-----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, RuhgLzwdccIdWnbo2wk6gXlqhaa9aJffb4ePPwu9qr2VoM9sRdbNA0TQ6yIHpK9w FSP7kNoTATPgu1JoZo75zw== 0000891618-99-002311.txt : 19990518 0000891618-99-002311.hdr.sgml : 19990518 ACCESSION NUMBER: 0000891618-99-002311 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYCHEM CORP CENTRAL INDEX KEY: 0000082206 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 941369731 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08341 FILM NUMBER: 99626808 BUSINESS ADDRESS: STREET 1: 300 CONSTITUTION DRIVE STREET 2: MS 120/1A CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 6503613333 MAIL ADDRESS: STREET 1: 300 CONSTITUTION DRIVE STREET 2: MS 120/1A CITY: MENLO PARK STATE: CA ZIP: 94025-1164 FORMER COMPANY: FORMER CONFORMED NAME: RAYTHERM CORP DATE OF NAME CHANGE: 19720526 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 03/31/99 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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 April 27, 1999, the registrant had outstanding 77,284,866 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 and nine months ended March 31, 1999 and 1998 1 Consolidated Condensed Balance Sheet at March 31, 1999 and June 30, 1998 2 Consolidated Condensed Statement of Cash Flows for the nine months ended March 31, 1999 and 1998 3 Notes to Consolidated Condensed Financial Statements 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 1: Legal Proceedings 25 Item 5: Other Information 26 Item 6: Exhibits and Reports on Form 8-K 26 SIGNATURES 27
3 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, (in thousands except per share data) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Revenues $ 444,931 $ 445,162 $1,343,022 $1,367,310 Cost of goods sold 244,612 232,558 725,944 696,640 Research and development expense 25,579 26,091 74,482 81,603 Selling, general, and administrative expense 122,258 117,776 368,664 353,816 Loss on minority investment -- 11,973 -- 11,973 Interest expense, net 7,936 3,831 19,919 9,501 Other (income) expense, net (1,867) 179 123 4,381 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 46,413 52,754 153,890 209,396 Provision for income taxes 13,166 13,189 50,783 52,349 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 33,247 $ 39,565 $ 103,107 $ 157,047 ================================================================================================================================ Earnings per share--basic $ 0.43 $ 0.47 $ 1.31 $ 1.85 Average number of shares outstanding--basic 77,190 84,143 78,891 84,952 - -------------------------------------------------------------------------------------------------------------------------------- Earnings per share--assuming dilution $ 0.43 $ 0.46 $ 1.29 $ 1.81 Average number of shares outstanding--assuming dilution 77,766 85,878 79,758 86,970 - -------------------------------------------------------------------------------------------------------------------------------- Dividends per share $ 0.09 $ 0.08 $ 0.25 $ 0.22 ================================================================================================================================
See accompanying notes to consolidated condensed financial statements. 1 4 RAYCHEM CORPORATION CONSOLIDATED CONDENSED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------ (UNAUDITED) (in thousands except share data) MARCH 31, 1999 June 30, 1998 - ------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 210,985 $ 92,667 Accounts receivable, net 369,775 325,039 Inventories: Raw materials 80,587 90,874 Work in process 49,411 64,143 Finished goods 126,871 123,931 -------------------------------- Total inventories 256,869 278,948 Prepaid taxes 35,972 38,350 Other current assets 113,329 110,593 - ------------------------------------------------------------------------------------------------------ Total current assets 986,930 845,597 - ------------------------------------------------------------------------------------------------------ Property, plant, and equipment 1,200,300 1,147,923 Less accumulated depreciation and amortization 701,692 668,737 - ------------------------------------------------------------------------------------------------------ Net property, plant, and equipment 498,608 479,186 - ------------------------------------------------------------------------------------------------------ Deferred tax assets 186,143 186,595 Other assets 129,480 107,977 - ------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 1,801,161 $ 1,619,355 ====================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 49,033 $ 181,284 Accounts payable 83,673 82,901 Compensation and benefits 69,269 56,878 Other accrued liabilities 91,109 88,914 Income taxes 68,064 62,871 Current maturities of long-term debt 10,363 6,574 - ------------------------------------------------------------------------------------------------------ Total current liabilities 371,511 479,422 - ------------------------------------------------------------------------------------------------------ Long-term debt 547,903 151,488 - ------------------------------------------------------------------------------------------------------ Deferred tax liabilities 24,035 27,762 - ------------------------------------------------------------------------------------------------------ Other long-term liabilities 96,392 92,257 - ------------------------------------------------------------------------------------------------------ Minority interests 10,239 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: 90,015,261 and 90,028,103 shares, respectively 90,015 90,028 Additional contributed capital 425,051 425,477 Retained earnings 734,829 665,753 Accumulated other comprehensive losses (34,251) (26,778) Treasury Stock, at cost (12,778,879 and 7,144,399 shares, respectively) (459,987) (290,320) Other (4,576) (4,518) - ------------------------------------------------------------------------------------------------------ Total stockholders' equity 751,081 859,642 - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,801,161 $ 1,619,355 ======================================================================================================
See accompanying notes to consolidated condensed financial statements. 2 5 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED MARCH 31, 1999 1998 (in thousands) - --------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 103,107 $ 157,047 Adjustments to reconcile net income to net cash provided by operating activities: Payments for restructurings and divestitures (12,242) (17,715) Loss on minority investment -- 11,973 Net gain on sale of intellectual property and other assets (875) (896) Depreciation and amortization 66,331 61,049 Deferred income tax provision (benefit) 3,727 (6,290) Changes in certain assets and liabilities, net of effects from acquisitions, restructurings and divestitures: Accounts receivable (33,172) (15,828) Inventories 26,667 (38,563) Accounts payable and accrued liabilities 25,038 (16,152) Income taxes 4,269 27,518 Other assets and liabilities 3,746 2,592 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 186,596 164,735 - --------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investment in property, plant, and equipment (79,135) (77,133) Disposition of property, plant, and equipment 784 8,347 Cost of acquisitions, net of cash acquired (43,791) -- Investments in and advances to affiliated companies -- (15,300) - --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (122,142) (84,086) - --------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net (payments of) proceeds from short-term debt (134,769) 101,367 Proceeds from long-term debt 458,358 2,450 Payments of long-term debt (66,396) (6,651) Repurchases of Common Stock (210,355) (192,033) Issuance of Common Stock under employee benefit plans 25,793 47,348 Proceeds from repayments of stockholder notes receivable 398 431 Cash dividends (19,710) (18,752) - --------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 53,319 (65,840) - --------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 545 (4,489) - --------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 118,318 10,320 Cash and cash equivalents at beginning of period 92,667 86,583 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 210,985 $ 96,903 =============================================================================================================== Supplemental Disclosures Cash paid for: Interest (net of amounts capitalized) $ 15,127 $ 13,162 Income taxes (net of refunds) 42,876 31,232 ===============================================================================================================
See accompanying notes to consolidated condensed financial statements. 3 6 RAYCHEM CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF ACCOUNTING PRESENTATION In the opinion of management, the accompanying unaudited consolidated condensed financial statements include all adjustments, including normal recurring accruals, necessary to present fairly the results of operations for the three and nine months ended March 31, 1999 and 1998, the financial position as of March 31, 1999, and the cash flows for the nine months ended March 31, 1999 and 1998. 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 and nine months ended March 31, 1999, 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 were as follows:
- ------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, (in thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------- REVENUES Electronics OEM components $ 214,781 $ 208,441 $ 626,904 $ 611,678 Telecommunications, energy and industrial 230,150 236,721 716,118 755,632 - ------------------------------------------------------------------------------------------------------------- Total revenues $ 444,931 $ 445,162 $ 1,343,022 $ 1,367,310 ============================================================================================================= OPERATING INCOME Electronics OEM components $ 33,554 $ 37,032 $ 96,021 $ 116,939 Telecommunications, energy and industrial 33,520 38,661 121,475 164,695 Corporate group expenses (14,592) (18,929) (43,564) (58,356) - ------------------------------------------------------------------------------------------------------------- Total operating income $ 52,482 $ 56,764 $ 173,932 $ 223,278 =============================================================================================================
For discussion of segment revenues and operating income, see the section entitled "Business Segments" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report on Form 10-Q. 4 7 EARNINGS PER SHARE The following table presents the computation of earnings per share--basic and earnings per share--assuming dilution.
- ----------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, (in thousands except per share data) 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Net income available to stockholders (numerator) $ 33,247 $ 39,565 $103,107 $157,047 ======================================================================================================================= Shares calculation (denominator): Average shares outstanding--basic 77,190 84,143 78,891 84,952 Effect of dilutive securities: Potential Common Stock relating to stock options and employee stock purchase plan 576 1,735 867 2,018 - ----------------------------------------------------------------------------------------------------------------------- Average shares outstanding--assuming dilution 77,766 85,878 79,758 86,970 ======================================================================================================================= Earnings per share--basic $ 0.43 $ 0.47 $ 1.31 $ 1.85 Earnings per share--assuming dilution $ 0.43 $ 0.46 $ 1.29 $ 1.81 =======================================================================================================================
Options to purchase 5,271,000 shares of Common Stock at prices ranging from $24.63 to $47.94 per share were outstanding during the quarter ended March 31, 1999, 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 February 2009. FINANCIAL INSTRUMENTS Net gains from forward exchange contracts used to cover receivables and payables totaled $0.4 million and $0.1 million for the three months ended March 31, 1999 and 1998, respectively. Net gains and losses from forward exchange contracts totaled a $1.7 million loss and a $7.3 million gain for the nine months ended March 31, 1999 and 1998, respectively. The company incurred a total net foreign exchange gain of $0.5 million and a net loss of $0.1 million for the three months ended March 31, 1999 and 1998, respectively. The company incurred a total net foreign exchange gain of $0.9 million and a net loss of $0.7 million for the nine months ended March 31, 1999 and 1998, respectively. These realized and unrealized gains and losses are included in "Other (income) expense, net." The total amount of foreign exchange exposure covered was $85 million at March 31, 1999. 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 U.S. dollar as functional currency. These exposures are primarily in Japanese yen (50% of net contract value), Euro (16%), and Saudi riyals (7%). 5 8 The company does not cover non-functional currency translation and transaction exposures in countries whose currencies do not have a liquid, cost-effective forward market available for hedging, or where the company's exposed position and the perceived currency environment render a hedge inadvisable. Such exposures at March 31, 1999, included $10 million in net receivables and payables in non-functional currencies and none in net monetary assets in foreign countries with the U.S. 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 March 31, 1999, was $5.3 million. Gross unrealized holding losses were $0.1 million as of March 31, 1999, and are included, net of tax, as a component of "Accumulated other comprehensive losses." LONG-TERM DEBT Long-term debt consists of the following:
- -------------------------------------------------------------------------------------------------------------- MARCH 31, June 30, (in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------------------- 7.20% notes due 2008 $398,756 $ -- 1.49% to 9.66% notes payable to banks, and other debt requiring payments in varying amounts, through 2017 51,350 45,980 Secured debt requiring varying semiannual payments from January 1997 through December 2006 (interest rate fluctuates semiannually and was 5.04% and 5.64% at March 31, 1999 and June 30, 1998, respectively) 108,160 112,082 - -------------------------------------------------------------------------------------------------------------- Total long-term debt 558,266 158,062 Less current maturities 10,363 6,574 - -------------------------------------------------------------------------------------------------------------- Long-term portion $547,903 $151,488 ==============================================================================================================
In October, 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 used part of the net proceeds from the sale of the notes to repay borrowings of $275 million outstanding under the company's $400 million revolving credit facility and to finance the company's share repurchase program. The $400 million revolving credit facility will remain available to the company until September 12, 2001. 6 9 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 116 positions will be eliminated. As of March 31, 1999, 107 employees have separated from the company due to the 1998 restructuring. The company expects the majority of the 1998 restructuring actions to be completed by the end of the current fiscal year. Certain actions, such as the relocation of manufacturing facilities, may extend to the following fiscal year. The following table, which includes the 1998 restructuring as well as prior restructurings, presents the company's restructuring reserves as of March 31, 1999:
- ------------------------------------------------------------------------------------------------------- EMPLOYEE ASSET (in thousands) COSTS WRITE-DOWNS LEASES OTHER TOTAL - ------------------------------------------------------------------------------------------------------- Reserve Balances, June 30, 1998 $ 22,318 $ 13,062 $ 89 $ 3,348 $ 38,817 Cash payments (9,924) -- (89) (2,521) (12,534) Non-cash items (793) (12,011) -- (571) (13,375) - ------------------------------------------------------------------------------------------------------- RESERVE BALANCES, MARCH 31, 1999 $ 11,601 $ 1,051 $ 0 $ 256 $ 12,908 =======================================================================================================
ACQUISITION 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 $41 million. The Mondragon telecommunications business manufactures and supplies components for connecting, insulating, and protecting copper and fiber-optic telephone networks. The Mondragon acquisition was accounted for using the purchase method of accounting for business combinations. The excess of purchase price over the fair value of the net assets acquired (goodwill) was approximately $34 million and is being amortized on a straight-line basis over 15 years. The results of Mondragon are included in the company's financial statements beginning as of October 1, 1998. Pro forma adjustments giving effect to the Mondragon acquisition as if it had occurred at the beginning of fiscal 1998 and 1999 would not have had a material effect on the company's consolidated financial statements. REPURCHASE OF COMMON STOCK 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. During the nine months ended March 31, 1999, the company repurchased 6.8 million shares of its Common Stock for $210 million and reissued 1.2 million shares, leaving 12.8 million shares in treasury stock at March 31, 1999. 7 10 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:
- ------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, - ------------------------------------------------------------------------------------------------------------------ (in thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Net income $ 33,247 $ 39,565 $ 103,107 $ 157,047 Other comprehensive (loss) income: Net change in unrealized (loss) gain on available-for-sale securities (1,970) (75) (4,091) 2,811 Foreign currency translation adjustment (30,942) (5,867) (3,382) (20,702) - ------------------------------------------------------------------------------------------------------------------ Comprehensive income $ 335 $ 33,623 $ 95,634 $ 139,156 ==================================================================================================================
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 March 31, 1999, 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. In September, 1998, the company 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. On April 28, 1999, the court entered an order denying the company's motion for judgment as a matter of law, but granting the company's motion for a new trial limited to the issue of damages on the grounds that the jury's award was excessive. The court's order also confirmed that any damages awarded to Bourns must be limited solely to the primary lithium battery market, and must be reduced to the extent necessary to reflect the effects of the company's lawful competition in this market. In addition to the new damages trial, the 8 11 company intends to continue with the trial of its theft of trade secrets case against Bourns. Under applicable U.S. antitrust law, damages awarded against the company will be trebled. A successful antitrust plaintiff is also entitled to recover certain fees and expenses. Following completion of the new damages and the trade secrets trial, the company intends to appeal the decision of the court denying the company's motion for judgment as a matter of law regarding the antitrust issues. No new trial date has been set. 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. On December 22, 1997, the company was joined, through a third party complaint brought by defendant Herman Goldner Co., Inc., in an action entitled Zoological Society of Philadelphia v. Barber-Coleman et al. in the Philadelphia County Court of Common Pleas. This action is based on a fire at the Philadelphia Zoo in December, 1995, which damaged the Zoo's House of Primates building and killed 23 of its primates. The complaint originally filed by the Zoological Society of Philadelphia attributed the cause of the fire to a valve manufactured by defendant Barber-Coleman and installed by the Herman Goldner Co. Herman Goldner filed a third party complaint against the company, alleging that the company's heating cable caused the fire. The Zoo's original claim in this action was the subrogated claim of its insurer for $6 million. During the third quarter of fiscal 1999, the Zoo has indicated an intent to pursue its uninsured loss, which it claims will total approximately $16 million. The trial date has been set for February 7, 2000. 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. In February, 1999, second amended complaints were filed by the plaintiffs in this case. The company is evaluating the second amended complaints and has obtained an extension of time to respond. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. 9 12 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. 10 13 RAYCHEM CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, (in millions except per share data) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------ Revenues $ 445 $ 445 $ 1,343 $ 1,367 - ------------------------------------------------------------------------------------------------ Pretax income $ 46 $ 53 $ 154 $ 209 Provision for income taxes 13 13 51 52 - ------------------------------------------------------------------------------------------------ Net income $ 33 $ 40 $ 103 $ 157 ================================================================================================ Earnings per share--assuming dilution $ 0.43 $ 0.46 $ 1.29 $ 1.81 ================================================================================================ Average number of shares outstanding-- assuming dilution 77.8 85.9 79.8 87.0 ================================================================================================
REVENUES Revenues for the third quarter of 1999 were $445 million, unchanged from the year-ago quarter. On a constant currency basis, revenues declined by 2%, primarily due to price reductions and slower volume growth in some of the company's business lines.
- ---------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED (percentage change over prior-year period) MARCH 31, 1999 MARCH 31, 1999 - ---------------------------------------------------------------------------------------------------- Change in components of reported revenue: Growth in volumes, net of product mix changes(a) 3% 3% Effect of price reductions(a) (5%) (5%) - ---------------------------------------------------------------------------------------------------- Change in constant currency revenue (2%) (2%) Effect of exchange rate changes 2% 0% - ---------------------------------------------------------------------------------------------------- Change in reported revenue 0% (2%) ====================================================================================================
(a)Management estimate. Although pricing pressures are likely to continue, the company expects revenue growth that should result in growth in the 5% to 8% range for the next fiscal year. On a constant currency basis, third-quarter revenues were up 8% in Asia and essentially flat in Europe compared with the year-ago quarter. Revenues declined by 5% in North America and by 7% in the rest of the world. 11 14 GROSS PROFIT, OPERATING EXPENSES, AND PRETAX INCOME
- ------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, (percentage of revenues) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- Gross profit 45% 48% 46% 49% - ------------------------------------------------------------------------------------------------------- Selling, general, and administrative expense 27% 26% 27% 26% - ------------------------------------------------------------------------------------------------------- Research and development expense 6% 6% 6% 6% - ------------------------------------------------------------------------------------------------------- Pretax income 10% 12% 11% 15% - -------------------------------------------------------------------------------------------------------
Gross profit as a percentage of revenues for the third quarter of 1999 decreased to 45%, from 48% in the year-ago quarter. This decrease was primarily due to sales price reductions in several product lines and a continued shift toward product lines with lower margins. Selling, general, and administrative expense (SG&A) as a percentage of revenues increased nominally during the third quarter of 1999, as compared with the year-ago period. On an absolute basis, quarter over quarter SG&A expense remained relatively flat in constant currencies. Pretax income as a percentage of revenues for the third quarter of 1999 declined two percentage points versus the year-ago quarter. The primary causes of this decline were the decrease in gross profits, the increase in SG&A, and higher interest expense. Net interest expense for the third quarter of 1999 was $8 million compared with $4 million in the prior-year quarter. The increase was primarily due to the increased level of borrowings outstanding during the period. In addition, pretax income for the third quarter of 1998 included a nonrecurring charge of $12 million ($9 million after tax), reflecting the write-off of goodwill, cash advances, and other assets related to Raychem's investment in Superconducting Core Technologies, Inc. (SCT), which ceased commercial operations in early March 1998. PROVISION FOR INCOME TAXES The estimated annual effective tax rate for fiscal year 1999 was reduced to 33% in the third quarter from 35% in the previous two quarters. This adjustment in the fiscal year 1999 estimated annual effective tax rate resulted in the inclusion of a catch-up reduction of $2 million in the current quarter's tax provision. The adjustment in the tax rate was primarily attributable to lower than expected earnings and a shift in the geographic distribution of profits. The estimated annual effective tax rate for 1998 was 25% in the year-ago quarter. The lower estimated annual effective tax rate in 1998 was attributable primarily to recognition of a U.S. deferred tax benefit. NET INCOME AND EPS Net income for the third quarter of 1999 was $33 million ($0.43 per share--assuming dilution), compared with net income of $40 million ($0.46 per share--assuming dilution) in the year-ago quarter. The average number of shares outstanding--assuming dilution, during the third quarter of 1999, decreased to 77.8 million from 85.9 million in the prior-year quarter, due to the company's share repurchase program. 12 15 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 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 NINE MONTHS ENDED MARCH 31, MARCH 31, (dollars in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------- Revenues $215 $208 $627 $612 - -------------------------------------------------------------------------------------------------------- Constant currency revenue growth 1% 15% 2% 16% - -------------------------------------------------------------------------------------------------------- Operating income $ 34 $ 37 $ 96 $117 - --------------------------------------------------------------------------------------------------------
Third-quarter revenues for the electronics OEM components business segment were $215 million, up 1% on a constant currency basis from the year-ago quarter, reflecting a widespread slowdown in the electronics components industry. Revenues from sales of interconnect products--including wire, cable, heat-shrinkable tubing, marking systems, connectors, and other devices--were $125 million, down 1% on a constant currency basis from the year-ago quarter. Strong growth in sales to commercial aerospace customers was offset by weak demand for electronic products. In addition, shipments to electronics components distributors declined as they continued to reduce inventories. Sales of circuit protection products were $57 million, down 4% on a constant currency basis from the year-ago quarter. Strengthening demand from battery and computer customers helped to push up unit volumes to a record annualized run rate of 1.5 billion parts. A 10% increase in unit volumes from the strong year-ago quarter was offset by a 13% decline in average selling prices, reflecting overall electronics industry trends. Elo TouchSystems' revenues grew to $32 million, up 19% on a constant currency basis from the year-ago quarter, reflecting strong performance in Europe and Asia due to growth in sales of touch products for point-of-sale and kiosk applications. The segment's operating income as a percentage of revenues in the third quarter of 1999 was 16%, compared with 18% in the year-ago quarter. The reduction in operating income as a percentage of revenues was primarily the result of pricing pressures on electronics components, particularly for circuit protection products. 13 16 Segment revenues for the nine months ended March 31, 1999, were $627 million, up 2% on a constant currency basis from the same period in the prior year. Increased unit volumes were partially offset by reductions in average selling prices. The year-to-date operating income as a percentage of revenues was 15%, compared with 19% in the prior-year period, primarily reflecting declines in gross profits (resulting from price declines and mix changes) and increased SG&A expense. TELECOMMUNICATIONS, ENERGY AND INDUSTRIAL This business segment serves operators of telecommunications, power, gas, and water utilities; and industrial plants and pipelines.
- -------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, (dollars in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------- Revenues $230 $ 237 $716 $756 - -------------------------------------------------------------------------------------------------------- Constant currency revenue (decline) growth (4%) 3% (5%) 7% - -------------------------------------------------------------------------------------------------------- Operating income $ 34 $ 39 $121 $165 - --------------------------------------------------------------------------------------------------------
Third-quarter revenues for the telecommunications, energy and industrial business segment were $230 million, down 4% on a constant currency basis from the year-ago quarter, reflecting generally weak industrial demand outside North America. Revenues from the sale of telecommunications products, including copper- and fiber-based network accessories were $87 million, down 4% on a constant currency basis from the year-ago quarter. Continuing double-digit growth in fiber-optic components was offset by reduced demand for copper cable accessories. Revenues for access network electronics (ANE) products were $27 million, down 20% on a constant currency basis over the prior-year quarter. Revenue growth was impacted by the company's decision in 1998 to discontinue sales of ANE products outside of North America, which represented revenues of approximately $4 million for the third quarter of 1998. Revenues from sales of ANE products in North America declined 11% when compared with a strong year-ago quarter. The company expects strong ANE revenue growth in North America in the fourth quarter of fiscal 1999, resulting in essentially flat ANE revenues for the year in this region. Revenues from sales of cable accessories for energy networks totaled $62 million, up 1% on a constant currency basis from the year-ago quarter. Sales gains in Asia and North America were offset by declines in Eastern Europe and Russia, where economic conditions contributed to sales declines. Revenues from the sale of heat-tracing and corrosion-prevention products and services were $55 million, up 2% on a constant currency basis from the year-ago quarter. Improvements in heat-tracing sales were offset by sales declines in corrosion prevention products due to a slowdown in oil industry projects. The segment's operating income as a percentage of revenues in the third quarter of 1999 was 15% compared with 16% in the year-ago quarter. The primary reason for the reduction in operating income as a percentage of revenues was lower profit margins resulting from product mix changes and competitive pricing pressures. The operating income for the third quarter of 1998 included a nonrecurring charge of $12 million, reflecting the write-off of Raychem's investment in SCT. 14 17 Segment revenues for the nine months ended March 31, 1999, were $716 million, down 5% on a constant currency basis from the same period in the prior year. The primary causes of the decline in revenues were lower sales volumes and price declines in most of the segment's product lines. The year-to-date operating income as a percentage of revenues was 17% compared with 22% in the prior-year period, primarily reflecting declines in gross profits resulting from changes in mix and price declines across most of the segment's product lines. Operating income for the nine months ended March 31, 1998, included a nonrecurring charge of $12 million, reflecting the write-off of Raychem's investment in SCT. 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 included 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. The company expects that its adoption will not have a material effect on the company's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the company had $211 million in cash and cash equivalents and $609 million in unused credit facilities, of which $486 million are committed facilities. 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. 15 18 The following table presents certain measures of liquidity and capital resources:
- ----------------------------------------------------------------------------------------------------- MARCH 31, June 30, (dollars in millions) 1999 1998 - ----------------------------------------------------------------------------------------------------- Debt net of cash $396 $247 - ----------------------------------------------------------------------------------------------------- Debt net of cash as a percent of stockholders' equity 53% 29% - ----------------------------------------------------------------------------------------------------- Days' sales outstanding 69 62 - ----------------------------------------------------------------------------------------------------- Days' sales in inventory 102 104 - -----------------------------------------------------------------------------------------------------
The increase in debt net of cash was primarily due to increased borrowings used in part to fund the company's share repurchase program. During the first nine months of 1999, the company repurchased 6.8 million shares of the company's Common Stock for $210 million. The table below summarizes the company's cash flows from operating, investing, and financing activities:
- ----------------------------------------------------------------------------------------------------- NINE MONTHS ENDED MARCH 31, 1999 1998 (dollars in millions) - ----------------------------------------------------------------------------------------------------- Cash provided by (used in): Operating activities $ 187 $165 Investing activities (122) (84) Financing activities 53 (66) Effect of exchange rate changes on cash and cash equivalents 0 (5) - ----------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents $ 118 $ 10 =====================================================================================================
OPERATING ACTIVITIES Net cash provided by operating activities during the nine months ended March 31, 1999, was $187 million, up from $165 million in the prior-year period. The increase from 1998 primarily reflected reduced inventory levels and the absence of employee bonus payments in 1999 (compared with $29 million in the comparable prior-year period), partially offset by increased levels of accounts receivable. In 1999, the company expects the U.S. tax provision to exceed cash tax payments by an amount in the range of $5 million to $15 million. The difference results primarily from tax benefits that were reported in the financial statements in 1996, 1997, and 1998, which will be realized in cash through reduced payments in 1999 and thereafter. INVESTING ACTIVITIES Net cash used in investing activities during the nine months ended March 31, 1999, was $122 million, of which $79 million was used for capital expenditures. In October 1998, the company completed the acquisition of the telecommunications business of Plasticos Mondragon for a cash purchase price of $41 million. Cash used in investing activities during the nine months ended March 31, 1998, included $77 million of capital expenditures, partially offset by $8 million in proceeds from the sale of property, plant and equipment. In addition, in 1998 the company made an investment of $10 million in cash related to an alliance with Tadiran Telecommunications Ltd. This investment was sold for $12.5 million in late March 1999. The proceeds from the sale were collected in April 1999. 16 19 FINANCING ACTIVITIES Net cash provided by financing activities during the nine months ended March 31, 1999, was $53 million. 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. During the first nine months of 1999, the company repurchased 6.8 million shares of the company's Common Stock for $210 million. During the comparable period in 1998, the company repurchased 4.4 million shares for $192 million. Spending on share repurchases was partially funded by increased borrowings. In October 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 used part of the net proceeds from the sale of the notes to repay borrowings of $275 million outstanding under the company's $400 million revolving credit facility and to finance the company's share repurchase program. The $400 million revolving credit facility will remain available to the company until September 12, 2001. YEAR 2000 DISCLOSURE The company has a comprehensive Year 2000 project designed to identify and assess the risks associated with its information systems, products, operations and infrastructure, and suppliers 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. In addition, the company provides its customers with information on the Year 2000 project and the progress made towards Year 2000 compliance. INFORMATION SYSTEMS. As part of an enterprisewide process reengineering commenced in fiscal 1996, the company is replacing a substantial portion of its existing information systems with a fully integrated, enterprise information system (supplied by SAP America, Inc.), which has been certified to be Year 2000 compliant. The new system 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 calendar year 2000. A review of the company's information systems for locations where this system will not have been implemented prior to January 1, 2000, has been completed and the company is engaged in 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 that the vendor (QAD Inc.) has confirmed to be Year 2000 compliant. The company expects this upgrade to be completed by the end of the fourth quarter of fiscal 1999. Integrated testing of all critical information systems will be conducted during the current fiscal year with ongoing testing through calendar year 1999. The company's global electronic data interchange applications (through which the company communicates business transactions with certain of its customers and suppliers) has been modified to be Year 2000 compliant. This task was completed as 17 20 planned in the third 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 external costs pertaining to its information systems to be between $5 million and $7 million. PRODUCTS. The company has assessed the capabilities of its products sold to customers and has developed remediation plans or replacements for almost all of its noncompliant products. Based on the assessments made to date, only a small number of the company's products are affected by Year 2000 issues. With one exception, all of the products that the company will continue to sell have been made Year 2000 compliant. The remaining non-compliant item is expected to be compliant by the first quarter of fiscal 2000. Year 2000 costs related to the company's products are not expected to be material. OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used in the operations and facilities of the company have been inventoried and assessed for Year 2000 compliance. This assessment has not yielded any major areas of concern. During the third quarter of fiscal 1999, the company continued to develop remediation plans. Based on remediation plans made to date, the company expects Year 2000 related external costs pertaining to its operations and infrastructure to range between $4 million and $5 million. The first phase of contingency plan development is underway and will focus on critical elements of the supply chain that have not completed remediation and/or replacement activity. A global contingency plan is expected to be completed by June 30, 1999. SUPPLIERS. The company continues to evaluate its supplier base to determine whether Year 2000 issues affecting suppliers will adversely impact the company's operations. The company has recently completed an assessment of its key suppliers. Although the company does not anticipate any business disruptions based on the assurances made by these suppliers, the company will continue to assess and monitor key suppliers through the year 2000 transition period. CUSTOMERS. The company has a Global Year 2000 Desk at its headquarters in California to handle all customer requests for compliance and survey information, and for other general information related to the company's Year 2000 programs. GENERAL AND RISK FACTORS. Although the company expects that the Year 2000 project will be completed in a timely manner to prevent any significant disruptions of business, unforeseen risks and delays may cause disruption in manufacturing, order processing and distribution services or lead to additional costs. Because the company has less control over assessing and remediating the year 2000 problems of third parties, the company believes its most reasonably likely worst-case scenario would relate to the failure of services provided by third parties such as electrical power, telecommunication services, transportation and shipping services. The company's production and distribution of products is conducted through a network of domestic and foreign facilities. Each location relies on local suppliers for electricity, water, and other needed supplies. The failure of electricity and transportation services -- particularly outside of countries such as the United States where year 2000 remediation has progressed the furthest -- would be a worst-case scenario that would shut down the affected facilities. The company is not in a position to identify or to avoid all possible third-party scenarios; however, the company is currently assessing scenarios to mitigate their impact, if they were to occur. 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. Internal costs incurred for the Year 2000 project are not being tracked; they principally consist of payroll and related costs. 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 developed remediation or contingency plans for all problems, or completely implemented or tested its remediation plans. 18 21 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 in a timely manner, it could be exposed to claims by 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, 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. See also "Problems associated with Year 2000" under "Forward-looking statements and risk factors" in this Report on Form 10-Q. EURO DISCLOSURE On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and adopted the euro as their common legal currency. The company is currently assessing the impact of the introduction of the euro on its business and is taking steps to mitigate risks and to identify opportunities related to the euro. These steps include reevaluating pricing and purchasing strategies in the new economic environment and evaluating the capability of the company's information systems to support the company's operations with respect to euro transactions during the transition period from January 1, 1999, through January 1, 2002. The company's existing information systems are capable of processing transactions in euro, such as sales and order activities. The company is in the process of implementing a fully euro-compliant enterprise information system for the operations impacted. The use of the euro has simplified the company's foreign exchange and hedging activities. Although the company will continue to evaluate the impact of the euro introduction, based on currently available information, management does not believe that the introduction of the euro will have a material adverse impact on the company's financial condition or results of operations. Total costs associated with the introduction of the euro are not expected to be material and will be expensed to operations as incurred. See also "Problems associated with the euro conversion" under "Forward-looking statements and risk factors" in this Report on Form 10-Q. 19 22 FORWARD-LOOKING STATEMENTS AND RISK FACTORS Statements in this Report on Form 10-Q that are not statements of historical fact, including statements regarding revenue; gross profit, earnings and pricing trends; tax provisions, tax payments, and tax rates; financial goals; litigation matters; acquisitions; restructuring actions; Year 2000 readiness; euro compliance; 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 and elsewhere in this Report on Form 10-Q, 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. COMPETITION AND FAILURE TO ACHIEVE PRODUCTIVITY IMPROVEMENTS MAY REDUCE THE PROFITABILITY OF THE COMPANY. The company sells its products in highly competitive markets, and the company's competitors include some of the largest companies in the world. Even when the company has strong intellectual property protection for its products, other products, sometimes based on lower-cost technologies, compete with the company's products. In some of the company's markets, prices trend downward over time, such as the market for circuit protection devices. Although the company has productivity improvement initiatives to attain the improvements in manufacturing and design necessary to remain competitive and to keep the company's gross profits from declining, there can be no assurance that the company will be able to attain the productivity improvements necessary to maintain or improve the company's gross profits. In addition, these trends may be exacerbated by weaker demand for the company's products caused by economic conditions in many regions where the company sells its products. CONDITIONS IN INTERNATIONAL AND EMERGING MARKETS MAY AFFECT THE COMPANY'S RESULTS. International and emerging markets provide the company with significant growth opportunities. However, these markets are volatile and subject to events which could adversely affect the company's financial results, such as: o periodic economic downturns in different regions of the world, o changes in trade policies or tariffs, o political instability, and o fluctuations in exchange rates. The economic conditions in certain Asian countries and emerging markets in Russia, Eastern Europe and Latin America may increase pressure on the company to reduce prices and reduce the ability of the company's customers to purchase the company's products. Such conditions may therefore cause revenues or gross profits to fall below the company's expectations. In addition, economic recession may 20 23 lead to the cancellation of orders, further pressure to reduce prices, difficulty in collecting receivables owed to the company, or other factors that may adversely affect the company's financial results. 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 more fully described under "Year 2000 Disclosure", 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. Additionally, the company may acquire businesses that are not Year 2000 compliant, which may cause disruptions to the company's operations or lead to additional costs. PROBLEMS ASSOCIATED WITH THE EURO CONVERSION. As described under "Euro Disclosure", the company is continuing to evaluate the impact of the introduction of the euro. There can be no assurance that all problems will be identified or corrected in time to prevent material adverse consequences to the company's financial condition or results of operations. In addition, the existence of a uniform currency across much of Europe may affect the company's pricing policies, which may adversely impact the company's margins. 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 most of the company's major manufacturing sites and sales locations. The change in systems and processes is substantial. During implementation of this new system, the change could cause delays in: o order processing, o shipments of products, o invoicing, and o 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. 21 24 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: o product liability, o unfair competition, o antitrust, o breach of contract, o environmental, and o 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: o the company will successfully realize its objectives, o the realization of these goals will not take longer or cost more than anticipated, or o 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: 22 25 o 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, o foreign countries are privatizing many electric power utilities, which may affect the purchasing policies of these utility companies. These and other types of market forces may adversely affect the company's operations and financial performance. CUSTOMER CONCENTRATION FOR ACCESS NETWORK ELECTRONICS PRODUCTS MAY AFFECT SALES OF THOSE 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 AND PRICE REDUCTIONS 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. In addition, reductions in pricing to end customers may also 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 expected 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, or could cause variances in projections of cash required for tax payments. REALIZATION OF ANY OF THESE RISKS MAY AFFECT THE COMPANY'S PERFORMANCE. Because of the foregoing risks, in addition to other risks that affect the company's operating results and financial position, investors should: o not consider past financial performance or management's expectations a reliable indicator of future performance, and o not use historical trends to anticipate results or trends in future periods. 23 26 In that regard, the company's results of operations and financial condition could be adversely affected by a number of risks 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 risks previously discussed 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 changes in events or circumstances. 24 27 RAYCHEM CORPORATION PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS 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. In September, 1998, the company 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. On April 28, 1999, the court entered an order denying the company's motion for judgment as a matter of law, but granting the company's motion for a new trial limited to the issue of damages on the grounds that the jury's award was excessive. The court's order also confirmed that any damages awarded to Bourns must be limited solely to the primary lithium battery market, and must be reduced to the extent necessary to reflect the effects of the company's lawful competition in this market. In addition to the new damages trial, the company intends to continue with the trial of its theft of trade secrets case against Bourns. Under applicable U.S. antitrust law, damages awarded against the company will be trebled. A successful antitrust plaintiff is also entitled to recover certain fees and expenses. Following completion of the new damages and the trade secrets trial, the company intends to appeal the decision of the court denying the company's motion for judgment as a matter of law regarding the antitrust issues. No new trial date has been set. Due to the foregoing, the company has not accrued any liability with respect to this litigation. On December 22, 1997, the company was joined, through a third party complaint brought by defendant Herman Goldner Co., Inc., in an action entitled Zoological Society of Philadelphia v. Barber-Coleman et al. in the Philadelphia County Court of Common Pleas. This action is based on a fire at the Philadelphia Zoo in December, 1995, which damaged the Zoo's House of Primates building and killed 23 of its primates. The complaint originally filed by the Zoological Society of Philadelphia attributed the cause of the fire to a valve manufactured by defendant Barber-Coleman and installed by the Herman Goldner Co. Herman Goldner filed a third party complaint against the company, alleging that the company's heating cable caused the fire. The Zoo's original claim in this action was the subrogated claim of its insurer for $6 million. During the third quarter of fiscal 1999, the Zoo has indicated an intent to pursue its uninsured loss, which it claims will total approximately $16 million. The trial date has been set for February 7, 2000. 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, 25 28 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. In February, 1999, second amended complaints were filed by the plaintiffs in this case. The company is evaluating the second amended complaints and has obtained an extension of time to respond. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. ITEM 5: OTHER INFORMATION On February 9, 1999, the company announced that its board of directors elected Thomas Jahn, 43, as vice president and general manager of the company's worldwide energy business headquartered in Ottobrunn, Germany. On April 23, 1999, the company announced that its board of directors has elected Jose Flahaux vice president of worldwide logistics. Flahaux, 53, will be responsible for Raychem's supply chain management and logistics network in North and South America, Europe and Asia. Flahaux will report to Frans Berthels, senior vice president for worldwide manufacturing and logistics. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits EXHIBIT NO. DESCRIPTION 10(aa) Key Employee Retention and Severance Plan 27 Financial Data Schedule (b) Reports on Form 8-K None 26 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYCHEM CORPORATION (Registrant) Date: May 17, 1999 /s/ RAYMOND J. SIMS -------------------------------------------- Raymond J. Sims Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 27 30 INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 10(aa) Key Employee Retention and Severance Plan 27 Financial Data Schedule EX-10.AA 2 KEY EMPLOYEE RETENTION & SEVERANCE PLAN 1 EXHIBIT 10(aa) RAYCHEM CORPORATION KEY EMPLOYEE RETENTION AND SEVERANCE PLAN ADOPTED FEBRUARY 5, 1999 This Key Employee Retention and Severance Plan (this "Plan") was adopted by the Compensation Committee of the Board of Directors of Raychem Corporation (the "Company") at a meeting held in Menlo Park, California on February 5, 1999, and approved and ratified by the full Board of Directors on February 5, 1999. BACKGROUND OF THE PLAN A. The Company draws upon the knowledge, experience and objective advice of its executives, managers and employees in order to manage its business for the benefit of the Company's stockholders. B. Due to the widespread awareness of the possibility of mergers, acquisitions and other strategic alliances, change of control is increasingly an issue in competitive recruitment and retention efforts. C. The Company recognizes that if there occurred a change of control or other event that could substantially change the nature and structure of the Company, the resulting uncertainty regarding the consequences of such an event could adversely affect the Company's ability to attract, retain and motivate its executives and key employees. D. The Company initiated a project in mid-summer, 1998, to evaluate existing Company plans and policies, industry practices and possible standard approaches to the retention and severance of executives, officers and key employees in the event of a change of control of the Company. 2 E. On December 11, 1998, the Compensation Committee reviewed a market analysis and preliminary recommendations with respect to the adoption of an executive retention plan, prepared by a team including the Vice President Human Resources, counsel to the Company, and a compensation consultant. F. On February 5, 1999, the Compensation Committee of the Company's Board of Directors reviewed, approved and adopted the general terms of the Retention Plan, and directed the Company's counsel to prepare definitive documentation of the Plan. G. On February 5, 1999, the Retention Plan was approved and ratified by the Company's Board of Directors. 1. GENERAL 1.1 Defined terms. Capitalized terms used in this Plan shall have the meanings set forth in section 4, unless the context clearly requires a different meaning. 1.2 Purpose. The purpose of this Plan is to aid the Company in attracting, retaining and motivating its Executives, Officers and Employees by providing specified compensation and benefits to selected Executives, Officers and Employees of the Company in the event of a Covered Termination. 1.3 No employment agreement. This Plan does not obligate the Company to continue to employ a Plan Participant for any specific period of time, or in any specific role or geographic location. Subject to the terms of any applicable written employment agreement between Company and a Participant, the Company may assign a Participant to other duties, and either the Company or Participant may terminate Participant's employment at any time for any reason. 2. TERMINATION UPON CHANGE OF CONTROL 2.1 Basic severance compensation. In the event of a Participant's Covered Termination, the Participant shall be entitled to the basic severance compensation described below. 2.1.1 Salary. All base salary and accrued vacation earned through the date of Participant's termination of employment shall be paid to Participant. 2.1.2 Expense reimbursement. Within thirty (30) days of submission of proper expense reports, the Company shall reimburse a Participant for all expenses reasonably and necessarily incurred by the Participant in connection with the business of the Company prior to Participant's termination of employment. 2.1.3 Employee benefits. Participant shall not receive any benefits under the Company's other benefit plans and policies other than those to which Participant may be entitled pursuant to the terms of such plans and policies. 3 2.2 Cash severance benefits. In the event of an Executive's or Officer's Covered Termination, such Executive or Officer shall be entitled to the additional severance benefits described below. 2.2.1 Prorated bonus payment. Such Executive or Officer shall receive his or her target bonus or incentive payment for the year in which termination occurs, prorated through the date of termination. 2.2.2 Cash severance payment. A lump sum cash severance payment shall be made: (a) to each such Officer in the amount of 200% of annual Target Annual Earnings; and (b) to each such Executive in the amount of 250% of Target Annual Earnings, All cash severance payments made under this Section 2.2 shall be reduced by applicable federal and state withholding taxes, and paid upon the later of (i) the date of the Change of Control or (ii) thirty (30) days following such Executive's or Officer's Covered Termination. A Participant shall not be entitled to contribute any funds paid to such Participant pursuant to this Plan to the Raychem Corporation Executive Deferred Compensation Plan. 2.3 Acceleration of Incentive Plan Awards. 2.3.1 Acceleration at Change of Control. All outstanding stock options granted and restricted stock or performance shares issued by the Company to a Participant prior to the Change of Control shall have their vesting accelerated as to one year of additional vesting as of the date of such Change of Control. 2.3.2 Acceleration at Covered Termination. (a) All outstanding stock options granted and restricted stock or performance shares issued by the Company prior to the Change of Control to an Employee who suffers a Termination Upon a Change of Control shall have their vesting fully accelerated so as to be 100% vested on the later of (i) the date of the Change of Control or (ii) the date of such Termination Upon Change of Control. (b) All outstanding stock options granted and restricted stock or performance shares issued by the Company prior to the Change of Control to an Executive or Officer who suffers a Termination Upon a Change of Control or a Constructive Termination Upon a Change of Control shall have their vesting fully accelerated so as to be 100% vested on the later of (i) the date of the Change of Control or (ii) the date of such Termination Upon Change of Control or Constructive Termination Upon Change of Control. 2.3.3 Acceleration upon non-assumption in a Change 4 of Control. If there is a Change of Control transaction in which outstanding stock options granted and restricted stock or performance shares issued by the Company to any Participant prior to the transaction are not fully assumed by the Successor, or replaced by fully equivalent substitute options, restricted stock or performance shares, then (1) all such options and restricted stock or performance shares shall have their vesting fully accelerated so as to be 100% vested prior to the effective date of the Change of Control, and (2) the Company shall provide reasonable prior written notice to the Participant of (a) the date such unexercised options will terminate, and (b) the period during which Participant may exercise the fully vested options. Alternatively, the Company may elect to deliver to Participant on the effective date of the Change of Control a cash payment equal to the difference between (i) the aggregate exercise price of Participant's unexercised options, restricted stock or performance shares, and (ii) the value of the consideration deliverable for an equivalent number of shares as a result of the Change of Control transaction. 2.4 Extended medical and dental benefits. 2.4.1 Benefit continuation. Each U.S. Executive and Officer shall receive continued provision of the Company's standard employee medical and dental benefit coverages at standard staff rates, as elected by the Executive or Officer and in effect immediately prior to the Change of Control, for up to two (2) years in the case of Officers who are not Executives and for up to two and one-half (2 1/2) years in the case of Executives. Continued health coverage for non-U.S. Executives and Officers shall be negotiated in accordance with applicable law and policy to provide similar coverage. 2.4.2 Continued medical coverage for U.S. residents. If the Executive or Officer resides in the United States, such Executive or Officer shall be entitled to continued medical and dental insurance coverage in accordance with the applicable provisions of U.S. federal law (Title X of the Consolidated Budget Reconciliation Act of 1985 ("COBRA")). The date of the COBRA "qualifying event" for the Executive or Officer and his or her dependents shall be the date of such Executive's or Officer's Covered Termination. 2.4.3 Termination of coverage. Notwithstanding the preceding provisions of this Section 2.4, in the event an Executive or Officer dies or becomes covered under another employer's group health plan during the continuation period (in which case such Executive or Officer promptly shall inform the Company), the Company shall cease provision of continued group health insurance for such Executive or Officer and any dependents. 3. FEDERAL EXCISE TAX UNDER IRC SECTION 28OG 3.1 Adjustment of excess payments payable to a Participant. If (1) any amounts payable to a Participant under this Plan are characterized as excess parachute payments pursuant to Section 4999 of the Internal Revenue Code, and (2) the Participant thereby would be subject to any United States federal excise tax due to that characterization, then the Participant may elect, in the Participant's sole discretion, to reduce the amounts 5 payable under this Plan or to have any portion of applicable options or restricted stock not vest in order to avoid any "excess parachute payment" under Section 28OG(b)(1) of the Internal Revenue Code of 1986, as amended. 3.2 Determination by independent public accountants. Unless the Company and Participant otherwise agree in writing, any determination required under this Section 3 shall be made in writing by independent public accountants agreed to by the Company and the Participant (the "Accountants"), whose determination shall be conclusive and binding upon the Participant and the Company for all purposes. For purposes of making the calculations required by this Section 3, the Accountants may rely on reasonable, good faith interpretations concerning the application of Sections 28OG and 4999 of the Code. The Company and the Participant shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make the required determinations. The Company shall bear all fees and expenses the Accountants may reasonably charge in connection with the services contemplated by this Section 3. 4. DEFINITIONS 4.1 Capitalized terms defined. Capitalized terms used in this Plan shall have the meanings set forth in this Section 4, unless the context clearly requires a different meaning. 4.2 "Cause" means: (a) theft; a material act of dishonesty or fraud; intentional falsification of any employment or Company records; or the commission of any criminal act which impairs the Participant's ability to perform appropriate employment duties for the Company; (b) improper disclosure or use of the Company's confidential, business or proprietary information by the Participant; (c) the Participant's conviction (including any plea of guilty or nolo contendere) for a crime involving moral turpitude causing material harm to the reputation and standing of the Company, as determined by the Company in its sole discretion; (d) gross negligence or willful misconduct in the performance of the Participant's assigned duties; or (e) repeated failure by the Participant to perform his or her job responsibilities in accordance with written instructions from such Participant's supervisor (which, in the case of the Company's Chief Executive Officer, shall be the Company's Board of Directors). 4.3 "Change of Control" means: (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities 6 Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of (A) the outstanding shares of common stock of the Company or (B) the combined voting power of the Company's then-outstanding securities; (b) the Company is party to a merger or consolidation which results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 30% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (c) the sale or disposition of all or substantially all of the Company's assets (or consummation of any transaction having similar effect); (d) there occurs a change in the composition of the Board of Directors of the Company within a two (2) year period, as a result of which fewer than a majority of the directors are Incumbent Directors; or (e) the dissolution or liquidation of the Company. 4.4 "Company" shall mean Raychem Corporation and, following a Change of Control, any Successor that agrees to assume, or otherwise becomes bound to by operation of law, all the terms and provisions of this Plan. 4.5 "Constructive Termination Upon Change of Control" means any resignation by an Executive or Officer for Good Reason, as defined in this Plan, within twenty-four (24) months after the occurrence of any Change of Control; provided that "Constructive Termination Upon Change of Control" shall not include any termination of the employment of a Participant (i) by the Company for Cause; (ii) by the Company as a result of the Permanent Disability of the Participant; (iii) as a result of the death of the Participant, or (iv) as a result of the voluntary termination of employment by the Participant for reasons other than Good Reason. 4.6 "Covered Termination" shall mean, with respect to an Employee of the Company, a Termination Upon Change of Control, and with respect to an Executive or an Officer, a Termination Upon Change of Control or a Constructive Termination Upon Change of Control. 4.7 "Effective Date" means February 5, 1999. 4.8 "Employee" shall mean each regular employee of the Company or any of its directly or indirectly, wholly owned subsidiaries. Temporary employees of the Company and its subsidiaries shall not be included in the definition of Employee for purposes of 7 this Plan. 4.9 "Executive" shall mean each person elected by the Board of Directors to serve as the Chief Executive Officer of the Company or his or her direct reports, and such additional individuals as may be designated thereafter by the Compensation Committee of the Board of Directors. 4.10 "Good Reason" means the occurrence of any of the following conditions following a Change of Control, without the Participant's informed written consent, which condition(s) remain(s) in effect ten (10) days after written notice to the Company from the Participant of such condition(s): (a) a material decrease in the Participant's base salary or target bonus amount; (b) the relocation of the Participant's work place for the Company to a location more than fifty (50) miles from the location of the work place prior to the Change of Control; (c) in the case of an Executive or Officer, assignment to responsibilities or duties that are not a Substantive Functional Equivalent (as defined in this Plan) of the position which the Executive or Officer occupied prior to the Change of Control; or (d) with respect to any individual Participant, any material breach by the Company of the terms of this Plan with the Participant. 4.11 "Incumbent Director" shall mean a director who either (1) is a director of the Company as of the Effective Date of this Plan, or (2) is elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the directors of the Company at the time of such election or nomination who were themselves elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the directors of the Company at the time of his or her election or nomination, provided that in no event shall any director be deemed to be an Incumbent Director if such director was elected or nominated in connection with an actual or threatened proxy contest relating to the election of directors to the Company. 4.12 "Officer" shall mean each Vice President of the Company, other than an Executive, appointed from time to time by the Company's Board of Directors. 4.13 "Participant" shall mean an Executive, Officer or Employee of the Company, and such additional individuals as may be designated to participate in the Plan by the Compensation Committee of the Board of Directors. 4.14 "Permanent Disability" means that: (a) the Participant has been incapacitated by bodily injury, illness or disease so as to be prevented thereby from engaging in the performance of the Participant's duties; 8 (b) such total incapacity shall have continued for a period of six (6) consecutive months; and (c) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. 4.15 "Substantive Functional Equivalent" means, with respect to a Participant who is an Executive or Officer, an employment position occupied after a Change of Control that: (a) is in a substantive area of competence (such as accounting; engineering management; executive management; finance; human resources; marketing, sales and service; operations and manufacturing; etc.) that is consistent with the Participant's experience and not materially different from the position occupied by the Participant prior to the Change of Control; (b) requires the Participant to serve in a role and perform duties that are functionally equivalent to those performed prior to the Change of Control; (c) carries a title that does not connote a lesser rank or corporate role than the title held by the Participant prior to the Change of Control; (d) does not otherwise constitute a material, adverse change in the Participant's responsibilities or duties, as measured against the Participant's responsibilities or duties prior to the Change of Control, causing it to be of materially lesser rank or responsibility; (e) if prior to the Change of Control the Participant was identified as an officer of the Company for purposes of the rules promulgated under Section 16 of the Securities Exchange Act of 1934, identifies the Participant as a Section 16 officer of a publicly traded Successor having net assets and annual revenues not less than eighty percent (80%) of those of the Company prior to the Change of Control; and (f) if prior to the Change of Control the Participant was identified as an officer of the Company for purposes of the rules promulgated under Section 16 of the Securities Exchange Act of 1934, requires the Participant to report directly to an executive officer, committee or board of the Successor that is no less senior than the executive officer, committee or board, as the case may be, to whom the Participant reported at the Company prior to the Change of Control. 4.16 "Successor" means the Company as defined above and any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company. 4.17 "Target Annual Earnings" means the sum of annual base salary plus one hundred percent (100%) of target annual bonus or incentive pay. If different sums would result from calculations as of (a) the date thirty (30) days prior to the date that the Company 9 publicly announces it is conducting negotiations leading to a Change of Control, (b) the date on which a Change of Control occurs or (c) the date of a Participant's Covered Termination, then Target Annual Earnings shall be determined by the calculation as of the specified date that yields the highest value. 4.18 "Termination Upon Change of Control" means any actual termination of the employment of a Participant by the Company without Cause during the period commencing thirty (30) days prior to the earlier of (1) the date that the Company first publicly announces it is conducting negotiations leading to a Change of Control, or (2) the date that the Company enters into a definitive agreement that would result in a Change of Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies); and ending on the earlier of (x) the date on which the Company announces that the definitive agreement described in clause (2) above has been terminated or that the Company's efforts to consummate the Change of Control contemplated by the previously announced negotiations or by a previously executed definitive agreement have been abandoned or (y) the date which is twenty-four (24) months after the Change of Control; provided that "Termination Upon Change of Control" shall not include any termination of the employment of a Participant (i) by the Company for Cause; (ii) by the Company as a result of the Permanent Disability of the Participant; (iii) as a result of the death of the Participant, or (iv) as a result of the voluntary termination of employment by the Participant for reasons other than Good Reason. 5. EXCLUSIVE REMEDY 5.1 Sole remedy for Covered Terminations. The payments and benefits provided for in Sections 2 and 3 shall constitute the Participant's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Participant and the Company in the event of the Participant's Covered Termination; provided that nothing in this Plan shall limit or prohibit severance payments to Employees who are not Executives or Officers under the Company's then existing policy for severance payments to such Employees. 5.2 No other benefits payable. The Participant shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Sections 2 and 3 have been provided to the Participant, except as expressly set forth in a written agreement or in a duly executed employment agreement between Company and Participant; provided that nothing in this Plan shall affect an Executive's or Officer's entitlement to receive outplacement and financial planning services ordinarily available under the Company's Executive Termination Compensation Policy. 5.3 Release of claims. The Company shall condition payment of the cash severance 10 benefits described in section 2.2 of this Plan and the stock option, restricted stock or performance share acceleration described in section 2.3 upon the delivery by Participant of a signed release of claims in a form reasonably satisfactory to the Company. 6. PROPRIETARY AND CONFIDENTIAL INFORMATION The Company shall condition payment of the cash severance benefits described in section 2.2 of this Plan and the stock option, restricted stock or performance share acceleration described in section 2.3 upon the Participant's acknowledgment of his or her continuing obligation to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Participant and the Company. 7. NON-SOLICITATION 7.1 Agreement not to solicit. The Company shall condition payment of the cash severance benefits described in section 2.2 of this Plan and the stock option, restricted stock or performance share acceleration described in section 2.3 upon the Participant's agreement, for a period of one (1) year after the Participant's Covered Termination, to not, directly or indirectly, solicit the services or business of any employee, distributor, vendor, representative or customer of the Company, or in any other manner persuade any such person or entity to discontinue that person's or entity's relationship with or to the Company. 7.2 Other agreements not superseded. No provision of this Plan shall supersede or limit the terms, including more restrictive terms, of any other agreement by a Participant to refrain from competition with or from soliciting the employees or customers of the Company. 8. ARBITRATION 8.1 Disputes subject to arbitration. Any claim, dispute or controversy arising out of this Plan, the interpretation, validity or enforceability of this Plan, or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association; provided, however, that (1) the arbitrator shall have no authority to make any ruling or judgment that would confer any rights with respect to the trade secrets, confidential and proprietary information or other intellectual property of the Company upon a Participant or any third party; and (2) this arbitration provision shall not preclude the Company from seeking legal and equitable relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's intellectual property. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. 8.2 Site of arbitration. The site of the arbitration proceeding shall be Santa Clara County, California. 9. INTERPRETATION 11 This Plan shall be interpreted in accordance with and governed by the laws of the State of California as applied to contracts entered into and entirely to be performed within that state. 10. OTHER BENEFIT PLANS; NONCUMULATION OF BENEFITS 10.1 No limitation of regular benefit plans. Except as provided in Section 10.2 below, this Plan is not intended to and shall not affect, limit or terminate any plans, programs, or arrangements of the Company that are regularly made available to a significant number of employees, officers or executives of the Company, including without limitation the Company's stock option plans. 10.2 Noncumulation of benefits. The Participant may not cumulate cash severance payments, stock option acceleration and excise tax reimbursement benefits under both this Plan and any other agreement or plan or policy of the Company, any statutory or legal allowance or provision, or otherwise. If the Participant has any other binding written agreement with the Company which provides that upon a Change of Control or termination of employment the Participant shall receive one or more of the benefits described in Sections 2 and 3 of this Plan (i.e., the payment of cash compensation or prorated bonus, acceleration of vesting of stock options or restricted stock rights, and adjustments or payments relating to federal excise tax), then with respect to those benefits the aggregate amounts payable under this Plan shall be reduced by the amounts paid or payable under such other and separate agreements. 11. SUCCESSORS AND ASSIGNS 11.1 Successors of the Company. The Company will require any Successor expressly, absolutely and unconditionally to assume and agree to perform this Plan in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement shall be a material breach of this Plan. 11.2 No assignment of rights. Except as set forth in Section 11.3, the interest of any Participant in this Plan or in any distribution to be made under this Plan may not be assigned, pledged, alienated, anticipated, or otherwise encumbered (either at law or in equity) and shall not be subject to attachment, bankruptcy, garnishment, levy, execution, or other legal or equitable process. Any act in violation of this Section 11.2 shall be void. 11.3 Heirs and representatives of Participant. A Participant's rights under this Plan shall inure to the benefit of and be enforceable by a Participant's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. 12. NOTICES For purposes of this Plan, notices and all other communications permitted or provided for in this Plan shall be in writing and shall be deemed to have been duly given when 12 delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Raychem Corporation Attention: General Counsel 300 Constitution Drive Menlo Park, CA 94025-1164 and if to the Participant at the most recent address recorded in the records of the Company. Either party may provide the other with notices of change of address, which shall be effective upon receipt. 13. VALIDITY 13.1 Invalid provisions. If any one or more of the provisions (or any part thereof) of this Plan shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 13.2 Certain Business Combinations. In the event it is determined by the Company's Board of Directors, upon consultation with the Company's management and independent auditors, that the enforcement of this Plan, including provisions of Section 2.3 of this Plan, which allows for the acceleration of vesting of stock options and restricted stock upon the effective date of a Change of Control or thereafter, would preclude accounting for any proposed business combination of the Company involving a Change of Control as a pooling of interests, and the Company's Board of Directors otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, then any such provision of this Plan shall be null and void. 14. AMENDMENT, SUSPENSION OR TERMINATION At any time after the Effective Date of this Plan and prior to the date thirty (30) days before the earlier of (1) the date that the Company first publicly announces it is conducting negotiations leading to a Change of Control, or (2) the date that the Company enters into a definitive agreement that would result in a Change of Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies), the Board of Directors of the Company shall have the right to amend, suspend or terminate this Plan at any time and for any reason. Notwithstanding the preceding sentence, however, no amendment or termination of this Plan shall reduce any Participant's rights or benefits that have accrued and become payable under this Plan before the date the amendment is adopted or this Plan is terminated, as appropriate. 15. EFFECTIVE DATE The Effective Date of this Plan is February 5, 1999. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS JUN-30-1999 JUL-01-1998 MAR-31-1999 210,985 5,251 378,427 8,652 256,869 986,930 1,200,300 701,692 1,801,161 371,511 547,903 0 0 90,015 661,066 1,801,161 1,340,982 1,343,022 724,070 725,944 74,482 79 19,919 153,890 50,783 153,890 0 0 0 103,107 1.31 1.29
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