-----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, TKCi2v2pLwe8BfC8X1ocyDUeC4esLWFBdYRjXVURq5IPHBtkDqx61YdRpFzLS0+A LhXfoKaRAFBq3uW7B407IQ== 0000891618-98-004705.txt : 19981110 0000891618-98-004705.hdr.sgml : 19981110 ACCESSION NUMBER: 0000891618-98-004705 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYCHEM CORP CENTRAL INDEX KEY: 0000082206 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 951778500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08341 FILM NUMBER: 98740091 BUSINESS ADDRESS: STREET 1: 141 SPRING STREET CITY: LEXINGTON STATE: MA ZIP: 02421 BUSINESS PHONE: 6503613333 MAIL ADDRESS: STREET 1: 141 SPRING STREET CITY: LEXINGTON STATE: MA ZIP: 02421 FORMER COMPANY: FORMER CONFORMED NAME: RAYTHERM CORP DATE OF NAME CHANGE: 19720526 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 2-15299 RAYCHEM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-1369731 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 300 CONSTITUTION DRIVE, MENLO PARK, CA 94025-1164 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 361-3333 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of October 28, 1998, the registrant had outstanding 79,153,355 shares of Common Stock, $1.00 par value. ================================================================================ 2 RAYCHEM CORPORATION INDEX TO FORM 10-Q
Page Number ----------- PART I. FINANCIAL INFORMATION Item 1: Financial Information Consolidated Condensed Statement of Income for the three months ended September 30, 1998 and 1997 1 Consolidated Condensed Balance Sheet at September 30, 1998 and June 30, 1998 2 Consolidated Condensed Statement of Cash Flows for the three months ended September 30, 1998 and 1997 3 Notes to Consolidated Condensed Financial Statements 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K 22 SIGNATURES 23
3 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENT OF INCOME (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, -------------------------- 1998 1997 -------- -------- Revenues $446,746 $455,031 Cost of goods sold 239,331 226,948 Research and development expense 24,473 27,363 Selling, general, and administrative expense 118,757 112,306 Interest expense, net 4,926 2,815 Other expense, net 413 3,572 -------- -------- Income before income taxes 58,846 82,027 Provision for income taxes 20,595 20,506 -------- -------- Net income $ 38,251 $ 61,521 ======== ======== Earnings per share--basic $ 0.47 $ 0.72 ======== ======== Average number of shares outstanding--basic 80,651 85,551 ======== ======== Earnings per share--assuming dilution $ 0.47 $ 0.70 ======== ======== Average number of shares outstanding--assuming dilution 81,635 87,934 ======== ======== Dividends per share $ 0.08 $ 0.07 ======== ========
See accompanying notes to consolidated condensed financial statements. 1 4 RAYCHEM CORPORATION CONSOLIDATED CONDENSED BALANCE SHEET (IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED) SEPTEMBER 30, June 30, 1998 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 164,103 $ 92,667 Accounts receivable, net 341,500 325,039 Inventories: Raw materials 87,011 90,874 Work in process 62,899 64,143 Finished goods 125,302 123,931 ----------- ----------- Total inventories 275,212 278,948 Prepaid taxes 40,429 38,350 Other current assets 109,937 110,593 ----------- ----------- Total current assets 931,181 845,597 Property, plant, and equipment 1,196,195 1,147,923 Less accumulated depreciation and amortization 700,923 668,737 ----------- ----------- Net property, plant, and equipment 495,272 479,186 Deferred tax assets 186,940 186,595 Other assets 109,409 107,977 ----------- ----------- TOTAL ASSETS $ 1,722,802 $ 1,619,355 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 333,322 $ 181,284 Accounts payable 73,388 82,901 Compensation and benefits 67,199 56,878 Other accrued liabilities 86,154 88,914 Income taxes 74,260 62,871 Current maturities of long-term debt 6,969 6,574 ----------- ----------- Total current liabilities 641,292 479,422 Long-term debt 152,810 151,488 Deferred tax liabilities 27,413 27,762 Other long-term liabilities 96,067 92,257 Minority interests 9,763 8,784 Stockholders' equity: Preferred Stock, $1.00 par value Authorized: 15,000,000 shares; Issued: none -- -- Common Stock, $1.00 par value Authorized: 150,000,000 shares Issued: 90,028,103 shares 90,028 90,028 Additional contributed capital 425,477 425,477 Retained earnings 694,555 665,753 Accumulated other comprehensive income (7,828) (26,778) Treasury Stock, at cost (10,787,408 and 7,144,399 shares, respectively) (401,938) (290,320) Other (4,837) (4,518) ----------- ----------- Total stockholders' equity 795,457 859,642 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,722,802 $ 1,619,355 =========== ===========
See accompanying notes to consolidated condensed financial statements. 2 5 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30, ----------------------------- 1998 1997 --------- --------- Cash flows from operating activities: Net income $ 38,251 $ 61,521 Adjustments to reconcile net income to net cash provided by operating activities: Payments for restructurings and divestitures (4,143) (7,438) Net loss (gain) on sale of intellectual property and other 437 (1,223) assets Depreciation and amortization 21,938 20,533 Deferred income tax (benefit) provision (1,004) 1,320 Changes in certain assets and liabilities, net of effects from restructuring and divestitures: Accounts receivable (5,280) (16,587) Inventories 10,870 (6,284) Accounts payable and accrued liabilities (4,839) (25,091) Income taxes 9,279 8,652 Other assets and liabilities 364 14 --------- --------- Net cash provided by operating activities 65,873 35,417 --------- --------- Cash flows from investing activities: Investment in property, plant, and equipment (26,660) (25,282) Disposition of property, plant, and equipment -- 8,314 Investments in and advances to affiliated companies (2,315) (2,500) --------- --------- Net cash used in investing activities (28,975) (19,468) --------- --------- Cash flows from financing activities: Net proceeds from short-term debt 150,022 70,119 Proceeds from long-term debt 4,127 222 Payments of long-term debt (4,991) (6,253) Common Stock repurchased (123,461) (94,386) Common Stock issued under employee benefit plans 8,668 23,897 Proceeds from repayments of stockholder notes receivable 62 320 Cash dividends (6,530) (6,015) --------- --------- Net cash provided by (used in) financing activities 27,897 (12,096) --------- --------- Effect of exchange rate changes on cash and cash equivalents 6,641 (1,035) --------- --------- Increase in cash and cash equivalents 71,436 2,818 Cash and cash equivalents at beginning of period 92,667 86,583 --------- --------- Cash and cash equivalents at end of period $ 164,103 $ 89,401 ========= ========= Supplemental Disclosures Cash paid for: Interest (net of amounts capitalized) $ 5,984 $ 4,496 Income taxes (net of refunds) 12,323 9,596
See accompanying notes to consolidated condensed financial statements. 3 6 RAYCHEM CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF ACCOUNTING PRESENTATION In the opinion of management, the accompanying unaudited consolidated condensed financial statements include all adjustments, including normal recurring accruals, necessary to present fairly the results of operations for the three months ended September 30, 1998 and 1997, the financial position as of September 30, 1998, and the cash flows for the three months ended September 30, 1998 and 1997. The June 30, 1998 balance sheet is derived from the consolidated financial statements included in the company's Annual Report on Form 10-K for the year ended June 30, 1998. The results of operations for the three months ended September 30, 1998, are not necessarily indicative of the results to be expected for the full year. Certain prior-period amounts have been reclassified to conform with the 1999 financial statement presentation. BUSINESS SEGMENTS Revenues and operating income by business segment are as follows:
(in thousands) THREE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1998 1997 --------- --------- Revenues Electronics OEM components $ 203,318 $ 199,903 Telecommunications, energy and industrial 243,428 255,128 --------- --------- Total revenues $ 446,746 $ 455,031 ========= ========= Operating income Electronics OEM components $ 30,214 $ 41,689 Telecommunications, energy and industrial 48,600 64,858 Corporate group expenses (14,629) (18,133) --------- --------- Total operating income $ 64,185 $ 88,414 ========= =========
4 7 EARNINGS PER SHARE In the second quarter of 1998, the company adopted and retroactively applied the requirements of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128) to all periods presented. The following table presents the computation of earnings per share--basic and earnings per share--assuming dilution.
(in thousands, except per share amounts) THREE MONTHS ENDED SEPTEMBER 30, ------------------------ 1998 1997 ------- ------- Net income available to stockholders (numerator) $38,251 $61,521 ======= ======= Shares calculation (denominator): Average shares outstanding--basic 80,651 85,551 Effect of dilutive securities: Potential Common Stock relating to stock options and employee stock purchase plan 984 2,383 ------- ------- Average shares outstanding--assuming dilution 81,635 87,934 ======= ======= Earnings per share--basic $ 0.47 $ 0.72 ======= ======= Earnings per share--assuming dilution $ 0.47 $ 0.70 ======= =======
Options to purchase 6,594,000 shares of Common Stock at prices ranging from $30.13 to $47.94 per share were outstanding during the quarter ended September 30, 1998, but were not included in the computation of earnings per share--assuming dilution because the options' exercise prices were greater than the average market price of the common shares. These options expire between April 2006 and August 2008. FINANCIAL INSTRUMENTS Net gains and losses from forward exchange contracts used to cover receivables and payables totaled gains of $4.3 million and $2.0 million for the three months ended September 30, 1998 and 1997, respectively. The company incurred a total net foreign exchange gain of $0.5 million and a net loss of $0.4 million for the three months ended September 30, 1998 and 1997, respectively. These realized and unrealized gains and losses are included in "Other expense, net." The total amount of foreign exchange exposure covered was $117 million at September 30, 1998. The company covers exposures that arise from trade and intercompany receivables and payables, intercompany loans in non-functional currencies, and net monetary assets in certain foreign countries with the US dollar as functional currency. These exposures are primarily in Japanese yen (27% of net contract value), Belgian francs (18%), French francs (13%), Italian lire (7%), and Spanish pesetas (7%). 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, or where the company's exposed position and the perceived currency environment render a hedge inadvisable. Such 5 8 exposures at September 30, 1998, included $13 million in net receivables and payables in non-functional currencies and $7 million in net monetary assets in foreign countries with the US dollar as functional currency. 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 marketable securities held at September 30, 1998, was $8 million. Gross unrealized gains were $3 million as of September 30, 1998, and are included, net of tax, as a component of "Accumulated other comprehensive income." RESTRUCTURING AND DIVESTITURES The company incurred a pretax restructuring charge of $28 million in the fourth quarter of 1998 (the 1998 restructuring). The restructuring actions included write-downs of inventory and machinery and equipment related to discontinued products and operations, severance costs for the reorganization of certain business segments, and severance costs associated with moving certain manufacturing facilities to lower-cost locations. As a result of the 1998 restructuring, approximately 130 positions will be eliminated. As of September 30, 1998, 68 employees have separated from the company due to the 1998 restructuring. The company expects the 1998 restructuring to be substantially completed by the end of the current fiscal year. The following table, which includes the 1998 restructuring as well as prior restructurings, presents the company's restructuring reserves as of September 30, 1998:
(in thousands) ----------------------------------------------------------------------------------- EMPLOYEE ASSET COSTS WRITE-DOWNS LEASES OTHER TOTAL -------- -------- -------- -------- -------- Reserve Balances, June 30, 1998 $ 22,318 $ 13,062 $ 89 $ 3,348 $ 38,817 Cash payments (3,548) -- -- (595) (4,143) Non-cash items -- (7,798) -- (17) (7,815) -------- -------- -------- -------- -------- RESERVE BALANCES, SEPTEMBER 30, 1998 $ 18,770 $ 5,264 $ 89 $ 2,736 $ 26,859 ======== ======== ======== ======== ========
REPURCHASE OF COMMON STOCK During the three months ended September 30, 1998, the company repurchased 4 million shares of its Common Stock for $123 million and reissued 0.4 million shares, leaving 10.8 million shares in treasury stock at September 30, 1998. In July 1997, the board of directors authorized the company's management, at its discretion, to repurchase up to $300 million of the company's stock during any fiscal year. The company utilized a portion of its committed borrowing facilities to partially finance share repurchases. 6 9 COMPREHENSIVE INCOME In the first quarter of 1999, the company adopted and retroactively applied the requirements of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for reporting and displaying comprehensive income and its components in an annual financial statement that is displayed with the same prominence as other financial statements. The components of comprehensive income, net of tax, are as follows:
(in thousands) THREE MONTHS ENDED SEPTEMBER 30, --------------------------- 1998 1997 -------- -------- Net income $ 38,251 $ 61,521 Other comprehensive income: Net change in unrealized (loss) gain on available-for-sale securities (2,275) 1,987 Foreign currency translation adjustment 21,225 (8,018) -------- -------- Comprehensive income $ 57,201 $ 55,490 ======== ========
CONTINGENCIES The company and its subsidiaries are parties to lawsuits or may in the future become parties to lawsuits involving various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, and intellectual property matters. Legal proceedings tend to be unpredictable and costly and may be affected by events outside the control of the company. The company maintains various levels of insurance to apply to product liability and certain other claims in excess of deductibles. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. The company's major litigation matters as of September 30, 1998, are described below. On December 19, 1994, the company filed a complaint entitled Raychem Corporation and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior Court of the State of California, County of San Mateo, which alleged, among other claims, misappropriation of trade secrets. On May 2, 1995, a complaint entitled Bourns, Inc. v. Raychem Corporation was filed in the United States District Court, Central District of California, alleging antitrust law violations. Many of the claims asserted in the company's state action were consolidated with Bourns' federal action against the company. On March 9, 1998, this case was transferred from the Eastern Division of the Central District to the Western Division of the Central District and reassigned to a new judge. The trial for Bourns' action against the company commenced on June 16, 1998. During the sixth week of the trial, due to the length of the proceeding, the judge bifurcated the company's trade secret action against Bourns for trial at a later date. On August 10, 1998, the trial of Bourns' action against the company ended with a jury verdict that awarded Bourns $64 million in damages. Legal fees and expenses, including attorneys fees, are also recoverable by Bourns under applicable U.S. antitrust law. The company has filed motions with the court to set aside the jury's verdict, to reduce the damages, and to ask for a new trial on the grounds that the verdict is contrary to the evidence presented at trial and is incorrect as a matter of law and that the jury's damage award bears no relationship to the market segment to which the verdict was directed. If necessary, the company intends to appeal this decision. Under applicable U.S. antitrust law, any remaining damage award against the company will be trebled. The company also intends to continue with its theft of trade secrets case against 7 10 Bourns. The new trial date for the trade secret action has not been set by the court. Due to the foregoing, the company has not accrued any liability with respect to this litigation. Currently, the company's principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company's experience to date is that losses, if any, from such claims have not had a material effect on the company's financial position or results of operations. However, the company sells its products into applications (such as electronic interconnection products for aerospace and automotive markets) where product liability issues could be material. The company is a defendant in a product liability case in the United States District Court in Seattle, All Alaskan Seafoods, Inc., et al. v. Raychem Corporation, Minnesota Mining and Manufacturing Corporation and Marine Electric, Inc., et al. The action arises out of a cargo vessel fire allegedly caused by a heat-tracing product. The plaintiffs in this case are seeking in excess of $150 million in damages. On November 21, 1997, the District Court granted the company's motion to limit damages claimed by the plaintiffs to the value of the cargo lost or destroyed and certain other incidental claims of crew members (now alleged to be approximately $4 million) on account of the incident giving rise to the plaintiffs' claims. The parties have stipulated to a dismissal (without prejudice) of the remaining claims, so that plaintiffs may appeal the District Court's decision to the Ninth Circuit Court of Appeals. Plaintiffs filed their Notice of Appeal on May 26, 1998. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. Four separate state actions based on essentially the same facts, alleging wrongful distributor termination and antitrust claims, have been consolidated in the Superior Court of San Mateo County, California, Unit Process Company, et al. v. Raychem Corporation, et al. The dismissal in the United States District Court, Northern District of California, of an action alleging essentially the same facts was affirmed by the Ninth Circuit Court of Appeals in 1996. On February 25, 1998, the Superior Court granted the company's motion to dismiss this lawsuit, with leave to the plaintiffs to amend certain of their claims. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. Additionally, the company has been named, among others, as a potentially responsible party in judicial and administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. The company believes that it does not have material liability for cleanup costs at these sites. SUBSEQUENT EVENTS On October 1, 1998, the company completed the acquisition of the telecommunications business of Plasticos Mondragon S.A. (Mondragon) in Spain for a cash purchase price of approximately $40 million. The Mondragon telecommunications business manufactures and supplies components for connecting, insulating, and protecting copper and fiber-optic telephone networks. The acquisition will be accounted for using the purchase method. On October 14, 1998, the company's Board of Directors announced its regular quarterly dividend of $0.08 per share, payable on December 9, 1998, to stockholders of record as of November 11, 1998. On October 23, 1998, the company issued $400 million of notes. The notes mature on October 15, 2008, and bear interest at a rate of 7.20% per annum. The company will use the net proceeds from the sale of 8 11 the notes primarily to repay $275 million outstanding under the company's $400 million revolving credit facility, which remains available to the company until September 12, 2001. The company intends to use the remaining portion of the net proceeds from the sale of the notes for general corporate purposes, which may include financing the company's current stock repurchase program and possible acquisitions. Between October 1, 1998 and November 4, 1998, the company repurchased 366,000 shares of the company's Common Stock for $11 million. 9 12 RAYCHEM CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 (in millions, except per share data) - ------------------------------------------------------------------------------------ Revenues $ 447 $ 455 Pretax income $ 59 $ 82 Provision for income taxes 21 20 Net income $ 38 $ 62 Earnings per share--assuming dilution $0.47 $0.70 Average number of shares outstanding--assuming dilution 81.6 87.9 - ------------------------------------------------------------------------------------
REVENUES AND REVENUE GROWTH Revenues for the first quarter of 1999 were $447 million compared to $455 million in the year-ago quarter. Revenues were flat on a constant currency basis, but declined 2% in reporting currencies, primarily as a result of the U.S. dollar strengthening against the Japanese yen. Revenues were also impacted by price reductions in several product lines due to competitive pressures, as shown in the table below:
- ------------------------------------------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30, 1998 (percentage change over prior-year quarter) - ------------------------------------------------------------------------------------ Components of reported revenue growth: Growth in volumes, net of product mix changes 4% Effect of price reductions(a) (4%) ---- - ------------------------------------------------------------------------------------ Constant currency revenue growth 0% Effect of exchange rate changes (2%) ---- - ------------------------------------------------------------------------------------ Total reported revenue growth (2%) ==== - ------------------------------------------------------------------------------------
(a) A management estimate based on year-over-year changes in revenues at constant volume and mix. On a constant currency basis, first quarter revenues were up 2% in North America, down 4% in Europe, down 1% in Asia, and up 9% in the rest of the world. In North America, sales growth was largely driven by sales increases in the electronics OEM components segment and by sales growth in access network electronics, partially offset by a decline in sales of telecommunications and electric heat-tracing products. The sales decline in Europe was mainly caused by weak sales of telecommunications and electric heat-tracing products. In Asia, revenue growth in Taiwan and the Peoples Republic of China was 10 13 offset by sales declines in other Asian markets, particularly in Korea and Japan. In the rest of the world, strong revenue growth in Latin America was partially offset by revenue declines in other regions. GROSS PROFIT, OPERATING EXPENSES, AND PRETAX INCOME
- -------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 (percentage of revenues) - -------------------------------------------------------------------------------- Gross profit 46% 50% Research and development expense 5% 6% Selling, general, and administrative expense 27% 25% Interest and other expense, net 1% 1% Pretax income 13% 18% - --------------------------------------------------------------------------------
Gross profit as a percentage of revenues declined to 46% in the first quarter of 1999, compared to 50% in the year-ago quarter. The decline was primarily due to price reductions, a shift toward product lines with lower margins, and adverse currency movements. Selling, general, and administrative expense (SG&A) as a percentage of revenues increased to 27% in the first quarter of 1999, compared to 25% in the prior-year quarter. The increase in SG&A was in part due to increased spending related to the implementation of the company's enterprise information system and higher litigation expenses. Pretax income for the first quarter of 1999 was $59 million (13% of revenues) compared to $82 million (18% of revenues) in the prior-year quarter. The decrease was primarily attributable to lower gross profit and increased SG&A expense during the quarter. PROVISION FOR INCOME TAXES The estimated annual effective tax rate for 1999 is 35% compared to 25% in the year-ago quarter. The lower estimated annual effective tax rate in 1998 was primarily attributable to recognition of a U.S. deferred tax benefit. NET INCOME AND EPS Net income for the first quarter of 1999 was $38 million ($0.47 per share--assuming dilution), compared to net income of $62 million ($0.70 per share--assuming dilution) in the year-ago quarter. The average number of shares outstanding--assuming dilution during the first quarter of 1999 decreased to 81.6 million from 87.9 million in the prior-year quarter, largely due to the company's repurchase of its Common Stock. 11 14 BUSINESS SEGMENTS During the fourth quarter of 1998, the company realigned its businesses by combining the former telecommunications and energy networks segment and the commercial and industrial infrastructure segment into the new telecommunications, energy and industrial business segment. The company's financial results are now reported as two business segments, described below, and the corporate group. ELECTRONICS OEM COMPONENTS This business segment serves original equipment manufacturers (OEMs) in transportation, defense, and a wide range of commercial electronics industries.
- --------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 (dollars in millions) - --------------------------------------------------------------- Revenues $203 $200 Constant currency revenue growth 5% 18% Operating income $ 30 $ 42 - ---------------------------------------------------------------
First quarter revenues for the electronics OEM components business segment were $203 million, up 5% on a constant currency basis from the year-ago quarter. Revenues from sales of interconnection products, including wire, cable, heat-shrinkable tubing and connectors, were $121 million for the quarter, reflecting growth of 8% on a constant currency basis from the year-ago quarter. Sales growth was strongest in North America as a result of increased sales of transportation and commercial electronics products. In Europe, growth was the result of increased sales of interconnection products for rail and mass transit, automotive and defense applications. The growth in North America and Europe more than offset sales declines in Japan and the rest of Asia where governments cut back on defense spending. Sales of circuit protection products were $54 million, down 7% on a constant currency basis from the year-ago quarter. This is primarily attributable to a 17% decline in sales price as compared to the year-ago quarter. However, an increase in unit volumes of 10% partially offset the adverse effect of competitive pricing pressures. Elo TouchSystems' revenues were $28 million, up 20% on a constant currency basis compared to the year-ago quarter. This growth was driven by an increase in the demand for kiosk and point-of-information applications in Europe and North America, and demand for touch-input systems in kiosk, amusement and gaming applications in Japan. The segment's operating income as a percentage of revenues in the first quarter of 1999 was 15% compared to 20% in the year-ago quarter. The reduction in operating income as a percentage of revenue was primarily caused by price reductions, primarily on circuit protection products; a change in product mix, as the sales volume of products with lower profit margins increased; and increased litigation expenses. 12 15 TELECOMMUNICATIONS, ENERGY AND INDUSTRIAL This business segment serves telecommunication operators; power, gas, and water utilities; and industrial plants and pipelines.
- ------------------------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 (dollars in millions) - ------------------------------------------------------------------ Revenues $ 243 $ 255 Constant currency revenue growth (4%) 7% Operating income $ 49 $ 65 - ------------------------------------------------------------------
First quarter revenues for the telecommunications, energy and industrial business segment were $243 million, down 4% on a constant currency basis from the year-ago quarter. Revenues from the sale of telecommunications products, including accessories for cable and fiber networks, were $95 million, down 6% on a constant currency basis from the year-ago quarter. A decline in sales of copper system accessories was partially offset by continuing growth in revenues from fiber-optic products for broadband networks. Revenues from sales of access network electronics products were $23 million, up 13% on a constant currency basis over the prior-year quarter. The first quarter revenue growth, as compared to the prior-year quarter, was impacted by the company's decision to discontinue sales of access network electronics products outside of North America. Growth in North America was up 27%, but slower than expected due to delayed product deployment at certain customers. Revenues from sales of cable accessories and other insulation products for energy networks totaled $69 million for the quarter, up 2% on a constant currency basis from the year-ago quarter. Revenues from commercial and industrial sales of electric heat-tracing systems, corrosion prevention products, and leak detection systems were $57 million, down 11% on a constant currency basis from the year-ago quarter. The decline in revenues was primarily caused by decreased sales of electric heat-tracing products in Europe and North America, in part due to the lingering effects of last year's warm winter, a slowdown in maintenance spending within the oil, gas and chemical processing industries, and slow project business. The segment's operating income as a percentage of revenues in the first quarter of 1999 was 20% compared with 25% in the year-ago quarter. The reduction in operating income as a percentage of sales was primarily caused by a shift in mix toward products that have lower profit margins and adverse currency exchange movements. 13 16 ACQUISITION Subsequent to quarter end, on October 1, 1998, the company completed the acquisition of the telecommunications business of Plasticos Mondragon S.A. (Mondragon) in Spain for a cash purchase price of approximately $40 million. The Mondragon telecommunications business manufactures and supplies components for connecting, insulating, and protecting copper and fiber-optic telephone networks. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The company is in the process of reassessing current business segment reporting to determine if changes in reporting will be required in adopting this new standard. The disclosures prescribed by FAS 131 will first be adopted in the company's 1999 annual report. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives should be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The company plans to adopt FAS 133 in the first quarter of fiscal 2000 and has not yet determined the effect, if any, of adopting the new standard. 14 17 LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the company had $164 million in cash and cash equivalents and $304 million in unused credit facilities, of which $182 million are committed facilities. Subsequent to quarter-end, on October 23, 1998, the company completed an offering of notes in the amount of $400 million. The combination of cash and cash equivalents, available lines of credit, 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. The following table presents certain measures of liquidity and capital resources:
- ------------------------------------------------------------------------------------- SEPTEMBER 30, June 30, (dollars in millions) 1998 1998 - ------------------------------------------------------------------------------------- Debt net of cash $329 $247 Debt net of cash as a percent of stockholders' equity 41% 29% Days' sales outstanding 64 62 Days' sales in inventory 102 104 - -------------------------------------------------------------------------------------
Debt net of cash was $329 million on September 30, 1998 compared to $247 million on June 30, 1998. The increase was primarily due to an increase in short-term borrowings to repurchase shares of the company's Common Stock. During the first quarter of 1999, the company repurchased 4 million shares for $123 million. The table below summarizes the company's cash flows from operating, investing, and financing activities:
- ------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 (dollars in millions) - ------------------------------------------------------------------------------------- Cash provided by (used in): Operating activities $ 66 $ 35 Investing activities (29) (19) Financing activities 28 (12) Effect of exchange rate changes on cash and cash equivalents 6 (1) ---- ---- - ------------------------------------------------------------------------------------- Increase in cash and cash equivalents $ 71 $ 3 ==== ==== - -------------------------------------------------------------------------------------
15 18 OPERATING ACTIVITIES Cash provided by operating activities during the first quarter of 1999 was $66 million compared to $35 million in the prior-year quarter. The increase was primarily due to the absence of employee bonus payments in the first quarter of 1999, compared to $29 million of such payments in the prior-year quarter. In addition, the change also reflects lower spending on inventory as compared to the first quarter of 1998. INVESTING ACTIVITIES Net cash used in investing activities was $29 million in the first quarter of 1999 compared to $19 million in the year-ago quarter. Capital expenditures were $27 million in the first quarter of 1999 compared to $25 million in the first quarter of 1998. Cash used in investing activities during the first quarter of 1998 was partially offset by $8 million in proceeds from the sale of property. FINANCING ACTIVITIES Net cash provided by financing activities during the first quarter of 1999 was $28 million compared to net cash used of $12 million in the year-ago quarter. Net proceeds from short-term debt were $150 million compared to $70 million in the prior-year quarter. The proceeds from short-term debt in the first quarter of 1999 were primarily used for share repurchases, as the company spent $123 million compared to $94 million in the prior-year quarter. Subsequent to quarter end, on October 23, 1998, the company issued notes in the amount of $400 million. The notes mature on October 15, 2008 and bear interest at a rate of 7.20% per annum. The interest rate on the notes may increase if, prior to October 23, 2002, either Moody's Investor Services, Inc. or Standard & Poor's Rating Services reduces the rating of the notes to below investment grade. The company will use the net proceeds from the sale of the notes primarily to repay $275 million outstanding under the company's $400 million revolving credit facility, which remains available to the company until September 12, 2001. The company intends to use the remaining portion of the net proceeds from the sale of the notes for general corporate purposes, which may include financing the company's current stock repurchase program and possible acquisitions. YEAR 2000 The company has a comprehensive Year 2000 project designed to identify and assess the risks associated with its information systems, products, operations and infrastructure, suppliers, and customers that are not Year 2000 compliant, and to develop, implement, and test remediation and contingency plans to mitigate these risks. The project comprises four phases: (1) identification of risks, (2) assessment of risks, (3) development of remediation and contingency plans, and (4) implementation and testing. INFORMATION SYSTEMS. As part of an enterprisewide process reengineering commenced in 1996, the company is replacing a substantial portion of its existing information systems with a fully integrated, enterprise information system, which its vendor (SAP America, Inc.) warrants to be Year 2000 compliant, and that will support the majority of the company's operations, including major plants in the United States and Europe. This project was undertaken without regard to possible Year 2000 issues and has not been accelerated as a result of Year 2000 issues. Therefore, the company does not expect to record Year 2000-related expenses in connection with the implementation of this system. However, this system will not be fully implemented in certain of the company's locations by the year 2000. A review of the company's information systems for locations where this system will not have been implemented 16 19 prior to January 1, 2000, has been completed and the company has initiated the work necessary for the existing systems in these locations to become Year 2000 compliant. In addition to the system described above, the company uses a different standardized enterprise information system in its Asian, Latin American, and certain other locations, and for sales-order and supply-chain activity in certain plants in North America. The company is currently in the process of implementing an upgrade for this system, which the vendor (QAD Inc.) warrants to be Year 2000 compliant, and expects this upgrade to be completed by the fourth quarter of fiscal 1999. Testing of all information systems will be conducted over the next year. The company's global electronic data interchange applications (through which the company communicates business transactions with certain of its customers and suppliers) will be modified to be Year 2000 compliant by the end of the second quarter of fiscal 1999. The company is also actively reviewing its hardware and systems infrastructure, such as networks, in order to support the activities described above. Based on the current status of the assessments and remediation plans made to date, the company expects total Year 2000 related costs pertaining to its information systems to be approximately $4 million. PRODUCTS. The company has assessed the capabilities of most of its products sold to customers and is in the process of developing remediation plans for Year 2000 compliance. Based on the assessments made to date, only a small number of the company's products are affected by Year 2000 issues. The company intends to make the products that it will continue to sell Year 2000 compliant within the next six months and to make upgrades available for certain other products. OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used in the operations and facilities of the company have been inventoried and are currently being assessed for Year 2000 compliance. The assessment process is expected to be completed during the second quarter of fiscal 1999. The assessment to date has not yielded any major areas of concern. SUPPLIERS. The company is also in the process of evaluating its supplier base to determine whether Year 2000 issues affecting suppliers will adversely impact the company's operations. To mitigate this risk, the company has contacted its suppliers to assess their Year 2000 readiness and will continue to monitor the progress of its key suppliers. The company has a limited number of key suppliers and expects to have the assessment of these key suppliers completed during the second quarter of fiscal 1999. CUSTOMERS. The company established a Global Year 2000 Desk at its headquarters in California to handle all customer requests for compliance, survey, and other general information related to its Year 2000 Programs. GENERAL AND RISK FACTORS. The company's Year 2000 project is currently in the assessment phase and, with respect to certain information systems and products, in the remediation phase. The company believes that its greatest potential risks for Year 2000 issues are associated with its information systems and systems embedded in its operations and infrastructure. The company has not yet determined the extent of contingency planning that may be required. Based on the status of the assessments made and remediation plans developed to date, the company is not in a position to state the total cost of remediation of all Year 2000 issues. The company does not currently expect the total costs to be material, and it expects to be able to fund the total costs through operating cash flows. However, the company has not yet completed its assessments, developed 17 20 remediation plans for all problems, developed any contingency plans, or completely implemented or tested any of its remediation plans. As the Year 2000 project continues, the company may discover additional Year 2000 problems, may not be able to develop, implement, or test remediation or contingency plans, or may find that the costs of these activities exceed current expectations and become material. In many cases, the company is relying on assurances from suppliers that new and upgraded information systems and other products will be Year 2000 compliant. The company plans to test certain third-party products, but cannot be sure that its tests will be adequate or that, if problems are identified, they will be addressed by the supplier in a timely and satisfactory way. Because the company uses a variety of information systems and has additional systems embedded in its operations and infrastructure, the company cannot be sure that all of its systems will work together in a Year 2000-compliant fashion. Furthermore, the company cannot be sure that it will not suffer business interruptions, either because of its own Year 2000 problems or those of its customers or suppliers whose Year 2000 problems may make it difficult or impossible for them to fulfill their commitments to the company. If the company fails to satisfactorily resolve Year 2000 issues related to its products in a timely manner, it could be exposed to liability to third parties. The company is continuing to evaluate Year 2000-related risks and to design and implement corrective actions. The risks associated with the Year 2000 problem are pervasive and complex; they can be difficult to identify and to address, and can result in material adverse consequences to the company. Even if the company, in a timely manner, completes all of its assessments, identifies and tests remediation plans believed to be adequate, and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences to the company. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Statements in this quarterly report on Form 10-Q that are not statements of historical fact, including statements regarding revenue or earnings trends, financial goals, litigation matters, acquisitions, restructuring actions, Year 2000 readiness, and currency fluctuations, economic trends, and the business environment, are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties include those described below, as well as risk factors included in the company's annual report on Form 10-K for the year ended June 30, 1998, on file with the Securities and Exchange Commission. FLUCTUATIONS IN FOREIGN EXCHANGE RATES MAY AFFECT THE COMPANY'S RESULTS. Approximately two-thirds of the company's revenues result from sales outside the United States, a significant portion of which are denominated in foreign currencies. In addition, the company has several production facilities located outside the United States. The company's financial results therefore can be affected by changes in foreign currency exchange rates. To mitigate these effects, the company hedges its transaction exposure (i.e., the effect on earnings and cash flows of changes in foreign exchange rates on receivables and payables denominated in foreign currencies). The company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on the company's consolidated net income. Accordingly, the company's reported revenues and net income have been and in the future may be affected by changes in foreign currency exchange rates. 18 21 IMPORTANCE OF INTERNATIONAL MARKETS. International markets provide the company with significant growth opportunities. However, the following events could adversely affect the company's financial results: - periodic economic downturns in different regions of the world, - changes in trade policies or tariffs, - political instability, and - fluctuations in exchange rates. The deterioration of economic conditions in certain Asian countries has caused revenues in Asia to fall below the company's expectations. Future results in Asia will depend on an improvement in these economic conditions. Continuing economic recession in Asia may lead to the cancellation of orders, pressure to reduce prices in the region, and difficulty in collecting receivables owed to the company or other factors that may adversely affect the company. RESTRUCTURING ACTIONS MAY NOT ACHIEVE INTENDED RESULTS. The company continues to implement a number of complex restructuring actions. Delay or difficulty in implementing these actions or market factors could reduce the anticipated benefit of these actions. The company's revenues, operating results, and financial condition could be adversely affected by the company's ability to manage effectively the transition to the new organizational structures, to continually improve manufacturing processes, and to outsource certain activities. There can be no assurance that the company will succeed in achieving its goals or that it will do so without unintended adverse consequences. PROBLEMS ASSOCIATED WITH YEAR 2000. As described above under Year 2000, the company is continuing to evaluate Year 2000-related risks and to design and implement corrective actions. The risks associated with the Year 2000 problem are pervasive and complex; they can be difficult to identify and to address, and can result in material adverse consequences to the company. Even if the company, in a timely manner, completes all of its assessments, identifies and tests remediation plans believed to be adequate, and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences to the company. IMPLEMENTATION OF NEW INFORMATION SYSTEMS COULD CAUSE BUSINESS DISRUPTIONS. In 1996, the company began an enterprisewide process reengineering and information-system implementation to redesign the company's supply chain and other key business processes. This system will replace the company's core data and information systems with a fully integrated, enterprise information system. It will cover all of the company's major manufacturing sites and sales locations. The company does not expect to fully implement the system in all geographical areas and divisions by the year 2000. However, the company does expect to complete the implementation of this system for a major portion of the company's business by the end of calendar year 1999. The change in systems and processes is substantial. During implementation of this new system, the change could cause delays in: - order processing, - shipments of products, - invoicing, and - the accumulation and analysis of financial data. There can be no assurance that these delays, if they occur, will not have an adverse effect on the company's operating results or financial position. 19 22 LITIGATION IS UNPREDICTABLE AND COSTLY. From time to time the company or its subsidiaries, or both, become involved in lawsuits arising from various types of commercial claims, including: - product liability, - unfair competition, - antitrust, - breach of contract, - environmental, and - intellectual property matters. Currently, the company's principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company also sells other products in markets where product liability issues could be material (for example, electronic interconnect products--such as wire, cable, heat-shrinkable tubing, marking systems, connectors, and other devices--for aerospace and automotive markets). The company has a substantial investment in intellectual properties (consisting of patents, trademarks, copyrights, and trade secrets). The company relies significantly on the protection these intellectual property rights provide. Accordingly, the company protects these rights and from time to time becomes involved in issues of infringement or theft by third parties. The third parties may assert related counterclaims against the company, including unfair competition, antitrust or infringement claims. The company has been involved, as both a defendant and a plaintiff, in intellectual property lawsuits and could become involved in others in the future. Litigation tends to be unpredictable and costly. Events outside the company's control may affect the results of litigation. There is no assurance that litigation will not have a material adverse effect on the company's future financial position or results of operations. NEW PRODUCTS AND ACQUISITIONS MAY NOT PRODUCE ANTICIPATED BENEFITS. The company has historically achieved part of its revenue growth by developing or acquiring new and innovative materials science technologies and products. The company remains committed to internal research and development efforts, and will continue to pursue the acquisition of new or compatible technologies and businesses as an important part of the company's growth strategy. The company also has entered into, and in the future may enter into, arrangements with other companies to expand product offerings and to enhance its own manufacturing capabilities. These arrangements may include minority equity investments in the other companies. The company cannot predict success in its research and development efforts, acquisitions of new technologies, products, or businesses, or arrangements with third parties. Accordingly, there can be no assurance that: - the company will successfully realize its objectives; - the realization of these goals will not take longer or cost more than anticipated; or - there will not be unintended adverse financial or other consequences from these actions. OTHER MARKET FORCES CAN ADVERSELY AFFECT THE DEMAND FOR THE COMPANY'S PRODUCTS. Changing market circumstances, such as fluctuations in demand and the seasonality of certain product lines, may affect the company's operating results. The company also sells certain of its products to customers in industries and countries that are experiencing periods of rapid change. For example: 20 23 - the telecommunications industry is going through a period of rapid technological change, and customers in this industry may delay purchases of the company's products until they resolve technology issues more clearly; - foreign countries are privatizing many electric power utilities, which may affect the purchasing policies of these utility companies. These types of market forces may adversely affect the company's operations and financial performance. CUSTOMER CONCENTRATION FOR ACCESS NETWORK ELECTRONICS PRODUCTS. The company no longer pursues sales of its access network electronics products outside of North America. Because these products are sold to operators of large telecommunication systems, the customers and potential customers for these products are now limited to the relatively few operators of such systems in North America. A decision by one of these customers not to purchase the company's access network electronics products, or to delay the purchase of these products, could have a material impact on the company's sales of these products or the growth rate of such sales. GEOGRAPHIC AND PRODUCT MIX CHANGES MAY AFFECT THE COMPANY'S RESULTS OF OPERATIONS. The company's results of operations vary by product line and by geographic region. Changes in the company's geographic or product mix of sales may therefore affect the company's gross profits. THE COMPANY'S ANNUAL EFFECTIVE TAX RATE IS DIFFICULT TO ESTIMATE. The company determines its provision for income taxes based on the company's level of profitability in each jurisdiction in which it is subject to tax. It is difficult for the company to predict the geographic distribution and level of profitability in each jurisdiction. The company's geographic distribution and level of profitability may therefore vary from forecasts. This type of variance could cause the company's estimated annual effective tax rate in interim quarters to vary from the actual annual effective tax rate for the year. GENERAL. Because of the foregoing factors, in addition to other factors that affect the company's operating results and financial position, investors should: - not consider past financial performance or management's expectations a reliable indicator of future performance, and - not use historical trends to anticipate results or trends in future periods. In that regard, results of operations and financial condition could be adversely affected by a number of factors in addition to those discussed above, including overall economic conditions and lower than expected demand. Further, the company's stock price is subject to volatility. Any of the factors discussed above could have an adverse effect on the company's stock price. In addition, the company's stock price could be adversely affected if the company's revenues or earnings in any quarter fail to meet the investment community's expectations, or if there are broader, negative market trends. NO DUTY TO UPDATE. The company does not undertake an obligation to update its forward-looking statements or risk factors to reflect future events or circumstances. 21 24 RAYCHEM CORPORATION PART II - OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits EXHIBIT NO. DESCRIPTION 10(y) Agreement and release between the company and Arati Prabhakar 27.1 Financial Data Schedule (b) Reports on Form 8-K The company filed one Current Report on Form 8-K during the quarter ended September 30, 1998. The report was filed on August 19, 1998, and reported on the outcome on August 10, 1998, of the trial of the action entitled Bourns, Inc. v. Raychem Corporation. 22 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYCHEM CORPORATION ------------------- (Registrant) Date: November 6, 1998 /s/ RAYMOND J. SIMS ----------------------------- Raymond J. Sims Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ DEIDRA D. BARSOTTI ----------------------------- Deidra D. Barsotti Vice President and Controller (Principal Accounting Officer) 23 26 EXHIBIT INDEX
EXHIBIT # DESCRIPTION - --------- ----------- 10(y) Agreement and release between the company and Arati Prabhakar 27.1 Financial Data Schedule
EX-10.Y 2 AGREEMENT AND RELEASE 1 EXHIBIT 10(y) [RAYCHEM CORPORATION LETTERHEAD] July 10, 1998 Arati Prabhakar Re: Agreement and Release Dear Arati: This Agreement and Release (the "Agreement") is to confirm our agreement with respect to the termination of your employment with Raychem Corporation ("Raychem"). Please indicate your agreement by signing, dating, and returning this Agreement to me no later than August 1, 1998. We have agreed that your employment with Raychem will end as of the end of the business day on September 1, 1998 or, if you elect to terminate your employment voluntarily before such date, such earlier date (the "Termination Date"). Thereafter, you will no longer be an employee of Raychem. In your final paycheck on the Termination Date, you will be paid all earned and unpaid salary together with any accrued and unused vacation pay, less deductions authorized or required by law. Raychem will also pay to you, by September 1, 1998, the guaranteed bonus for the period from July 1, 1997 to June 30, 1998, as outlined in Raychem's offer letter to you dated March 11, 1997. In addition, to induce Raychem to enter into this Agreement, you agree to enter into the Professional Services Agreement attached as Exhibit 1. You agree that the consideration named in this Agreement is sufficient to compensate you for the release given herein, for any consulting services you may provide to Raychem pursuant to the Professional Services Agreement, and for agreeing to all other terms set forth in this Agreement. You also agree that the severance amounts set forth herein are in lieu of any severance payments to which you would otherwise be entitled under Raychem's Human Resources policies. Commencing on September 1, 1998, you will also receive a severance amount equal to (i) one (1) year of severance payments based on your current salary of Two Hundred and Fifty Thousand Dollars ($250,000.00) regardless of whether you obtain other employment during this period (the "Full Salary Period"), and (ii) if you are not working at a new job or for yourself (self-employed) during the one (1) year period commencing on September 1, CONFIDENTIAL 2 Arati Prabhakar July 10, 1998 Page 2 1999, upon your written request as set forth below, up to an additional one (1) year of such severance payments based on your current salary Two Hundred and Fifty Thousand Dollars ($250,000.00) or, if you are working at a new job or for yourself (self-employed) during the year commencing on September 1, 1999, and your annual cash compensation and/or salary (including bonuses) from this employment or self-employment is less than Two Hundred and Fifty Thousand Dollars ($250,000.00), the difference between those two (2) figures (the "Differential Salary Period"). Your written request to receive all or part of the second year of such severance payments must be received by Raychem at least seven (7) days prior to the date you would be eligible for such payments. Your written request must include confirmation that you are not working or, if you are, what your salary or compensation and expected bonus are. You also agree to subsequently notify Raychem in writing within five (5) days after any changes in such information (including changes in employment, salary, compensation and bonus) and to certify to Raychem on a quarterly basis, and otherwise, as requested by Raychem, the amount of compensation, salary and bonus from another employer and/or self-employment you are receiving during the Differential Salary Period. Payments pursuant to the Full Salary and the Differential Salary Period are not eligible for deferral under the Raychem Executive Deferred Compensation Plan. This severance benefit, minus deductions authorized or required by law, will be paid in bi-weekly installments. All required notification must be sent to Raychem's Corporate Legal Department, Attention General Counsel. Information on health coverage and COBRA conversion rights will be mailed to your home address. Your present Raychem medical benefits (for you and your eligible covered dependents) will remain in effect, at standard staff rates, until the earliest to occur of (i) one (1) year after the Termination Date, or (ii) you secure other employment and you therefore become eligible for medical insurance, or, you are eligible for medical insurance through any other means, or (iii) your death, or (iv) you reach age sixty-five (65). Your present Raychem dental benefits (for you and your eligible covered dependents) will remain in effect, at standard staff rates, until the earliest to occur of (i) one (1) year after the Termination Date, or (ii) you secure other employment and you therefore become eligible for dental insurance, or, you are eligible for dental insurance through any other means, or (iii) your death, or (iv) you reach age sixty-five (65). You agree to notify Raychem in writing within five (5) days after securing other employment or obtaining other medical or dental benefits. For purposes of COBRA, the "qualifying event" shall be deemed to be the Termination Date. COBRA coverage, to the extent required by law, will run concurrently with the Full Salary Period and with the Differential Salary Period if applicable, up to the end of the eighteen (18) month COBRA period. Your spouse and/or dependent children will be entitled to COBRA benefits to the extent provided by statute should your death occur during the period of your COBRA coverage. The standard Raychem-paid life insurance benefits will remain in effect on your behalf for one (1) year from the Termination Date. CONFIDENTIAL 3 Arati Prabhakar July 10, 1998 Page 3 If you are terminating your employment with Raychem before age fifty-five (55) and are vested in the Raychem Pension Plan, you will be offered the option of receiving your accrued benefit as an annuity or a lump sum in the first month of the second calendar quarter following your termination. If your pension benefit amount as a lump sum is less than Five Thousand Dollars ($5,000) then it will be distributed to you without the option to decline. At any time after reaching retirement age (age 65 or older, or age 55 with ten (10) or more years of service), you are eligible to receive your pension benefit as a normal or early retirement benefit; at your option, the payment can be in the form of an annuity or a lump sum. Raychem will furnish to you through one (1) year from the Termination Date, according to then current Raychem practices and policies: - Financial planning services. - The career transition services of either de Recat & Associates, or Peller Marion & Associates, professional outplacement firms, to support and enhance your job search efforts. Your outstanding stock options to purchase Raychem stock and restricted stock, under the 1990 Incentive Plan (the "1990 Plan"), to the extent they are unvested, will continue to vest through September 1, 1999. Any incentive stock options shall convert to non-qualified stock options three (3) months following the Termination Date. In exchange for the benefits provided to you under this Agreement, you agree that the termination date for the 1990 Plan relating to all outstanding stock options and restricted stock shall be September 1, 1999, and any unvested options or restricted stock under the 1990 Plan will lapse as of September 1, 1999. The post-termination exercise period of your options under the 1990 Plan will begin on September 1, 1999, and your vested options under the 1990 Plan will expire three (3) months following September 1, 1999. Any outstanding unvested options under stock option or incentive plans other than the 1990 Plan will expire on your Termination Date (as defined in paragraph 2 of this Agreement). All outstanding vested options under such other plans will expire per the terms of such other plans. However, the provisions of this Agreement shall not extend the exercisability of options to purchase Raychem stock beyond the expiration date(s) stated in the relevant option agreement(s). You agree to execute amendments to the Relocation Loan Agreement and Promissory Note and any other documents necessary to amend the Deed of Trust. Subject to the terms and conditions of the Loan Agreement and Promissory Note , as amended, you agree that the scheduled due date for repayment of the loan of Four CONFIDENTIAL 4 Arati Prabhakar July 10, 1998 Page 4 Hundred Thousand Dollars ($400,000), provided to you in conjunction with the purchase of your house, will be August 30, 1999, and that prior to August 30, 1999, the loan shall not bear interest. You agree that Raychem-provided mortgage interest/property tax differential (MID) will no longer be paid to you by Raychem. Raychem will not require reimbursement of any portion of the MID payment made to you in January, 1998 for the 1998 calendar year, despite your September 1, 1998 termination date, but no further MID payments will be made to you as of the Termination Date. You will continue to be considered a designated insider for purposes of trading in Raychem stock for the entire Full Salary Period, and, if receiving severance payments, during the Differential Salary Period. Any Raychem employee benefits not otherwise provided for in this Agreement will no longer be available to you as of the Termination Date. You agree that you will return all Raychem property to Richard Kashnow or designee by the Termination Date. Raychem property includes but is not limited to equipment, all samples, cases, brochures, papers, notes, and other documents, and all copies thereof, relating to Raychem, its business, and its customers that have been obtained by you during your employment, together with other Raychem or Raychem-customer or supplier property in your possession. You acknowledge your obligations under the Raychem Employee Intellectual Property Agreement which still remains in effect. You also acknowledge that a breach of that agreement and the disclosure of Raychem proprietary information would cause irreparable harm to Raychem and entitle Raychem to obtain injunctive relief without further proof of damage. We have enclosed a copy of that agreement as Exhibit 2 for your reference. As further consideration for the severance benefits set forth in this Agreement, you agree that you will not, during the term of the Full Salary Period and Differential Salary Period, if applicable, directly or indirectly, anywhere in the United States, including any county of the state of California, or in any foreign country in which, during such period, business is conducted by Raychem or substantial customers of Raychem are located, enter into or engage in any activity, as a sole proprietor, shareholder, employee, director, partner, consultant, or otherwise, or in any way be concerned with the design, development, use, manufacture and/or sale of any technology, product, product line or component which is directly competitive with any technology based on Raychem proprietary information, or any technology, product, product line or component, which is in development, manufactured and/or CONFIDENTIAL 5 Arati Prabhakar July 10, 1998 Page 5 sold by Raychem alone or jointly with third parties as of the Termination Date. You also agree that during the term of the Full Salary Period and Differential Salary Period, if applicable, you will not directly or indirectly solicit or induce any other employee or consultant with Raychem to terminate their employment or relationship with Raychem. Raychem and you acknowledge that the provisions of this paragraph may or may not be enforceable under the laws of certain states and/or certain countries. Raychem and you intend that this paragraph be enforced, to the extent enforceable, in all jurisdictions worldwide in which Raychem currently does business, and that lack of enforceability in any one jurisdiction shall not impair enforcement in any other jurisdiction. Breach of this provision shall entitle Raychem to terminate severance payments under this Agreement in addition to any other legal remedies to which it may be entitled. Raychem Corporation is prepared to offer you the consideration set forth herein, which is above and beyond the wages and benefits to which you would otherwise be entitled, in exchange for your agreement to release all claims, known or unknown, against Raychem Corporation, its parent, subsidiaries and affiliates, and its past, present, and future officers, directors, shareholders, agents, employees, attorneys, insurers, successors, and assigns (collectively referred to in this Agreement as "Raychem") as of the date you signed this Agreement. You are not eligible to receive the consideration outlined herein unless you elect to sign this Agreement. In consideration for the severance benefits set forth in this Agreement, you, on behalf of yourself, your heirs, spouse, and assigns, hereby completely release and forever discharge Raychem from any and all claims, of any and every kind, nature, and character, known or unknown, foreseen or unforeseen, based on any act or omission occurring prior to the Termination Date, including but not limited to any claims arising out of your offer of employment, your employment, any employment agreement, or termination of your employment with Raychem or acts leading up to such termination, and any and all claims under federal and state discrimination laws. The only exceptions are any claims that you may have for unemployment compensation, any rights that you may have under any Raychem Pension Plan, any Workers' Compensation benefits to which you may be found entitled, any claims for amounts deferred pursuant to the Raychem Executive Deferred Compensation Plan, any claims relating to the Raychem TaxSaver Plus Plan, and any claims for indemnification, including any related insurance coverage, to which you may be entitled in connection with your service as an officer of Raychem (collectively referred to in this Agreement as "Exempt Claims"). This Release shall not apply to your right to be indemnified to the fullest extent allowed by Raychem's Articles and Bylaws, any indemnification agreement between you and Raychem, or under applicable law with respect to any claims, actions or proceedings based on or arising out of acts CONFIDENTIAL 6 Arati Prabhakar July 10, 1998 Page 6 performed within the course and scope of your employment with Raychem. This Agreement fully and finally extinguishes and discharges all claims (except for Exempt Claims), whether known or not and you hereby agree to release not only claims known but those unknown to you which arose out of your employment with Raychem or and/or its termination. You therefore agree to waive the provisions of California Civil Code Section 1532 which states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." You fully understand that, if, in fact, any matter covered by this Agreement is found hereafter to be other than or different from the fact now believed by you to be true, you expressly accept and assume that this Agreement will be and remain effective, notwithstanding such difference in the facts. You agree neither to file nor to encourage or knowingly permit another to file on your behalf any claim, charge, action, or complaint concerning any matter referred to in this Agreement. If you have previously filed any such claims (other than Workers' Compensation claims), you agree to take all reasonable steps to cause them to be withdrawn without delay. This Agreement constitutes the entire agreement between yourself and Raychem with respect to any matters referred to in this Agreement and supersedes any and all of the other oral or written agreements between yourself and Raychem, with the exception of the Professional Services Agreement attached hereto as Exhibit 1, the Raychem Employee Intellectual Property Agreement attached hereto as Exhibit 2, and the Relocation Loan Agreement, as amended, and the Promissory Note, as amended, and attached hereto as Exhibit 3, which remain in full force and effect. No other consideration, agreements, representations, oral statements, understandings, policies or course of conduct that are not expressly set forth in this Agreement should be implied or are binding. You are not relying upon any other agreement, representation, statement, omission, understanding, policy or course of conduct that is not expressly set forth in this Agreement. You understand and agree that this Agreement will not be deemed or construed at any time or for any purposes as an admission of any liability or wrongdoing by either yourself or Raychem. You also agree that if any provision of this Agreement is deemed invalid, the remaining provisions will still be given full force and effect. The terms and conditions of this Agreement will be governed by the laws of California applicable to contracts made and performed within California. CONFIDENTIAL 7 Arati Prabhakar July 10, 1998 Page 7 In the event of any conflict between this Agreement and the Professional Services Agreement attached hereto as Exhibit 1, this Agreement shall govern and control. Prior to execution of this Agreement, you should apprise yourself of sufficient relevant information to intelligently exercise your own judgment. You are advised to consult an attorney. In order to obtain the consideration described in this Agreement, this Agreement must be signed by you and returned to me by August 1, 1998. Finally, you agree that you will not disclose to anyone (except for your spouse, accountant, financial planner and/or lawyer) or allow anyone else to disclose the existence of, reason for, or contents of this Agreement without Raychem's prior written consent, unless required to do so by law. Sincerely, /s/ RICHARD A. KASHNOW Richard A. Kashnow Chairman of the Board, President and Chief Executive Officer ================================================================================ EMPLOYEE'S ACCEPTANCE OF AGREEMENT, RELEASE AND BENEFITS I HAVE CAREFULLY READ, FULLY UNDERSTAND, AND VOLUNTARILY AGREE TO ALL THE TERMS OF THIS AGREEMENT AND RELEASE IN EXCHANGE FOR THE ADDITIONAL BENEFITS TO WHICH I WOULD NOT OTHERWISE BE ENTITLED. THIS RELEASE IS EXECUTED VOLUNTARILY AND WITH FULL KNOWLEDGE OF ITS SIGNIFICANCE. JULY 30, 1998 /S/ ARATI PRABHAKAR - ---------------------------------- ------------------------------------ Date CONFIDENTIAL 8 [RAYCHEM LOGO] EXHIBIT 1 TO THE AGREEMENT AND RELEASE BETWEEN THE COMPANY AND ARATI PRABHAKAR PROFESSIONAL SERVICES AGREEMENT - ARATI PRABHAKAR THIS PROFESSIONAL SERVICES AGREEMENT (hereinafter "Professional Services Agreement") is effective as of September 2, 1998, (hereinafter "Effective Date"), by and between RAYCHEM CORPORATION, a corporation organized and existing under and by virtue of the laws of the State of Delaware, having a place of business at 300 Constitution Drive, Menlo Park, California 94025-1164 (hereinafter "RAYCHEM"), and Arati Prabhakar (hereinafter "CONSULTANT"). NOW, THEREFORE, for and in consideration of the mutual covenants and obligations assumed by the parties hereto, it is agreed as follows: 1. CONSULTANT, pursuant to the provisions of this Professional Services Agreement, is retained to perform services as reasonably requested from time to time by RAYCHEM, at such place or places and at such times as shall be mutually agreeable. The services shall be carried out at the direction of the Chief Executive Officer or designee. 2. Full and complete compensation for CONSULTANT's services and also for the discharge of CONSULTANT's obligations hereunder shall be CONSULTANT's consideration named in the Agreement and Release between the parties dated July 10, 1998 (hereinafter "Agreement and Release"), to which this Professional Services Agreement is attached as Exhibit 1. A. RAYCHEM shall reimburse CONSULTANT for the expense of round trip tourist class transportation, hotels and meals, reasonably incurred by CONSULTANT in connection with any trip made by CONSULTANT at the request of RAYCHEM, that have been preapproved by the Chief Executive Officer or designee. RAYCHEM shall reimburse CONSULTANT for any other reasonable expenses actually incurred which are incidental to the services performed hereunder. Expenses exceeding One Hundred Dollars ($100.00) must be approved in advance by the Chief Executive Officer or designee. B. Invoices for expenses shall be submitted to the Chief Executive Officer or designee within thirty (30) days. Payment of CONSULTANT's invoice shall be made by RAYCHEM within thirty (30) days of receipt thereof. CONFIDENTIAL 9 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 2 3. CONSULTANT's relationship to RAYCHEM shall be that of an independent contractor and nothing in this Professional Services Agreement shall be construed to create an employer-employee relationship. Since CONSULTANT will not be an employee of RAYCHEM, it is understood that CONSULTANT will not be entitled to any benefits under RAYCHEM's retirement, group insurance or medical plans or any other employee benefits except as expressly provided in the Agreement and Release. In the performance of all services hereunder, CONSULTANT shall comply with all applicable laws and regulations. 4. CONSULTANT recognizes the vital importance to RAYCHEM of the confidential nature of all proprietary information of Raychem Corporation, its parent, subsidiaries and/or affiliates (hereinafter "RAYCHEM GROUP"). In order to prevent what CONSULTANT agrees would otherwise result in the inevitable disclosure of Proprietary Information which would thereby cause irreparable harm to the RAYCHEM GROUP, CONSULTANT agrees that CONSULTANT will not, without the prior written consent of RAYCHEM, during the term of this Professional Services Agreement including any renewal thereof, directly or indirectly, anywhere in the State of California, or in any other State of the United States or in any other country in which during such period business is conducted by the RAYCHEM GROUP or substantial customers of the RAYCHEM GROUP, enter into or engage in any activity as a sole proprietor, shareholder, employee, director, partner, consultant or otherwise which is in any way concerned with the design, development, use, manufacture and/or sale of any technology, product, product line or component in development, manufactured or sold by the RAYCHEM GROUP. Further, CONSULTANT shall not directly or indirectly solicit or induce any employee of the RAYCHEM GROUP to leave their employment with the RAYCHEM GROUP. CONSULTANT further agrees that CONSULTANT shall not, either during the term of this Professional Services Agreement and any extension thereof, serve as an expert witness for, or advisor to any third party in connection with any litigation involving RAYCHEM without the express prior written consent of RAYCHEM. This provision is in addition to any requirement of the Raychem Employee Intellectual Property Agreement between RAYCHEM and CONSULTANT and of any applicable policies and laws regarding trade secrets. 5. RAYCHEM and CONSULTANT acknowledge that the provisions of Paragraph 4 may or may not be enforceable under the laws of certain states CONFIDENTIAL 10 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 3 and/or certain countries. RAYCHEM and CONSULTANT intend that Paragraph 4 be enforced, to the extent enforceable, in all jurisdictions worldwide in which the RAYCHEM GROUP currently does business, and that lack of enforceability in any one jurisdiction shall not impair enforcement in any other jurisdiction. 6. CONSULTANT understands that RAYCHEM does not desire to acquire from CONSULTANT any secret or confidential know-how or information of CONSULTANT or which CONSULTANT has acquired or shall hereafter acquire from any third party. Accordingly, CONSULTANT represents and warrants that CONSULTANT is free to divulge to RAYCHEM, without any obligation to, or violation of any right of CONSULTANT or others, any and all information, practices or techniques which CONSULTANT will describe, demonstrate, divulge, or any other manner make known to RAYCHEM during CONSULTANT's performance of services hereunder. CONSULTANT hereby undertakes to exonerate, indemnify and hold harmless RAYCHEM from and against any and all liability, loss, cost, expense, damage, claim or demand for actual or alleged violation of the rights of CONSULTANT or of the rights divulged to RAYCHEM in any trade secret, know-how or information CONSULTANT has divulged to RAYCHEM in any trade secret, know-how or other confidential information by reason of RAYCHEM's receipt or use of the services or information described above, or otherwise in connection therewith. 7. As used in this Professional Services Agreement, the term "Invention" shall mean any and all discoveries, improvements, trade secrets, processes, techniques, copyrightable material, computer programs, formula, design and know-how, of any kind or nature, whether or not patentable, and whether or not related to RAYCHEM's business, and which are invented, conceived, discovered, developed or reduced to practice by CONSULTANT and which in any way result from or arise out of CONSULTANT's services hereunder and/or CONSULTANT's exposure to RAYCHEM's proprietary information pursuant to Paragraph 7 of this Professional Services Agreement. CONSULTANT agrees that CONSULTANT will promptly and fully disclose to RAYCHEM all Inventions. CONSULTANT also agrees to and hereby does assign to RAYCHEM all right, title and interest in and to all Inventions and CONSULTANT represents and warrants that CONSULTANT has no contractual or other obligations to any third party which preclude or in any way encumber CONSULTANT's right to assign to RAYCHEM the full and CONFIDENTIAL 11 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 4 exclusive right, title and interest in and to any and all Inventions. It is further understood and agreed that all Inventions will be and remain the property of RAYCHEM whether or not disclosed, assigned or patented. CONSULTANT shall, if RAYCHEM shall so request, assist RAYCHEM in every proper way to obtain for the sole benefit of RAYCHEM, patents on Inventions in any and all countries. The decision to file (or not to file) and/or continue to prosecute a patent application or applications on any Inventions shall be in RAYCHEM's sole discretion. 8. The parties hereto acknowledge that during the course of CONSULTANT's service to RAYCHEM pursuant to this Professional Services Agreement it may be necessary or desirable for RAYCHEM to disclose to CONSULTANT significant RAYCHEM proprietary information. Any information imparted to RAYCHEM in confidence by a third party shall be deemed for purposes of this Professional Services Agreement to constitute RAYCHEM proprietary information. CONSULTANT fully understands that the maintenance of RAYCHEM's proprietary information in strict confidence and the confinement of its use to RAYCHEM is of vital importance to RAYCHEM. CONSULTANT therefore agrees that all information and knowledge divulged to CONSULTANT by RAYCHEM or which CONSULTANT acquires in connection with or as a result of CONSULTANT's services hereunder shall be regarded and treated by CONSULTANT as confidential. Without limiting the generality of the foregoing, CONSULTANT recognizes that, unless and until published, all features of the materials, apparatus, process and application methods heretofore or hereafter used or developed by RAYCHEM shall be regarded and treated by CONSULTANT as a trade secret of RAYCHEM. CONSULTANT shall not use, nor shall CONSULTANT disclose, any such information or knowledge to any person either during or after the term of this Professional Services Agreement, except only to those employees of RAYCHEM as may be necessary in the regular course of CONSULTANT's duties hereunder, or except as otherwise authorized in writing by RAYCHEM, unless such information or knowledge are, or become, publicly known through no act or omission of CONSULTANT. 9. CONSULTANT recognizes that all records and copies of records, drawings, models, apparatus, samples and the like which in any way relate to RAYCHEM's technology, operations, investigations and business, and which are made or received by CONSULTANT during the term of, or otherwise CONFIDENTIAL 12 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 5 pursuant to, this Professional Services Agreement are and shall remain the exclusive property of RAYCHEM. CONSULTANT shall keep such records and/or copies thereof at all times in CONSULTANT's custody and subject to CONSULTANT's control, and shall surrender the same to RAYCHEM immediately upon the request of RAYCHEM. 10. CONSULTANT hereby undertakes to exonerate RAYCHEM, its officers, directors, shareholders, agents, employees, attorneys, insurers, successors and/or assigns from and against any and all liability, loss, cost, damage, claims, demands for expenses of every kind on account of any injuries (including death) to CONSULTANT or loss of or damage to CONSULTANT's property arising out of or resulting in any manner from or occurring in connection with CONSULTANT's performances of services hereunder, except only if caused solely by the negligence of RAYCHEM or its servants or employees. 11. CONSULTANT shall not assign this Professional Services Agreement or any part thereof without RAYCHEM's prior written consent, and any such purported assignment shall be void. This Professional Services Agreement shall inure to the benefit of RAYCHEM's parent, subsidiaries, successors and/or assigns. 12. This Professional Services Agreement shall be effective as of the date first written above and shall terminate on September 1, 1999. This Professional Services Agreement will be subject to a one (1) year renewal at RAYCHEM's option, which renewal shall be automatic if, and extend for the period that, CONSULTANT continues to receive compensation from RAYCHEM pursuant to the Agreement and Release dated July 10, 1998. Any act or omission by CONSULTANT constituting a material breach of this Professional Services Agreement shall subject this Professional Services Agreement to termination immediately by RAYCHEM for good cause and shall automatically suspend all RAYCHEM obligations to perform hereunder so long as CONSULTANT is in breach hereof. This Professional Services Agreement shall terminate automatically in the event of CONSULTANT's death or inability for any reason to perform the services contemplated herein. On termination of this Professional Services Agreement, for any reason, RAYCHEM's obligation to pay any compensation, except for services or expenses already properly accrued or incurred, shall forthwith cease and terminate. Termination of this Professional Services Agreement for any reason shall not affect CONFIDENTIAL 13 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 6 CONSULTANT's obligations under Paragraphs 4 through 10, inclusive, hereof. 13. CONSULTANT represents and warrants that CONSULTANT has or will promptly obtain an agreement containing provisions equivalent in all material respects to the provisions contained in Paragraphs 4 through 10, inclusive, hereof with all agents, employees or associates of CONSULTANT who will be in any way involved either with RAYCHEM proprietary information or otherwise in connection with the services being performed hereunder. The obligations undertaken by CONSULTANT pursuant to Paragraphs 4 through 10, inclusive, hereof shall extend to the RAYCHEM GROUP and to its predecessors and successors in interest. 14. Any notices or communications hereunder shall be effective only if in writing, addressed as follows: If to RAYCHEM: RAYCHEM CORPORATION Attn: Richard A. Kashnow 300 Constitution Drive Mail Stop 120/7815 Menlo Park, California 94025-1164 with a copy to: RAYCHEM CORPORATION Attn: Legal Department Mail Stop 120/8502 300 Constitution Drive Menlo Park, California 94025-1164 If to CONSULTANT: Arati Prabhakar 15. This Professional Services Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Professional Services Agreement shall be determined in accordance with the laws of the State of California applicable to contracts made within the State of California. 16. This Professional Services Agreement, together with the Agreement and Release dated July 10, 1998, and the Raychem Employee Intellectual Property Agreement dated May 12, 1997, constitutes the entire agreement between the parties and supersedes any and all of the other oral or written agreements CONFIDENTIAL 14 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 7 between CONSULTANT and RAYCHEM. In the event of any conflict between this Professional Services Agreement and the Agreement and Release, the Agreement and Release will govern. Any changes in or modifications to this Professional Services Agreement shall be effective only if in writing and signed by the parties hereto. CONSULTANT represents that in entering into this Professional Services Agreement, CONSULTANT has not relied on any previous oral or implied representations, inducements or understandings of any kind or nature whatsoever. IN WITNESS WHEREOF, the parties hereto have executed this Professional Services Agreement to be effective as of the Effective Date. RAYCHEM CORPORATION by: /s/ RICHARD A. KASHNOW ------------------------------------ Richard A. Kashnow Title: Chief Executive Officer Date: JULY 10, 1998 ------------------------------------ CONSULTANT by: /s/ ARATI PRABHAKAR ------------------------------------ (Arati Prabhakar) Social Security No.: ------------------------------------ Date: JULY 30, 1998 ------------------------------------ Department/Account To Charge: ------------------------------------ CONFIDENTIAL 15 [RAYCHEM LOGO] EXHIBIT 3 TO THE AGREEMENT AND RELEASE BETWEEN THE COMPANY AND ARATI PRABHAKAR AMENDMENT TO RELOCATION LOAN AGREEMENT (SECURED BY DEED OF TRUST) AND TO PROMISSORY NOTE (SECURED BY DEED OF TRUST) AMENDMENT TO RELOCATION LOAN AGREEMENT (SECURED BY DEED OF TRUST) AND TO PROMISSORY NOTE (SECURED BY DEED OF TRUST) ("Amendment"), dated as of August 1, 1998, between Raychem Corporation, a Delaware corporation ("Raychem"), and Arati Prabhakar ("Employee") and Patrick H. Windham (together with Employee, the "Borrower"). R E C I T A L S WHEREAS, Raychem and Borrower have previously entered into a Relocation Loan Agreement (secured by Deed of Trust) dated as April 14, 1997 ("Loan Agreement") pursuant to which Raychem provided Borrower a relocation loan subject to the terms and conditions set forth in the Loan Agreement; and WHEREAS, Borrower has previously entered into a Promissory Note (secured by Deed of Trust) dated as April 14, 1997 ("Promissory Note") pursuant to which Borrower promised to pay to Raychem the principal sum of Four Hundred Thousand Dollars (US $400,000) (the "Loan") together with interest subject to the terms and conditions set forth in the Promissory Note; and WHEREAS, based on Employee's resignation effective September 1, 1998, Raychem and Borrower now desire to modify the Loan Agreement and Promissory Note to provide for, among other things, the repayment of the Loan and payment of interest at a date later than that specified in the Loan Agreement and Promissory Note. NOW THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties agree as follows: SECTION 1. Amendments to Loan Agreement. The Loan Agreement is, effective as of the date hereof, hereby amended as follows: (a) The Loan Agreement is hereby amended by adding a new 16 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 2 Section 1(c) to read in full as follows: "1(c) The Second Loan will mature and become entirely due and payable, and the Borrower agrees to pay the same, on August 30, 1999 (the "Scheduled Due Date") or on such earlier date upon which the Second Loan may become due under the terms and conditions of this Agreement or the other documents evidencing or securing the Second Loan." (b) The Loan Agreement is further hereby amended by adding a new Section 1 (g) to read in full as follows: "1(g) Notwithstanding the Scheduled Due Date set forth in Section 1(c) above, if Employee's employment with Raychem is terminated for any reason (including voluntary or involuntary termination, with or without cause, disability, retirement, or death), the Second Loan shall become entirely due and payable, and Borrower agrees to pay the same, on the Scheduled Due Date." (c) The Loan Agreement is further hereby amended by adding a new Section 3(b) to read in full as follows: "3(b) Effective as of the date of (i) any failure of Borrower continuously to occupy the New Residence as Borrower's principal residence, whether or not subsequently cured, (ii) any breach by Borrower of any negative covenants set forth in Section 6 below, whether or not subsequently cured, (iii) any breach by Borrower of the terms of the "due on sale" clause referred to and set forth in Section 4(b) of the Note, which shall include, without limitation, any conveyance by Employee of Employee's fee interest in the New Residence to Employee's spouse or former spouse (whether or not such spouse be a Borrower hereunder), or (iv) any breach by or default of Borrower of or under any of the other terms, covenants, conditions, representations or warranties set forth in any of the Loan Documents (as to which interest shall cease to accrue upon the cure of such breach or default), then the Second Loan shall bear interest CONFIDENTIAL 17 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 3 at Nine Percent (9%) per annum, and thereafter all accrued interest shall be payable in full on or before the first calendar day of each month." (d) The Loan Agreement is further hereby amended by deleting Section 7(e). SECTION 2. Amendments to Promissory Note. The Promissory Note is, effective as of the date hereof, hereby amended as follows: (a) The Promissory Note is hereby amended by adding a new Section 2(a) to read in full as follows: "2(a) The term of this Loan shall commence upon the date hereof and shall expire on August 30, 1999 (the "Scheduled Due Date"), at which time all amounts then owing and unpaid (including principal, interest, and any other accrued and unpaid charges under any of the Loan Documents) shall be immediately due and payable by Borrower to Payee in full." (b) The Promissory Note is hereby further amended by adding a new Section 2(c) to read in full as follows: "2(c) Notwithstanding the Scheduled Due Date stated above, if the employment of Employee (Employee being defined in the Agreement) with Payee is terminated for any reason (including voluntary or involuntary termination, with or without cause, disability, retirement, or death), the term of this Note shall expire and all amounts then owing and unpaid (including principal, interest, and any other accrued and unpaid charges under any of the Loan Documents) shall become immediately due and payable by Borrower to Payee in full on the Scheduled Due Date." (c) The Promissory Note is further hereby amended by adding a new Section 4(c) to read in full as follows: "4(c) If any Event of Default set forth in Section 7 of the Agreement should occur prior to the Scheduled Due Date, Payee at its election, without CONFIDENTIAL 18 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 4 demand or notice and irrespective of the otherwise dated maturity hereof, may accelerate the unpaid balance of principal plus accrued interest, if any, and in the event of such acceleration the entire unpaid balance of principal plus any accrued interest shall be immediately due and payable." SECTION 3. Continued Effect of Deed of Trust. The parties to this Amendment agree that the Deed of Trust referenced in the Loan Agreement, dated as April 14, 1997, and Promissory Note, dated as April 14, 1997 and recorded at the request of North American Title Insurance on April 18, 1997 in the official records of San Mateo County (Document No. 97-044874), will continue in full force and effect as stated in the Loan Agreement and Promissory Note as amended, and the parties intend that the Loan Agreement and Promissory Note as amended will continue to be secured by the Deed of Trust as set forth in such documents. SECTION 4. Definition of Referenced Terms in Amendments. Any terms defined in the Loan Agreement and Promissory Note that are referenced in the foregoing amended Sections of the Loan Agreement and Promissory Note shall be defined as set forth in the Loan Agreement and Promissory Note unless otherwise specified. SECTION 5. Governing Law. This Amendment, its validity, interpretation, execution, and settlement of any disputes arising hereunder shall be governed by and in accordance with the laws of the State of California. SECTION 6. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. CONFIDENTIAL 19 [RAYCHEM LOGO] Professional Services agreement - Arati Prabhakar July 10, 1998 Page 5 Raychem: RAYCHEM CORPORATION a Delaware Corporation By: /s/ RICHARD A. KASHNOW ----------------------- Richard A. Kashnow Chief Executive Officer Borrower: /s/ ARATI PRABHAKAR ----------------------- Arati Prabhakar /s/ PATRICK H. WINDHAM ----------------------- Patrick H. Windham CONFIDENTIAL EX-27.1 3 FINANICAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 164,103 7,738 351,722 10,222 275,212 931,181 1,196,195 700,923 1,722,802 641,292 152,810 0 0 90,028 705,429 1,722,802 446,065 446,746 238,539 239,331 24,473 824 4,926 58,846 20,595 38,251 0 0 0 38,251 0.47 0.47
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