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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 2-15299
RAYCHEM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-1369731
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 CONSTITUTION DRIVE, MENLO PARK, CA 94025-1164
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (415) 361-4180
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
<S> <C>
Common Stock, $1 par value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates of the
registrant (assuming for these purposes, but without conceding, that all
executive officers and directors are "affiliates" of the registrant) as of
August 21, 1995, (based on the closing sale price as reported on the New York
Stock Exchange on such date) was $1,950,514,125.
Number of shares of Common Stock outstanding as of August 21, 1995:
44,066,955.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV: Portions of the Annual Report to Stockholders for the fiscal
year ended June 30, 1995
Part III: Portions of the Proxy Statement dated
September 18, 1995.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Raychem Corporation, founded in 1957, is a broadly based materials science
company serving both domestic and international markets. The terms "company" or
"Raychem" mean Raychem Corporation and its consolidated subsidiaries.
The company develops, manufactures, and sells a variety of high-performance
products used by customers in the aerospace, automotive, cable television,
commercial electronics, communications, computer, construction, defense,
industrial infrastructure, mass transit, medical, and telephone industries.
On November 16, 1994, the company formed a joint venture, Ericsson Raynet,
with LM Ericsson, a Swedish telecommunications company. Ericsson Raynet has
taken over and is continuing the operations of the company's Raynet subsidiary
("Raynet"). Raynet delivered fiber-optic distribution systems for voice, video,
and data to telecommunications network operators. Raynet was consolidated in
prior years when it was a wholly owned Raychem subsidiary. Following formation
of the joint venture, Raychem changed its Raynet accounting in 1995 from
consolidation to the equity method. Raychem's equity in net losses of affiliated
companies for 1995 includes the results of Raynet Corporation and subsidiaries
through November 16, 1994, and Raynet's allocation of the results of Ericsson
Raynet from November 17, 1994, through June 30, 1995. For information regarding
the transaction and loss allocations, see the Note entitled "Raynet" in the
company's 1995 Annual Report to Stockholders (the "1995 Annual Report"), which
is incorporated herein by reference and is included in this filing as Exhibit
13.
For information regarding the company's restructuring actions, see the Note
entitled "Restructuring and Divestitures" and the section entitled "Financial
Review" of the 1995 Annual Report, which are incorporated herein by reference
and are included in this filing as Exhibit 13.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The company's business is organized into three industry segments designated
as electronics, industrial, and telecommunications (collectively referred to as
the "core business"). Raynet Corporation and subsidiaries results are presented
on the equity basis of accounting in 1995 versus consolidated in 1994 and 1993.
Thus, Raynet is not considered an industry segment in 1995. For financial and
other information concerning the company's industry segments, see the Note
entitled "Business Segments" and the section entitled "Financial Review" of the
1995 Annual Report, which are incorporated herein by reference and are included
in this filing as Exhibit 13.
(C) NARRATIVE DESCRIPTION OF BUSINESS
For information regarding operating results, principal products produced,
and industries served by the company's industry segments, see the Note entitled
"Business Segments" and the section entitled "Financial Review" of the 1995
Annual Report, which are incorporated herein by reference and are included in
this filing as Exhibit 13.
METHODS OF DISTRIBUTION
The products of the company's industry segments are marketed primarily
through Raychem's worldwide sales force as well as through outside distribution
channels both within and outside the United States.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Materials required by the company's industry segments in their continuing
manufacturing operations, or substitutes for such materials, are generally
available from multiple sources worldwide. In recent months, supplies of certain
raw materials the company uses has been tightening. In some instances, this has
resulted in
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increased prices, rationing, spot shortages, and the potential for future
shortages. In response, the company has identified alternative materials for
some products, and these materials are currently undergoing qualification
testing. To date, the company has had no disruption of manufacturing, and the
impact of raw material price increases has been immaterial.
PATENTS AND PROPRIETARY INFORMATION
The company applies for patents in the United States and other countries,
as appropriate, to protect its significant patentable developments. As of June
30, 1995, the company had in force 943 U.S. patents and 3,581 foreign patents,
and had pending 327 U.S. patent applications and 3,100 foreign patent
applications. Patents held by the company in the aggregate are of material
importance in the operation of the company's business. Certain patents are the
subject of litigation. Management, however, does not believe that any single
patent, or group of related patents, is essential to the company's business as a
whole or to that of any of its industry segments. Additionally, the company owns
and uses in its business a substantial body of proprietary information and
numerous trademarks. In the normal course of business, the company from time to
time makes and receives inquiries with regard to possible patent infringement.
The company believes that it is unlikely that the outcome of these inquiries
will have a material adverse effect on the company's financial position. The
company intends to be active in the protection of its intellectual property,
including its patents.
WORKING CAPITAL
Information relative to working capital is included in the section entitled
"Financial Review" of the 1995 Annual Report, which is incorporated herein by
reference and is included in this filing as Exhibit 13.
CUSTOMERS
The company's industry segments sell to many customers. Management does not
believe that the loss of any one customer would have a materially adverse effect
on the business of the company. During 1995, there was no single customer that
accounted for 10% or more of the company's revenues.
BACKLOG
The company's business is characterized by short lead times and the absence
of a significant backlog. The company expects that substantially all of the
backlog at June 30, 1995, will be shipped in fiscal 1996. Unfilled orders may be
canceled by customers prior to shipment of goods; however, such cancellations
historically have not been material.
Set forth below is the backlog at June 30, 1995 and 1994, for each of the
company's industry segments.
<TABLE>
<CAPTION>
JUNE 30,
-------------
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Electronics................................. $130 $129
Industrial.................................. 62 48
Telecommunications.......................... 83 83
Raynet...................................... --* 15
---- ----
Total....................................... $275 $275
==== ====
</TABLE>
---------------
* Raynet Corporation and subsidiaries' results are presented on the equity basis
of accounting in 1995 versus consolidated in 1994.
GOVERNMENT CONTRACTS
No material portion of the company's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
government.
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COMPETITION
The company's key competitive elements in its core business include:
developing products that provide innovative solutions to customers' technical
problems; providing high product quality and performance; continually
introducing new products as well as improvements to existing products; and
providing ongoing customer support.
The products of the company's core industry segments are sold in highly
competitive markets. The company's total sales are often a small fraction of
total sales within the markets in which it operates. Raychem's products compete
with those of a large number of companies and divisions within companies that
are both larger and smaller than Raychem.
Ericsson Raynet joint venture is engaged in the development, manufacture,
and sale of fiber-optic loop optical carrier systems and integrated operations
support system software. Ericsson Raynet's products compete with those of
specialized telecommunications companies and affiliates of diversified
international corporations that are both larger and smaller than Ericsson
Raynet. The competitive features of Ericsson Raynet's markets include emphasis
on product quality, price, and performance in the provision of
telecommunications services for the local loop network.
RESEARCH AND DEVELOPMENT
For financial information on research and development expense, see the
sections entitled "Consolidated Statement of Operations" and "Financial Review"
of the 1995 Annual Report, which are incorporated herein by reference and are
included in this filing as Exhibit 13.
ENVIRONMENTAL REGULATIONS
For information regarding the effect of environmental regulations on the
company, see the section entitled "Financial Review," the Note entitled "Summary
of Significant Accounting Policies," and the Note entitled "Contingencies" of
the 1995 Annual Report, which are incorporated herein by reference and are
included in this filing as Exhibit 13.
Additional information regarding environmental administrative and judicial
proceedings is set forth in Part I, Item 3 of this Form 10-K under the caption
"Legal Proceedings."
EMPLOYEES
As of June 30, 1995, the company employed 9,496 people.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The company's international operations are conducted primarily through
wholly owned subsidiaries that are responsible for sales, distribution and, in
some cases, research, development, and manufacturing activities. At June 30,
1995, these operations employed approximately 5,144 people, representing 54% of
the company's total work force.
The company's principal international operations are located in Western
Europe. Although the company's Western European operations are subject to a
number of risks, such as changes in foreign currency exchange rates, management
believes that they do not involve significantly greater risks than the company's
domestic operations. The company also operates in the Middle East, Asia, and
Latin America. Although doing business in these parts of the world involves some
degree of risk due to greater economic and political uncertainties, management
believes that the company's spending and exposure levels are appropriate in the
regions in which it conducts business.
For additional information regarding the company's international and
domestic operations and export sales, see the Note entitled "Worldwide
Operations" and the section entitled "Financial Review" of the 1995 Annual
Report, which are incorporated herein by reference and are included in this
filing as Exhibit 13.
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ITEM 2. PROPERTIES
The company's principal domestic facilities are located in Menlo Park and
Redwood City, California, and in Fuquay-Varina, North Carolina. Additional
facilities of significance are located in Belgium, France, Germany, Ireland,
Japan, the People's Republic of China, and the United Kingdom.
The company owns and leases a total of 6,472,000 square feet of
manufacturing, distribution, research and development, and sales and
administrative facilities worldwide.
The approximate square footage of all property owned and leased by each of
the company's industry segments and corporate as of June 30, 1995, is shown in
the following table:
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------------------------------------------
TELECOM- CONSOLIDATED
ELECTRONICS INDUSTRIAL MUNICATIONS CORPORATE TOTAL
----------- ---------- ----------- --------- ------------
(SQUARE FEET IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Owned property:
United States.................... 467 198 396 737 1,798
International.................... 779 605 833 63 2,280
----- ----- ----- ----- -----
Total owned property.......... 1,246 803 1,229 800 4,078
----- ----- ----- ----- -----
Leased Property:
United States.................... 359 190 170 390 1,109
International.................... 596 366 321 2 1,285
----- ----- ----- ----- -----
Total leased property......... 955 556 491 392 2,394
----- ----- ----- ----- -----
Total owned and leased
property.................... 2,201 1,359 1,720 1,192 6,472
===== ===== ===== ===== =====
</TABLE>
The company owns approximately 223 acres of land in the United States and
370 acres abroad for a total of 593 acres. Of this total, electronics uses
approximately 198 acres; industrial, 156 acres; telecommunications, 134 acres;
and corporate, 105 acres.
The company's facilities are suitable for their respective uses and, in
general, are adequate to support the current and anticipated volume of business.
The company conducts continuing reviews of its facilities under improvement
programs aimed at modernization and cost reduction. For information on capital
expenditures, see the section entitled "Financial Review" of the 1995 Annual
Report, which is incorporated herein by reference and is included in this filing
as Exhibit 13.
For information regarding leased properties, see the Note entitled
"Commitments" of the 1995 Annual Report, which is incorporated herein by
reference and is included in this filing as Exhibit 13.
ITEM 3. LEGAL PROCEEDINGS
I. The company and its subsidiaries have been named as defendants in lawsuits
arising from various commercial matters, including product liability. The
principal product liability litigation involves a variety of claims arising from
the company's heat-tracing and freeze protection products. Principal product
liability matters include:
A. On March 7, 1995, a complaint entitled All Alaskan Seafoods, Inc.,
AAS-DMP Management Partnership, L.P. by Kodiak Marine Protein, Inc., General
Partner, Holding Company Dalmoreproduct, Sandra Kegley, and Shin Nihon Global
Co., Ltd. v. Raychem Corporation and Rubatex Corporation was filed in the United
States District Court, Western District of Washington at Seattle, asserting
liability against the company for alleged fire damage to a ship and its cargo
and the death of one crew member. The complaint seeks compensatory and exemplary
damages based on claims of strict product liability and negligence. Damage to
the ship and its cargo has been alleged to exceed $25 million and the plaintiffs
are claiming lost business damages of an unspecified amount. The company intends
to defend itself vigorously in this matter.
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B. On May 10, 1995, a decision was rendered on an appeal of a judgment in
the company's favor in a lawsuit originally filed on September 9, 1988, in the
Supreme Court of Newfoundland, Canada, Trial Division, Bow Valley, et al. v.
Saint John Shipbuilding and Raychem. The Court of Appeal found the company 20%
responsible for property damage of approximately $5 million (Canadian). The
plaintiffs have since sought leave to appeal the decision to the Supreme Court
of Canada. The Supreme Court of Canada has not yet decided whether to hear the
case. The plaintiffs had alleged claims for damages arising out of a fire on an
offshore drilling platform and made allegations attributing the cause and spread
of the fire to heat-tracing and cladding products manufactured by the company.
On November 30, 1993, a Petition by joint venturers of the plaintiffs in the Bow
Valley lawsuit making similar claims was filed in the Supreme Court of
Newfoundland, Canada, Trial Division and was served on the company on March 25,
1994. This action is stayed. A New Brunswick lawsuit filed by Saint John
Shipbuilding against Raychem Canada, Ltd. arising out of the same incident has
also been stayed by prior agreement of the parties.
C. On January 5, 1995, the company and its insurers agreed to settle for
$8.5 million the property damage claims in the lawsuit entitled Culinary Foods,
Inc., et al. v. Raychem Corporation, filed in the United States District Court,
Northern District of Illinois, on December 14, 1992. Of this amount, the company
was required to pay a $1 million insurance deductible. Subsequently, the
personal injury claims in the Culinary Foods action were settled for $1.05
million, which was funded entirely by insurance. This lawsuit asserted liability
against the company for alleged property damage and personal injury (a death)
arising out of use of a heat-tracing product.
II. The company is also involved in certain other litigation which the company
believes does not meet the disclosure threshold of Item 103 of Regulation S-K.
Some of these include:
A. On May 4, 1994, the United States District Court for the Northern
District of California entered an Order Granting Summary Adjudication on Certain
Issues and Continuing Motion As to Other Issues in the matter of Raychem
Corporation v. Federal Insurance Company, a lawsuit filed by the company on
December 16, 1991, seeking recovery from Federal, its insurer, of $8.25 million
paid by the company in settlement of a class action securities suit. The Order
found in Raychem's favor that the indemnification of officers and directors for
settlement payments and defense costs was "permitted by law," that any
"allocation" for coverage purposes between the corporation and the officers and
directors is improper, and that the officers and directors were acting in their
official capacities insofar as the acts alleged to have occurred; further that
although Federal has raised no genuine issue of material fact to the contrary,
Federal was allowed to conduct discovery over a six-month period on whether
Raychem's indemnification of the officers and directors was in good faith and
whether settlement payments and defense costs were for matters insurable under
the law. The Company is actively pursuing its breach of contract claim and its
claim that Federal acted in bad faith in connection with its handling of this
claim. Cross motions for summary judgment are scheduled for hearing in
September, 1995.
B. On August 4, 1995, a motion filed by the company and other defendants
for judgment on the pleadings was granted by the United States District Court,
Northern District of California, in a lawsuit originally filed on August 27,
1993, West County Landfill, Inc. v. Raychem International Corporation; FMC
Corporation; Kaiser Aluminum & Chemical Corporation; Flint Ink Corporation;
Stauffer Chemical Company; Rhone-Poulenc Basic Chemicals Co.; Rhone-Poulenc
Inc.; Pacific Gas & Electric Company; Union Oil Company of California; Chevron
U.S.A. Inc.; Chevron Chemical Company; Shell Oil Company; Desoto, Inc.;
Occidental Chemical Corporation; General Motors Corporation; Romic Chemical
Corporation; United Airlines, Inc.; United States Department of Defense; United
States Department of Navy, striking the plaintiff's claim that the company and
other defendants were jointly and severally liable for response costs at a site
operated by the plaintiff. The allegations in the original complaint contend
that the defendants generated hazardous materials which were disposed of at the
site. Raychem International Corporation is alleged to have done so during the
period 1975 through 1979 and perhaps at other times. The complaint seeks
recovery of response costs which plaintiff has allegedly incurred in an amount
exceeding $15 million. As a result of the District Court's grant of the
company's motion, the company's potential liability, if any, for response costs
at the site would be based on the company's disposal of wastes at the site. The
company believes that its wastes constitute less than 3% of the total amount of
wastes disposed of at the site.
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C. On July 10, 1991, the company received written notice from the
California Department of Health Services ("DHS") that it intends to issue an
administrative order relating to the clean-up of soil contamination at the
company's administrative and manufacturing site in Menlo Park, California. The
company is currently negotiating with DHS regarding the proposed administrative
order. To date, no administrative order has been issued by DHS.
D. On October 1, 1994, The United States Environmental Protection Agency
revised its designation of the company to de minimus potentially responsible
party in administrative proceedings instituted by the United States
Environmental Protection Agency on March 23, 1989, naming the company, among
others, as an interested party. The company has also been named, among others,
as a potentially responsible party in a matter initiated by the California
Environmental Protection Agency on September 1, 1992. In each of these matters
it is alleged that the company may be liable for costs of correcting
environmental conditions at certain hazardous waste sites.
E. On February 10, 1995, Creole Engineering Co., Unit Process Company, and
the three other plaintiffs appealed the grant on January 13, 1995, by the United
States District Court, Northern District of California, of the company's motion
to dismiss related lawsuits filed on August 19, 1993, Creole Engineering Co. v.
Raychem Corporation, Tri-Systems, and Tracer Construction Company, and on June
29, 1993, Unit Process Company; Brock Easley, Inc.; Bylin Heating Systems, Inc.;
and Fluid Flow Control Contractors v. Raychem Corporation; Debenham Electrical
Supply Company, Inc.; and K.V.A. Electrical Supply Corp. This appeal was made to
the United States Court of Appeals for the Ninth Circuit. In addition, on
February 10, 1995, the plaintiffs filed lawsuits against the company alleging
violations of similar provisions of the laws of four states (California,
Colorado, Louisiana, and Washington), based on essentially the same facts
alleged in the federal action. The California, Louisiana, and Washington actions
have been consolidated in the Superior Court of San Mateo County, California,
and the Colorado action is in the District Court of Jefferson County, Colorado.
The complaints in each of the two lawsuits seek damages in excess of $15 million
(prior to trebling) arising out of distributor terminations and other alleged
antitrust violations by the company.
F. On May 2, 1995, a Complaint entitled Bourns, Inc. v. Raychem Corporation
was filed in the United States District Court, Central District of California,
in response to the company's action, filed December 19, 1994, in the Superior
Court of the State of California, County of San Mateo, Raychem Corporation and
Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. The Bourns' action
alleges violation of federal antitrust laws. The company's state court action
alleges, among other claims, misappropriation of trade secrets and breach of
contract and seeks in excess of $5 million in damages. Mr. Hogge has filed a
cross-complaint alleging interference with the pursuit of a lawful occupation
and unfair competition. Neither the federal complaint nor Mr. Hogge's
counterclaim specify a claim for monetary damages. On August 28, 1995, Bourns AG
filed an arbitration proceeding against the company with the International
Chamber of Commerce in Paris seeking damages for breach of a private brand
agreement in an amount in excess of $1.5 million.
G. On June 30, 1995, PSI Telecommunications, Inc. served on the company its
amended answer and counterclaim to the company's second amended complaint for
patent infringement, in a lawsuit initially filed by the company on November 30,
1993, in the United States District Court, Northern District of California,
against PSI Telecommunications, Inc. PSI Telecommunications, Inc. has filed a
counterclaim against the company for declaratory judgment that the patent is
invalid and not infringed, antitrust and unfair competition counterclaims, and
inequitable conduct and patent misuse defenses. No monetary damages have been
alleged. The company believes the counterclaims are without merit.
H. On July 6, 1994, the company and Communications Technology Corporation
settled all claims and counterclaims in the company's lawsuit for patent
infringement filed in the United States District Court, Northern District of
California, on November 2, 1992.
III. Legal proceedings tend to be unpredictable and costly. Based on currently
available information, however, management believes that the resolution of
pending claims, regulatory inquiries, and legal proceedings will not have a
material adverse effect on the company's operating results or financial
position. The company is maintaining insurance to cover product liability and
certain other claims.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the fourth quarter.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all executive officers
of the company as of June 30, 1995, their positions with the company, and the
date each was first elected as, or otherwise deemed to be, an executive officer
of the registrant. This table is included as an unnumbered item in Part I of
this Form 10-K.
<TABLE>
<CAPTION>
DATE APPOINTED
NAME AGE POSITION AN OFFICER
------------------------------------ --- ------------------------------------ --------------
<S> <C> <C> <C>
Robert J. Saldich................... 62 President, Chief Executive Officer 1971
and Director
Harry O. Postlewait................. 61 Executive Vice President 1971
Charles J. Abbe..................... 54 Senior Vice President, Corporate 1993
Development
Michael T. Everett.................. 46 Senior Vice President, Asia 1987
Ralph H. Harnett.................... 47 Senior Vice President, Telecom 1993
Raymond J. Sims..................... 44 Senior Vice President and Chief 1988
Financial Officer
James B. Spradling.................. 61 Senior Vice President, Europe 1973
Joseph G. Wirth..................... 59 Senior Vice President and Chief 1991
Technical Officer
Stephen A. Balogh................... 48 Vice President 1990
Deidra D. Barsotti.................. 39 Vice President and Controller 1991
Peter L. Brooks..................... 49 Vice President 1995
John D. McGraw...................... 48 Vice President 1995
Andrew F. Roake..................... 43 Vice President 1995
Hus Tigli........................... 41 Vice President 1995
Eric Van Zele....................... 47 Vice President 1994
Robert J. Vizas..................... 48 Vice President, General Counsel and 1990
Secretary
Rik P. Dobbelaere................... 41 Division Manager 1995
Timothy S. Jenks.................... 40 Division Manager 1995
Robert R. Roeser.................... 52 President and Chief Executive 1995
Officer, Elo TouchSystems, Inc.
</TABLE>
There are no family relationships between any executive officers. All of
the executive officers except Mr. Wirth have been employed by or associated with
the company in their present or other managerial and executive capacities for
more than five years. Mr. Wirth was a Vice President at General Electric Company
before becoming Senior Vice President and Chief Technical Officer of Raychem in
1991.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section entitled "Quarterly Financial Data (Unaudited)" of the 1995
Annual Report is incorporated herein by reference and is included in this filing
as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Ten-Year Summary" of the 1995 Annual Report is
incorporated herein by reference and is included in this filing as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The section entitled "Financial Review" of the 1995 Annual Report is
incorporated herein by reference and is included in this filing as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, together with the Notes thereto and
the report thereon of Price Waterhouse LLP, dated July 18, 1995, and the section
entitled "Quarterly Financial Data (Unaudited)" of the 1995 Annual Report are
incorporated herein by reference and are included in this filing as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the company's directors is presented in the
subsection entitled "Nominees" appearing on pages 2 to 3 of the Proxy Statement
dated September 18, 1995 (the "1995 Proxy Statement"), which page is
incorporated herein by reference.
Information regarding the company's executive officers is set forth in Part
I of this Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the company's compensation of its executive officers
is set forth on pages 6 to 11 of the 1995 Proxy Statement which pages are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth on page 4 of the 1995 Proxy Statement, which pages are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding transactions with the company's directors and
executive officers is set forth on page 13 of the 1995 Proxy Statement, which
pages are incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE IN 1995
ANNUAL REPORT*
--------------
<S> <C>
Financial Review....................................................... 20-26
Report of Independent Accountants...................................... 27
Consolidated Balance Sheet at June 30, 1995 and 1994................... 28
Consolidated Statement of Operations for the three years ended June 30,
1995................................................................. 29
Consolidated Statement of Cash Flows for the three years ended June 30,
1995................................................................. 30
Consolidated Statement of Stockholders' Equity for the three years
ended June 30, 1995.................................................. 31
Notes to Consolidated Financial Statements............................. 32-46
Quarterly Financial Data (Unaudited)................................... 47
Ten-Year Summary....................................................... 48-49
</TABLE>
(2) Financial Statement Schedules
<TABLE>
<S> <C>
Separate Financial Statements of Subsidiaries Not Consolidated and Fifty
Percent or Less Owned Persons:
Raynet International, Inc., Special Report dated November 16, 1994
Ericsson Raynet, Annual Report dated June 30, 1995
</TABLE>
Schedules:
<TABLE>
<S> <C>
Report of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
</TABLE>
The financial statement schedule should be read in conjunction with the
financial statements in the 1995 Annual Report to Stockholders. All other
Financial Statement Schedules are omitted because they are not required or
are not applicable, or the required information is included in the
Consolidated Financial Statements or the Notes.
---------------
* Incorporated herein by reference and included in this filing as Exhibit 13.
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(3) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------ -----------------------------------------------------------------------------------
<S> <C>
2(a) Ericsson Raynet Formation Agreement dated as of October 10, 1994(11)
2(b) Amendment to Ericsson Raynet Formation Agreement dated as of November 16, 1994(11)
2(c) Ericsson Raynet Joint Venture Agreement dated as of November 16, 1994(11)
3(a) Amended and Restated Certificate of Incorporation(6)
3(b) Bylaws(1)
3(c) Certificate of Merger(1)
4(a) Rights Agreement(5)
4(b) Credit Agreement dated as of September 29, 1994(10)
4(c) Term Loan Agreement dated as of September 29, 1994(10)
10(a) Amended and Restated 1981 Incentive Stock Option Plan(2)
10(b) Amended and Restated 1981 Supplemental Stock Option Plan(2)
10(c) Executive Long Term Incentive Plan(3)
10(d) Bonus Deferral Plan(3)
10(e) Amended and Restated 1987 Directors Stock Option Plan(8)
10(f) Supplemental Executive Retirement Plan(4)
10(g) Raynet Corporation Common Stock Plan(4)
10(h) Amended and Restated 1990 Incentive Plan(8)
10(i) Consulting Agreement dated as of April 1, 1990, between the company and Paul M.
Cook(6)
10(j) Description of Bonus Plan(7)
10(k) Consulting Agreement dated as of April 18, 1994, between Raynet Corporation and
Robert M. Halperin(9)
10(l) Raynet Corporation 1993 Common Stock Plan(9)
10(m) 1995 Executive Deferred Compensation Plan(12)
10(n) Consulting Agreement effective July 1, 1994, between the company and Isaac Stein
and Waverley Associates, Inc.
10(o) Revolving Credit Line Agreement dated as of January 2, 1995, between the company
and Ericsson Raynet
10(p) Executive Termination Compensation Policy dated as of June 1, 1995
10(q) Consulting/Employment Agreement dated as of June 7, 1995, between the company and
Robert J. Saldich
13 Portions of the 1995 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
99(a) List of subsidiaries whose employees are participating in the Amended and Restated
1984 Employee Stock Purchase Plan for United States employees and employees of
certain domestic and foreign subsidiaries.
99(b) List of subsidiaries whose employees are participating in the 1985 Supplemental
Employee Stock Purchase Plan for employees of certain subsidiaries.
</TABLE>
11
<PAGE> 13
---------------
(1) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1987, (File No. 2-15299) and incorporated by
reference.
(2) Filed as an exhibit to the company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1987, (File No. 2-15299) and incorporated by
reference.
(3) Filed as an exhibit to the company's Proxy Statement dated September 12,
1988, mailed to stockholders in connection with the 1988 Annual Meeting of
Stockholders and incorporated by reference.
(4) Filed as an exhibit to the company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1988, (File No. 2-15299) and incorporated by
reference.
(5) Filed as an exhibit to the Registration Statement on Form 8-A filed by the
company on February 3, 1989, (File No. 2-15299) and incorporated by
reference.
(6) Filed as an exhibit to the company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1990, (File No. 2-15299) and incorporated by
reference.
(7) Filed as an exhibit to the company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992, (File No. 2-15299) and incorporated by
reference.
(8) Filed as an exhibit to the company's Registration Statement on Form S-8
filed by the company on October 25, 1993, (Registration No. 33-50737) and
incorporated by reference.
(9) Filed as an exhibit to the company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, (File No. 2-15299) and incorporated by
reference.
(10) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994, (File No. 2-15299) and incorporated by
reference.
(11) Filed as an exhibit to the company's Form 8-K dated November 16, 1994,
(File No. 2-15299) and incorporated by reference.
(12) Filed as an exhibit to the company's Registration Statement on Form S-8
filed by the company on April 5, 1995, (Registration No. 33-58437) and
incorporated by reference.
(b) Reports on Form 8-K
None.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
RAYCHEM CORPORATION
Registrant
By: /s/ ROBERT J. SALDICH
-----------------------------------
Robert J. Saldich
President and
Chief Executive Officer
Date: September 19, 1995
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Robert
J. Saldich and Raymond J. Sims, or either of them, as his attorney-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------ ------------------------------ -------------------
<C> <S> <C>
/s/ ROBERT J. SALDICH President, Chief Executive September 19, 1995
------------------------------------------ Officer and Director
Robert J. Saldich (Principal Executive Officer)
/s/ RAYMOND J. SIMS Senior Vice President and September 19, 1995
------------------------------------------ Chief Financial Officer
Raymond J. Sims (Principal Financial Officer)
/s/ DEIDRA D. BARSOTTI Vice President and Controller September 19, 1995
------------------------------------------ (Principal Accounting Officer)
Deidra D. Barsotti
/s/ PAUL M. COOK Chairman of the Board September 19, 1995
------------------------------------------
Paul M. Cook
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------ ------------------------------ -------------------
<C> <S> <C>
/s/ RICHARD DULUDE Director September 19, 1995
------------------------------------------
Richard Dulude
/s/ JAMES F. GIBBONS Director September 19, 1995
------------------------------------------
James F. Gibbons
/s/ JOHN P. MCTAGUE Director September 19, 1995
------------------------------------------
John P. McTague
/s/ DEAN O. MORTON Director September 19, 1995
------------------------------------------
Dean O. Morton
------------------------------------------ Director
Isaac Stein
/s/ CYRIL J. YANSOUNI Director September 19, 1995
------------------------------------------
Cyril J. Yansouni
</TABLE>
14
<PAGE> 16
RAYNET INTERNATIONAL, INC.
Special Report
November 16, 1994
<PAGE> 17
RAYNET INTERNATIONAL, INC.
CONTENTS
---------------------------------------------------------------------------
Consolidated Financial Statements 2
---------------------------------------------------------------------------
Notes to Consolidated Financial Statements 5
---------------------------------------------------------------------------
Report of Independent Accountants 20
---------------------------------------------------------------------------
<PAGE> 18
RAYNET INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
-------------------------------------------------------------------------------------
NOVEMBER 16, 1994 (IN THOUSANDS)
-------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,236
Accounts receivable, net of allowance for doubtful accounts of $196 22,473
Inventories, net 25,285
Prepaid expenses and other current assets 1,705
-------------------------------------------------------------------------------------
Total current assets 60,699
Property, plant and equipment, net 25,119
Capitalized software development costs, net 11,406
Other assets 1,111
-------------------------------------------------------------------------------------
TOTAL ASSETS $ 98,335
=====================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable to parent company $ 14,535
Loan payable to parent company 34,279
Accounts payable 17,331
Accrued payroll and related liabilities 4,914
Other accrued liabilities 4,515
Deferred income 1,861
Excluded liabilities 8,699
-------------------------------------------------------------------------------------
Total current liabilities 86,134
Long-term warranty liability 320
-------------------------------------------------------------------------------------
Total liabilities 86,454
-------------------------------------------------------------------------------------
Commitments and contingencies (see note)
Shareholder's equity:
Common and preferred stock 528,799
Accumulated deficit (517,243)
Foreign currency translation 325
-------------------------------------------------------------------------------------
Total shareholder's equity 11,881
-------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 98,335
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
<PAGE> 19
RAYNET INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
--------------------------------------------------------------------------------
FOR THE PERIOD FROM JULY 1 THROUGH NOVEMBER 16, 1994
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenues, net of returns and allowances $ 26,348
Cost of goods sold 33,941
Research and development expense 17,688
Sales, marketing, and administrative expense 16,442
Interest expense, net 328
Other expense, net 126
--------------------------------------------------------------------------------
Loss before income taxes (42,177)
Provision for income taxes 2
--------------------------------------------------------------------------------
NET LOSS ($42,179)
Accumulated deficit, beginning of period (475,064)
--------------------------------------------------------------------------------
ACCUMULATED DEFICIT, END OF PERIOD ($517,243)
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE> 20
RAYNET INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
FOR THE PERIOD FROM JULY 1 THROUGH NOVEMBER 16, 1994
(IN THOUSANDS)
------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows used in operating activities:
Net loss ($42,179)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 4,040
Amortization 1,839
Changes in certain assets and liabilities:
Decrease in accounts receivable 14,247
Decrease in inventories 2,388
Decrease in prepaid expenses and other assets 1,098
Increase in accounts payable to parent company and excluded liabilities 6,370
Decrease in accounts payable and accruals (9,122)
Decrease in deferred income (471)
------------------------------------------------------------------------------------------------------
Net cash used in operating activities (21,790)
------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in capitalized software development costs (1,857)
Investment in property, plant and equipment, net of retirements (2,127)
------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,984)
------------------------------------------------------------------------------------------------------
Cash flows from financing activities - net borrowings from parent company 34,279
------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 25
------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 8,530
Cash and cash equivalents at beginning of period 2,706
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $11,236
======================================================================================================
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for income taxes $ 74
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE> 21
RAYNET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COMPANY
Raynet Corporation was incorporated in 1987 by Raychem Corporation (the parent
company or Raychem) to develop, manufacture, and sell high-performance,
cost-effective, resource-sharing fiber optic telephone and video distribution
systems for local loop applications throughout the world. Since its inception,
Raynet has engaged primarily in product engineering and development. Commercial
deployment began in the first half of calendar 1993.
Raynet International, Inc. (RNI) was formed in 1988 to pursue market
opportunities for fiber-optic telephone distribution systems outside the United
States and Canada. On June 24, 1993, Raychem purchased all of the convertible
preferred stock in RNI which had been previously held by BellSouth Enterprises
Inc. (BSE). Raychem has waived its right to associated dividends since July 1,
1994.
Prior to the merger of Raynet Corporation and RNI on November 15, 1994, Raychem
contributed its RNI preferred stock holdings to Raynet Corporation. The
surviving company, Raynet International, Inc., is hereinafter referred to as
"the company." The company's fiscal year end is June 30. Raychem is the
company's sole shareholder.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
REVENUE RECOGNITION AND RELATED COSTS
The company has conducted technology field trials, domestic first office
applications (FOA), and international pilots. These activities are covered by
fixed price contracts and involve the deployment of pre-production or low volume
Raynet systems. Revenue typically is recognized on such contracts upon the
customer's acceptance of the delivered system. Associated production costs,
charged to cost of goods sold,
Page 5
<PAGE> 22
RAYNET INTERNATIONAL, INC.
are deferred until such time that revenue is recognized. There were no deferred
trial/pilot costs in net inventory as of November 16, 1994.
Under the company's DBP Telekom OPAL 93 commercial volume contract, product
sales revenue and associated cost of goods sold are recognized as product is
accepted by the customer. The company subcontracts related trenching and
engineering activities, referred to as "turnkey" services, as well as product
installation services. Billings for turnkey services provided by subcontractors
are recognized on a percentage of completion basis and recorded as an offset to
the related project cost of goods sold. Other non-manufacturing operating costs
incurred to support this contract are deferred to the extent recoverable and
recognized in cost of goods sold in proportion to product or turnkey revenue
recognized. The OPAL 93 contract was completed in the first quarter of fiscal
1995. For the period ended November 16, 1994, $12.7 million, or 48% of revenues,
relates to this contract.
Revenue under other commercial contracts is recognized when the earnings process
is complete. This generally occurs at the time product is shipped. For the
period ended November 16, 1994, $11.3 million, or 43% of revenues, relates to
product shipped under the company's July 1993 supply contract with NYNEX.
The company's sales contracts often allow for billings based on agreed upon
milestones. Deferred income arises from amounts billed in advance of revenue
recognized while unbilled receivables arise from revenue recognized in advance
of amounts billed. Unbilled receivables totaled $1.5 million at November 16,
1994, of which $0.75 million, classified as other assets, is due beyond one
year.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of 90 days or less at the date of
purchase are considered to be cash equivalents. At November 16, 1994, the
company had $5.4 million invested with financial institutions in short-term
interest bearing deposits that mature within 30 days.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost of inventories
is determined on the first-in, first-out method.
Page 6
<PAGE> 23
RAYNET INTERNATIONAL, INC.
The components of inventories, net were as follows:
<TABLE>
--------------------------------------------------------------------------------
NOVEMBER 16, 1994 (in thousands)
--------------------------------------------------------------------------------
<S> <C>
Raw materials $14,513
Work-in-process 6,071
Finished goods 4,701
--------------------------------------------------------------------------------
$25,285
================================================================================
</TABLE>
WARRANTY
The company warrants the performance of its various products, pursuant to
written limited warranties, typically for periods of between one and three years
after customer acceptance. A warranty liability is provided at the time of
shipment based upon expected return rates, average costs to repair, and
anticipated retrofit activity. Warranty and retrofit liabilities at November 16,
1994 totaled $1.5 million, of which $1.2 million was included in "Other accrued
liabilities."
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at original cost. Depreciation and
amortization are provided over the economic lives of the individual assets and,
for leasehold improvements, over the terms of their respective leases, if
shorter, using accelerated methods for assets acquired prior to fiscal 1991 and
the straight-line method for acquisitions thereafter.
The components of property, plant and equipment were as follows:
<TABLE>
--------------------------------------------------------------------------------
NOVEMBER 16, 1994
--------------------------------------------------------------------------------
<S> <C>
Machinery and equipment $ 54,884
Furniture and fixtures 5,483
Leasehold improvements 8,095
--------------------------------------------------------------------------------
68,462
Less: accumulated depreciation and amortization (43,343)
--------------------------------------------------------------------------------
$ 25,119
================================================================================
</TABLE>
Depreciation expense was $4.0 million for the period.
Page 7
<PAGE> 24
RAYNET INTERNATIONAL, INC.
INTANGIBLE ASSETS
Trademarks and software licenses are amortized on a straight-line basis over
their legal or estimated useful lives, whichever is shorter.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the company capitalizes software development costs as resulting
products become "technologically feasible." At November 16, 1994, the company
had $11.4 million in capitalized software development costs, which is net of
accumulated amortization of $6.8 million.
Amortization of capitalized software development costs begins when the products
are available for general release to customers on a volume basis and is computed
on a product-by-product basis as the greater of: (a) the ratio of current gross
revenues for a product to the total of current and anticipated future gross
revenues for the product; or (b) the straight-line method over a period not to
exceed three years. The company began amortizing capitalized software
development costs in fiscal 1993. Total amortization of $1.8 million has been
included in cost of goods sold for the period.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the company's foreign operations are translated into
United States dollars at exchange rates prevailing at period end, and the
resulting translation adjustments are included as a component of shareholder's
equity. Net realized and unrealized foreign currency exchange gain or loss was
insignificant for the period.
RELATED PARTY TRANSACTIONS
REVOLVING CREDIT AGREEMENT WITH RAYCHEM
The company may borrow up to $150 million under a revolving credit agreement
with Raychem International Manufacturing Corporation (RIMC), an affiliated
company and wholly owned subsidiary of the parent company. Advances are made
Page 8
<PAGE> 25
RAYNET INTERNATIONAL, INC.
through bank transfers between the companies' accounts each day in the amount
needed to cover the company's daily operating cash needs. These advances bear
interest monthly at the then current prime rate calculated on the average daily
balance for the month. This agreement is terminable on ninety (90) days notice.
This agreement was terminated on November 16, 1994 in connection with the
formation of Ericsson Raynet (see "Subsequent Event - Ericsson Raynet
Partnership" footnote).
PARTICIPATION IN RAYCHEM'S EMPLOYEE STOCK PURCHASE PLAN
The company's employees are eligible to participate in the parent company's
Employee Stock Purchase Plan. This plan provides that eligible employees may
contribute up to 15% of their base earnings towards the quarterly purchase of
the parent company common stock. The employees' purchase price is derived from a
formula based on the fair market value of the parent company's common stock. No
compensation expense is recorded in connection with this plan. Amounts withheld
from employees related to employees' participation in this plan are transferred
quarterly to the parent company. After the formation of Ericsson Raynet (see
"Subsequent Event - Ericsson Raynet Partnership" footnote), the partnership's
employees will be ineligible to participate in this plan.
PARTICIPATION IN RAYCHEM'S PENSION PLANS
The company's employees also participate in the parent company's pension plans.
Raychem has noncontributory defined benefit pension plans which cover
substantially all U.S. employees and a number of its employees in foreign
countries. The benefits for these plans are based primarily on years of service
and employee compensation. The parent company funds these pension plans when
legally or contractually required. Plan assets generally consist of publicly
traded securities, bonds and cash investments.
The company is charged for pension expense as an element of a composite fringe
benefit charge from its parent company. Information on the actuarial present
value of benefit obligations, fair value of plan assets and pension costs are
not provided as such information is not maintained separately for employees of
the company. As a result of the formation of Ericsson Raynet (see "Subsequent
Event - Ericsson Raynet Partnership" footnote), effective December 31, 1994 the
partnership's employees will no longer participate in Raychem's pension plans.
Page 9
<PAGE> 26
RAYNET INTERNATIONAL, INC.
OTHER POSTRETIREMENT BENEFITS
The parent company provides postretirement health care benefits to U.S.
employees who qualify for the parent company's defined benefit pension plan and
retire on or after age 55, until reaching age 65. Such benefits are limited to
allowing retirees to continue their participation in the parent company's group
medical plan. Eligible retirees pay monthly premiums, thus reducing the parent
company's cost.
Raychem adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (FAS 106), effective
July 1, 1992. This statement requires accrual accounting for all postretirement
benefits other than pensions. The cost associated with this recently implemented
standard has also been charged to the company as an element of a composite
fringe benefit charge from the parent company. Information on the actual expense
resulting from the adoption of FAS 106 is not maintained separately for
employees of the company.
OTHER TRANSACTIONS WITH RAYCHEM
In the normal course of business, the company contracts to purchase materials
and receive certain services from the parent company such as employer payroll
based charges, security and maintenance of the company's facilities, contracted
construction work, and relocation of the company's employees. In general,
charges for payroll and relocation are passed through at actual cost, while
other charges are in accordance with negotiated agreements. The company also
reimburses the parent company for certain amounts Raychem pays on its behalf,
such as direct deposit payroll, foreign currency intercompany payables, business
insurance, and workers compensation premiums. Total charges for these products,
services, and reimbursements were approximately $23.5 million for the period.
The company had outstanding accounts payable to the parent company of $14.5
million as of November 16, 1994.
FINANCIAL INSTRUMENTS
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Page 10
<PAGE> 27
RAYNET INTERNATIONAL, INC.
Cash and Cash Equivalents
The carrying amount approximates fair value.
Forward Foreign Exchange Contracts
The fair values of forward foreign exchange contracts, which approximate their
carrying amount, are estimated based on quoted market prices of comparable
contracts.
FORWARD FOREIGN EXCHANGE CONTRACTS
The parent company enters into forward foreign exchange contracts on behalf of
the company to hedge certain of the company's foreign currency denominated
receivables and payables. The related gains and losses on these contracts are
included in "other expense, net" as they arise. To the extent that a forward
contract is intended to hedge a firm foreign currency commitment, the gains and
losses that arise from these transactions are deferred and included in the
company's current assets or liabilities. The related gains and losses are
recognized in later periods and included in the measurement of the related
foreign currency transaction. For the period ended November 16, 1994, $0.8
million of deferred hedge gain was included in cost of goods sold. There were no
deferred hedge gains or losses in current assets or liabilities at November 16,
1994.
Parties to the hedging transactions typically are large international financial
institutions. During the period ended November 16, 1994, the parent company
managed all of the company's forward foreign exchange contracts which related
primarily to major western European currencies. At November 16, 1994, the
company did not have any forward foreign exchange contracts outstanding.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the company to significant
concentrations of credit risk consist of trade accounts receivable. As of
November 16, 1994, the company's trade accounts receivable were due primarily
from NYNEX (22%), the DBP Telekom (66%) and Ericsson, S.A. (5%).
Page 11
<PAGE> 28
RAYNET INTERNATIONAL, INC.
INTEREST
Interest expense, net for the period consists principally of interest charged by
Raychem on the Revolving Credit Agreement.
INCOME TAXES
Effective July 1, 1992, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes" (FAS 109).
For U.S. federal tax purposes, the company and its subsidiaries are members of
an affiliated group of which Raychem is the common parent corporation. The
affiliated group files its U.S. federal tax return on a consolidated basis
utilizing a June 30 fiscal year end.
For purposes of financial statement presentation, income tax expense and related
asset and liability accounts have been computed on a stand-alone basis.
Deferred tax liabilities (assets) under FAS 109 consisted of the following at
June 30, 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------------------------------------------
<S> <C>
Gross deferred tax liabilities $ 749
--------------------------------------------------------------------------------
ASSETS:
Difference in book and tax bases of assets (3,426)
Compensation accruals (249)
Asset reserves (2,796)
Capitalization of research & experimental costs, net of amortization (91,547)
Loss and tax credit carryforwards (37,855)
Other (2,545)
--------------------------------------------------------------------------------
GROSS DEFERRED TAX ASSETS (138,418)
--------------------------------------------------------------------------------
DEFERRED TAX ASSET VALUATION ALLOWANCE 137,669
--------------------------------------------------------------------------------
TOTAL NET DEFERRED TAX ASSETS $ 0
================================================================================
</TABLE>
Page 12
<PAGE> 29
RAYNET INTERNATIONAL, INC.
For the interim period from July 1 through November 16, 1994, any change in net
deferred tax assets arising from the results of operations would be offset by a
corresponding adjustment in the valuation allowance.
The loss before income taxes for the period from July 1 through November 16,
1994 is primarily attributable to U.S. operations. The company's net operating
losses and tax credit carryforwards expire in 2002 through 2009.
COMMON AND PREFERRED STOCK
Prior to the merger of Raynet Corporation and RNI, Raynet Corporation issued
34,762,271 shares of common stock and 86,905,678 shares of Series A common Stock
to RIMC with respect to its prior equity contribution of $121.7 million. In
connection with the merger of Raynet Corporation into RNI, the company was
recapitalized.
At November 16, 1994, issued and outstanding shares, as well as shares
authorized, were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Issued and Outstanding Authorized
------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 36,362,272 215,000,000
Series A common stock 90,905,678 100,000,000
Series A preferred stock 8,771,870 8,771,870
Series B preferred stock 1,200,000 1,200,000
Series C preferred stock 4,200,000 4,200,000
Series D preferred stock 26,611,800 55,000,000
</TABLE>
STOCK OPTIONS
All 4,396,050 options outstanding at November 15, 1994 (average exercise price
of $2.04) under the company's 1987 and 1993 Common Stock Option Plans were
terminated.
FOREIGN OPERATIONS
The company maintains wholly owned subsidiaries in Germany, France, Spain,
Belgium, and the United Kingdom. These foreign subsidiaries perform sales and
marketing functions and provide field installation and engineering support for
international deployments of the company's products. Revenues, net of returns
and allowances, from unaffiliated customers for the period include $10.8 million
in the
Page 13
<PAGE> 30
RAYNET INTERNATIONAL, INC.
United States, $12.7 million in Germany and $2.8 million in other European
countries. These revenues reflect only local shipments and exclude direct
exports from other geographic areas. Total assets, excluding intercompany
receivables and investments, comprised $71.6 million in the United States, $22.9
million in Germany and $4.0 million in other European countries at November 16,
1994.
COMMITMENTS AND CONTINGENCIES
LEASES
The company leases certain machinery and equipment, and its manufacturing and
office facilities under operating leases. These leases require the company to
pay taxes, insurance, and maintenance expenses, and provide for renewal and/or
purchase options at the fair market value of the property. Certain office and
manufacturing facilities are leased from the parent company. As of November 16,
1994, the aggregate minimum rental commitments under non-cancelable leases were
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
COMMITMENT
TO THE PARENT COMMITMENT
YEAR ENDING JUNE 30 COMPANY TO OTHERS TOTAL
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1995 $ 606 $ 925 $1,531
1996 932 730 1,662
1997 - 307 307
1998 - 72 72
1999 - 14 14
Thereafter - - -
--------------------------------------------------------------------------------
TOTAL $1,538 $2,048 $3,586
================================================================================
</TABLE>
Rental expense under operating leases was approximately $1.5 million for the
period.
As of November 16, 1994, the company had outstanding bank guarantees of $0.7
million related to its OPAL 93 contract performance, duty declaration, and
certain foreign leases.
Page 14
<PAGE> 31
RAYNET INTERNATIONAL, INC.
ROYALTY AGREEMENTS
Since 1988, the company has entered into various agreements with BSE which
provide for royalty payments based on a percentage of the company's net sales of
certain products. In October 1994, Raychem Corporation, Raynet Corporation, RNI,
and BSE, entered into an agreement whereby, among other things, BSE agreed to
reduce by half the ongoing royalties, previously generally due at 6% of
revenues, with respect to the period July 1 through September 30, 1994, and to
forego royalties with respect to the period October 1, 1994 through the closing
of the joint venture with Ericsson (see "Subsequent Event - Ericsson Raynet
Partnership" footnote), contingent on said closing occurring prior to December
1, 1994. All such royalties, amounting to $0.6 million and classified as
Excluded Liabilities on the accompanying consolidated balance sheet, were due
and payable on the closing date of the joint venture. Additionally, the company
is required to pay BSE $10 million in calendar 1994, and to make two additional
payments of $10 million each over the next two calendar years. The company has
agreed to make other royalty payments to BSE contingent upon the revenues and
earnings performance of Ericsson Raynet.
SUBSEQUENT EVENT - ERICSSON RAYNET PARTNERSHIP
On November 16, 1994, the company and L M Ericsson, a Swedish telecommunications
company, formed a joint venture, called "Ericsson Raynet", which assumed and is
continuing the company's operations. Ericsson Raynet is headquartered in Menlo
Park, California, and has been organized as a general partnership under Delaware
law. Ericsson representatives will constitute a majority of the Board of
Managers of the joint venture.
In forming the joint venture, the company sold certain specified assets to
Ericsson in exchange for $40 million. Ericsson contributed the purchased assets
to the joint venture, and the company contributed substantially all of its
remaining assets and liabilities to the joint venture. Funding of the joint
venture will initially be provided by the partners, generally 51% by Ericsson
and 49% by the company.
During the first five to eight years of operation, subject to various
conditions, substantially all of the profits of the joint venture up to $156
million will be allocated to the company; thereafter profits of the joint
venture will be shared 51/49 by Ericsson and the company, respectively.
Ericsson's share of the joint venture's losses will be capped at $25 million for
the fiscal year ending June 30, 1995. During the fiscal year ending June 30,
1996, up to $19.6 million of losses will be allocated to
Page 15
<PAGE> 32
RAYNET INTERNATIONAL, INC.
Ericsson and the company in a 51/49 ratio; additional losses, if any, up to $10
million will be allocated 100% to the company; and, thereafter, additional
losses, if any, will again be allocated to Ericsson and the company in a 51/49
ratio.
Ericsson has a right to purchase the company's interest in the joint venture at
a fixed price for a limited period beginning November 16, 1996; and Ericsson and
the company have call and put rights, respectively, on the company's interest in
the joint venture exercisable at fair market value at any time after July 1,
1999. If any of these options are exercised, the company has agreed to pay BSE a
portion of the purchase price received.
Certain liabilities to be retained by the company have been classified as
"Excluded Liabilities" in the accompanying consolidated balance sheet and
consist at November 16, 1994 of:
<TABLE>
--------------------------------------------------------------------------------------
(in thousands)
--------------------------------------------------------------------------------------
<S> <C>
Accrued balances as of June 30, 1994
Retention bonus $1,187
Restructuring for consulting and severance 1,022
Employee deferred option bonus 42
Tax liabilities, net 35
BSE royalty 2,046
--------------------------------------------------------------------------------------
SUBTOTAL $4,332
--------------------------------------------------------------------------------------
Additional accruals for the period:
Employee severance 387
BSE royalty 621
Retention bonus 2,972
--------------------------------------------------------------------------------------
SUBTOTAL PERIOD EXPENSE $3,980
--------------------------------------------------------------------------------------
Reimbursement to Raychem of their funding of period severance expense 387
--------------------------------------------------------------------------------------
TOTAL EXCLUDED LIABILITIES $8,699
======================================================================================
</TABLE>
Also to be retained by the company are the net assets of its foreign
subsidiaries in France, Spain, Belgium and the United Kingdom, referred to as
"excluded subsidiaries". Net assets of these excluded foreign subsidiaries
totaled $0.5 million as of November 16, 1994.
Page 16
<PAGE> 33
RAYNET INTERNATIONAL, INC.
Ericsson and Raychem agreed that for purposes of determining financial matters
or economic results to the parties, the joint venture would be effective as of
July 1, 1994. Since the joint venture was not legally formed at that time, it
was contemplated that the same economics would be accomplished by adjusting
contributions to and distributions from the joint venture to account for the
period July 1 through November 16, 1994 (the actual date of formation of the
partnership). In order to accomplish this, it was agreed that Raychem would bear
the loss from operations (excluding expenses related to excluded liabilities)
for the period July 1 through November 16, 1994 (referred to in the Joint
Venture Agreement as the "Stub Period Loss"). As a result, the assets
contributed by RNI to the joint venture includes a receivable from Raychem of
$38.2 million.
Ericsson and Raychem also agreed that the results of operations of the foreign
subsidiaries not transferred to the joint venture (RNI subsidiaries in the UK,
Belgium, France and Spain) would be included in the measurement of the Stub
Period Loss. As a result, the net income of $0.269 million of these subsidiaries
is included in the Stub Period Loss and the assets contributed to the joint
venture by RNI includes a receivable from RNI of $0.269 million.
If the accompanying consolidated statement of operations excluded expenses
related to the above excluded liabilities of $8.7 million, the resulting Stub
Period Loss is calculated as follows:
<TABLE>
--------------------------------------------------------------------------------
FOR THE PERIOD FROM JULY 1 THROUGH NOVEMBER 16, 1994
(IN THOUSANDS)
--------------------------------------------------------------------------------
<S> <C>
Target revenues $26,348
Cost of goods sold 32,829
Research and development expense 16,220
Sales, marketing, and administrative expense 15,042
Interest expense, net 328
Other expense, net 129
--------------------------------------------------------------------------------
Loss before income taxes (38,200)
Provision for income taxes 2
--------------------------------------------------------------------------------
NET LOSS ($38,202)
================================================================================
</TABLE>
The assets and liabilities to be contributed by RNI and Ericsson to the joint
venture consist of the following:
Page 17
<PAGE> 34
RAYNET INTERNATIONAL, INC.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
NOVEMBER 16, 1994 (IN THOUSANDS)
Raynet Raynet Eliminating Consolidated
International GmbH Entries Balances
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,263 $ 4,726 -- $ 8,989
Accounts receivable, net of allowance for doubtful accounts of $196 6,380 14,720 -- 21,100
Inventories 23,169 3,001 (885) 25,285
Prepaid expenses and other current assets 1,170 324 -- 1,494
Intercompany Receivable 11,990 404 (12,394) --
Receivable from excluded subs. 2,404 4 -- 2,408
Receivable from Raychem/RNI 38,471 -- -- 38,471
Property, plant & equipment, net 24,001 988 -- 24,989
Capitalized software development costs, net 11,406 -- -- 11,406
Investment, intercompany 29 -- (29) --
Other assets 1,111 -- -- 1,111
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 124,394 24,167 (13,308) 135,253
-------------------------------------------------------------------------------------------------------------------------------
Accounts payable to Raychem 14,362 -- -- 14,362
Intercompany payable 405 11,987 (12,392) --
Payable to excluded subs. 240 -- -- 240
Loan payable to parent company 34,279 -- -- 34,279
Accounts payable 7,981 9,181 -- 17,162
Accrued payroll and related liabilities 3,874 588 -- 4,462
Other accrued liabilities 5,239 974 -- 6,213
Long-term warranty liability 320 -- -- 320
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 66,700 22,730 (12,392) 77,038
-------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 57,694 $ 1,437 (916) $ 58,215
===============================================================================================================================
</TABLE>
Page 18
<PAGE> 35
RAYNET INTERNATIONAL, INC.
On January 2, 1995, the joint venture entered into three revolving credit
agreements with its partners. Raynet and Ericsson each committed to make
available to the joint venture a maximum of $50 million, due in full on December
20, 1995 or earlier if the revolving credit agreement is terminated at the
discretion of the lender. Both credit agreements stipulate that borrowings by
the joint venture will be interest-free. The third revolving credit agreement,
between the joint venture and Ericsson, provides for maximum borrowings of $25
million. Principal and accrued but unpaid interest is due in full on December
20, 1995 or earlier if this agreement is terminated at Ericsson's discretion.
Interest is payable quarterly in arrears at a rate which approximates
third-party lending rates. None of these agreements impose covenants or
restrictions on the joint venture's operations.
Page 19
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Raynet International, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and accumulated deficit and of cash flows
present fairly, in all material respects, the financial position of Raynet
International, Inc. and its subsidiaries at November 16, 1994 and the results of
their operations and their cash flows for the period from July 1 through
November 16, 1994, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
January 6, 1995
Page 20
<PAGE> 37
ERICSSON RAYNET
Annual Report
June 30, 1995
<PAGE> 38
ERICSSON RAYNET
CONTENTS
---------------------------------------------------------------------------
Consolidated Financial Statements 2
---------------------------------------------------------------------------
Notes to Consolidated Financial Statements 6
---------------------------------------------------------------------------
Report of Independent Accountants 18
---------------------------------------------------------------------------
<PAGE> 39
ERICSSON RAYNET
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
NOVEMBER 16,
JUNE 30, 1994
(IN THOUSANDS) 1995 (INCEPTION)
----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,121 $ 8,989
Accounts receivable 15,749 21,100
Due from Raychem and its affiliates 9,622 40,879
Due from Ericsson and its affiliates 451 --
Inventories 33,048 25,285
Prepaid expenses and other current assets 873 1,494
----------------------------------------------------------------------------------
Total current assets 62,864 97,747
Property, plant and equipment, net 21,811 24,989
Capitalized software development costs, net 12,050 11,406
Other assets 342 1,111
----------------------------------------------------------------------------------
TOTAL ASSETS $ 97,067 $135,253
==================================================================================
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable to Raychem or its affiliates $ 1,903 $ 14,602
Accounts payable to Ericsson or its affiliates 1,372 --
Loans payable to Ericsson or its affiliates 13,271 --
Loans payable to Raychem or its affiliates 3,460 34,279
Accounts and notes payable 6,806 17,162
Accrued payroll and related liabilities 5,289 4,462
Accrued restructuring costs 12,401 --
Other accrued liabilities 5,534 4,352
Deferred income 15,870 1,861
----------------------------------------------------------------------------------
Total current liabilities 65,906 76,718
Long-term warranty liability 495 320
----------------------------------------------------------------------------------
Total liabilities 66,401 77,038
----------------------------------------------------------------------------------
Commitments and contingencies (see note)
Partners' equity:
Ericsson 19,511 29,513
Raychem 18,745 28,356
Capital contribution receivable (8,105) --
Foreign currency translation 515 346
----------------------------------------------------------------------------------
Total partners' equity 30,666 58,215
----------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 97,067 $135,253
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
<PAGE> 40
ERICSSON RAYNET
CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
FOR THE PERIOD FROM NOVEMBER 16, 1994 (INCEPTION) THROUGH JUNE 30, 1995
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenues, net of returns and allowances $ 19,228
Cost of goods sold 36,796
Research and development expense 25,681
Sales, marketing, and administrative expense 23,085
Restructuring of operations 12,446
Interest income, net 96
Other income, net 789
--------------------------------------------------------------------------------
Loss before income taxes (77,895)
Provision for income taxes 461
--------------------------------------------------------------------------------
NET LOSS ($78,356)
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE> 41
ERICSSON RAYNET
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
CAPITAL FOREIGN
CONTRI- CURR-
BUTION ENCY
RECEIV- TRANS-
(IN THOUSANDS) ERICSSON RAYCHEM ABLE LATION TOTAL
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at November 16, 1994
(inception) $ 29,513 $ 28,356 -- $346 $ 58,215
Allocation of losses to partners (31,347) (47,009) -- -- (78,356)
Additional contributions 21,345 37,398 -- -- 58,743
Capital contributions receivable from
Raychem -- -- ($8,105) -- (8,105)
Currency translation -- -- -- 169 169
-----------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 $ 19,511 $ 18,745 ($8,105) $515 $ 30,666
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE> 42
ERICSSON RAYNET
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
----------------------------------------------------------------------------------------------
FOR THE PERIOD FROM NOVEMBER 16, 1994 (INCEPTION) THROUGH JUNE 30, 1995 (IN
THOUSANDS)
----------------------------------------------------------------------------------------------
<S> <C>
Cash flows used in operating activities:
Net loss ($78,356)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 6,296
Amortization 3,179
Restructuring of operations 12,446
Changes in certain assets and liabilities:
Decrease in accounts receivable 5,351
Decrease in due from Raychem and its affiliates 2,146
Increase in due from Ericsson and its affiliates (451)
Increase in inventories (7,763)
Decrease in prepaid expenses and other assets 1,380
Decrease in accounts payable to Partners (11,327)
Decrease in accounts payable and accruals (8,172)
Decrease in accrued restructuring (45)
Increase in deferred income 14,009
----------------------------------------------------------------------------------------------
Net cash used in operating activities (61,307)
----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in capitalized software development costs (3,813)
Investment in property, plant and equipment, net of retirements (2,968)
----------------------------------------------------------------------------------------------
Net cash used in investing activities (6,781)
----------------------------------------------------------------------------------------------
Cash flows from financing activities :
Net decrease in loans payable to Raychem (30,819)
Net borrowings from Ericsson 13,271
Capital contributions from Ericsson 21,345
Capital contributions from Raychem 37,398
Increase in capital contribution receivable (8,105)
Decrease in funding due from Raychem 29,111
----------------------------------------------------------------------------------------------
Net cash provided by financing activities 62,201
----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 19
----------------------------------------------------------------------------------------------
(5,868)
Decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period 8,989
----------------------------------------------------------------------------------------------
$ 3,121
Cash and cash equivalents at end of period
==============================================================================================
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for income taxes $ 283
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE> 43
ERICSSON RAYNET
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PARTNERSHIP
On November 16, 1994, Raychem Corporation ("Raychem"), through its wholly owned
subsidiary Raynet International, Inc. ("RNI") and L M Ericsson ("Ericsson"),
through its majority owned subsidiary Ericsson GE Holding Inc. (now called
Ericsson Holding Inc.), formed Ericsson Raynet ("the partnership") as a general
partnership under Delaware law. The partnership assumed the operations of RNI,
formed in 1988, which was the surviving company after its merger on November 15,
1994 with Raynet Corporation, incorporated in 1987. The partnership develops,
manufactures, and sells high-performance, resource-sharing fiber optic telephone
and video distribution systems for local loop applications throughout the world.
Ericsson representatives constitute a majority of the partnership's Board of
Managers. The partnership, which is headquartered in Menlo Park, California, has
a fiscal year end of June 30.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the partnership
and its wholly owned subsidiary. All significant intercompany transactions and
balances have been eliminated. The assets contributed to and the liabilities
assumed by the partnership at November 16, 1994 were recorded at the historical
cost basis of RNI. The statement of operations represents operating activity
from the inception of the partnership through June 30, 1995.
REVENUE RECOGNITION AND RELATED COSTS
Revenue under commercial contracts is recognized when the earnings process is
complete. This generally occurs at the time product is shipped. For the period
from November 16, 1994 through June 30, 1995, $10.2 million, or 53% of revenues,
relates to product shipped or services provided under the partnership's
contracts with NYNEX; and $4.7 million or 25% of revenues, relates to product
shipped to the Deutsche Bundespost (DBP) Telekom under follow-on spares orders
to the OPAL 93 commercial volume contract.
Page 6
<PAGE> 44
ERICSSON RAYNET
Under the partnership's DBP Telekom OPAL 94 commercial volume contract, product
sales revenue and associated cost of goods sold are recognized as product is
accepted by the customer. Non-manufacturing operating costs incurred to support
the installation of product delivered under this contract are deferred to the
extent recoverable and recognized in cost of goods sold in proportion to product
revenue recognized. As of June 30, 1995, $1.3 million of deferred installation
costs were classified in net inventory. The contract allows the DBP to withhold
payment of a percentage of amounts billed until certain contract performance
criteria are met. As of June 30, 1995, the DBP was withholding payment of $1.5
million (classified in accounts receivable) which the partnership anticipates to
collect in fiscal 1996. Revenues related to this contract are anticipated to
commence in the first quarter of fiscal 1996.
The partnership's sales contracts often allow for billings based on agreed upon
milestones. Deferred income arises from amounts billed in advance of revenue
recognized while unbilled receivables arise from revenue recognized in advance
of amounts billed. At June 30, 1995, unbilled receivables totaled $0.75 million.
At November 16, 1994, unbilled receivables totaled $1.5 million, of which $0.75
million was classified as long-term in "other assets."
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of 90 days or less at the date of
purchase are considered to be cash equivalents. At June 30, 1995 and November
16, 1994, the partnership had $2.9 million and $4.6 million, respectively,
invested with financial institutions in short-term interest bearing deposits
that mature within 90 days.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost of inventories
is determined on the first-in, first-out method.
The components of inventories, net were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
JUNE 30, NOVEMBER 16,
(IN THOUSANDS) 1995 1994
<S> <C> <C>
-----------------------------------------------------------------------------------
Raw materials $ 9,027 $14,513
Work-in-process 8,352 6,071
Finished goods 15,669 4,701
-----------------------------------------------------------------------------------
$33,048 $25,285
===================================================================================
</TABLE>
Page 7
<PAGE> 45
ERICSSON RAYNET
WARRANTY
The partnership warrants the performance of its various products, pursuant to
written limited warranties, typically for periods of between one and three years
after customer acceptance. A warranty liability is provided at the time of
shipment based upon expected return rates, average costs to repair, and
anticipated retrofit activity. Warranty and retrofit liabilities at June 30,
1995 and November 16, 1994 totaled $1.8 million and $1.5 million, respectively,
including $1.3 million and $1.2 million, respectively, recorded as "other
accrued liabilities."
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at original cost. Depreciation and
amortization are provided over the economic lives of the individual assets and,
for leasehold improvements, over the terms of their respective leases, if
shorter, using accelerated methods for assets acquired prior to fiscal 1991 and
the straight-line method for acquisitions thereafter.
The components of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
JUNE 30, NOVEMBER 16,
(IN THOUSANDS) 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 55,967 $ 54,617
Furniture and fixtures 6,118 5,423
Leasehold improvements 8,159 8,095
----------------------------------------------------------------------------------
70,244 68,135
Less: accumulated depreciation and amortization (48,433) (43,146)
----------------------------------------------------------------------------------
$ 21,811 $ 24,989
==================================================================================
</TABLE>
Depreciation expense was $6.3 million for the period from November 16, 1994
through June 30, 1995.
INTANGIBLE ASSETS
Trademarks and software licenses are amortized on a straight-line basis over
their legal or estimated useful lives, whichever is shorter.
Page 8
<PAGE> 46
ERICSSON RAYNET
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the partnership capitalizes software development costs as resulting
products become "technologically feasible." At June 30, 1995 and November 16,
1994, the partnership had $12.1 million and $11.4 million, respectively, in net
capitalized software development costs. Accumulated amortization was $10.0
million and $6.8 million at June 30, 1995 and November 16, 1994, respectively.
Amortization of capitalized software development costs begins when the products
are available for general release to customers on a volume basis and is computed
on a product-by-product basis as the greater of: (a) the ratio of current gross
revenues for a product to the total of current and anticipated future gross
revenues for the product; or (b) the straight-line method over a period not to
exceed three years. Total amortization of $3.2 million has been included in cost
of goods sold for the period.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the partnership's foreign operation are translated
into United States dollars at exchange rates prevailing at period end and the
income statement is translated at average exchange rates during the period. The
resulting translation adjustments are accumulated under partners' equity. Net
operational gains and losses on foreign exchange, mainly related to amounts
receivable or payable, are included in "other income, net." The net realized and
unrealized foreign currency exchange gain was $1.0 million for the period
November 16, 1994 through June 30, 1995.
ADVERTISING COSTS
The partnership expenses advertising costs as incurred. No advertising costs
were incurred for the period November 16, 1994 through June 30, 1995.
RESTRUCTURING OF OPERATIONS
In June 1995, the partnership announced a plan to restructure its operations in
order to sharpen focus on selected high potential products, markets, and
customers and to reduce costs. Planned changes include the relocation of
manufacturing operations to existing Ericsson units in Sweden and consolidation
of certain general and administrative functions within Ericsson in the U.S. and
Sweden. The partnership
Page 9
<PAGE> 47
ERICSSON RAYNET
intends to reduce its workforce by approximately 40%, with nearly all of the
reductions to take place in Menlo Park, California. These restructuring
activities are anticipated to be completed by December 1995.
The restructuring charge of $12.4 million includes provisions for employees
severance costs, including health insurance benefits and outplacement services,
lease termination costs, and the write-off of fixed assets and leasehold
improvements.
RELATED PARTY TRANSACTIONS
REVOLVING CREDIT AGREEMENTS
On January 2, 1995, the partnership entered into revolving credit agreements
(RCA) with RNI or Ericsson Inc. ("EUS"), a subsidiary of Ericsson. Both RNI and
EUS committed to make available to the partnership a maximum of $50 million, due
in full on December 20, 1995 or earlier if the RCA is terminated at the
discretion of the lender. Both credit agreements stipulate that borrowings by
the partnership will be interest-free. An additional RCA, between the
partnership and EUS, provides for maximum borrowings of $25 million. Principal
and accrued but unpaid interest is due in full on December 20, 1995 or earlier
if this agreement is terminated at EUS's discretion. Interest is payable
quarterly in arrears at a rate which approximates third-party lending rates.
None of these agreements impose covenants or restrictions on the partnership's
operations. To meet temporary cash requirements, the partnership's wholly owned
subsidiary in Germany entered into a short-term loan agreement with one of
Ericsson's affiliates in Germany. This loan, plus interest, was repaid in full
in July 1995.
Amounts outstanding under these agreements at June 30, 1995 were:
<TABLE>
<CAPTION>
(in thousands)
--------------------------------------------------------------------------------
<S> <C>
Non-interest bearing RCA with EUS $ 3,602
Interest bearing RCA with EUS 9,091
Short-term loan with Ericsson affiliate in Germany 578
--------------------------------------------------------------------------------
Total loans payable to Ericsson or its affiliates $13,271
================================================================================
Non-interest bearing RCA with RNI $ 3,460
================================================================================
</TABLE>
On November 16, 1994, the partnership assumed the debt Raynet Corporation had
accumulated under its revolving credit agreement with Raychem International
Page 10
<PAGE> 48
ERICSSON RAYNET
Manufacturing Corporation (RIMC), a wholly owned subsidiary of Raychem. The
agreement was terminated in connection with the partnership's formation, at
which time $16.8 million of the $34.3 million then payable to RIMC was forgiven
by Raychem as part of its capital contributions and the remaining $17.5 million
was paid from capital contributions by Ericsson.
PARTICIPATION IN PENSION PLANS
Until December 31, 1994, the partnership's employees were eligible to
participate in Raychem's pension plans, which were noncontributory defined
benefit pension plans that covered substantially all U.S. employees and a number
of its employees in foreign countries. The benefits for these plans were based
primarily on years of service and employee compensation. Raychem funded these
pension plans as legally and contractually required. Plan assets generally
consisted of publicly traded securities, bonds and cash investments. Raychem
charged the partnership for pension expense as an element of a composite fringe
benefit charge.
Effective January 1, 1995, the partnership's employees in the U.S. began
participation in The Retirement Plan for Employees of Ericsson Inc. (the
"Ericsson Plan"), which is also a noncontributory defined benefit pension plan.
The benefits for this plan are based primarily upon years of service and
employees' qualifying compensation during the final years of employment.
Partnership contributions are made to the extent allowed for Federal income tax
purposes.
Assets and liabilities in respect of accrued benefits earned by participation in
the Raychem Pension Plan through December 31, 1994, were transferred to the
Ericsson Plan. The partnership accrues for pension expense as an element of a
composite fringe benefit charge based on management's best estimates of actual
pension costs. Information on actual pension costs, the actuarial present value
of benefits and the fair market value of plan assets is not available at this
time as the Ericsson Plan operates on a calendar year plan year and an actuarial
valuation including the partnership's participants has not yet been completed.
PARTICIPATION IN CAPITAL ACCUMULATION AND SAVINGS PLAN
Effective January 1, 1995, the partnership's eligible employees in the U.S.
began participation in the Capital Appreciation and Savings Plan of Ericsson
Inc. Eligible participants may contribute on a pre-tax basis from 1% to 13% of
their eligible earnings into the Capital Accumulation 401K portion of the Plan
and may contribute
Page 11
<PAGE> 49
ERICSSON RAYNET
from 1% to 3% to the Savings portion on an after-tax basis. The partnership
contributes 1% of a participant's eligible pay to the Capital Accumulation
portion of the Plan, whether or not the participant contributes. The partnership
also matches dollar for dollar participant contributions of up to 3% of eligible
pay. The participant may elect to apply the match to either their before-tax
401K contribution or their after-tax contribution, or to a combination of both.
Contributions are 100% vested immediately with the exception of the partnership
match on Employee Savings contributions, which become 100% vested at the time
the participant completes two years of service. Contributions are remitted to a
trust for investment each month. Participants may direct the investment of their
accounts among six separate funds which are invested in varying combinations of
common stock, mutual funds, government bond funds, and other publicly traded
investments.
OTHER POSTRETIREMENT BENEFITS
Until December 31, 1994, Raychem provided postretirement health care benefits to
partnership employees in the U.S. who qualified for its defined benefit pension
plan and retired on or after age 55, until reaching age 65. Such benefits were
limited to allowing retirees to continue their participation in Raychem's group
medical plan. Eligible retirees paid monthly premiums, thus reducing Raychem's
cost.
Effective January 1, 1995, the partnership's eligible active or retired
employees in the U.S. began participation in certain retiree health and life
insurance benefit plans of EUS. Retiring participants become eligible for
retiree health and life insurance benefits upon retirement with 10 or more years
retirement plan vesting service coupled with immediate commencement of pension
benefits. Contributions required from retirees depend upon the date of
retirement as well as age and years of service at retirement. The partnership
funds the benefit costs on a pay-as-you-go basis. Information on retirement plan
costs is not available at this time as the EUS Plan operates on a calendar year
plan year and an actuarial valuation including the partnership's participants
has not yet been completed.
OTHER TRANSACTIONS WITH PARTNERS
In the normal course of business, the partnership contracts to purchase
materials and receive certain services from the partners such as security and
maintenance of the partnership's facilities, administration of various employee
benefit plans, contracted construction work, relocation of the partnership's
employees, and international sales and marketing functions. In general, charges
for relocation are passed through at
Page 12
<PAGE> 50
ERICSSON RAYNET
actual cost, while other charges are in accordance with negotiated agreements.
The partnership also reimburses the partners for certain amounts they pay on its
behalf, such as direct deposit payroll, employer payroll based charges, business
insurance, health insurance, and workers compensation premiums. Total charges
for these products, services, and reimbursements were approximately $29.3
million to Ericsson and $9.8 million to Raychem for the period November 16, 1994
through June 30, 1995. The partnership had outstanding accounts payable to
Ericsson and its affiliates of $1.4 million as of June 30, 1995. The partnership
had outstanding accounts payable to Raychem and its affiliates of $1.9 million
and $14.6 million as of June 30, 1995 and November 16, 1994, respectively.
The partnership sells its product or services to Ericsson or Ericsson affiliates
in accordance with negotiated agreements. Sales to Ericsson or its affiliates
for the period November 16, 1994 through June 30, 1995 were $0.9 million.
Amounts due from Raychem and its affiliates relate primarily to funding or
contribution requirements as agreed to by the partners. As of June 30, 1995 and
November 16, 1994, $9.1 million and $38.2 million, respectively, related to
funding or contribution requirements, were due from RNI or Raychem. Remaining
amounts outstanding at both balance sheet dates relate to product sales made
prior to the partnership's formation by Raynet Corporation to RNI subsidiaries
which were not subsequently contributed to the partnership.
FINANCIAL INSTRUMENTS
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
For cash and cash equivalents, the carrying amount approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the partnership to significant
concentrations of credit risk consist of trade accounts receivable. As of June
30, 1995, the partnership's trade accounts receivable were due primarily from
NYNEX (21%), and the DBP Telekom (67%).
FOREIGN OPERATIONS
The partnership maintains a wholly owned subsidiary in Germany, Raynet GmbH,
which performs sales and marketing functions and provides field installation and
Page 13
<PAGE> 51
ERICSSON RAYNET
engineering support for deployments of the partnership's products. Revenues, net
of returns and allowances, from unaffiliated customers for the period November
16, 1994 through June 30, 1995 include $14.5 million in the United States and
$4.7 million in Germany. These revenues reflect only local shipments and exclude
direct exports from other geographic areas. Revenues between the U.S. and Raynet
GmbH, which are recorded on the basis of arms-length prices established by the
partnership, were $16.3 million for the period November 16, 1994 through June
30, 1995. Income before income taxes and net loss incurred by Raynet GmbH for
the period are insignificant. Total assets, excluding intercompany receivables
and investments, comprised $66.5 million in the United States and $30.6 million
in Germany at June 30, 1995.
INTEREST
Interest income, net for the period November 16, 1994 through June 30, 1995
consists principally of net interest earned from Ericsson under the
partnership's $25 million revolving credit agreement and interest earned on
various short-term investments held by Raynet GmbH.
INCOME TAXES
For U.S. Federal income tax purposes, the partnership's results of operations
pass through to its partners. Accordingly, the partnership is not subject to
U.S. taxes. The provision for income taxes of $0.5 million for the period from
November 16, 1994 through June 30, 1995 relates to the operations of Raynet
GmbH. A reconciliation of the partners' tax bases of asset and liabilities to
the reported amounts of such assets and liabilities is not presented herein as
it is not considered meaningful.
COMMITMENTS AND CONTINGENCIES
LEASES
The partnership leases certain machinery and equipment, and its manufacturing
and office facilities under operating leases. These leases require the
partnership to pay taxes, insurance, and maintenance expenses, and provide for
renewal and/or purchase options at the fair market value of the property.
Certain office and manufacturing facilities are leased from Raychem.
Page 14
<PAGE> 52
ERICSSON RAYNET
As of June 30, 1995, the aggregate minimum rental commitments under
non-cancellable leases were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
COMMITMENT COMMITMENT
YEAR ENDING JUNE 30 TO RAYCHEM TO OTHERS TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
1996 $892 $1,813 $2,705
1997 -- 501 501
1998 -- 178 178
1999 -- 16 16
2000 -- -- --
Thereafter -- -- --
--------------------------------------------------------------------------------
TOTAL $892 $2,508 $3,400
================================================================================
</TABLE>
Rental expense under operating leases was approximately $2.2 million for the
period from November 16, 1994 through June 30, 1995.
As of June 30, 1995 and November 16, 1994, the partnership had outstanding bank
guarantees of $1.0 million and $0.7 million, respectively, related to its OPAL
93 or OPAL 94 contract performance, duty declaration, and certain foreign
leases.
PARTNERS' EQUITY
In forming the partnership, RNI sold certain specified assets to Ericsson in
exchange for $40 million. Ericsson contributed the purchased assets and RNI
contributed substantially all of its remaining assets and liabilities to the
partnership. Funding is provided by the partners, generally 51% by Ericsson and
49% by RNI.
During the first five to eight years of operation, subject to various
conditions, substantially all of the partnership's profits up to $156 million
will be allocated to RNI; thereafter profits will be shared 51/49 by Ericsson
and RNI, respectively. Ericsson's share of the partnership's losses were capped
at $25 million for the period ended June 30, 1995. During the fiscal year ending
June 30, 1996, up to $19.6 million of losses will be allocated to Ericsson and
RNI in a 51/49 ratio; additional losses, if any, up to $10 million will be
allocated 100% to RNI; and, thereafter, additional losses, if any, will again be
allocated to Ericsson and RNI in a 51/49 ratio.
Page 15
<PAGE> 53
ERICSSON RAYNET
Ericsson has a right to purchase RNI's interest in the partnership at a fixed
price for a limited period beginning November 16, 1996 ("First Call Option");
and Ericsson and Raychem have call and put rights, respectively, on RNI's
interest in the partnership exercisable at fair market value at any time after
July 1, 1999. If any of these options are exercised, Raychem has agreed to pay
BellSouth Enterprises Inc. a portion of the purchase price received.
CAPITAL CONTRIBUTION RECEIVABLE
In accordance with an agreement between the partners, a portion of RNI's capital
contributions have been made in the form of non-interest bearing promissory
notes. RNI is required to fund such amounts upon the earlier of Ericsson's
exercise of its First Call Option, the distribution of profits related to RNI's
Incremental Loss for 1995 as defined in the Joint Venture Agreement or the
Target Date defined in the agreement as 2000 at the earliest; 2003 if certain
future events occur.
ALLOCATION OF LOSS TO PARTNERS
The accompanying financial statements are prepared on a historical cost basis
reflecting the original costs as recorded on the books and records of RNI
without any step up adjustments arising from the partnership's formation.
Consequently, the financial statements do not include intangibles arising upon
the partnership's formation or the amortization thereof.
Raychem has recorded its investment in the partnership at the net book value of
the RNI assets on a historical cost basis. Ericsson has recorded its investment
based on its purchase price of $40 million which exceeds its beginning capital,
on a historical cost basis, of $29.5 million. The purchase price in excess of
the beginning capital account at historical costs results in an intangible of
$10.5 million arising upon the partnership's formation. This intangible will be
amortized by Ericsson Holding Inc. over ten years beginning November 16, 1994
resulting in amortization expense of $0.7 million for the period November 16,
1994 through June 30, 1995.
Ericsson and Raychem have agreed that Ericsson's share of the loss for the
period November 16, 1994 through June 30, 1995, including amortization of the
intangible asset arising on the partnership's formation, is limited to $25
million, excluding restructuring costs.
Page 16
<PAGE> 54
ERICSSON RAYNET
The following presents the loss to be included in the financial statements of
each partner:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
FOR THE PERIOD FROM NOVEMBER 16, 1994 (INCEPTION)
THROUGH JUNE 30, 1995 ERICSSON RAYCHEM TOTAL
------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss on a historical cost basis, excluding
restructuring costs allocated 51% / 49% $ 33,614 $32,296 $65,910
Amortization of intangibles arising upon
formation, net 655 -- 655
------------------------------------------------------------------------------------------
Allocation prior to maximum loss limitation 34,269 32,296 66,565
Maximum loss limitation adjustment (9,269) 9,269 --
------------------------------------------------------------------------------------------
Loss before restructuring expenses 25,000 41,565 66,565
Restructuring expenses shared in ratio of
51/49 6,347 6,099 12,446
------------------------------------------------------------------------------------------
Total allocated loss from the partnership $ 31,347 $47,664 $79,011
==========================================================================================
</TABLE>
Page 17
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of Ericsson Raynet
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows, and changes in partners'
equity, present fairly, in all material respects, the financial position of
Ericsson Raynet and its subsidiary at June 30, 1995 and November 16, 1994 and
the results of their operations and their cash flows for the period from
November 16, 1994 (inception) through June 30, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
July 18, 1995
Page 18
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Raychem Corporation:
Our audits of the consolidated financial statements referred to in our
report dated July 18, 1995 appearing on page 27 of Exhibit 13 to this Form 10-K
(which is incorporated herein by reference) also included an audit of the
Financial Statement Schedule II listed in Item 14(a)(2) of this Form 10-K. In
our opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICE WATERHOUSE LLP
San Jose, California
July 18, 1995
<PAGE> 57
SCHEDULE II
RAYCHEM CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS*
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO FOREIGN BALANCE
BEGINNING COSTS AND ACCOUNTS CURRENCY AT END
DESCRIPTION OF YEAR EXPENSES WRITTEN OFF TRANSLATION OF YEAR
------------------------------------ ---------- ---------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
1995:
Accounts receivable................. $ 11,599 $2,857 $ 4,509** $ 401 $10,348
======= ====== ====== ======= =======
1994:
Accounts receivable................. $ 8,557 $6,288 $ 2,395 $ (851) $11,599
======= ====== ====== ======= =======
1993:
Accounts receivable................. $ 8,828 $3,626 $ 2,748 $(1,149) $ 8,557
======= ====== ====== ======= =======
</TABLE>
---------------
* Allowances are deducted from assets to which they apply.
** Includes $1,044 effect of deconsolidation of certain Raychem subsidiaries.
<PAGE> 1
EXHIBIT 10(n)
August 12, 1994
Mr. Isaac Stein
525 University Avenue
Suite #415
Palo Alto, CA 94301
Dear Isaac:
Thank you for agreeing to serve as Chairman of the new Executive Committee of
the Board of Directors of Raychem. Your compensation as Chairman will be $25,000
per year. You will also continue as Chairman of the Raynet Oversight Committee
and will receive an annual fee of $25,000 for chairing this effort.
In addition to your normal board responsibilities, we have also agreed that you
will spend approximately 50% of your professional time as a consultant to the
Board and to the CEO. Initially, these efforts will focus on completion of the
Raynet-Ericsson joint venture, management succession and the operations of the
Board itself. It is presently contemplated that your services will be required
in this capacity for one to two years. You will receive a retainer of $30,000
per month for these consulting services. In addition, we will reimburse your
customary out-of-pocket expenses and will pay Waverley Associates, Inc. as a
contribution to your rental and secretarial expenses an additional $5,000 per
month. This arrangement will commence as of July 1, 1994 and will continue until
terminated by either party on 9 months notice. This letter will amend and
supersede our letter agreement of January 25, 1994. You and Waverley will
continue to receive a customary indemnity from Raychem for these services
covering liabilities and expenses, including costs of defense.
At today's Board meeting, you were also granted a stock option covering 25,000
shares of Raychem common stock. It is our expectation that there will be an
additional grant at the beginning of fiscal 1996 commensurate with your level of
involvement.
<PAGE> 2
Mr. Isaac Stein
August 12, 1994 Page 2
Please sign and return the enclosed copy of this letter to confirm this
arrangement.
Very truly yours,
/s/ PAUL M. COOK
Paul M. Cook
PMC/lda
cc: Robert J. Saldich
Robert J. Vizas
Read and Agreed to:
/s/ ISAAC STEIN
Isaac Stein
<PAGE> 1
EXHIBIT 10(o)
REVOLVING CREDIT LINE AGREEMENT
Ericsson Raynet, a Delaware partnership ("Borrower") and Raynet International,
Inc,. a Delaware corporation ("Lender") hereby agree as follows:
1. Lender hereby agrees to make available to Borrower from the date hereof
through and including December 20, 1995 (the "Maturity Date"), but subject
to Lender's right to terminate this Revolving Credit Line Agreement (this
"Agreement"), as hereinafter provided, a revolving line of credit in the
maximum amount of $50,000,000.00. Borrower may borrow all or any portion of
such sum at any time or times prior to the Maturity Date, provided that all
principal amounts borrowed hereunder, and all interest accrued thereon,
shall in all events be due and payable to Lender in New York City, or at
such other location specified by Lender, at the earlier of (such earlier
time being hereinafter referred to as the "Due Date") (i) demand by Lender,
or (ii) the Maturity Date. Lender reserves in all events the right to
terminate this Agreement, and any further obligation to lend money to
Borrower, as of the earlier of (i) the Due Date or (ii) any other date
which is specified in a written notice delivered to Borrower and which is
at least three business days after the date of such notice.
2. Amounts borrowed under this Agreement may be repaid at any time prior to
the Due Date without premium or penalty of any kind, and repaid amounts may
be reborrowed at any time prior to such Due Date, provided that Borrower
shall give Lender three (3) business days notice prior to any such
prepayment unless Lender waives such notice. Any acceptance of prepayment
by Lender shall constitute a waiver of the notice required hereby.
3. No interest shall be payable under this Agreement.
4. All indebtedness of the Borrower arising from borrowings hereunder shall
be evidenced by a demand note substantially in the form of the grid
promissory note attached hereto as Exhibit A. Borrower shall pay all fees
and costs incurred by Lender in connection with collecting any principal
or interest due to Lender hereunder, including, without limitation, court
costs and attorneys fees. All borrowings hereunder shall rank at least
pari passu with all other unsecured debt of the Borrower to any bank,
financial institution or other person. Borrower hereby expressly waives any
requirement of presentment, demand, protest or other notice of any kind in
connection with Lender's collection of any amount due hereunder or under
the aforesaid promissory note.
5. The Agreement constitutes the entire understanding and agreement of the
parties as to the subject matter hereof. This Agreement may not be altered
or amended except by further written agreement between the parties.
6. This Agreement may be executed in any number of counterparts each of which
shall be deemed an original of the Agreement, but all of which together
shall constitute one and the same instrument. In making proof hereof it
shall not be necessary to produce or account for more than one such
counterpart.
Dated as of January 2, 1995.
RAYNET INTERNATIONAL, INC. ("LENDER")
By: /s/ RAYMOND J. SIMS
Raymond J. Sims
Title: Director
ERICSSON RAYNET ("BORROWER")
By: /s/ R G KELSCH
Robert Kelsch
Title: President
<PAGE> 2
EXHIBIT A
PROMISSORY NOTE
$50,000,000.00 U.S. Date: January 2, 1995
FOR VALUE RECEIVED, the undersigned Ericsson Raynet, a Delaware partnership
("Borrower") hereby unconditionally promises to pay to the order of Raynet
International, Inc., a Delaware corporation ("Lender") in New York City, or
other location as designated from time to time by Lender, upon demand and in
any event by no later than December 20, 1995, in lawful money of the United
States of America and in immediately available funds, the aggregate unpaid
principal amount of all loans made by Lender to the undersigned hereunder as
such loans are set forth on the schedule hereto. No interest shall be payable
under this Agreement.
The holder of this note is authorized to set forth the date and amount of each
loan pursuant hereto and each payment of principal with respect thereto on the
schedule annexed hereto and made a part hereof, or on a continuation thereof
which shall be attached hereto and made a part hereof, which endorsement shall
constitute prima facie evidence of the accuracy of the information endorsed. If
any payment on this note becomes due and payable on a Saturday, Sunday or other
day on which commercial banks in New York are authorized or required by law to
close, the maturity thereof shall be extended to the next succeeding business
day. Prepayment of all or any part of the principal of this note may be made at
any time without premium or penalty, subject to the terms of the Credit
Agreement referred to hereinbelow.
This note is the note described in the Revolving Credit line Agreement dated
January 2, 1995 ("Credit Agreement") between Ericsson Raynet (as Borrower) and
Raynet International, Inc. (as Lender), which Credity Agreement and all its
terms and provisions are incorporated herein by reference as though fully set
forth herein. Such agreement provides that the Borrower may borrow up to
$50,000,000.00 U.S. at any time or times, and may reborrow principal which has
been repaid, provided that all principal must be repaid to the Lender by
December 20, 1995, or, if earlier, on demand.
IN WITNESS WHEREOF, the undersigned has caused this note to be duly executed as
of the day and year first above written.
ERICSSON RAYNET
By: EXHIBIT - DO NOT SIGN
Robert Kelsch
Title: President
<PAGE> 1
EXHIBIT 10(p)
RAYCHEM CORPORATION
EXECUTIVE TERMINATION COMPENSATION POLICY
PHILOSOPHY: From time to time, Raychem may need to terminate the
employment of certain officers of the corporation
without cause. Raychem recognizes that such officers
may have difficulty locating new employment. In
recognition of the level of responsibility held by
such officers, Raychem will provide certain benefits
to ease their transition. Officers who receive
termination compensation will become consultants to
Raychem for a period of time and certain restrictions
will be placed on their activities.
ELIGIBILITY: All employees appointed by Raychem's Board of
Directors as officers of Raychem Corporation, at the
level of Vice President or above ("Officers"), are
eligible to receive the executive termination
benefit. This replaces any severance or layoff
benefits for which Officers otherwise may have been
eligible under any other policy or geographic
practice, but it does not supersede any written
employment agreement with Raychem.
GUIDELINES: 1. Executive Termination Benefit.
If a Covered Termination of Employment (defined
below) occurs and Officer remains eligible to
receive the Executive Termination Benefit, such
benefit shall be paid by Raychem to Officer, and
Officer shall sign a full release of all claims
against Raychem. The "Executive Termination
Benefit" shall mean:
(a) Continuation of Officer's base salary for
one year ("Full Salary Period") after a
Covered Termination of Employment,
regardless of whether Officer obtains
other employment during the Full Salary
Period (Variable Pay Plan eligibility
ceases at employment termination), offset
by amounts Officer is eligible to receive
upon retirement (early, regular, deferred
or other), whether or not Officer actually
retires;
(b) For a period of up to one calendar year
after the end of the Full Salary Period
("Differential Salary Period"), payment of
base salary differential for any time when
Officer does not hold employment with a
base salary equal to or greater than
Officer's base salary upon termination,
offset further by amounts Officer is
eligible to receive upon retirement
(early, regular, deferred or other),
whether or not Officer actually retires;
-1-
<PAGE> 2
(c) Continuation of Officer's medical, dental
and life insurance benefits at staff rates
until Officer obtains other employment or
medical and dental coverage, during the
Full Salary Period and the Differential
Salary Period;
(d) Continuation of vesting of Officer's
options to purchase Raychem stock through
the Full Salary Period, to the extent that
such options are unvested;
(e) Right to financial planning services, if
still provided by Raychem to Officers, for
the Full Salary Period;
(f) Continuation of Officer's right to retain
his or her company car and computer
through the Full Salary Period; and
(g) Outplacement selected by Raychem, to
support and enhance Officer's job search
efforts.
The Executive Termination Benefit is supplemental
to the provisions which apply to all employees
upon termination of employment, such as payment
of accrued vacation pay, refunds of deposits
under the stock purchase plan, and the
opportunity to continue certain insurance plans
at personal expense. Other benefits for which
Officer may be eligible at the time of
termination of employment, such as purchase of
company car and computer according to Raychem
policy, shall not be affected by this Agreement.
Nothing in this policy is intended to extend the
exercisability of options to purchase Raychem
stock beyond the expiration date(s) stated in the
relevant option agreement(s).
In the event of Officer's death while receiving
the Executive Termination Benefit, all benefits
shall cease, except that if death occurs during
the Full Salary Period, payment of Officer's base
salary shall continue through the end of the Full
Salary Period.
2. Covered Termination of Employment
(a) Definition. A "Covered Termination of
Employment" means termination of Officer's
employment by Raychem or a successor for
the convenience of Raychem (which includes
a determination that Officer's good-faith
performance has not met Raychem's needs or
standards, but excludes a Termination for
Cause, as defined below).
-2-
<PAGE> 3
(b) Excluded Events. The Executive Termination
Benefit is not payable if Officer's
employment terminates because of a
Voluntary Termination, a Termination for
Cause, Officer's disability by reason of
physical or mental incapacity to perform
the duties of Officer's job assignment, or
Officer's death.
"Voluntary Termination" means a
termination of employment initiated by
Officer.
"Termination for Cause" means a
termination of employment by Raychem, at
Raychem's sole discretion, because of (i)
Officer's willful or continued failure to
substantially perform his or her duties
for reasons other than physical or mental
incapacity, (ii) Officer's willful
engaging in misconduct which is materially
injurious to Raychem, monetarily or
otherwise, (iii) Officer's acts of
personal dishonesty or moral turpitude,
(iv) Officer's acts of insubordination, or
(v) Officer's willful breach of a material
obligation or duty to Raychem.
4. Noncompetition and Nonsolicitation
As a condition of receiving the Executive
Termination Benefit, Officer shall provide
consulting services during the Full Salary
Period.
In order to protect Raychem's proprietary
information, while serving as a consultant
Officer will be precluded from entering into any
employment or consulting arrangement with any
direct competitor of any business operated by
Raychem and/or its subsidiaries, as such business
is conducted on the date of termination of
Officer's employment. In addition, while serving
as a consultant Officer shall not, directly or
indirectly, aid or endeavor to solicit or induce
any other employee and/or consultant to leave
their employment with Raychem in order to accept
employment of any kind with any other person,
firm, partnership or corporation.
5. Not a Contract of Employment
This policy does not create a contract of
employment. No rights to hire or continuation of
employment, or to advancement or reassignment,
are hereby created.
PROCESS: 1. Consulting
-3-
<PAGE> 4
Officer shall enter into a consulting agreement,
pursuant to which Officer will provide
consultation to Raychem while Officer is
receiving salary continuation and differential
payments from Raychem. As a consultant, Officer
will be required to make him or herself available
on an as needed basis at mutually agreeable times
for consultation with regard to Raychem's
business at no additional charge to Raychem.
2. Payment of Executive Termination Benefit
If the Executive Termination Benefit becomes
payable, Raychem or its successor may elect among
several ways to pay Officer. Raychem may make
salary payments biweekly or on another periodic
schedule, or in a lump sum, in any case less
deductions authorized or required by law. Also,
Raychem may continue in force Officer's insurance
benefits, secure individual pre-paid insurance
policies on Officer's behalf or pay the cost of
post-termination medical benefits in a lump sum.
3. Documentation
If Officer is eligible for base salary
differential payments after the expiration of the
Full Salary Period, Officer may submit a written
request for such payments. Raychem shall have no
obligation to make base salary differential
payments to Officer in the absence of a written
request. Officer shall submit all supporting
documentation when and as requested by Raychem.
CLAIMS: 1. If any claim for payment of a benefit under this
policy shall be denied, the [COMPENSATION
COMMITTEE OF RAYCHEM'S BOARD OF DIRECTORS
("COMMITTEE")] shall:
(a) Notify the claimant within a reasonable
time of such denial setting forth the
specific reasons therefor; and
(b) Afford such claimant a reasonable
opportunity for a full and fair review of
the decision denying claimant's claim.
2. Claimant may request review of a denial of his or
her claim within thirty (30) days of such denial.
Upon such request, the Committee shall take
appropriate steps to review its decision in light
of any further information or comments submitted
by the claimant. The Committee is empowered to
hold a hearing at which the claimant shall be
entitled to present the basis of his or her claim
for review and at which claimant may be
represented by counsel.
-4-
<PAGE> 5
3. The Committee shall render a decision within
sixty (60) days after the Claimant's request for
review (which period may be extended by the
Committee to 120 days if circumstances so
require) and shall advise the claimant in writing
of its decision on such review, specifying its
reasons and identifying appropriate provisions of
this policy.
AMENDMENT AND
TERMINATION: The Company expects to continue this policy but
reserves the right, at any time with or without prior
notice, to amend it in whole or in part or to
terminate and discontinue it if, in the Company's
sole discretion, such amendment or termination is
deemed advisable.
-5-
<PAGE> 1
EXHIBIT 10(q)
CONSULTING/EMPLOYMENT AGREEMENT
This Agreement is entered into as of June 7, 1995, between Raychem
Corporation, a Delaware corporation having its principal place of business at
300 Constitution Drive, Menlo Park, California 94025, and Robert J. Saldich
("Saldich"), an individual having a home address of 27 Crescent Drive, Palo
Alto, California 94301.
Saldich is currently the CEO of Raychem Corporation. Raychem desires to
insure the availability of services by Saldich through June 7, 1998. This
Agreement sets forth the compensation and benefits to be received by Saldich
through June 7, 1998 and the services Saldich agrees to provide as set forth in
the letter of June 7, 1995 from Paul M. Cook to Saldich. The parties therefore
agree as follows:
1. SERVICES
Saldich agrees to remain as CEO or consultant to Raychem until
his 65th birthday. Saldich will remain as CEO until such time as the Board of
Directors of Raychem selects a new CEO, and Saldich will participate in the CEO
selection process and provide an orderly transition process.
2. COMPENSATION AND STOCK OPTIONS
(a) For as long as Saldich remains the CEO, he will
receive his current compensation plus annual raises
and bonuses in the normal course of business based on
his performance and the performance of the Company;
(b) In the event Saldich steps down as CEO prior to age
65 and assumes other duties, either as an employee or
consultant, his compensation throughout his
sixty-fifth birthday (June 7, 1998) will be his
annual salary at the time he leaves the CEO position.
Saldich will continue to accrue Raychem service time
for pension purposes for the duration of this
Agreement, or until June 7, 1998. By mutual
agreement, this amount may be paid by crediting
Saldich with Raychem service through age 65, if he
elects to take retirement prior to that time, and
paying him an amount annually equal to the difference
between his annual salary and his annual retirement
income from Raychem. If Saldich elects to take
retirement, he agrees to hold himself available for
up to 20% of his time to perform such consulting
duties as the Board may from time to time require;
(c) In addition to the compensation enumerated in
Paragraph b above, Saldich will receive a bonus
payment at the end of the fiscal year following his
departure as CEO that will reflect the Board's
assessment of (a) his performance of his duties in
effecting this
<PAGE> 2
transition, and (b) the effect of his efforts on the
Company's performance;
(d) Saldich will receive all available Raychem employee
or executive benefits through his 65th birthday, June
7, 1998, as long as he continues to perform such
duties or be available to perform such duties as the
Board shall require. This means that all of his stock
options will continue to vest until age 65 and remain
available for him to exercise by their terms
following his 65th birthday.
3. BENEFITS
(a) During the term of this Agreement, Raychem shall
provide Saldich with a car, life insurance, health
insurance, and other standard employee benefits under
Raychem's standard benefit provisions. Such benefits
shall be premised on a base compensation of $650,000
per year, or the actual compensation at the time of
retirement if greater than $650,000.
(b) For purposes of calculating Saldich's pension, the
three year average salary to be used shall be assumed
to be $650,000 per year or the actual average of his
final three years' salary, whichever is greater.
(c) Raychem will provide Saldich with an office and
secretary through June 7, 1998.
4. CONFIDENTIALITY
Saldich shall hold in confidence all of Raychem's Proprietary
Information and all proprietary information entrusted by third parties to
Raychem. Saldich shall not disclose, use, copy, publish, summarize, or remove
from Raychem's premises any such Proprietary Information except as necessary to
carry out his responsibilities under this Agreement.
5. NON-COMPETITION
Saldich agrees that he will not, during the period of this
Agreement, consult or work for any entity concerned with the design,
development, use, manufacture, or sale of any product or product line that is
competitive with any product or product line manufactured or sold by Raychem.
6. GENERAL
2
<PAGE> 3
(a) Entire Agreement. This Agreement is the entire
agreement between the parties and supersedes any and
all prior agreements between the parties with respect
to the services described by this Agreement. This
Agreement also replaces any executive or employee
severance benefits to which Saldich may be entitled
otherwise.
(b) Assignment. Neither party shall assign any right or
obligation described in this Agreement without the
other party's prior written consent.
Dated: June 29, 1995 RAYCHEM CORPORATION
/s/ PAUL M. COOK
Paul M. Cook
Chairman of the Board
Dated: June 29, 1995 /s/ ROBERT J. SALDICH
ROBERT J. SALDICH
3
<PAGE> 1
EXHIBIT 13
FINANCIAL REVIEW
================================================================================
RESULTS OF OPERATIONS
OVERVIEW
--------------------------------------------------------------------------------
The company reported a net loss of $29 million, or $0.67 per share, for 1995,
compared to net income of $2 million, or $0.04 per share, in 1994 and $10
million, or $0.23 per share, in 1993. Revenues increased to $1.53 billion in
1995 from $1.46 billion in 1994, and $1.39 billion in 1993. Revenues in 1994 and
1993 included $58 million and $10 million, respectively, in revenues from Raynet
Corporation and subsidiaries (Raynet).
Raynet was consolidated in prior years when it was a wholly owned Raychem
subsidiary. On November 16, 1994, the company formed a joint venture, Ericsson
Raynet, with LM Ericsson, a Swedish telecommunications company. Consequently,
Raychem changed its Raynet accounting in 1995 from consolidation to the equity
method. Raychem's equity in net losses of affiliated companies for 1995 includes
the results of Raynet Corporation and subsidiaries through November 16, 1994,
and Raynet's allocation of the results of Ericsson Raynet from November 17,
1994, through June 30, 1995 (see "Raynet" in the notes to consolidated financial
statements for details on the transaction and loss allocations; see
"Investments" in the notes to consolidated financial statements for summarized
financial information). Raynet's pretax loss for 1995 of $118 million included a
$28 million loss on formation of the Ericsson Raynet joint venture, equity in
net loss of $86 million, and $4 million of other Raynet items.
Several unusual transactions have affected core business results in the
last three years. Pretax income for 1995 included a pretax charge of $24 million
for restructuring and divestitures, a gain of $5 million from the sale of the
company's minority interest in Menlo Care, Inc., and charges of $9 million for
severance and other costs. Results for 1994 included charges of $6 million for
plant consolidation and severance costs. Results for 1993 included charges of
$17 million for plant consolidation and severance costs, $9 million in one-time
license fee income, and a gain of $4 million from the sale of the remaining
portion of the company's equity interest in Mitek Surgical Products, Inc.
(Mitek). Excluding these transactions and the effect of Raynet, Raychem's
"ongoing" pretax income was $146 million in 1995, compared to $143 million in
1994 and $136 million in 1993.
Raychem's results for the past three years are summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PRETAX INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CHANGES IN ACCOUNTING
PRINCIPLES
YEARS ENDED JUNE 30 (in millions) 1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Core business
"Ongoing" pretax income $ 146 $ 143 $ 136
One-time license fees - - 9
Provision for restructuring and divestitures (24) - -
Gain on sales of assets 5 - 4
Severance, plant consolidation, and other charges (9) (6) (17)
--------------------------------------------------------------------------------
Core business pretax income 118 137 132
Loss on formation of Ericsson Raynet joint venture
and other Raynet items (32) - -
Equity in net loss of Ericsson Raynet (86) - -
Raynet pretax loss - (103) (92)
--------------------------------------------------------------------------------
Consolidated $ (0) $ 34 $ 40
--------------------------------------------------------------------------------
</TABLE>
The provision for income taxes was $21 million in 1995, compared to $32
million in both 1994 and 1993. The provision for income taxes in 1995 was lower
than in 1994 due to the recognition of tax benefits related to restructuring,
severance, and other costs, and lower profits in certain non-U.S. subsidiaries.
The results for 1995 include an extraordinary loss of $6 million, or $0.15
per share, for the early retirement of debt following payment by the company of
its 9.55% privately placed senior notes. In addition, the company adopted,
effective July 1, 1994, Financial Accounting Standards Board (FASB) Statement
No. 112, "Employers' Accounting for Postemployment Benefits" (FAS 112). The
cumulative effect of this accounting change was a charge of $1 million, or $0.03
per share.
The following discussion of the results of operations is based on the
company's business segments--electronics, industrial, and telecommunications
(which, along with the corporate groups, are referred to collectively as the
"core business")--and on Raynet.
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<PAGE> 2
CORE BUSINESS OPERATIONS
--------------------------------------------------------------------------------
REVENUES AND GROSS PROFIT
Core business revenues for 1995 increased 9% to $1.53 billion from $1.40 billion
in 1994, which was an increase of 2% over 1993. Revenues would have increased 4%
from 1994 to 1995, and 7% from 1993 to 1994, if foreign currency exchange rates
had remained constant in those years. Gross profit as a percent of revenues for
the company's core business was 50% in 1995, unchanged from 1994 and 1993.
ELECTRONICS
Revenues in the electronics business segment increased 17% to $611 million in
1995 from $522 million in 1994, although growth on a constant currency basis was
13%. In 1995, decreases in worldwide defense sales were more than offset by
increases of more than 30% in sales of PolySwitch devices and touchscreen
products, and continued growth in sales to the automotive market by the
Electronics division (which consolidates the combined operations of the former
Thermofit, Wire and Cable, and Devices/ICD business units). Elo TouchSystems
experienced strong growth as a result of large contracts with major equipment
manufacturers deploying new point-of-sale and public interactive systems. Prices
generally declined in many of the segment's markets, with PolySwitch decreasing
its prices substantially from those of the prior year while increasing its sales
in all geographic regions. Gross profit as a percent of revenues for the
electronics segment remained essentially unchanged, despite the decrease in
prices, reflecting primarily higher volumes and manufacturing efficiencies.
Revenues in 1994 were $522 million, up 4% from $503 million in 1993, while
constant currency growth was 6%. Revenues in 1994 included $3 million in license
fees and royalty income, down from $11 million ($9 million of which were
one-time license fees) in 1993. In 1994, decreases in worldwide defense sales
were more than offset by growth in sales of PolySwitch devices and touchscreen
products. Several of the segment's divisions increased business with the
automotive market, which resulted in higher sales of PolySwitch devices, wire
and cable, and molded parts. Prices generally decreased in 1994 in many of the
segment's markets, principally due to increasing competitive price pressure.
Gross profit as a percent of revenues for the electronics segment increased two
percentage points in 1994, primarily the result of improved manufacturing
capabilities and higher volumes for PolySwitch devices. Restructuring and plant
consolidation activities in previous years also helped to improve profitability
within the Thermofit and Wire and Cable divisions.
INDUSTRIAL
Revenues in the industrial business segment for 1995 grew 11% to $499 million
from $452 million in 1994, while constant currency growth for the segment was
5%. The segment's Electrical Products Division increased sales in North America,
Europe, and Latin America. Revenues were also up for Chemelex, notably in North
America. Revenues were down sharply in Ultratec, the segment's pipeline
accessory division, which had benefited a year ago from major pipeline projects.
Prices remained generally unchanged in most of the segment's markets. Gross
profit as a percent of revenues was also unchanged as improved revenues and
profitability in the Electrical Products and Chemelex divisions offset the
effects of revenue declines in Ultratec.
Segment revenues of $452 million in 1994 were up 2% from $443 million in
1993, while constant currency growth for the segment was 8%. Electrical Products
increased sales in Asia and North America. Revenues were also up in Ultratec as
it benefited from significant projects, notably in Mexico and India. In
addition, the unusually harsh winter conditions contributed to North American
sales growth for the Chemelex division. Europe's continuing recession and
adverse currency movements moderated the reported revenue growth experienced
across the segment's divisions. Prices generally declined in 1994 in many of the
segment's markets. Nevertheless, gross profit as a percent of revenues in the
industrial segment improved slightly in 1994 from 1993 due to higher
manufacturing yields and improved efficiency, notably in Electrical Products and
Chemelex, but was partially offset by lower margin business within Ultratec.
TELECOMMUNICATIONS
Revenues in the telecommunications business segment were $420 million in 1995,
down 2% from $430 million in 1994, although revenues declined 5% on a constant
currency basis. Revenues were up
21
<PAGE> 3
in North America, but down in Europe and Asia, and approximately unchanged
in Latin America. The discontinuance of unprofitable product lines and
a general market shift away from the copper telephony network accounted for
the revenue decline. While the segment is introducing new products into other
market segments of the outside plant network, sales of these new products,
which carry lower margins, are not yet sufficient to offset the decline in
sales of copper closures. Prices generally declined across the world in the
copper segment as competitive pressures increased. Gross profit as a percent of
revenues remained unchanged because previous restructuring actions reduced the
impact of lower sales levels and prices. The declining copper closure business
and increasing competition has led the segment not only to reduce overall
resources, but also shift its resources to focus on the growing parts,
principally fiber and electronics products, of its marketplace.
Revenues were unchanged in 1994 from $430 million in 1993, although growth
was 6% on a constant currency basis. Sales growth in Asia, Latin America, and
Spain was offset by adverse currency fluctuations and lower revenues in several
European countries. Prices decreased slightly in 1994 due to increased
competition in the segment's market. Adverse currency fluctuations and a $4
million cost to restructure the segment's European manufacturing operations
impacted gross profit as a percent of revenues for the telecommunications
business segment--down over two percentage points in 1994.
PROVISION FOR RESTRUCTURING AND DIVESTITURES
Over the past several years, the company has strengthened its core businesses
and improved its results of operations through a series of initiatives. These
actions were in response to product shifts within markets, declining worldwide
defense sales, and expanding commercial opportunities. The company therefore
consolidated manufacturing capabilities and streamlined operations.
The core business incurred a pretax charge of $24 million in the first
quarter of 1995 for the restructuring of its telecommunications business
segment. The segment's restructuring charge included $13 million for severance
costs related to a net workforce reduction of 340 employees, resulting from the
closure of telecommunications' manufacturing operations in Germany and the
restructuring of its North American activities. The remaining charge of $11
million related to plant consolidations and the shutdown of unprofitable product
lines. The charge, excluding $8 million of asset writedowns, was cash in nature
and was primarily incurred in 1995 and funded through operating cash flow. The
restructuring was substantially completed by June 30, 1995, and will result in
approximately $24 million of annualized savings, of which $10 million of savings
were realized in fiscal 1995. Substantially all of the savings are cash related.
In 1992, the company incurred pretax charges of $42 million for
restructuring and divestitures. A significant portion of this restructuring
charge--$24 million--was due to the electronics segment's accelerated efforts to
realign its business toward a more commercial focus. The segment's restructuring
charge included $13 million for severance costs, primarily related to the
commercial reorientation of the sales force and reconfiguration of electronics
into three functionally integrated divisions. The remaining electronics charge
of $11 million related to plant consolidations and the shutdown of unprofitable
product lines. In addition, Electrical Products provided $3 million for the
relocation of part of its Menlo Park, California, operations to Delaware and for
other plant consolidations. In total, these actions provided for a workforce
reduction of approximately 460 employees. Other actions amounted to $14 million
and included the sale and discontinuation of various portions of certain
businesses. All of these programs were substantially completed at June 30, 1995.
See "Restructuring and Divestitures" in the notes to consolidated financial
statements for further details on the restructuring reserves and the nature of
the 1995 provision for restructuring and divestitures.
RESEARCH AND DEVELOPMENT EXPENSE
Raychem continues to invest in product development. Research and development
(R&D) expense for the core business totaled $119 million in 1995, up from $95
million in 1994 and $89 million in 1993. R&D expense represented 8% of revenues
in 1995, compared to 7% in 1994 and 6% in 1993. The increase in 1995 over 1994
primarily reflects increased development spending, but also includes $2 million
of severance and other costs to consolidate certain R&D activities.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense as a percent of revenues was
32% in 1995, unchanged from 1994 and 1993.
22
<PAGE> 4
OTHER EXPENSE, NET
Other expense, net, consists primarily of amortization of intangible assets, net
foreign exchange gains and losses, bank charges, gains and losses on the
disposition of fixed assets and investments, and certain other non-operating
items. Other expense, net of income items, was $4 million in 1995, $8 million in
1994, and $10 million in 1993. The decrease from 1994 to 1995 was due
principally to the $5 million gain from the sale of the company's minority
interest in Menlo Care, Inc. The decrease from 1993 to 1994 was due principally
to lower net foreign exchange losses.
INCOME TAXES
The core business' provision for income taxes was $21 million, $32 million, and
$31 million in 1995, 1994, and 1993, respectively. The provision for income
taxes in each of these years resulted primarily from profitable non-U.S.
operations. Substantially all of the Raynet-related losses are incurred in the
U.S. No U.S. tax benefit has been recorded because management believes
sufficient uncertainty exists regarding the realizability of the benefit. The
provision for income taxes in 1995 was lower than in 1994 due to the recognition
of tax benefits related to restructuring, severance, and other costs, and lower
profits in certain non-U.S. subsidiaries. The provision for income taxes in 1994
was higher than in 1993 due to higher non-U.S. income.
EXTRAORDINARY ITEM
On November 1, 1994, the company prepaid the holders of its 9.55% privately
placed senior notes. Accordingly, the company recorded an extraordinary loss of
$6 million for the early retirement of debt. For details, see "Extraordinary
Item--Loss Related to Early Retirement of Debt" in the notes to consolidated
financial statements.
CHANGES IN ACCOUNTING PRINCIPLES
Effective July 1, 1994, the company adopted FAS 112. This statement changed the
method of accounting for certain postemployment benefits from a cash basis to an
accrual basis. Adopting the standard resulted in a one-time charge against net
income of $1 million in 1995 to reflect the cumulative amount that would have
been accrued had the statement been in effect in prior years.
Effective July 1, 1992, the company adopted two new standards of the FASB.
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," requires accrual accounting for the expected future cost of
company-provided health care for retirees. Statement No. 109, "Accounting for
Income Taxes," changed the method of accounting for income taxes to an asset and
liability method from a deferred method. The net cumulative effect of adopting
these two standards was to increase 1993 net income by $2 million. For details,
see the notes to consolidated financial statements.
NEW ACCOUNTING STANDARDS
In October 1994, the FASB issued Statement No. 119, "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments," which the
company adopted in the second quarter of 1995. For required disclosures, see
"Financial Instruments" in the notes to consolidated financial statements.
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
For a description, see the notes to consolidated financial statements. This
statement must be adopted by the first quarter of fiscal 1997. The company has
not yet fully determined the impact of adoption, if any, on the company's
results of operations or financial condition.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
It is the company's goal to be recognized worldwide as an exemplary corporate
citizen with outstanding environmental, occupational health, and safety
performance for our products and for the facilities where we develop,
manufacture, and distribute these products. This includes compliance with
governmental regulations relating to the environment. Such regulations continue
to evolve throughout the world, and changes in regulation can affect the
company's manufacturing processes as well as the cost, availability, and use of
raw materials. The company does not expect compliance with environmental
regulations to have a material effect on capital expenditures or operating
results in 1996; however, changes in regulation
23
<PAGE> 5
or in the availability or cost of raw materials, or other unknown factors or
events, may have a material adverse effect on capital expenditures or operating
results.
In recent months, supplies of certain raw materials the company uses have
been tightening. In some instances, this has resulted in increased prices,
rationing, spot shortages, and the potential for future shortages. In response,
the company has identified alternative materials for some products, and they are
currently undergoing qualification testing. To date, the company has had no
disruption of manufacturing, and the impact of raw material price increases has
been immaterial.
The company has embarked on an "Operational Excellence" program to improve
operational efficiency in all areas of the company and to reduce SG&A costs. The
program focuses on vigorous process improvements across organizational
boundaries. While actions associated with the program are expected to reduce
ongoing costs, they may also result in related charges to implement the changes.
A portion of the company's research and development activities, its
corporate headquarters, and other critical business operations are located near
major earthquake faults. In the event of a major earthquake, the ultimate impact
on the company, significant suppliers, and the general infrastructure is
unknown, but operating results could be materially affected. The company is
predominantly not insured for losses and interruptions caused by earthquakes.
The company's international business activities and its results could be
significantly affected by changes in the policies of foreign governments and in
prevailing social and economic conditions overseas, including civil unrest,
unstable governments, changing inflation and foreign exchange rates, restrictive
exchange controls, and trade restrictions or prohibitions.
Any of the foregoing factors could have an adverse effect on future
results.
RAYNET OPERATIONS - 1995
--------------------------------------------------------------------------------
Raynet was consolidated in prior years when it was a wholly owned Raychem
subsidiary. On November 16, 1994, the company formed a joint venture, Ericsson
Raynet, with LM Ericsson, a Swedish telecommunications company. Consequently,
Raychem changed its Raynet accounting in 1995 from consolidation to the equity
method. Raychem's equity in net losses of affiliated companies for 1995 includes
the results of Raynet Corporation and subsidiaries through November 16, 1994,
and Raynet's allocation of the results of Ericsson Raynet from November 17,
1994, through June 30, 1995 (see "Raynet" in the notes to consolidated financial
statements for details on the transaction and loss allocations).
Raynet's pretax loss for 1995 of $118 million includes a $28 million loss
on the formation of the Ericsson Raynet joint venture, $4 million of other
Raynet items, and equity in net loss of $86 million. The equity in net loss
includes Raynet Corporation and subsidiaries' loss of $38 million through
November 16, 1994, and Raynet's $48 million loss allocation from Ericsson
Raynet. Ericsson Raynet's net loss for the period from November 17, 1994,
through June 30, 1995, was $78 million and included $12 million of restructuring
costs related to an operational consolidation. The Ericsson Raynet restructuring
costs were shared by Ericsson and Raynet on a 51/49 basis, and the remaining
loss was allocated to Ericsson and Raynet on a 51/49 basis subject to Ericsson's
$25 million loss allocation limit for 1995. See "Investments" in the notes to
consolidated financial statements for additional summarized financial
information.
See "Raynet" in the notes to consolidated financial statements for details
of the partner's loss allocations in fiscal 1996.
RAYNET OPERATIONS - 1994 VS. 1993
--------------------------------------------------------------------------------
Revenues at Raynet were $58 million in 1994, up from $10 million in 1993.
Revenues in 1994 principally resulted from the previously announced OPAL '93
contract with the German telephone company, Deutsche Bundespost Telekom (DBPT),
and volume shipments to NYNEX. Revenues in 1993 were derived primarily from
field trial installations, first office applications, and RIDES software
licensing arrangements.
R&D expense at Raynet was $41 million and $40 million in 1994 and 1993,
respectively. Raynet's SG&A expense increased to $39 million in 1994 from $35
million in 1993 because of higher international sales and marketing spending,
and employee severance costs.
Raynet capitalized $4 million and $8 million of software development costs
in 1994 and 1993, respectively, for its domestic and international operating
systems and system support software. Amortization of certain of these costs
began in 1993 and 1994 as the related products were made available for sale.
24
<PAGE> 6
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED
--------------------------------------------------------------------------------
Debt net of cash decreased by $22 million to $175 million at June 30, 1995, from
$197 million at June 30, 1994. Debt net of cash increased by $56 million in
1994. The decrease in debt net of cash in 1995 resulted primarily from reduced
funding requirements for Raynet losses, cash proceeds from the Ericsson Raynet
joint venture transaction, and proceeds from the sale of a minority interest in
Menlo Care, Inc., partially offset by the company's repurchase of its Common
Stock. The increase in debt net of cash in 1994 resulted from increases in
accounts receivable and inventories, higher capital spending, and a $20 million
funding of the company's U.S. pension plan, partially offset by increases in
accounts payable and accrued liabilities, lower tax payments, and the effect of
a large tax refund in the United Kingdom.
In February 1991, the company entered into a $210 million privately placed
debt agreement. In December 1992, the company entered into an interest rate swap
agreement with a financial institution, which effectively converted $100 million
of notional principal amount from a fixed to a floating interest rate. The
effect of this interest rate swap was to reduce net interest expense in both
1993 and 1994 by $1 million. In December 1993, the company terminated the swap
agreement. The termination resulted in a gain of $3 million, which was deferred,
to be amortized over the remaining life of the hedged debt. On November 1, 1994,
the company prepaid the holders of its 9.55% privately placed senior notes,
resulting in an extraordinary loss, which included recognition of the remaining
deferred gain on the termination of the interest rate swap.
In September 1994, the company entered into syndicated loan agreements
providing for a five-year partially amortizing term loan of $225 million, and a
renewable 364-day revolving credit facility of $200 million. Interest on the
term loan and revolving credit facility are at variable spreads over LIBOR. The
term loan requires quarterly principal payments of $15 million beginning
December 31, 1996, increasing to $17.5 million at December 31, 1997, and to $20
million from December 31, 1998, with a final payment of $35 million due
September 29, 1999. Proceeds from the term loan were drawn on November 1, 1994,
and used to retire the 9.55% privately placed senior notes and for general
corporate purposes, while the revolving credit facility replaced existing
committed credit facilities. The new syndicated loan agreements include
covenants that, among other things, specify a minimum net worth requirement, a
maximum leverage limit, a minimum fixed charge coverage ratio, and limits on
further advances to fund Raynet operations.
In November 1994, the company completed the transactions related to the
formation of the Ericsson Raynet joint venture. In forming the joint venture,
Raychem sold certain specified assets of its Raynet subsidiary to Ericsson in
exchange for $40 million in cash. In January 1995, the company entered into a
revolving credit agreement with the joint venture. The company agreed to make
available to the joint venture a maximum of $50 million, due in full on December
20, 1995, or earlier if the revolving credit arrangement is terminated at the
company's discretion. The credit agreement stipulates that borrowings under the
arrangement will be interest-free, and imposes no covenants or restrictions on
the joint venture's operations. Ericsson has also entered into a similar
agreement with the joint venture. Through June 30, 1995, the company made net
advances to Ericsson Raynet of $62 million, of which $4 million was under the
above credit agreement and the remaining $58 million has been capitalized as an
investment in the joint venture.
In December 1994, the Board of Directors authorized the repurchase, at
management's discretion, of up to 1.5 million shares of the company's stock
during any one fiscal year. Shares repurchased under this authorization will be
used to offset the dilution caused by the company's employee stock plans. The
company repurchased 700,000 shares at a cost of $26 million in 1995, and
subsequently reissued 473,360 shares through June 30, 1995.
In the fourth quarter of fiscal 1995, the company sold its minority
interest in Menlo Care, Inc. for cash and common stock of Johnson & Johnson. A
portion of the stock received was sold during the quarter. The cash proceeds
from these two related transactions amounted to $4 million.
In June 1993, Raychem repurchased all of the preferred stock in Raynet
International Inc. (RNI), a subsidiary of Raynet, previously held by BellSouth
Enterprises Inc. As a result of this $30 million purchase, Raynet and RNI were
essentially wholly owned by the company and its consolidated
25
<PAGE> 7
subsidiaries. Accordingly, at June 30, 1994 and 1993, there was no minority
interest related to the RNI preferred stock.
In 1993, Raychem received $4 million from the sale of the remaining portion
of the company's investment in Mitek and $7 million from the sale of various
fixed assets.
Net interest expense was $13 million in both 1995 and 1994, compared to $15
million in 1993. While debt was higher in 1995 versus 1994, net interest expense
was unchanged due to lower interest cost resulting from the refinancing of the
company's debt. Net interest expense was lower in 1994 due to the repurchase of
the RNI preferred stock.
Proceeds from the issuance of Common Stock to employees participating in
the company's employee stock purchase plan and stock option plans amounted to
$40 million in 1995, up from $34 million in 1994. The company's quarterly cash
dividend has been paid consistently since the second quarter of 1978. During
1995 the company paid $14 million in dividends to its stockholders, and expects
to continue to pay dividends in the foreseeable future.
At June 30, 1995, the company had $118 million in cash and cash
equivalents, $240 million in committed credit facilities (of which $2 million
was utilized), and $180 million in various uncommitted credit facilities (of
which $54 million was utilized). The combination of cash and cash equivalents,
available lines of credit, and future cash flows from operations are expected to
be sufficient to satisfy substantially all of the company's needs for working
capital, normal capital expenditures, and anticipated dividends. The future
operating cash requirements of Ericsson Raynet that Raychem is obligated to fund
are expected to be below the funding levels of 1995.
CORE BUSINESS
--------------------------------------------------------------------------------
See the previous section "Liquidity and Capital Resources--Consolidated" for a
discussion of 1995. Cash provided by operations in the core business improved to
$151 million in 1994 from $126 million in 1993. The increase in 1994 resulted
from decreased spending for restructuring and divestitures, lower tax payments,
and a large tax refund in the United Kingdom, partially offset by increases in
accounts receivable and a $20 million funding of the U.S. pension plan.
Inventory as measured by the number of days of inventory on hand improved
to 109 days for 1995 from 114 days for 1994. Receivables as measured by the
number of billing days outstanding were 61 days at June 30, 1995, down from 65
days at June 30, 1994. The decrease in receivables days outstanding resulted
from changes in the receivables mix and an improvement in collections in some
larger countries.
Capital expenditures as a percent of revenues were 6% in 1995, down
slightly from 7% in 1994, but equal to that of 1993. Investments in core
business property, plant, and equipment totaled $94 million, $93 million, and
$79 million in 1995, 1994, and 1993, respectively. The increase in 1994 was due
to spending on a number of projects, including new manufacturing facilities in
Japan and the People's Republic of China, and on new PolySwitch capacity in
Menlo Park, California. Capital expenditures in 1996 are expected to be about 7%
of revenues.
RAYNET
--------------------------------------------------------------------------------
See "Liquidity and Capital Resources--Consolidated" above for a discussion of
1995. Net cash used in operating and investing activities at Raynet increased to
$136 million in 1994, up from $80 million in 1993. The higher cash needs in 1994
resulted from a larger operating loss and increases in receivables and
inventories as volume shipments commenced. The lower cash needs in 1993 resulted
from the collection of a $12 million receivable from DBPT for development
contracts and lower capital expenditures. Capital expenditures totaled $11
million in both 1994 and 1993.
In the fourth quarter of 1993, Raynet received a $168 million capital
injection from Raychem. Proceeds were used to pay down existing intercompany
debt and to partially fund expenditures in 1994. The intercompany debt at June
30, 1994, of $122 million was reflected as equity since Raychem intended to, and
did, capitalize this debt in early fiscal 1995.
26
<PAGE> 8
REPORT OF MANAGEMENT
================================================================================
Responsibility for the preparation, integrity, and objectivity of the financial
information presented in this annual report rests with Raychem management. The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, applying certain estimates and
judgments as required.
Raychem maintains a system of internal accounting control designed to be
cost-effective while providing reasonable assurance that assets are safeguarded
and that transactions are executed in accordance with management's authorization
and are properly recorded in the financial records. Internal control
effectiveness is supported through written communication of policies and
procedures, careful selection and training of personnel, quarterly financial
reviews with divisions and major subsidiaries, and audits by a professional
staff of internal auditors. The company's control environment is further
enhanced through a formal Statement of Corporate Values which sets standards of
professionalism and integrity for employees worldwide.
Price Waterhouse LLP, independent accountants, are retained to examine
Raychem's financial statements. Their accompanying report is based on an
examination conducted in accordance with generally accepted auditing standards,
including a review of financial controls and tests of accounting procedures and
records as deemed necessary.
The Audit Committee of the Board of Directors is composed solely of
nonemployee directors, and is responsible for recommending to the Board the
independent accounting firm to be retained for the coming year, subject to
stockholder approval. The Audit Committee meets periodically and privately with
the independent accountants, with our internal auditors, and with Raychem
management, to review accounting, auditing, financial control, and financial
reporting matters.
/s/ Robert J. Saldich /s/ Raymond J. Sims
Robert J. Saldich Raymond J. Sims
President and Chief Senior Vice President and
Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF RAYCHEM CORPORATION
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Raychem
Corporation and its subsidiaries at June 30, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in the notes to consolidated financial statements, the company
changed its method of accounting for postemployment benefits in 1995 and its
methods of accounting for income taxes and nonpension postretirement benefits in
1993.
/s/ Price Waterhouse LLP
San Jose, California
July 18, 1995
27
<PAGE> 9
CONSOLIDATED BALANCE SHEET
<TABLE>
===========================================================================================
<CAPTION>
June 30 (in thousands except share data) 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 118,067 $ 78,090
Accounts receivable, net of allowances for doubtful accounts
of $10,348 in 1995 and $11,599 in 1994 304,819 312,624
Inventories:
Raw materials 76,862 99,129
Work in process 53,632 55,406
Finished goods 103,206 93,254
----------- -----------
Total inventories 233,700 247,789
Prepaid taxes 60,661 40,014
Other current assets 62,361 57,425
-------------------------------------------------------------------------------------------
Total current assets 779,608 735,942
-------------------------------------------------------------------------------------------
Property, plant, and equipment:
Land 50,063 46,840
Buildings 374,577 359,911
Machinery and equipment 645,265 646,752
Leasehold improvements 48,034 57,192
---------- ----------
Total property, plant, and equipment 1,117,939 1,110,695
Less accumulated depreciation and amortization 590,520 576,216
-------------------------------------------------------------------------------------------
Net property, plant, and equipment 527,419 534,479
-------------------------------------------------------------------------------------------
Other assets 147,718 128,594
-------------------------------------------------------------------------------------------
Total assets $ 1,454,745 $ 1,399,015
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 28,632 $ 26,986
Accounts payable 67,102 83,136
Compensation and benefits 85,690 91,422
Other accrued liabilities 97,789 93,151
Income taxes 22,943 25,515
Current maturities of long-term debt 1,042 3,881
-------------------------------------------------------------------------------------------
Total current liabilities 303,198 324,091
-------------------------------------------------------------------------------------------
Long-term debt 263,552 244,681
-------------------------------------------------------------------------------------------
Deferred income taxes 35,002 27,433
-------------------------------------------------------------------------------------------
Other long-term liabilities 98,215 65,625
-------------------------------------------------------------------------------------------
Minority interests 5,120 4,261
-------------------------------------------------------------------------------------------
Commitments and contingencies (See notes)
-------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred Stock, $1.00 par value
Authorized: 15,000,000; Issued: none - -
Common Stock, $1.00 par value
Authorized: 72,150,000
Issued: 1995-43,897,275; 1994-43,005,786 43,897 43,006
Additional contributed capital 380,127 354,660
Retained earnings 272,657 319,905
Currency translation 61,946 16,077
Treasury Stock, at cost (226,640 shares) (8,330) -
Notes receivable from sale of stock (639) (724)
-------------------------------------------------------------------------------------------
Total stockholders' equity 749,658 732,924
-------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,454,745 $ 1,399,015
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 10
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
==============================================================================================
<CAPTION>
YEARS ENDED JUNE 30 (in thousands except share data) 1995 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $1,530,573 $1,461,532 $1,385,730
Cost of goods sold 758,566 779,820 710,820
Research and development expense 118,762 136,619 128,992
Selling, general, and administrative expense 495,537 491,563 479,889
Provision for restructuring and divestitures 23,900 -- --
Loss on formation of Ericsson Raynet joint venture
and other Raynet items 32,032 -- --
Equity in net losses of affiliated companies 84,758 109 1,121
Interest expense, net 13,046 12,762 14,867
Other expense, net 4,242 6,914 10,457
----------------------------------------------------------------------------------------------
(Loss) income before income taxes, extraordinary
item, and changes in accounting principles (270) 33,745 39,584
Provision for income taxes 21,178 32,066 31,659
----------------------------------------------------------------------------------------------
(Loss) income before extraordinary item
and changes in accounting principles (21,448) 1,679 7,925
Extraordinary item--loss related to early
retirement of debt, net of $0 income taxes (6,318) -- --
Cumulative effect of changes in accounting
principles, net of $0 income taxes (1,477) -- 1,700
----------------------------------------------------------------------------------------------
Net (loss) income $ (29,243) $ 1,679 $ 9,625
==============================================================================================
(Loss) earnings per common share:
(Loss) income before extraordinary item
and changes in accounting principles $ (0.49) $ 0.04 $ 0.19
Extraordinary item (0.15) -- --
Changes in accounting principles (0.03) -- 0.04
----------------------------------------------------------------------------------------------
Net (loss) income $ (0.67) $ 0.04 $ 0.23
==============================================================================================
Average number of common shares outstanding 43,538,028 43,290,797 42,232,289
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 11
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
========================================================================================================
<CAPTION>
YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (29,243) $ 1,679 $ 9,625
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Provision for restructuring and divestitures, net of payments 7,620 (6,163) (18,802)
Loss on formation of Ericsson Raynet joint venture 14,517 -- --
Equity in net losses of affiliated companies 84,758 109 1,121
Extraordinary loss related to early retirement of debt (1,043) -- --
Changes in accounting principles 1,477 -- (1,700)
Depreciation and amortization 74,798 86,265 80,643
Deferred income tax provision (benefit) 3,465 (4,723) (1,377)
Gain on sale of investment (5,414) (870) (3,609)
Net loss on disposal of other property, plant, and equipment 3,856 127 84
Changes in certain assets and liabilities, net of effects from
restructuring and divestitures, joint venture formation,
extraordinary item, and changes in accounting principles:
Accounts receivable (12,911) (61,340) 9,536
Inventories (1,107) (14,734) (19,590)
Accounts payable and accrued liabilities (1,166) 25,317 33,195
Income taxes (14,822) 17,329 (57,182)
Other assets and liabilities 4,479 (17,212) 24,531
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 129,264 25,784 56,475
--------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in property, plant, and equipment (94,041) (104,056) (89,545)
Disposition of property, plant, and equipment 6,342 4,494 6,963
Proceeds from sale of specified Raynet assets 40,000 -- --
Advances to affiliated companies (63,427) -- --
Cost of acquisition, net of cash acquired (3,930) -- --
Repurchase of Raynet minority interest -- -- (30,000)
Proceeds from sale of investment 4,387 873 3,774
Purchase of investment (1,000) -- --
--------------------------------------------------------------------------------------------------------
Net cash used in investing activities (111,669) (98,689) (108,808)
--------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (payment of) short-term debt 5,031 (11,503) 18,936
Proceeds from long-term debt 225,498 17,405 9,219
Payments of long-term debt (213,100) (8,242) (6,529)
Common Stock repurchased (26,139) -- --
Common Stock issued under employee benefit plans 39,877 34,071 35,570
Proceeds from repayments of stockholder notes receivable 320 117 2,880
Cash dividends (13,950) (13,624) (13,156)
--------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,537 18,224 46,920
--------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 4,845 (1,175) (9,503)
--------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 39,977 (55,856) (14,916)
Cash and cash equivalents at beginning of year 78,090 133,946 148,862
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 118,067 $ 78,090 $ 133,946
========================================================================================================
Supplemental Disclosures
Cash paid for:
Interest (net of amounts capitalized) $ 25,710 $ 19,197 $ 26,583
Income taxes (net of refunds) 25,623 6,991 60,479
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 12
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
=============================================================================================================================
NOTES
ADDITIONAL CURRENCY RECEIVABLE
COMMON CONTRIBUTED RETAINED TRANS- TREASURY FROM SALE
(in thousands except share data) STOCK CAPITAL EARNINGS LATION STOCK OF STOCK TOTAL
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1992 $40,242 $287,322 $335,381 $ 55,503 $ -- $(3,260) $ 715,188
-----------------------------------------------------------------------------------------------------------------------------
Net income -- -- 9,625 -- -- -- 9,625
Common Stock issued (1,632,990
shares) 1,633 34,190 -- -- -- (253) 35,570
Cash dividends ($0.32 per share of
Common Stock) -- -- (13,156) -- -- -- (13,156)
Currency translation -- -- -- (60,603) -- -- (60,603)
Repayments of notes receivable -- -- -- -- -- 2,880 2,880
-----------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1993 41,875 321,512 331,850 (5,100) -- (633) 689,504
-----------------------------------------------------------------------------------------------------------------------------
Net income -- -- 1,679 -- -- -- 1,679
Common Stock issued (1,131,013 shares) 1,131 33,148 -- -- -- (208) 34,071
Cash dividends ($0.32 per share of
Common Stock) -- -- (13,624) -- -- -- (13,624)
Currency translation -- -- -- 21,177 -- -- 21,177
Repayments of notes receivable -- -- -- -- -- 117 117
-----------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1994 43,006 354,660 319,905 16,077 -- (724) 732,924
-----------------------------------------------------------------------------------------------------------------------------
Net loss -- -- (29,243) -- -- -- (29,243)
Common Stock issued (891,490 shares) 891 25,467 -- -- -- (235) 26,123
Cash dividends ($0.32 per share of
Common Stock) -- -- (13,950) -- -- -- (13,950)
Currency translation -- -- -- 45,869 -- -- 45,869
Treasury Stock purchased (700,000
shares) net of issuances (473,360
shares) -- -- (4,055) -- (8,330) -- (12,385)
Repayments of notes receivable -- -- -- -- -- 320 320
-----------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1995 $43,897 $380,127 $272,657 $ 61,946 $(8,330) $ (639) $ 749,658
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of all wholly owned
and majority owned subsidiaries. Investments in entities owned 20% or more but
less than majority owned and not otherwise controlled by the company are
accounted for under the equity method. Due to the formation of the Ericsson
Raynet joint venture in November 1994, the operations of Raynet Corporation and
subsidiaries (Raynet) for 1995 are included in the consolidated financial
statements using the equity method of accounting; Raynet's operations were
consolidated in prior years (see "Raynet" note). All significant intercompany
accounts and transactions are eliminated.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of operations outside the United States, except for
operations in highly inflationary economies (principally in Latin America), are
translated into U.S. dollars using the exchange rate in effect at each period
end. Revenues and expenses are translated at the average exchange rate
prevailing during the period. The effects of foreign currency translation
adjustments arising from differences in exchange rates from period to period are
deferred and included as a component of "stockholders' equity." The effects of
foreign currency transactions and of remeasuring the financial position and
results of operations into the functional currency are included in "other
expense, net."
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at the
date of purchase are classified as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally using the first-in, first-out method and includes materials, direct
and indirect labor, and manufacturing overhead.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are carried at cost. Effective July 1, 1990, the
company adopted the straight-line method of depreciation for property, plant,
and equipment placed in service on or after that date. Fixed assets placed in
service prior to 1991 continue to be depreciated using principally accelerated
methods. Property, plant, and equipment are depreciated over the estimated
useful lives of the individual assets and, for leasehold improvements, over the
terms of their respective leases, if shorter. The estimated useful lives of
major classes of depreciable assets are as follows:
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Buildings and Improvements 5 - 45 years
Machinery and Equipment 3 - 10 years
Leasehold Improvements Term of lease or life of asset
--------------------------------------------------------------------------------
</TABLE>
SOFTWARE CAPITALIZATION
The company capitalizes software development costs as resulting products become
technologically feasible. Capitalized software development costs are amortized
over a period not to exceed three years, commencing when the products are
available for general release to customers on a volume basis. At June 30, 1994,
the company had $11 million in net capitalized software development costs. For
the years ended June 30, 1994, and 1993, amortization of software development
costs was $4 million and $1 million, respectively. Capitalized software
development costs at June 30, 1995, and related amortization for the year ended
June 30, 1995, were zero as the company's Raynet subsidiary, which held this
software, was accounted for on the equity basis of accounting beginning in 1995.
INTANGIBLE ASSETS
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of businesses acquired and is amortized on a
straight-line basis over periods not exceeding 20 years. Patents and trademarks
are amortized on a straight-line basis over their legal or estimated useful
lives, whichever is shorter. The company assesses the carrying value of
intangible assets on a regular basis. An impairment of intangible assets is
recognized when it is deemed probable that the carrying amount of an asset
cannot be fully recovered, based on estimated future operating profits of the
related business.
32
<PAGE> 14
REVENUE RECOGNITION
Revenue from product sales is recognized when the earnings process is complete.
This generally occurs at the time product is shipped. Revenue on certain Raynet
contracts was recognized upon installation and acceptance by the customer. Other
revenues are principally from licensing and royalty arrangements. License and
royalty revenues are recognized according to the terms of the specific
agreements.
ENVIRONMENTAL COSTS
Environmental expenditures are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the cost can be reasonably estimated.
INCOME TAXES
The company adopted the provisions of Financial Accounting Standards Board
(FASB) Statement No. 109, "Accounting for Income Taxes" (FAS 109), effective as
of July 1, 1992. FAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The cumulative effect of adopting the standard as of July 1, 1992, was a $4
million, or $0.10 per share, increase in 1993 net income.
EARNINGS (LOSS) PER COMMON SHARE
Primary earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding after giving effect to
stock options considered to be dilutive common stock equivalents. Common shares
outstanding includes issued shares less shares held in treasury. In the case
that fully diluted earnings per common share is materially different from
primary earnings per common share, fully diluted earnings per common share is
calculated by dividing net income by the sum of the weighted average number of
common shares outstanding, dilutive stock options, and shares issuable under the
company's Employee Stock Purchase Plan at the end of the period. Common stock
equivalents would be excluded from both the primary and fully diluted
calculations if a net loss was incurred for the period as they would be
anti-dilutive.
TREASURY STOCK
The company's repurchases of shares of Common Stock are recorded as treasury
shares and result in a reduction of "stockholders' equity." When treasury shares
are reissued, the company uses a first-in, first-out method and the excess of
repurchase cost over reissuance price is treated as a reduction of "retained
earnings."
NEW ACCOUNTING STANDARD
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell, except for assets that are covered by
APB Opinion No. 30. The statement must be adopted by the first quarter of fiscal
1997. The company has not yet fully determined the impact of adoption, if any,
on the company's results of operations or financial condition.
FINANCIAL PRESENTATION
Certain prior-year amounts have been reclassified to conform with the 1995
financial statement presentation.
================================================================================
RAYNET
On November 16, 1994, the company and LM Ericsson (Ericsson), a Swedish
telecommunications company, formed a joint venture for the development,
manufacture, and marketing of fiber-optic communications systems for telephone
access networks worldwide. The joint venture, called "Ericsson Raynet," has
taken over and is continuing the operations of the company's Raynet subsidiary,
and is headquartered in Menlo Park, California. Ericsson Raynet has been
organized as a partnership under Delaware law; the company's Raynet subsidiary
holds the company's interest in the joint venture. Ericsson representatives
constitute a majority of the Board of Managers of the joint venture.
In forming the joint venture, Raychem sold certain specified assets of its
Raynet subsidiary to Ericsson in exchange for $40 million in cash. Ericsson
contributed the purchased assets to the joint venture, and Raynet contributed
substantially all of its remaining assets and liabilities to the joint venture.
Funding of the joint venture will initially be provided by the partners,
generally 51% by Ericsson and 49% by Raynet, subject to Ericsson's loss
allocation limit described below.
33
<PAGE> 15
During the first five to eight years of operation, subject to various
conditions, substantially all of the profits of the joint venture up to $156
million (plus incremental losses borne by Raynet on account of the loss cap)
will be allocated to Raynet; thereafter, profits of the joint venture will be
shared 51/49 by Ericsson and Raynet, respectively. Ericsson's share of the joint
venture's losses was capped at $25 million for the fiscal year ending June 30,
1995. In addition, restructuring costs in 1995 were shared 51/49 by Ericsson and
Raynet, respectively, without consideration of Ericsson's previously mentioned
loss allocation cap. During the fiscal year ending June 30, 1996, up to $19.6
million of losses will be allocated to Ericsson and Raynet in a 51/49 ratio;
additional losses, if any, of up to $10 million will be allocated 100% to
Raynet; and additional losses, if any, will again be allocated to Ericsson and
Raynet in a 51/49 ratio.
BellSouth Enterprises Inc. (BSE) had financed a portion of the software
development work at Raynet and held a royalty interest in the software related
revenues of Raynet. The royalty was based on a variable rate subject to meeting
certain annual royalty payment levels. Royalty expense under the agreement was
$3 million and $1 million in 1994 and 1993, respectively. With the creation of
the joint venture, this royalty payment was reconfigured. Raychem paid BSE $10
million in November 1994, and is required to make two additional payments of $10
million each in November 1995 and 1996. Raychem has agreed to make other royalty
payments to BSE contingent upon the revenues and earnings performance of the
joint venture. At such time as the joint venture achieves profitability, these
royalty payments could approximate 36% of Raychem's distributions from the joint
venture.
Ericsson has the right to purchase Raynet's interest in the joint venture
at a fixed price for a limited period beginning November 16, 1996; and Ericsson
and Raynet have call and put rights, respectively, on Raynet's interest in the
joint venture exercisable at fair market value at any time after July 1, 1999.
If any of these options are exercised, Raychem has agreed to pay BSE a portion
of the purchase price received.
The company's loss resulting from these transactions, a pre-tax charge of
$28 million, is included in the line item "loss on formation of Ericsson Raynet
joint venture and other Raynet items." For purposes of recording its loss, the
company has discounted its obligations to BSE to their present value as of
November 16, 1994, using a 7.97% discount rate.
See "Investments" note for summarized financial information of Ericsson
Raynet and related party balances.
REVOLVING CREDIT AGREEMENT
On January 2, 1995, the company entered into a revolving credit agreement with
Ericsson Raynet. The company committed to make available to the joint venture a
maximum of $50 million, due in full on December 20, 1995, or earlier if the
revolving credit arrangement is terminated at the company's discretion. The
credit agreement stipulates that borrowings under the agreement will be
interest-free, and imposes no covenants or restrictions on the joint venture's
operations. Ericsson has also entered into a similar agreement with the joint
venture. At June 30, 1995, Ericsson Raynet had borrowed $4 million from the
company under the revolving credit agreement, which amount is included in "other
current assets."
REPURCHASE OF MINORITY INTEREST
On June 24, 1993, the company repurchased all of the convertible preferred stock
in Raynet International Inc. (RNI), a subsidiary of Raynet Corporation,
previously held by BSE. As a result of this $30 million purchase, Raynet and RNI
were essentially wholly owned by Raychem and its consolidated subsidiaries. The
RNI preferred stock was previously recorded as a minority interest. Accordingly,
at June 30, 1994 and 1993, there was no minority interest related to the RNI
preferred stock.
The excess of Raychem's cost over the fair value of the preferred stock was
recorded as "goodwill" and was being amortized over a five-year period. Goodwill
amortization expense was $1 million in 1994 (none in 1993). In 1995, the
underlying assets of the business were sold and the remaining $4 million of
unamortized goodwill was included in the "loss on formation of Ericsson Raynet
joint venture and other Raynet items."
================================================================================
FINANCIAL INSTRUMENTS
In October 1994, the FASB issued Statement No. 119, "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments," which the
company adopted in the second quarter of 1995.
Currently, the company is not a party to any interest rate risk management
transactions. The company does not hold any derivative financial instruments for
trading purposes. The company has written policies which place all foreign
currency forward and option transactions under the direction of corporate
treasury and restrict all derivative transactions to those intended for hedging
purposes.
34
<PAGE> 16
The company operates in more than 40 countries worldwide, with in excess of
sixty percent of its revenues occurring outside the United States. The company
attempts to limit its exposure to changing foreign currency exchange rates
through both operational and financial market actions. The company manufactures
its products in a number of locations around the world, and hence has a cost
base that is well diversified over a number of European and Asian currencies as
well as the U.S. dollar. This diverse base of local currency costs serves to
counterbalance the income effect of potential changes in the value of the
company's local currency denominated revenues. Also, the company denominates its
third-party export sales in the currency of the selling Raychem entity, whenever
possible.
FORWARD FOREIGN EXCHANGE CONTRACTS
Short-term exposures to changing foreign currency exchange rates are managed by
financial market transactions, principally through the purchase of forward
foreign exchange contracts (with maturities usually less than three months) to
hedge the non-functional currency denominated receivables and payables and
anticipated transactions of the company's operating units. The related realized
and unrealized gains and losses are included in "other expense, net." The
company is subject to credit risk exposure from nonperformance by the
counterparties to these transactions, typically large international financial
institutions.
Gains and losses from forward foreign exchange contracts used to hedge
receivables, payables and anticipated transactions totaled a $4 million gain for
the year ended June 30, 1995. The company incurred total foreign exchange
transaction losses of $4 million, $5 million, and $10 million for 1995, 1994,
and 1993, respectively. The total amount of exposure hedged at June 30, 1995,
was $205 million, reflecting hedging for trade and intercompany receivables and
payables (including anticipated transactions), and loans in non-functional
currencies.
The company has unhedged non-functional currency translation and
transaction exposures in countries whose currencies do not have a liquid,
cost-effective forward market available for hedging. Exposures at June 30, 1995,
included $7 million in net intercompany payables in non-functional currencies
and $7 million of net monetary assets in foreign countries with the U.S. dollar
as functional currency.
The company periodically enters into forward foreign exchange contracts to
hedge a portion of its equity in foreign subsidiaries. The gains and losses on
these contracts are included in "stockholders' equity." There were no such
hedges of foreign equity outstanding at June 30, 1995.
INTEREST RATE SWAP AGREEMENT
On December 8, 1992, the company entered into a three-year interest rate swap
agreement for a notional principal amount of $100 million, involving the
exchange of fixed and floating interest payment obligations. On December 8,
1993, the company terminated the swap agreement. In addition to the financial
risk that varied during the life of this swap agreement in relation to market
interest rates, the company was subject to credit risk exposure from
nonperformance by the counterparty to the swap agreement.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the company to significant
concentrations of credit risk consist primarily of cash and trade accounts
receivable.
The company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions. These financial institutions
are located throughout the world, and the company's policy is designed to limit
exposure to any one institution. The company's periodic evaluations of the
relative credit standing of these financial institutions are considered in the
company's investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the company's customer
base and their dispersion across many different industries and countries. Credit
risk to certain countries is further limited through the use of irrevocable
letters of credit and bank guarantees. As of June 30, 1995 and 1994, the company
had no significant concentrations of credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the company's financial instruments, including cash and cash
equivalents, accounts receivable, notes payable to banks, accounts payable, and
other accrued liabilities, the carrying amounts approximate fair value due to
their short maturities. Consequently, such instruments are not included in the
following table, which provides information regarding the estimated fair values
of other financial instruments.
35
<PAGE> 17
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
1995 1994
--------------------- ---------------------
JUNE 30 CARRYING FAIR CARRYING FAIR
ASSET (LIABILITY)(in thousands) AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt, including current maturities,
and accrued interest of $2,812 and
$6,685 in 1995 and 1994, respectively $(267,406) $(267,406) $(255,247) $(261,405)
Forward foreign exchange contracts
included in:
Other current assets $ 805 $ 805 $ 1,231 $ 1,231
Other accrued liabilities $ (307) $ (307) $ (15) $ (15)
--------------------------------------------------------------------------------------------
</TABLE>
The fair value of long-term debt is estimated using discounted cash flow
analysis, based on the incremental borrowing rates currently available to the
company for bank loans with similar terms and maturities. The estimated fair
value of forward foreign exchange contracts is primarily based on quoted market
prices of comparable contracts.
================================================================================
INVESTMENTS
Of the total investments accounted for by the equity method, Ericsson Raynet, a
49%-owned joint venture for the development, manufacture, and marketing of
fiber-optic communication systems for telephone access networks worldwide,
represented $18 million at June 30, 1995 (see related "Raynet" note). The
remaining investments accounted for by the equity method aggregate to $2 million
at June 30, 1995, and include various manufacturing companies owned between
20%-50%. Investments are included as a component of "other assets." No dividends
were received from equity affiliates in 1995. The investment balance and the
company's equity in net losses of affiliated companies were immaterial in prior
years. Summarized financial information of Ericsson Raynet and the other equity
affiliates follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
TOTAL
ERICSSON OTHER EQUITY
1995 (in thousands) RAYNET AFFILIATES AFFILIATES
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 62,864 (a) $ 19,354 $ 82,218
Non-current assets 34,203 (a) 6,892 41,095
Current liabilities 65,906 (a) 23,666 89,572
Non-current liabilities 495 (a) 1,077 1,572
-------------------------------------------------------------------------------
Revenues $ 45,502 (b) $ 40,990 $ 86,492
-------------------------------------------------------------------------------
Gross profit (loss) $ (24,074)(b) $ 15,645 $ (8,429)
-------------------------------------------------------------------------------
Net (loss) income $(116,638)(b) $ 4,698 $(111,940)
-------------------------------------------------------------------------------
Raychem's equity in (loss) income $ (85,946)(c) $ 1,188 $ (84,758)
-------------------------------------------------------------------------------
</TABLE>
(a) Balances as of June 30, 1995 are those of Ericsson Raynet.
(b) Includes the results of Raynet Corporation and subsidiaries through November
16, 1994, and the results of Ericsson Raynet from November 17, 1994, through
June 30, 1995.
(c) The joint venture agreement specifies varying profit and loss allocations to
its partners as more fully described in the accompanying "Raynet" note.
Raychem's equity in loss includes the results of Raynet Corporation and
subsidiaries through November 16, 1994, and Raychem's allocation of the
results of Ericsson Raynet from November 17, 1994, through June 30, 1995.
Included in Raychem's "other accrued liabilities" is a $9 million
obligation to fund the cash losses of Ericsson Raynet, which amount was paid
subsequent to June 30, 1995. Included in Raychem's "other long-term liabilities"
is an $8 million non-interest bearing promissory note, due no earlier than
November 1996, payable to Ericsson Raynet for capital contributions relating to
non-cash losses. At June 30, 1995, the company's investment balance in Ericsson
Raynet was greater than its equity share in the net assets of Ericsson Raynet by
$3 million principally due to the joint venture's classification of a capital
contribution receivable from Raynet as a contra-equity item.
36
<PAGE> 18
================================================================================
OTHER POSTRETIREMENT BENEFITS
The company provides postretirement health care benefits to U.S. employees who
qualify for the company's defined benefit pension plan and retire on or after
age 55, until the employees reach age 65. Such benefits are limited to allowing
retirees to continue their participation in the company's group medical plan.
Eligible retirees pay monthly premiums, thus reducing the cost to the company.
The company adopted FASB Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (FAS 106), effective July 1, 1992.
This statement requires accrual accounting for all postretirement benefits other
than pensions. The company elected to immediately recognize the transition
obligation as the cumulative effect of a change in accounting principle,
resulting in a decrease to 1993 net income of $2 million, or $0.06 per share.
Prior to the adoption of FAS 106, the cost of providing medical and dental
benefits to early retirees was expensed as incurred. The cost of these benefits
(determined in accordance with FAS 106) was $0.4 million, comprised of a service
cost of $0.2 million and interest cost of $0.2 million, in each of the years
1995, 1994, and 1993.
The following table sets forth components of the accumulated postretirement
benefit obligation:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
JUNE 30 (in thousands) 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees $ 792 $ 500
Fully eligible employees 689 600
Other active employees 1,740 1,600
--------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 3,221 2,700
Unrecognized net gain 74 233
--------------------------------------------------------------------------------
Accrued postretirement benefit obligation $3,295 $2,933
--------------------------------------------------------------------------------
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligation were 7.75% at June 30, 1995 and 8.25% at June 30, 1994. The
assumed health care cost trend rate for 1995 is 9%, declining to an ultimate
rate in 2001 of 6%. A one percentage point increase in the assumed health care
cost trend rate for each future year increases annual net periodic
postretirement benefit cost and the accumulated postretirement benefit
obligation as of June 30, 1995, by $0.1 million and $0.4 million, respectively.
================================================================================
RETIREMENT BENEFITS
The company has noncontributory defined benefit pension plans that cover
substantially all U.S. employees and a number of its employees in foreign
countries. The benefits for these plans are based primarily on years of service
and employee compensation. The company funds these pension plans when legally or
contractually required, or earlier.
Plan assets for the U.S. and non-U.S. defined benefit pension plans
generally consist of publicly traded securities, bonds, and cash investments.
Amortization of prior service cost is calculated on a straight-line basis over
the expected future years of service of the plans' active participants.
Effective January 1, 1995, the company adopted amendments to the
International Pension Plan to expand benefit coverage to include more employees.
This change resulted in an increase of $0.2 million in pension expense for 1995
and an increase of approximately $2.5 million in the projected benefit
obligation.
In 1995, the U.S. plan recognized a curtailment loss of $1.2 million
related to the transfer of Raynet employees to the Ericsson pension plan.
On January 1, 1993, the U.S. plan was amended to update the years used to
calculate past service benefits. The amendment generated an unrecognized prior
service cost of $5 million.
The assumptions used to measure the projected benefit obligation and to
compute the expected long-term return on assets for the company's defined
benefit pension plans are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. plans:
Discount rate 7.75% 8.25% 8.25%
Average increase in compensation levels 4.75% 5.25% 5.5%
Expected long-term return on assets 8.5% 9% 9%
Non-U.S. plans:
Discount rates 5.5% - 9.3% 6% - 8.5% 6% - 9.5%
Average increase in compensation levels 3% - 6.9% 4% - 6.9% 6% - 7%
Expected long-term return on assets 7.5% - 10% 7.5% - 9.5% 8% - 10%
--------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 19
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
U.S. PLANS NON-U.S. PLANS
----------------------------- -----------------------------
YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993 1995 1994 1993
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned during the period $ 6,105 $ 6,161 $ 5,479 $ 9,584 $ 7,477 $ 7,154
Interest cost on projected benefit obligation 9,009 8,091 7,061 13,161 10,148 8,809
Actual (return) loss on plan assets (16,342) 165 (10,927) (3,969) (14,055) (15,488)
Net amortization and deferral 9,820 (6,697) 4,828 (6,241) 5,607 7,744
-------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 8,592 $ 7,720 $ 6,441 $12,535 $ 9,177 $ 8,219
-------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the funded status of the plans:
<TABLE>
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS EXCEED ACCUMULATED BENEFITS ACCUMULATED BENEFITS EXCEED ASSETS
--------------------------------------------- ----------------------------------------
U.S. PLANS NON-U.S. PLANS U.S. PLANS NON-U.S. PLANS
--------------------- --------------------- ------------------ -------------------
JUNE 30 (in thousands) 1995 1994 1995 1994 1995 1994 1995 1994
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Actuarial present value
of benefit obligations:
Vested benefit obligation $(103,501) $ (93,365) $ (64,030) $ (55,629) $(3,978) $ (1,776) $(43,820) $(33,232)
-------------------------------------------------------------------------------------------------------------------------
Accumulated benefit
obligation $(108,949) $ (98,025) $ (65,111) $ (56,687) $(4,027) $( 1,808) $(45,855) $(35,200)
-------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $(118,013) $(107,694) $(121,614) $(107,740) $(7,702) $ (3,141) $(54,377) $(42,021)
Plan assets at fair value 110,652 98,915 120,735 105,038 - - 744 -
-------------------------------------------------------------------------------------------------------------------------
Plan assets less than
projected benefit obligation (7,361) (8,779) (879) (2,702) (7,702) (3,141) (53,633) (42,021)
Unrecognized net loss (gain) 17,170 21,961 (1,167) 2,096 818 (620) (4,798) (3,698)
Unrecognized net transition
(asset) liability (1,668) (3,204) (8,169) (8,942) 645 675 (477) -
Unrecognized prior service cost 8,150 10,747 3,055 3,174 5,247 3,161 - -
Adjustment required to
recognize additional
minimum liability - - - - (3,033) (2,211) - -
-------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued)
pension cost $ 16,291 $ 20,725 $ (7,160) $ (6,374) $(4,025) $ (2,136) $(58,908) $(45,719)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
DEBT STRUCTURE
Long-term debt consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
JUNE 30 (in thousands) 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
3.3% to 8.875% notes payable to banks and others
requiring payments in varying amounts through 2025 $ 39,094 $ 37,062
9.55% privately placed senior notes, payable in 1996,
retired on November 1, 1994 - 210,000
Syndicated term loan requiring varying quarterly
payments beginning December 1996 through
September 1999. The interest rate fluctuates
quarterly and was 6.792% at June 30, 1995. 225,000 -
Industrial Revenue Bond due in equal quarterly
installments through 1996. The interest rate,
which fluctuates according to the lender's prime
rate, was 5.13% at June 30, 1995. 500 1,500
--------------------------------------------------------------------------------
Total long-term debt 264,594 248,562
Less current maturities 1,042 3,881
--------------------------------------------------------------------------------
Long-term portion $263,552 $244,681
--------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 20
The company entered into a $210 million private placement debt agreement in
February 1991. In December 1992, the company entered into a three-year interest
rate swap agreement which effectively converted $100 million of notional
principal amount from a fixed rate to a floating rate. Under the agreement,
which was to mature on December 8, 1995, the company made payments to a
counterparty at variable rates based on LIBOR, reset every six months, and in
return received payments based on a fixed rate of 5.715%. The LIBOR rate for the
period from December 8, 1992, to June 7, 1993, was 3.875% and the LIBOR rate for
the period from June 8, 1993, to December 8, 1993, was 3.4375%. The effect of
the interest rate swap agreement was to reduce interest expense in both 1994 and
1993 by $1 million. On December 8, 1993, the company terminated this agreement
which resulted in a deferred gain of $3 million to be amortized over the
remaining life of the hedged debt. In 1994, $1 million of the gain was
recognized as a reduction of interest expense. On November 1, 1994, the company
prepaid the holders of its 9.55% privately placed senior notes resulting in an
extraordinary loss, which included recognition of the remaining deferred gain on
the termination of the interest rate swap (see note "Extraordinary Item--Loss
Related to the Early Retirement of Debt").
On September 29, 1994, the company entered into syndicated loan agreements
providing for a five-year partially amortizing loan of $225 million, and a
renewable 364-day revolving credit facility of $200 million. Interest on the
term loan and revolving credit facility are at variable spreads over LIBOR.
Proceeds from the term loan were drawn on November 1, 1994, and used to retire
the 9.55% privately placed senior notes and for general corporate purposes,
while the revolving credit facility replaced existing committed credit
facilities.
The new syndicated loan agreements include covenants that, among other
things, specify a minimum net worth requirement, a maximum leverage limit, a
minimum fixed charge coverage ratio, and limits on further advances to fund
Raynet operations.
Long-term debt maturing during the five years subsequent to June 30, 1995,
is as follows: 1996--$1 million; 1997--$47 million; 1998--$69 million; 1999--$98
million; 2000--$36 million; and thereafter-- $14 million. Assets pledged as
security for long-term debt totaled $46 million at June 30, 1995.
Information regarding short-term debt is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
YEARS ENDED JUNE 30 (dollars in thousands) 1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Total lines of credit at June 30 $419,864 $483,073 $448,651
Available unused credit lines at June 30 $364,307 $437,856 $394,636
--------------------------------------------------------------------------------
Weighted average interest rate at June 30:
Highly inflationary economies 16.8% 15.1% 9.8%
Other countries 7.0% 9.4% 7.3%
Worldwide average 7.1% 9.5% 7.5%
--------------------------------------------------------------------------------
</TABLE>
In addition to short-term borrowings, lines of credit are used for letters
of credit, debt guarantees, and other purposes. The company had no significant
compensating balance requirements or capital lease obligations at June 30, 1995.
================================================================================
STOCK
REPURCHASE OF COMMON STOCK
In December 1994, the Board of Directors authorized the repurchase, at
management's discretion, of up to 1.5 million shares of the company's stock
during any one fiscal year. Shares repurchased under this authorization are used
to offset the dilution caused by the company's employee stock purchase and stock
option plans. In 1995, the company repurchased 700,000 shares, of which 473,360
shares were reissued and 226,640 shares were held as treasury stock at June 30,
1995. The 473,360 shares reissued were repurchased at an aggregate price of $18
million and reissued at an aggregate price of $14 million. The $4 million
difference between the repurchase and reissuance prices was treated as a
reduction of retained earnings.
EMPLOYEE STOCK PURCHASE PLANS
The company's employee stock purchase plans provide that eligible employees may
contribute up to 15% of their base earnings toward the quarterly purchase of the
company's Common Stock. The employees' purchase price is derived from a formula
based on the fair market value of the Common Stock. No compensation expense is
recorded in connection with the plans. Shares issued under the plans were
905,000 in 1995, 901,000 in 1994, and 1,188,000 in 1993. At June 30, 1995, a
total of 4,466 of the 8,337 eligible employees were participants in the plans.
39
<PAGE> 21
On October 28, 1992, the stockholders approved an amendment to the employee
stock purchase plans to reduce the maximum enrollment period from 27 months to
12 months and to increase the aggregate number of shares issuable under the
plans by 1,400,000. On October 27, 1993, the stockholders approved an amendment
to the employee stock purchase plans to increase the aggregate number of shares
issuable under the plans by 700,000. On November 9, 1994, the stockholders
approved another amendment to the employee stock purchase plans to increase the
aggregate number of shares issuable under the plans by 700,000. The total number
of shares reserved for future issuance under the plans was 733,000 at June 30,
1995.
STOCK OPTION AND INCENTIVE PLANS
The company has various stock option and management incentive plans for selected
employees, officers, directors, and consultants. The plans provide for awards in
the form of stock options, stock appreciation rights, stock purchase rights,
convertible debentures, and performance shares. As of June 30, 1995, only stock
options had been awarded under the plans. Options to purchase Common Stock have
been granted at no less than fair market value on the date of grant.
On October 27, 1993, the stockholders approved an amendment to the 1990
Incentive Plan to increase by 1,700,000 shares the aggregate number of shares
issuable under the plan. On November 9, 1994, the stockholders approved two
amendments to the 1990 Incentive Plan to: 1) limit the number of shares with
respect to which options may be granted to no more than 200,000 shares to any
one participant in any one-year period; and 2) to extend up to five years the
period during which awards granted on or after August 12, 1994, may be exercised
following retirement from the company.
At June 30, 1995, 853 optionees held options for the purchase of Common
Stock with expiration dates occurring between July 1, 1995 and June 30, 2005,
with an average exercise price of $34 per share.
The following table summarizes Raychem option activity during 1995, 1994,
and 1993:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
OPTION SHARES, JUNE 30 (in thousands except per share data) 1995 1994 1993
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 5,211 4,896 4,299
Granted 1,051 894 1,188
Exercised (466) (232) (453)
Expired or canceled (208) (347) (138)
----------------------------------------------------------------------------------------
Outstanding at end of year 5,588 5,211 4,896
----------------------------------------------------------------------------------------
Exercisable 3,256 2,676 2,284
----------------------------------------------------------------------------------------
Available for future grant 759 1,792 710
----------------------------------------------------------------------------------------
Option price per share
Exercised $17-$40 $21-$41 $17-$41
Outstanding $17-$45 $17-$45 $17-$45
----------------------------------------------------------------------------------------
</TABLE>
================================================================================
RESTRUCTURING AND DIVESTITURES
Over the past several years, the company has strengthened its core businesses
and improved its results of operations through a series of initiatives. These
actions were in response to product shifts within markets, declining worldwide
defense sales, and expanding commercial opportunities. The company therefore
consolidated manufacturing capabilities and streamlined operations.
The core business incurred a pretax charge of $24 million in the first
quarter of 1995 for the restructuring of its telecommunications business
segment. All charges, excluding asset writedowns, were cash in nature,
substantially incurred in 1995, and funded through operating cash flows. The
following table sets forth components of the company's "Provision for
restructuring and divestitures" for the year ended June 30, 1995 (none in 1994
and 1993):
40
<PAGE> 22
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30 EMPLOYEE ASSET
(in thousands) SEVERANCE WRITEDOWNS LEASES OTHER TOTAL
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Telecommunications:
Employee severance $13,200 $ - $ - $ - $13,200
Assets to be sold - 5,680 - 1,000 6,680
Discontinued product inventory - 2,600 - - 2,600
Vacated buildings - - 620 - 620
Other - - - 800 800
------------------------------------------------------------------------------------------------------
Provision for restructuring
and divestitures $13,200 $8,280 $620 $1,800 $23,900
------------------------------------------------------------------------------------------------------
</TABLE>
The company has implemented a number of programs in prior years to
restructure the core business. Reserves which were established prior to fiscal
1992 have largely been used, and the remaining balances, if any, are immaterial.
The following table sets forth the company's restructuring reserves as of June
30, 1993, 1994, and 1995:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
RESTRUCTURING RESERVES EMPLOYEE ASSET
(in thousands) SEVERANCE WRITEDOWNS LEASES OTHER TOTAL
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance July 1, 1992 $ 11,585 $ 3,681 $ 1,363 $ 7,698 $ 24,327
--------------------------------------------------------------------------------------------------------------
Cash payments (8,584) - (688) (3,320) (12,592)
Non-cash items - (2,199) - (1,200) (3,399)
--------------------------------------------------------------------------------------------------------------
Balance June 30, 1993 3,001 1,482 675 3,178 8,336
--------------------------------------------------------------------------------------------------------------
Cash payments (1,663) - (645) (2,726) (5,034)
Non-cash items - (630) - - (630)
--------------------------------------------------------------------------------------------------------------
Balance June 30, 1994 1,338 852 30 452 2,672
--------------------------------------------------------------------------------------------------------------
Provision for restructuring
and divestitures 13,200 8,280 620 1,800 23,900
Adjustment to reserves 1,300 (1,300) - - -
Cash payments (13,676) - (650) (1,237) (15,563)
Non-cash items - (7,832) - - (7,832)
--------------------------------------------------------------------------------------------------------------
Balance June 30, 1995 $ 2,162 $ - $ - $ 1,015 $ 3,177
--------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
INTEREST
Interest expense, net, consisted of the following components:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Years ended June 30 (in thousands) 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense incurred $ 20,434 $ 22,318 $ 26,991
Interest expense capitalized (724) (1,172) (362)
Interest income (6,664) (8,384) (11,762)
-------------------------------------------------------------------------------
Interest expense, net $ 13,046 $ 12,762 $ 14,867
-------------------------------------------------------------------------------
</TABLE>
================================================================================
SALE OF ASSETS
In the fourth quarter of 1995, Johnson & Johnson acquired, in a tax-free
reorganization, all of the outstanding common stock of Menlo Care, Inc., a
company in which Raychem held a minority interest. This transaction resulted in
a pretax gain of $5 million. In 1993, the company sold its remaining equity
interest in Mitek Surgical Products, Inc. for $4 million, resulting in a pretax
gain of $4 million. These gains were included in "other expense, net."
41
<PAGE> 23
As proceeds from the Menlo Care transaction, the company received cash, and
shares of Johnson & Johnson common stock valued on the closing date at
approximately $6 million. In connection with the transaction, the company agreed
that it had no present plan or intention to sell more than 60% of the stock
received. At June 30, 1995, the company held Johnson & Johnson stock valued at
approximately $3 million, the fair value based on the quoted market price.
================================================================================
INCOME TAXES
As discussed in the "Summary of Significant Accounting Policies," the company
adopted FAS 109 effective July 1, 1992. (Loss) income before income taxes,
extraordinary item, and changes in accounting principles consisted of the
following components:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. operations, including Puerto Rico $(89,868) $(102,200) $ (74,736)
Non-U.S. operations 89,598 135,945 114,320
----------------------------------------------------------------------------------------------
(Loss) income before income taxes, extraordinary item,
and changes in accounting principles $ (270) $ 33,745 $ 39,584
----------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes included:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax (benefit):
U.S. federal, including Puerto Rico $ 547 $ 1,194 $ (2,398)
U.S. state and local 510 775 743
Non-U.S 16,656 34,820 34,691
--------------------------------------------------------------------------------
Total current tax 17,713 36,789 33,036
--------------------------------------------------------------------------------
Deferred tax (benefit):
U.S. federal, including Puerto Rico (12) (2,419) 1,419
Non-U.S 3,477 (2,304) (2,796)
--------------------------------------------------------------------------------
Total deferred tax (benefit) 3,465 (4,723) (1,377)
--------------------------------------------------------------------------------
Provision for income taxes $ 21,178 $ 32,066 $ 31,659
--------------------------------------------------------------------------------
</TABLE>
The company has provided for U.S. federal income taxes and foreign
withholding taxes on the portion of the undistributed earnings of non-U.S.
subsidiaries expected to be remitted. Undistributed earnings intended to be
reinvested indefinitely in foreign subsidiaries were approximately $388 million
at June 30, 1995. If these earnings were distributed, foreign withholding taxes
would be imposed; however, foreign tax credits would become available to
substantially reduce any resulting U.S. income tax liability.
Income from operations in certain countries is subject to reduced tax rates
as a result of satisfying certain commitments regarding employment and capital
investment. The exemption grants for these operations will expire at various
dates through 2010. The income tax benefits related to the tax status of these
operations are estimated to be $3 million for 1995, and $5 million for 1994 and
1993.
The company's provision for income taxes differed from the amount computed
by applying the statutory U.S. federal income tax rate to (loss) income before
income taxes, extraordinary item, and changes in accounting principles as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Benefit) tax determined by applying U.S. statutory rate
to (loss) income before income taxes, extraordinary item,
and changes in accounting principles $ (95) $ 11,811 $ 13,459
Tax benefit of deferred deductions, net operating losses,
and net foreign and minimum tax credits to be carried
forward to future years 31,873 31,025 30,932
Tax rate differences and foreign tax credits,
net of withholding taxes (8,202) (9,572) (12,443)
State and local taxes, net of federal income tax benefits 338 497 51
Adjustment of prior years' taxes 230 210 (2,395)
Other items, net (2,966) (1,905) 2,055
--------------------------------------------------------------------------------------------------
Provision for income taxes $ 21,178 $ 32,066 $ 31,659
--------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 24
Future expirations of U.S. tax loss and tax credit carryforwards, if not
utilized, are as follows: $0.6 million in 1998; $6.2 million in 1999; $1.3
million in 2000; $6.4 million in 2004; $4.3 million in 2005; $4.2 million in
2006; $4.8 million in 2007; $2.0 million in 2008; $12.3 million in 2009; $18.7
million in 2010; and $7.8 million with no expiration.
U.S. federal tax return examinations have been completed for years through
1992. The company believes adequate provisions for income tax have been recorded
for all years.
Deferred tax liabilities (assets) under FAS 109 were comprised of the
following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
JUNE 30 (in thousands) 1995 1994 1993
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liabilities:
Difference between book and tax bases of assets $ -- $ -- $ 1,487
Retirement benefits 874 1,668 2,658
Other 14,613 13,127 11,434
-----------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 15,487 14,795 15,579
-----------------------------------------------------------------------------------------------------
Assets:
Compensation and benefits accrual (3,949) (3,412) (2,748)
Asset reserves (11,396) (16,662) (7,473)
Restructuring and divestitures accruals (8,065) (5,109) (10,484)
Capitalization of research and experimental costs,
net of amortization (166,744) (167,576) (176,829)
Difference between book and tax bases of investments (712) (2,215) (1,918)
Net operating loss carryforwards (38,065) (12,124) --
General business credits (27,049) (14,670) (9,056)
Minimum tax credit (4,097) (3,277) (3,167)
Foreign tax credit (31,488) (5,900) --
Difference between book and tax bases of assets (1,833) (275) --
Other (10,236) (9,055) (13,874)
-----------------------------------------------------------------------------------------------------
Gross deferred tax assets (303,634) (240,275) (225,549)
-----------------------------------------------------------------------------------------------------
Deferred tax asset valuation allowance 292,822 229,787 210,404
-----------------------------------------------------------------------------------------------------
Net deferred tax liability $ 4,675 $ 4,307 $ 434
-----------------------------------------------------------------------------------------------------
</TABLE>
The net change in the total valuation allowance for the year ended June 30,
1995, was an increase of $63 million. The deferred tax asset valuation allowance
is primarily attributed to U.S. federal and state deferred tax assets.
Management believes sufficient uncertainty exists regarding the realizability of
these items that a valuation allowance is required.
================================================================================
EXTRAORDINARY ITEM--LOSS RELATED TO EARLY RETIREMENT OF DEBT
On November 1, 1994, the company prepaid the holders of its 9.55% privately
placed senior notes. Accordingly, the company recorded an extraordinary loss of
$6 million related to the early retirement of debt. The extraordinary loss was
comprised of a $7 million prepayment penalty and deferred debt issuance costs,
net of a $1 million deferred gain resulting from the termination of a related
interest rate swap agreement. There was no tax benefit recognized for the
extraordinary item because it increased U.S. losses.
43
<PAGE> 25
<TABLE>
===================================================================================================================================
WORLDWIDE OPERATIONS(a)
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
UNITED REST OF CONSOLIDATED
(in thousands) STATES EUROPE ASIA WORLD CONSOLIDATION TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from unaffiliated customers(b) 1995 $539,518 $653,221 $198,845 $138,989 $ -- $1,530,573
1994 562,199 587,196 179,060 133,077 -- 1,461,532
1993 487,958 644,547 127,090 126,135 -- 1,385,730
-----------------------------------------------------------------------------------------------------------------------------------
Revenues between geographic areas(c) 1995 220,267 117,188 13,729 138 (351,322) --
1994 199,331 141,493 8,427 142 (349,393) --
1993 169,586 183,176 4,700 55 (357,517) --
-----------------------------------------------------------------------------------------------------------------------------------
Total revenues 1995 759,785 770,409 212,574 139,127 (351,322) 1,530,573
1994 761,530 728,689 187,487 133,219 (349,393) 1,461,532
1993 657,544 827,723 131,790 126,190 (357,517) 1,385,730
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before provision for 1995 43,664 103,926 4,809 5,309 -- 157,708
restructuring and divestitures, and loss on 1994 (80,764) 120,825 2,026 11,443 -- 53,530
formation of JV and other Raynet items 1993 (64,039) 115,476 2,514 12,078 -- 66,029
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) including provision 1995 6,532 85,126 4,809 5,309 -- 101,776
for restructuring and divestitures, and loss on 1994 (80,764) 120,825 2,026 11,443 -- 53,530
formation of JV and other Raynet items 1993 (64,039) 115,476 2,514 12,078 -- 66,029
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, 1995 (89,868) 60,983 18,583 10,032 -- (270)
extraordinary item, and changes in 1994 (102,200) 108,345 15,686 11,914 -- 33,745
accounting principles 1993 (74,736) 93,967 6,282 14,071 -- 39,584
-----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 1995 335,609 487,079 150,511 60,492 -- 1,033,691
1994 433,155 452,888 139,947 56,328 -- 1,082,318
1993 426,920 416,147 85,698 46,910 -- 975,675
-----------------------------------------------------------------------------------------------------------------------------------
Corporate assets 1995 186,911 177,809 40,445 15,889 -- 421,054
1994 201,762 67,581 32,542 14,812 -- 316,697
1993 203,758 105,346 26,011 21,480 -- 356,595
-----------------------------------------------------------------------------------------------------------------------------------
Total assets 1995 522,520 664,888 190,956 76,381 -- 1,454,745
1994 634,917 520,469 172,489 71,140 -- 1,399,015
1993 630,678 521,493 111,709 68,390 -- 1,332,270
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Raynet Corporation and subsidiaries' results are presented on the equity
basis of accounting in 1995 versus consolidated in 1994 and 1993.
(b) Revenues from unaffiliated customers in each geographic area reflect only
shipments originating locally and exclude direct exports from other
geographic areas.
(c) Revenues between geographic areas are recorded on the basis of arms-length
prices established by the company. Beginning in 1993, revenues originating
from the company's Tijuana, Mexico facility are reported as originating in
the United States due to a change in the cross-border product transfer
agreement between the United States and Mexico.
44
<PAGE> 26
================================================================================
BUSINESS SEGMENTS
The electronics business segment serves the aerospace, automotive, defense, mass
transit, computer, communications, medical, and other industries. The industrial
business segment serves industrial and commercial infrastructure customers,
including electric, gas, and water utilities; industrial plants and pipelines;
and commercial construction. The telecommunications business segment serves the
telephone and cable television industries. The company's Raynet subsidiary
delivered fiber-optic distribution systems for voice, video, and data to
telecommunications network operators. Raynet Corporation and subsidiaries'
results are presented on the equity basis of accounting in 1995 versus
consolidated in 1994 and 1993.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
TELECOMMU- CONSOLIDATED
(in thousands) ELECTRONICS INDUSTRIAL NICATIONS RAYNET CORPORATE TOTAL
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(a) 1995 $611,036 $499,344 $420,193 $ -- $ -- $1,530,573
1994 521,890 451,814 430,044 57,784 -- 1,461,532
1993 503,168 443,390 429,501 9,671 -- 1,385,730
---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before provision for 1995 98,768 86,519 62,809 -- (90,388) 157,708
restructuring and divestitures, and loss on 1994 88,070 77,800 76,485 (100,416) (88,409) 53,530
formation of JV and other Raynet items 1993 64,334 80,869 87,191 (88,946) (77,419) 66,029
---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) including provision 1995 98,768 86,519 38,909 -- (122,420) 101,776
for restructuring and divestitures, and loss 1994 88,070 77,800 76,485 (100,416) (88,409) 53,530
on formation of JV and other Raynet items 1993 64,334 80,869 87,191 (88,946) (77,419) 66,029
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, 1995 -- -- -- -- -- (270)
extraordinary item, and changes 1994 -- -- -- -- -- 33,745
in accounting principles 1993 -- -- -- -- -- 39,584
---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 1995 448,858 323,109 261,724 -- 421,054 1,454,745
1994 381,863 300,320 290,591 109,544 316,697 1,399,015
1993 341,578 279,367 275,100 79,630 356,595 1,332,270
---------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 1995 37,179 22,515 20,802 -- 13,545 94,041
1994 33,211 20,415 26,967 10,758 12,705 104,056
1993 17,508 14,758 24,411 11,036 21,832 89,545
---------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 1995 27,020 16,456 19,873 -- 11,449 74,798
1994 24,672 16,715 17,795 14,806 12,277 86,265
1993 23,531 14,030 20,687 10,259 12,136 80,643
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Revenues between segments are immaterial.
45
<PAGE> 27
================================================================================
COMMITMENTS
Total rental expense was $35 million in 1995, and $39 million in both 1994 and
1993. The company had commitments at June 30, 1995, to expend approximately $15
million for the construction or acquisition of additional property, plant, and
equipment. Annual future minimum lease payments at June 30, 1995, under
noncancelable operating leases, are as follows: 1996--$27 million; 1997--$20
million; 1998--$16 million; 1999--$11 million; 2000--$11 million; and
thereafter--$64 million.
================================================================================
CONTINGENCIES
The company has been named, among others, as a potentially responsible party
("PRP") in administrative proceedings alleging that it may be liable for the
costs of correcting environmental conditions at certain hazardous waste sites.
At all of the sites, the company is alleged to be a de minimis generator of
hazardous wastes, and the company believes that it has limited or no liability
for cleanup costs at these sites. The company has also been notified by a state
environmental agency that it may be required to investigate the need for
remedial work at one of its manufacturing sites. The company is currently
conducting such investigations on a voluntary basis. The company and its
subsidiaries have also been named as a defendant, along with sixteen other
corporate and governmental codefendants, in a private cost recovery for
environmental cleanup expenses at the West Contra Costa County Landfill in
Richmond, California. On August 4, 1995, the company's and other defendants'
motion for judgment on the pleadings was granted by the District Court, striking
the plaintiff's claim that the company and the other defendants were jointly and
severally liable for response costs at the site. As a result, the company's
potential liability, if any, for response costs at the site would be based on
the company's disposal of wastes at the site. The company believes its wastes
constitute less than 2% of the total amount of wastes disposed of at the site.
Additionally, the company and its subsidiaries have been named as
defendants in lawsuits arising from various commercial matters, including
product liability. The principal product liability litigation involves a
variety of claims arising from the company's heat-tracing and freeze-protection
products. The only such action in which material damages are alleged seeks in
excess of $25 million, but the claim has not progressed sufficiently for the
company to estimate a range of possible loss, if any. The company intends to
defend itself vigorously in these matters. The company's experience to date is
that losses, if any, from such claims have not had, nor are they expected to
have, a material effect on the company's financial position or results of
operations. The company maintains insurance to cover product liability claims.
In the second quarter of 1992, the company and its insurer reached
settlement with the plaintiffs in a class action securities suit. The
settlement totaled $19.5 million, which was funded $8.25 million by the company
and $11.25 million by its insurer. The company expects to recover a portion of
its funding, either through litigation or when a definitive agreement is
reached with its insurer, and has filed suit against its insurer to resolve
this issue. Recovery, if any, will be recorded when received.
Legal proceedings tend to be unpredictable and costly. Based on currently
available information, however, management believes that the resolution of
pending claims, regulatory inquiries, and legal proceedings will not have a
material adverse effect on the company's operating results or financial
position.
46
<PAGE> 28
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED)
=================================================================================================================================
=================================================================================================================================
QUARTER ENDED (in thousands except share data) SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1995:(a)
Revenues $368,145(b) $382,494 $368,784 $411,150
Gross profit 185,286(b) 197,846 184,718 204,157
Provision for restructuring and divestitures 23,900 -- -- --
Loss on formation of Ericsson Raynet joint venture
and other Raynet items 31,723(b) (423) 931 (199)
(Loss) income before income taxes, extraordinary
item, and change in accounting principle (45,638) 31,134 18,562 (4,328)
(Loss) income before extraordinary item and
change in accounting principle (48,328) 19,999 10,896 (4,015)
Extraordinary item--(loss) adjustment related to
early retirement of debt, net of $0 income taxes (7,074) 756 -- --
Cumulative effect of change in accounting principle,
net of $0 income taxes (1,477) -- -- --
Net (loss) income (56,879) 20,755 10,896 (4,015)
---------------------------------------------------------------------------------------------------------------------------------
Per share data:
(Loss) earnings per common share:
(Loss) income before extraordinary item and
change in accounting principle $ (1.12) $ 0.45 $ 0.25 $ (0.09)
Extraordinary item (0.16) 0.02 -- --
Change in accounting principle (0.04) -- -- --
-------- -------- -------- --------
Net (loss) income $ (1.32) $ 0.47 $ 0.25 $ (0.09)
-------- -------- -------- --------
Cash dividends per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08
Price range of Common Stock(c) 35 1/8 - 41 7/8 32 3/8 - 42 3/8 34 1/4 - 41 3/8 32 1/2 - 41 1/4
=================================================================================================================================
FISCAL 1994:
Revenues $355,432 $353,835 $361,278 $390,987
Gross profit 171,702 165,851 165,769 178,390
Income before income taxes 18,317 4,731 7,395 3,302
Net income (loss) 6,411 1,656 1,066 (7,454)
---------------------------------------------------------------------------------------------------------------------------------
Per share data:
Net income (loss) per common share $ 0.15 $ 0.04 $ 0.02 $ (0.17)
Cash dividends per common share 0.08 0.08 0.08 0.08
Price range of Common Stock(c) 34 1/8 - 44 3/8 35 1/4 - 43 35 3/8 - 40 3/4 33 1/4 - 38 3/4
=================================================================================================================================
</TABLE>
(a) Raynet Corporation and subsidiaries' results are presented on the equity
basis of accounting in fiscal 1995 versus consolidated in fiscal 1994.
(b) Reflects restatement of Raynet Corporation and subsidiaries' results to
the equity basis of accounting.
(c) The price range of Common Stock is as reported on the New York Stock
Exchange composite tape.
Raychem Corporation Common Stock is listed on the New York Stock Exchange. The
number of stockholders as of August 21, 1995, was 6,387. Dividends have been
paid quarterly since the second quarter of fiscal 1978. The closing price of the
company's Common Stock on the New York Stock Exchange composite tape on August
21, 1995, was $44 5/8 per share.
47
<PAGE> 29
<TABLE>
<CAPTION>
TEN-YEAR SUMMARY
===============================================================================================================================
===============================================================================================================================
<S> <C> <C> <C>
YEARS ENDED JUNE 30 (dollars in thousands except per share amounts)
1995 1994 1993
===============================================================================================================================
RAYCHEM CORPORATION Consolidated(a)
===============================================================================================================================
INCOME DATA
Revenues $1,530,573 $1,461,532 $1,385,730
------------------------------------------------
Provision for restructuring and divestitures $ 23,900 $ - $ -
------------------------------------------------
Loss on formation of Ericsson Raynet joint venture and other Raynet items $ 32,032 $ - $ -
------------------------------------------------
Equity in net loss of Ericsson Raynet $ 85,946 $ - $ -
------------------------------------------------
(Loss) income before income taxes, extraordinary item,
and changes in accounting principles $ (270) $ 33,745 $ 39,584
------------------------------------------------
Net (loss) income $ (29,243) $ 1,679 $ 9,625
===============================================================================================================================
SHARE DATA
(Loss) earnings per common share $ (0.67) $ 0.04 $ 0.23
------------------------------------------------
Cash dividends per common share $ 0.32 $ 0.32 $ 0.32
------------------------------------------------
Cash dividends per Series B share $ - $ - $ -
------------------------------------------------
Weighted average number of shares outstanding 43,538,028 43,290,797 42,232,289
===============================================================================================================================
BALANCE SHEET DATA
Total assets $1,454,745 $1,399,015 $1,332,270
------------------------------------------------
Long-term debt $ 263,552 $ 244,681 $ 233,853
------------------------------------------------
Total debt $ 293,226 $ 275,548 $ 275,562
------------------------------------------------
Stockholders' equity $ 749,658 $ 732,924 $ 689,504
------------------------------------------------
(Decrease) increase in debt net of cash $ (22,299) $ 55,842 $ 32,715
===============================================================================================================================
OTHER SIGNIFICANT MEASURES
Gross profit as a percent of product sales 50.5 % 46.7 % 48.2 %
------------------------------------------------
Research and development expense as a percent of revenues 7.8 % 9.3 % 9.3 %
------------------------------------------------
Selling, general, and administrative expense as a percent of revenues 32.4 % 33.6 % 34.6 %
------------------------------------------------
Net debt as a percent of stockholders' equity 23.4 % 26.9 % 20.5 %
------------------------------------------------
Number of employees 9,496 10,769 10,772
------------------------------------------------
Revenues per average number of employees $ 151 $ 136 $ 126
===============================================================================================================================
RAYNET CORPORATION(f)
===============================================================================================================================
Revenues $ - $ 57,784 $ 9,671
------------------------------------------------
Net (loss) income $ - $ (102,993) $ (92,551)
===============================================================================================================================
</TABLE>
(a) Raynet Corporation and subsidiaries' results are presented on the equity
basis of accounting in 1995 versus consolidated in prior years.
(b) Restated to reflect reclassification of royalty and licensing income from
"other expense, net" to "revenues."
(c) Reflects reclassification of litigation settlement to "other expense, net."
(d) Restated to reflect the three-for-one stock split effective on November 2,
1987.
(e) Cash exceeded debt at June 30.
(f) Raynet Corporation was incorporated in 1988.
48
<PAGE> 30
TEN-YEAR SUMMARY
<TABLE>
<CAPTION>
============================================================================================================
============================================================================================================
<S> <C> <C>
YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1992 1991
============================================================================================================
RAYCHEM CORPORATION Consolidated(a)
============================================================================================================
INCOME DATA
Revenues $1,301,601 (b) $1,250,772 (b)
-----------------------------
Provision for restructuring and divestitures $ 43,300 $ 3,697
-----------------------------
Loss on formation of Ericsson Raynet joint venture and other Raynet items $ - $ -
-----------------------------
Equity in net loss of Ericsson Raynet $ - $ -
-----------------------------
(Loss) income before income taxes, extraordinary item,
and changes in accounting principles $ 12,585 (c) $ (3,109)
-----------------------------
Net (loss) income $ (24,808) $ (23,429)
============================================================================================================
SHARE DATA
(Loss) earnings per common share $ (0.64) $ (0.63)
-----------------------------
Cash dividends per common share $ 0.32 $ 0.3
-----------------------------
Cash dividends per Series B share $ - $ -
-----------------------------
Weighted average number of shares outstanding 39,030,049 37,134,161
============================================================================================================
BALANCE SHEET DATA
Total assets $1,392,606 $1,234,860
-----------------------------
Long-term debt $ 229,768 $ 233,347
-----------------------------
Total debt $ 257,763 $ 265,340
-----------------------------
Stockholders' equity $ 715,188 $ 651,973
-----------------------------
(Decrease) increase in debt net of cash $ (57,610) $ 90,589
============================================================================================================
OTHER SIGNIFICANT MEASURES
Gross profit as a percent of product sales 48.2 % 48.5 %
-----------------------------
Research and development expense as a percent of revenues 10.8 % 11.2 %
-----------------------------
Selling, general, and administrative expense as a percent of revenues 33.6 % 35.8 %
-----------------------------
Net debt as a percent of stockholders' equity 15.2 % 25.5 %
-----------------------------
Number of employees 11,187 11,406
-----------------------------
Revenues per average number of employees $ 115 $ 111
============================================================================================================
RAYNET CORPORATION(f)
============================================================================================================
Revenues $ 16,594 $ 11,500
-----------------------------
Net (loss) income $ (89,334) $ (73,959)
============================================================================================================
<CAPTION>
============================================================================================================
<S> <C> <C>
YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1990 1989
============================================================================================================
RAYCHEM CORPORATION Consolidated(a)
============================================================================================================
INCOME DATA
Revenues $1,114,713 (b) $1,083,028
-----------------------------
Provision for restructuring and divestitures $ 90,000 $ -
-----------------------------
Loss on formation of Ericsson Raynet joint venture and other Raynet items $ - $ -
-----------------------------
Equity in net loss of Ericsson Raynet $ - $ -
-----------------------------
(Loss) income before income taxes, extraordinary item,
and changes in accounting principles $ (86,261) $ 63,767
-----------------------------
Net (loss) income $ (111,398) $ 36,347
============================================================================================================
SHARE DATA
(Loss) earnings per common share $ (3.12) $ 1.04
-----------------------------
Cash dividends per common share $ 0.32 $ 0.30
-----------------------------
Cash dividends per Series B share $ - $ 0.01
-----------------------------
Weighted average number of shares outstanding 35,708,523 34,928,935
============================================================================================================
BALANCE SHEET DATA
Total assets $1,270,834 $1,172,783
-----------------------------
Long-term debt $ 31,087 $ 29,029
-----------------------------
Total debt $ 212,954 $ 130,294
-----------------------------
Stockholders' equity $ 690,467 $ 734,286
-----------------------------
(Decrease) increase in debt net of cash $ 98,633 $ (19,132)
-----------------------------
============================================================================================================
OTHER SIGNIFICANT MEASURES
Gross profit as a percent of product sales 49.6 % 52.8 %
-----------------------------
Research and development expense as a percent of revenues 11.0 % 11.1 %
-----------------------------
Selling, general, and administrative expense as a percent of revenues 37.5 % 36.7 %
-----------------------------
Net debt as a percent of stockholders' equity 11.0 % (e)
-----------------------------
Number of employees 11,065 11,451
-----------------------------
Revenues per average number of employees $ 99 $ 97
============================================================================================================
RAYNET CORPORATION(f)
Revenues $ 7,625 $ 2,960
-----------------------------
Net (loss) income $ (64,484) $ (54,307)
============================================================================================================
<CAPTION>
==============================================================================================================================
<S> <C> <C>
YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1988 1987 1986
==============================================================================================================================
RAYCHEM CORPORATION Consolidated(a)
==============================================================================================================================
INCOME DATA
Revenues $1,094,733 $ 944,434 $ 797,632
-----------------------------------------------
Provision for restructuring and divestitures $ - $ - $ -
-----------------------------------------------
Loss on formation of Ericsson Raynet joint venture and other Raynet items $ - $ - $ -
-----------------------------------------------
Equity in net loss of Ericsson Raynet $ - $ - $ -
-----------------------------------------------
(Loss) income before income taxes, extraordinary item,
and changes in accounting principles $ 169,304 $ 100,821 $ 65,490
-----------------------------------------------
Net (loss) income $ 125,285 $ 73,599 $ 48,790
==============================================================================================================================
SHARE DATA
(Loss) earnings per common share $ 3.69 $ 2.25 (d) $ 1.55 (d)
-----------------------------------------------
Cash dividends per common share $ 0.22 $ 0.15 (d) $ 0.15 (d)
-----------------------------------------------
Cash dividends per Series B share $ 0.03 $ 0.02 (d) $ 0.02 (d)
-----------------------------------------------
Weighted average number of shares outstanding 33,979,365 32,738,442 (d) 31,508,283 (d)
==============================================================================================================================
BALANCE SHEET DATA
Total assets $1,148,975 $ 926,920 $ 785,592
-----------------------------------------------
Long-term debt $ 35,458 $ 22,377 $ 54,088
-----------------------------------------------
Total debt $ 129,246 $ 132,409 $ 149,603
-----------------------------------------------
Stockholders' equity $ 722,155 $ 570,946 $ 452,464
-----------------------------------------------
(Decrease) increase in debt net of cash $ (80,857) $ (57,859) $ 4,921
==============================================================================================================================
OTHER SIGNIFICANT MEASURES
Gross profit as a percent of product sales 54.3 % 52.2 % 53.3 %
-----------------------------------------------
Research and development expense as a percent of revenues 7.7 % 7.3 % 8.3 %
-----------------------------------------------
Selling, general, and administrative expense as a percent of revenues 32.8 % 33.2 % 34.5 %
-----------------------------------------------
Net debt as a percent of stockholders' equity (e) 13.5 % 29.9 %
-----------------------------------------------
Number of employees 10,909 9,899 9,928
-----------------------------------------------
Revenues per average number of employees $ 105 $ 95 $ 82
==============================================================================================================================
RAYNET CORPORATION(f)
Revenues $ 25,160 $ - $ -
-----------------------------------------------
Net (loss) income $ 2,562 $ - $ -
==============================================================================================================================
</TABLE>
49
<PAGE> 31
EXHIBIT 13 APPENDIX
OMITTED GRAPHIC MATERIAL
The following graphic material, included in the original paper format, has been
excluded from the electronic filing of the 1995 Annual Report (Exhibit 13 to
this filing). Item (a) appears in the Note entitled "Worldwide Operations" of
the 1995 Annual Report, and items (b) through (g) appear in the section entitled
"Financial Review" of the 1995 Annual Report.
(a) 1995 REVENUES BY CUSTOMER LOCATION
A proportional pie chart (in millions) depicting: U.S./Canada $510;
Europe $613; Asia $255; and Rest of World $153.
(b) "ONGOING" PRETAX INCOME (excludes Raynet)
A bar chart (in millions) depicting: $136 in 1993; $143 in 1994; and
$146 in 1995.
(c) GROSS PROFIT AS A PERCENT OF REVENUES (excludes Raynet)
A bar chart (in percent) depicting: 50 in 1993; 50 in 1994; and 50 in
1995.
(d) RESEARCH AND DEVELOPMENT EXPENSE AS A PERCENT OF REVENUES (excludes
Raynet)
A bar chart (in percent) depicting: 6 in 1993; 7 in 1994; and 8 in
1995.
(e) SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE AS A PERCENT OF REVENUES
(excludes Raynet)
A bar chart (in percent) depicting: 32 in 1993; 32 in 1994; and 32 in
1995.
(f) INVENTORY DAYS REACH (excludes Raynet)
A line graph depicting in number of days: 117 in 1992; 114 in 1993; and
109 in 1995.
(g) DAYS SALES OUTSTANDING (excludes Raynet)
A line graph depicting in number of days: 54 in 1993; 65 in 1994; and
61 in 1995.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY NAME ORGANIZED UNDER
THE LAWS OF
--------------------------------------------------------------------------------------------------------------
<S> <C>
Compagnie Francaise des Isolants (CFI) . . . . . . . . . . . . . . . . . . . . . France
Elo TouchSystems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tennessee
K.K. Raychem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan
Raychem AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland
Raychem Aktiebolag . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden
Raychem A/S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denmark
Raychem A/S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Norway
Raychem (Australia) Proprietary, Ltd . . . . . . . . . . . . . . . . . . . . . . Australia (New South Wales)
Raychem Canada Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada
Raychem (Delaware) Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Raychem DISC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California
Raychem Gesellschaft m.b.H. . . . . . . . . . . . . . . . . . . . . . . . . . . Austria
Raychem GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany
Raychem Industries N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium
Raychem International Corporation . . . . . . . . . . . . . . . . . . . . . . . California
Raychem International. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cayman Islands, B.W. I.
Raychem International Manufacturing Corporation . . . . . . . . . . . . . . . . California
Raychem Korea Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Korea
Raychem Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom
Raychem (Nederland) Besloten Vennootschap. . . . . . . . . . . . . . . . . . . . The Netherlands
Raychem N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium
Raychem OY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland
Raychem Produtos Irradiados Limitada . . . . . . . . . . . . . . . . . . . . . . Brazil
Raychem Puerto Rico Corporation. . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Raychem RPG Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . India
Raychem S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France
Raychem, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain
Raychem S.A. Industrial y Comercial . . . . . . . . . . . . . . . . . . . . . . Argentina
Raychem Saudi Arabia Limited . . . . . . . . . . . . . . . . . . . . . . . . . . Saudi Arabia
Raychem Shanghai Cable Accessories Ltd . . . . . . . . . . . . . . . . . . . . . People's Republic of China
Raychem Singapore Pte. Limited . . . . . . . . . . . . . . . . . . . . . . . . . Singapore
Raychem S.p.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy
Raychem Taiwan Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan
Raychem Technologies Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cyprus
Raychem Tecnologias, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . Mexico
Raychem Ventures, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California
RTP Development Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
SHG Strahlenchemie Holding GmbH . . . . . . . . . . . . . . . . . . . . . . . . Germany
Sigmaform France S.A.R.L. . . . . . . . . . . . . . . . . . . . . . . . . . . . France
Sigmaform GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany
Sigmaform U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom
Walter Rose GmbH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-15116, No. 33-15117, No. 33-23856, No. 33-29215,
No. 33-29216, No. 33-37579, No. 33-37580, No. 33-45986, No. 33-50737, No.
33-58437, No. 33-58869, No. 33-58871, and No. 33-59600) of Raychem Corporation
of our report dated July 18, 1995, appearing on page 27 of Exhibit 13 which is
included in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement
Schedule II, listed in Item 14(a)(2) of this Form 10-K. We also consent to the
incorporation by reference of our reports on the separate financial statements
of Raynet International, Inc. as of and for the period ended November 16, 1994
and on the financial statements of Ericsson Raynet as of and for the period
ended June 30, 1995, which appear in Item 14(a)(2) of this Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
September 18, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED JUNE 30, 1995,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000082206
<NAME> RAYCHEM CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 118,067
<SECURITIES> 0
<RECEIVABLES> 315,167
<ALLOWANCES> 10,348
<INVENTORY> 233,700
<CURRENT-ASSETS> 779,608
<PP&E> 1,117,939
<DEPRECIATION> 590,520
<TOTAL-ASSETS> 1,454,745
<CURRENT-LIABILITIES> 303,198
<BONDS> 263,552
<COMMON> 43,897
0
0
<OTHER-SE> 705,761
<TOTAL-LIABILITY-AND-EQUITY> 1,454,745
<SALES> 1,527,260
<TOTAL-REVENUES> 1,530,573
<CGS> 756,552
<TOTAL-COSTS> 758,566
<OTHER-EXPENSES> 118,762
<LOSS-PROVISION> 2,857
<INTEREST-EXPENSE> 13,046
<INCOME-PRETAX> (270)
<INCOME-TAX> 21,178
<INCOME-CONTINUING> (21,448)
<DISCONTINUED> 0
<EXTRAORDINARY> (6,318)
<CHANGES> (1,477)
<NET-INCOME> (29,243)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
RAYCHEM CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1995
Participating Subsidiaries in the Amended and Restated 1984
Employee Stock Purchase Plan for United States employees and
employees of certain domestic and foreign subsidiaries.
The following subsidiaries of Raychem Corporation have been designated by
the Administrator to participate in the Plan:
Compagnie Francaise des Isolants S.A. (CFI)
Elo Touch Systems, Inc.
K.K. Raychem
Raychem AG
Raychem A/S (Denmark)
Raychem (Australia) Proprietary, Ltd.
Raychem Gesellschaft m.b.H.
Raychem GmbH
Raychem (H.K.) Limited
Raychem International Corporation
Raychem Korea Ltd
Raychem Limited
Raychem (Nederland) B.V.
Raychem New Zealand Limited
Raychem N.V.
Raychem OY
Raychem S.A.
Raychem, S.A.
Raychem Saudi Arabia Limited
Raychem Singapore Pte. Limited
Raychem S.p.A.
Raychem Taiwan Limited
Remtek International Corporation
Sigmaform France S.A.R.L.
Sigmaform GmbH
Sigmaform (U.K.) Limited
Walter Rose GmbH
<PAGE> 1
EXHIBIT 99(b)
RAYCHEM CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1995
Participating Subsidiaries in the 1985 Supplemental Employee
Stock Purchase Plan for employees of certain subsidiaries.
The following subsidiaries of Raychem Corporation have been designated by
the Administrator to participate in the Plan:
Raychem Ltd.
Raychem Aktiebolag
Raychem A/S (Norway)
Raychem Canada Limited
Raychem Industrial y Comercial Limitada
Raychem International (Ireland)
Raychem Produtos Irradiados Limitada
Raychem S.A. Industrial y Comercial
Raychem Tecnologias, S.A. de C.V.
Raychem Technologies Limited
Raychem de Venezuela, C.A.
