand Limited Raychem N.V. Raychem OY Raychem S.A. Raychem S.A. Raychem Saudi Arabia Limited RAYCHEM SINGAPORE PTE. LIMITED Raychem S.p.A. Raychem Taiwan Limited Remtek International, Inc. Sigmaform U.K. Limited Sigmaform GmbH SHG Strahlenchemie Holding Gesellschaft mit beschrankter Haftung Elo TouchSystems, Inc. Elo TouchSystems GmbH & Co. KG Walter Rose GmbH EX-99.B 10 PARTICIPATING SUBSIDIARIES IN THE 1985 PLAN 1 Exhibit 99(b) Participating subsidiaries in the Amended and Restated 1985 Supplemental Employee Stock Purchase Plan for employees of certain subsidiaries. The following subsidiaries of Raychem Corporation have been designated by the Administrator to participate in the Plan: Raychem Ltd. Raychem Aktiebolag Raychem Canada Limited Raychem del Peru, S.A. Raychem Industrial Y Comercial Limitada Raychem International Raychem International Manufacturing Corporation Raychem Produtos Irradiados Limitada Raychem S.A. Industrial y Comercial Raychem Technologias, S.A. de C.V. Raychem Uruguay S.A. Raychem de Venezuela, C.A. Raychem Technologies Ltd. -----END PRIVACY-ENHANCED MESSAGE-----