<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 2-15299
RAYCHEM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-1369731
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 CONSTITUTION DRIVE, MENLO PARK, CA 94025-1164
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 361-3333
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of April 27, 1999, the registrant had outstanding 77,284,866 shares of Common
Stock, $1.00 par value.
================================================================================
<PAGE> 2
RAYCHEM CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Information
Consolidated Condensed Statement of Income for
the three and nine months ended March 31, 1999 and 1998 1
Consolidated Condensed Balance Sheet at
March 31, 1999 and June 30, 1998 2
Consolidated Condensed Statement of Cash Flows for
the nine months ended March 31, 1999 and 1998 3
Notes to Consolidated Condensed Financial
Statements 4
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 25
Item 5: Other Information 26
Item 6: Exhibits and Reports on Form 8-K 26
SIGNATURES 27
</TABLE>
<PAGE> 3
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(in thousands except per share data) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 444,931 $ 445,162 $1,343,022 $1,367,310
Cost of goods sold 244,612 232,558 725,944 696,640
Research and development expense 25,579 26,091 74,482 81,603
Selling, general, and administrative expense 122,258 117,776 368,664 353,816
Loss on minority investment -- 11,973 -- 11,973
Interest expense, net 7,936 3,831 19,919 9,501
Other (income) expense, net (1,867) 179 123 4,381
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 46,413 52,754 153,890 209,396
Provision for income taxes 13,166 13,189 50,783 52,349
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 33,247 $ 39,565 $ 103,107 $ 157,047
================================================================================================================================
Earnings per share--basic $ 0.43 $ 0.47 $ 1.31 $ 1.85
Average number of shares outstanding--basic 77,190 84,143 78,891 84,952
- --------------------------------------------------------------------------------------------------------------------------------
Earnings per share--assuming dilution $ 0.43 $ 0.46 $ 1.29 $ 1.81
Average number of shares outstanding--assuming dilution 77,766 85,878 79,758 86,970
- --------------------------------------------------------------------------------------------------------------------------------
Dividends per share $ 0.09 $ 0.08 $ 0.25 $ 0.22
================================================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE> 4
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(UNAUDITED)
(in thousands except share data) MARCH 31, 1999 June 30, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 210,985 $ 92,667
Accounts receivable, net 369,775 325,039
Inventories:
Raw materials 80,587 90,874
Work in process 49,411 64,143
Finished goods 126,871 123,931
--------------------------------
Total inventories 256,869 278,948
Prepaid taxes 35,972 38,350
Other current assets 113,329 110,593
- ------------------------------------------------------------------------------------------------------
Total current assets 986,930 845,597
- ------------------------------------------------------------------------------------------------------
Property, plant, and equipment 1,200,300 1,147,923
Less accumulated depreciation and amortization 701,692 668,737
- ------------------------------------------------------------------------------------------------------
Net property, plant, and equipment 498,608 479,186
- ------------------------------------------------------------------------------------------------------
Deferred tax assets 186,143 186,595
Other assets 129,480 107,977
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,801,161 $ 1,619,355
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 49,033 $ 181,284
Accounts payable 83,673 82,901
Compensation and benefits 69,269 56,878
Other accrued liabilities 91,109 88,914
Income taxes 68,064 62,871
Current maturities of long-term debt 10,363 6,574
- ------------------------------------------------------------------------------------------------------
Total current liabilities 371,511 479,422
- ------------------------------------------------------------------------------------------------------
Long-term debt 547,903 151,488
- ------------------------------------------------------------------------------------------------------
Deferred tax liabilities 24,035 27,762
- ------------------------------------------------------------------------------------------------------
Other long-term liabilities 96,392 92,257
- ------------------------------------------------------------------------------------------------------
Minority interests 10,239 8,784
- ------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred Stock, $1.00 par value
Authorized: 15,000,000 shares; Issued: none -- --
Common Stock, $1.00 par value
Authorized: 150,000,000 shares
Issued: 90,015,261 and 90,028,103 shares, respectively 90,015 90,028
Additional contributed capital 425,051 425,477
Retained earnings 734,829 665,753
Accumulated other comprehensive losses (34,251) (26,778)
Treasury Stock, at cost (12,778,879 and 7,144,399
shares, respectively) (459,987) (290,320)
Other (4,576) (4,518)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 751,081 859,642
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,801,161 $ 1,619,355
======================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 5
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31, 1999 1998
(in thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 103,107 $ 157,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Payments for restructurings and divestitures (12,242) (17,715)
Loss on minority investment -- 11,973
Net gain on sale of intellectual property and other assets (875) (896)
Depreciation and amortization 66,331 61,049
Deferred income tax provision (benefit) 3,727 (6,290)
Changes in certain assets and liabilities, net of effects from
acquisitions, restructurings and divestitures:
Accounts receivable (33,172) (15,828)
Inventories 26,667 (38,563)
Accounts payable and accrued liabilities 25,038 (16,152)
Income taxes 4,269 27,518
Other assets and liabilities 3,746 2,592
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 186,596 164,735
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in property, plant, and equipment (79,135) (77,133)
Disposition of property, plant, and equipment 784 8,347
Cost of acquisitions, net of cash acquired (43,791) --
Investments in and advances to affiliated companies -- (15,300)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (122,142) (84,086)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (payments of) proceeds from short-term debt (134,769) 101,367
Proceeds from long-term debt 458,358 2,450
Payments of long-term debt (66,396) (6,651)
Repurchases of Common Stock (210,355) (192,033)
Issuance of Common Stock under employee benefit plans 25,793 47,348
Proceeds from repayments of stockholder notes receivable 398 431
Cash dividends (19,710) (18,752)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 53,319 (65,840)
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents 545 (4,489)
- ---------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 118,318 10,320
Cash and cash equivalents at beginning of period 92,667 86,583
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 210,985 $ 96,903
===============================================================================================================
Supplemental Disclosures
Cash paid for:
Interest (net of amounts capitalized) $ 15,127 $ 13,162
Income taxes (net of refunds) 42,876 31,232
===============================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 6
RAYCHEM CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
STATEMENT OF ACCOUNTING PRESENTATION
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements include all adjustments, including normal recurring
accruals, necessary to present fairly the results of operations for the three
and nine months ended March 31, 1999 and 1998, the financial position as of
March 31, 1999, and the cash flows for the nine months ended March 31, 1999 and
1998. The June 30, 1998 balance sheet is derived from the consolidated financial
statements included in the company's Annual Report on Form 10-K for the year
ended June 30, 1998. The results of operations for the three and nine months
ended March 31, 1999, are not necessarily indicative of the results to be
expected for the full year. Certain prior-period amounts have been reclassified
to conform with the 1999 financial statement presentation.
BUSINESS SEGMENTS
Revenues and operating income by business segment were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Electronics OEM components $ 214,781 $ 208,441 $ 626,904 $ 611,678
Telecommunications, energy
and industrial 230,150 236,721 716,118 755,632
- -------------------------------------------------------------------------------------------------------------
Total revenues $ 444,931 $ 445,162 $ 1,343,022 $ 1,367,310
=============================================================================================================
OPERATING INCOME
Electronics OEM components $ 33,554 $ 37,032 $ 96,021 $ 116,939
Telecommunications, energy
and industrial 33,520 38,661 121,475 164,695
Corporate group expenses (14,592) (18,929) (43,564) (58,356)
- -------------------------------------------------------------------------------------------------------------
Total operating income $ 52,482 $ 56,764 $ 173,932 $ 223,278
=============================================================================================================
</TABLE>
For discussion of segment revenues and operating income, see the section
entitled "Business Segments" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Report on Form 10-Q.
4
<PAGE> 7
EARNINGS PER SHARE
The following table presents the computation of earnings per share--basic and
earnings per share--assuming dilution.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(in thousands except per share data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income available to stockholders (numerator) $ 33,247 $ 39,565 $103,107 $157,047
=======================================================================================================================
Shares calculation (denominator):
Average shares outstanding--basic 77,190 84,143 78,891 84,952
Effect of dilutive securities:
Potential Common Stock relating to stock options
and employee stock purchase plan 576 1,735 867 2,018
- -----------------------------------------------------------------------------------------------------------------------
Average shares outstanding--assuming dilution 77,766 85,878 79,758 86,970
=======================================================================================================================
Earnings per share--basic $ 0.43 $ 0.47 $ 1.31 $ 1.85
Earnings per share--assuming dilution $ 0.43 $ 0.46 $ 1.29 $ 1.81
=======================================================================================================================
</TABLE>
Options to purchase 5,271,000 shares of Common Stock at prices ranging from
$24.63 to $47.94 per share were outstanding during the quarter ended March 31,
1999, but were not included in the computation of earnings per share--assuming
dilution because the options' exercise prices were greater than the average
market price of the common shares. These options expire between April 2006 and
February 2009.
FINANCIAL INSTRUMENTS
Net gains from forward exchange contracts used to cover receivables and payables
totaled $0.4 million and $0.1 million for the three months ended March 31, 1999
and 1998, respectively. Net gains and losses from forward exchange contracts
totaled a $1.7 million loss and a $7.3 million gain for the nine months ended
March 31, 1999 and 1998, respectively. The company incurred a total net foreign
exchange gain of $0.5 million and a net loss of $0.1 million for the three
months ended March 31, 1999 and 1998, respectively. The company incurred a total
net foreign exchange gain of $0.9 million and a net loss of $0.7 million for the
nine months ended March 31, 1999 and 1998, respectively. These realized and
unrealized gains and losses are included in "Other (income) expense, net." The
total amount of foreign exchange exposure covered was $85 million at March 31,
1999. The company covers exposures that arise from trade and intercompany
receivables and payables, intercompany loans in non-functional currencies, and
net monetary assets in certain foreign countries with the U.S. dollar as
functional currency. These exposures are primarily in Japanese yen (50% of net
contract value), Euro (16%), and Saudi riyals (7%).
5
<PAGE> 8
The company does not cover non-functional currency translation and transaction
exposures in countries whose currencies do not have a liquid, cost-effective
forward market available for hedging, or where the company's exposed position
and the perceived currency environment render a hedge inadvisable. Such
exposures at March 31, 1999, included $10 million in net receivables and
payables in non-functional currencies and none in net monetary assets in foreign
countries with the U.S. dollar as functional currency.
MARKETABLE SECURITIES
Marketable securities are classified as available for sale and carried at fair
value as determined by quoted market prices. The aggregate fair value of
marketable securities held at March 31, 1999, was $5.3 million. Gross unrealized
holding losses were $0.1 million as of March 31, 1999, and are included, net of
tax, as a component of "Accumulated other comprehensive losses."
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MARCH 31, June 30,
(in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
7.20% notes due 2008 $398,756 $ --
1.49% to 9.66% notes payable to banks, and
other debt requiring payments in varying
amounts, through 2017 51,350 45,980
Secured debt requiring varying semiannual
payments from January 1997 through December 2006 (interest rate fluctuates
semiannually and was 5.04% and 5.64% at March 31, 1999 and June 30, 1998,
respectively) 108,160 112,082
- --------------------------------------------------------------------------------------------------------------
Total long-term debt 558,266 158,062
Less current maturities 10,363 6,574
- --------------------------------------------------------------------------------------------------------------
Long-term portion $547,903 $151,488
==============================================================================================================
</TABLE>
In October, 1998, the company issued notes in the amount of $400 million. The
notes mature on October 15, 2008, and bear interest at a rate of 7.20% per
annum. The interest rate on the notes may increase if, prior to October 23,
2002, either Moody's Investor Services, Inc. or Standard & Poor's Rating
Services reduces the rating of the notes to below investment grade. The company
used part of the net proceeds from the sale of the notes to repay borrowings of
$275 million outstanding under the company's $400 million revolving credit
facility and to finance the company's share repurchase program. The $400 million
revolving credit facility will remain available to the company until September
12, 2001.
6
<PAGE> 9
RESTRUCTURING AND DIVESTITURES
The company incurred a pretax restructuring charge of $28 million in the fourth
quarter of 1998 (the 1998 restructuring). The restructuring actions included
write-downs of inventory and machinery and equipment related to discontinued
products and operations, severance costs for the reorganization of certain
business segments, and severance costs associated with moving certain
manufacturing facilities to lower-cost locations. As a result of the 1998
restructuring, approximately 116 positions will be eliminated. As of March 31,
1999, 107 employees have separated from the company due to the 1998
restructuring. The company expects the majority of the 1998 restructuring
actions to be completed by the end of the current fiscal year. Certain actions,
such as the relocation of manufacturing facilities, may extend to the following
fiscal year.
The following table, which includes the 1998 restructuring as well as prior
restructurings, presents the company's restructuring reserves as of March 31,
1999:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
EMPLOYEE ASSET
(in thousands) COSTS WRITE-DOWNS LEASES OTHER TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve Balances,
June 30, 1998 $ 22,318 $ 13,062 $ 89 $ 3,348 $ 38,817
Cash payments (9,924) -- (89) (2,521) (12,534)
Non-cash items (793) (12,011) -- (571) (13,375)
- -------------------------------------------------------------------------------------------------------
RESERVE BALANCES,
MARCH 31, 1999 $ 11,601 $ 1,051 $ 0 $ 256 $ 12,908
=======================================================================================================
</TABLE>
ACQUISITION
On October 1, 1998, the company completed the acquisition of the
telecommunications business of Plasticos Mondragon S. A. (Mondragon) in Spain
for a cash purchase price of approximately $41 million. The Mondragon
telecommunications business manufactures and supplies components for connecting,
insulating, and protecting copper and fiber-optic telephone networks. The
Mondragon acquisition was accounted for using the purchase method of accounting
for business combinations. The excess of purchase price over the fair value of
the net assets acquired (goodwill) was approximately $34 million and is being
amortized on a straight-line basis over 15 years. The results of Mondragon are
included in the company's financial statements beginning as of October 1, 1998.
Pro forma adjustments giving effect to the Mondragon acquisition as if it had
occurred at the beginning of fiscal 1998 and 1999 would not have had a material
effect on the company's consolidated financial statements.
REPURCHASE OF COMMON STOCK
In July 1997, the board of directors authorized the company's management, at its
discretion, to repurchase up to $300 million of the company's stock during any
fiscal year. During the nine months ended March 31, 1999, the company
repurchased 6.8 million shares of its Common Stock for $210 million and reissued
1.2 million shares, leaving 12.8 million shares in treasury stock at March 31,
1999.
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<PAGE> 10
COMPREHENSIVE INCOME
In the first quarter of 1999, the company adopted and retroactively applied the
requirements of Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FAS 130). FAS 130 establishes standards for reporting and
displaying comprehensive income and its components in an annual financial
statement that is displayed with the same prominence as other financial
statements.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
- ------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 33,247 $ 39,565 $ 103,107 $ 157,047
Other comprehensive (loss) income:
Net change in unrealized (loss) gain on
available-for-sale securities (1,970) (75) (4,091) 2,811
Foreign currency translation adjustment (30,942) (5,867) (3,382) (20,702)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 335 $ 33,623 $ 95,634 $ 139,156
==================================================================================================================
</TABLE>
CONTINGENCIES
The company and its subsidiaries are parties to lawsuits or may in the future
become parties to lawsuits involving various types of commercial claims,
including, but not limited to, product liability, unfair competition, antitrust,
breach of contract, and intellectual property matters. Legal proceedings tend to
be unpredictable and costly and may be affected by events outside the control of
the company. The company maintains various levels of insurance to apply to
product liability and certain other claims in excess of deductibles. There is no
assurance that litigation will not have an adverse effect on the company's
financial position or results of operations. The company's major litigation
matters as of March 31, 1999, are described below.
On December 19, 1994, the company filed a complaint entitled Raychem Corporation
and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior
Court of the State of California, County of San Mateo, which alleged, among
other claims, misappropriation of trade secrets. On May 2, 1995, a complaint
entitled Bourns, Inc. v. Raychem Corporation was filed in the United States
District Court, Central District of California, alleging antitrust law
violations. Many of the claims asserted in the company's state action were
consolidated with Bourns' federal action against the company. On March 9, 1998,
this case was transferred from the Eastern Division of the Central District to
the Western Division of the Central District and reassigned to a new judge. The
trial for Bourns' action against the company commenced on June 16, 1998. During
the sixth week of the trial, due to the length of the proceeding, the Judge
bifurcated the company's trade secret action against Bourns for trial at a later
date. On August 10, 1998, the trial of Bourns' action against the company ended
with a jury verdict that awarded Bourns $64 million in damages. In September,
1998, the company filed motions with the court to set aside the jury's verdict,
to reduce the damages, and to ask for a new trial on the grounds that the
verdict is contrary to the evidence presented at trial and is incorrect as a
matter of law and that the jury's damage award bears no relationship to the
market segment to which the verdict was directed. On April 28, 1999, the court
entered an order denying the company's motion for judgment as a matter of law,
but granting the company's motion for a new trial limited to the issue of
damages on the grounds that the jury's award was excessive. The court's order
also confirmed that any damages awarded to Bourns must be limited solely to the
primary lithium battery market, and must be reduced to the extent necessary to
reflect the effects of the company's lawful competition in this market. In
addition to the new damages trial, the
8
<PAGE> 11
company intends to continue with the trial of its theft of trade secrets case
against Bourns. Under applicable U.S. antitrust law, damages awarded against the
company will be trebled. A successful antitrust plaintiff is also entitled to
recover certain fees and expenses. Following completion of the new damages and
the trade secrets trial, the company intends to appeal the decision of the court
denying the company's motion for judgment as a matter of law regarding the
antitrust issues. No new trial date has been set. Due to the foregoing, the
company has not accrued any liability with respect to this litigation.
Currently, the company's principal product liability litigation involves a
variety of claims arising from the company's heat-tracing and freeze-protection
products. The company's experience to date is that losses, if any, from such
claims have not had a material effect on the company's financial position or
results of operations. However, the company sells its products into applications
(such as electronic interconnection products for aerospace and automotive
markets) where product liability issues could be material.
The company is a defendant in a product liability case in the United States
District Court in Seattle, All Alaskan Seafoods, Inc., et al. v. Raychem
Corporation, Minnesota Mining and Manufacturing Corporation and Marine Electric,
Inc., et al. The action arises out of a cargo vessel fire allegedly caused by a
heat-tracing product. The plaintiffs in this case are seeking in excess of $150
million in damages. On November 21, 1997, the District Court granted the
company's motion to limit damages claimed by the plaintiffs to the value of the
cargo lost or destroyed and certain other incidental claims of crew members (now
alleged to be approximately $4 million) on account of the incident giving rise
to the plaintiffs' claims. The parties have stipulated to a dismissal (without
prejudice) of the remaining claims, so that plaintiffs may appeal the District
Court's decision to the Ninth Circuit Court of Appeals. Plaintiffs filed their
Notice of Appeal on May 26, 1998. The company believes that it has meritorious
defenses to the claims asserted in this case and intends to defend itself
vigorously in this matter.
On December 22, 1997, the company was joined, through a third party complaint
brought by defendant Herman Goldner Co., Inc., in an action entitled Zoological
Society of Philadelphia v. Barber-Coleman et al. in the Philadelphia County
Court of Common Pleas. This action is based on a fire at the Philadelphia Zoo in
December, 1995, which damaged the Zoo's House of Primates building and killed 23
of its primates. The complaint originally filed by the Zoological Society of
Philadelphia attributed the cause of the fire to a valve manufactured by
defendant Barber-Coleman and installed by the Herman Goldner Co. Herman Goldner
filed a third party complaint against the company, alleging that the company's
heating cable caused the fire. The Zoo's original claim in this action was the
subrogated claim of its insurer for $6 million. During the third quarter of
fiscal 1999, the Zoo has indicated an intent to pursue its uninsured loss, which
it claims will total approximately $16 million. The trial date has been set for
February 7, 2000. The company believes that it has meritorious defenses to the
claims asserted in this case and intends to defend itself vigorously in this
matter.
Four separate state actions based on essentially the same facts, alleging
wrongful distributor termination and antitrust claims, have been consolidated in
the Superior Court of San Mateo County, California, Unit Process Company, et al.
v. Raychem Corporation, et al. The dismissal in the United States District
Court, Northern District of California, of an action alleging essentially the
same facts was affirmed by the Ninth Circuit Court of Appeals in 1996. On
February 25, 1998, the Superior Court granted the Company's motion to dismiss
this lawsuit, with leave to the plaintiffs to amend certain of their claims. In
February, 1999, second amended complaints were filed by the plaintiffs in this
case. The company is evaluating the second amended complaints and has obtained
an extension of time to respond. The company believes that it has meritorious
defenses to the claims asserted in this case and intends to defend itself
vigorously in this matter.
9
<PAGE> 12
Additionally, the company has been named, among others, as a potentially
responsible party in judicial and administrative proceedings alleging that it
may be liable for the costs of correcting environmental conditions at certain
hazardous waste sites. The company believes that it does not have material
liability for cleanup costs at these sites.
10
<PAGE> 13
RAYCHEM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(in millions except per share data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 445 $ 445 $ 1,343 $ 1,367
- ------------------------------------------------------------------------------------------------
Pretax income $ 46 $ 53 $ 154 $ 209
Provision for income taxes 13 13 51 52
- ------------------------------------------------------------------------------------------------
Net income $ 33 $ 40 $ 103 $ 157
================================================================================================
Earnings per share--assuming dilution $ 0.43 $ 0.46 $ 1.29 $ 1.81
================================================================================================
Average number of shares outstanding--
assuming dilution 77.8 85.9 79.8 87.0
================================================================================================
</TABLE>
REVENUES
Revenues for the third quarter of 1999 were $445 million, unchanged from the
year-ago quarter. On a constant currency basis, revenues declined by 2%,
primarily due to price reductions and slower volume growth in some of the
company's business lines.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
(percentage change over prior-year period) MARCH 31, 1999 MARCH 31, 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in components of reported revenue:
Growth in volumes, net of
product mix changes(a) 3% 3%
Effect of price reductions(a) (5%) (5%)
- ----------------------------------------------------------------------------------------------------
Change in constant currency revenue (2%) (2%)
Effect of exchange rate changes 2% 0%
- ----------------------------------------------------------------------------------------------------
Change in reported revenue 0% (2%)
====================================================================================================
</TABLE>
(a)Management estimate.
Although pricing pressures are likely to continue, the company expects revenue
growth that should result in growth in the 5% to 8% range for the next fiscal
year.
On a constant currency basis, third-quarter revenues were up 8% in Asia and
essentially flat in Europe compared with the year-ago quarter. Revenues declined
by 5% in North America and by 7% in the rest of the world.
11
<PAGE> 14
GROSS PROFIT, OPERATING EXPENSES, AND PRETAX INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(percentage of revenues) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross profit 45% 48% 46% 49%
- -------------------------------------------------------------------------------------------------------
Selling, general, and administrative expense 27% 26% 27% 26%
- -------------------------------------------------------------------------------------------------------
Research and development expense 6% 6% 6% 6%
- -------------------------------------------------------------------------------------------------------
Pretax income 10% 12% 11% 15%
- -------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit as a percentage of revenues for the third quarter of 1999 decreased
to 45%, from 48% in the year-ago quarter. This decrease was primarily due to
sales price reductions in several product lines and a continued shift toward
product lines with lower margins.
Selling, general, and administrative expense (SG&A) as a percentage of revenues
increased nominally during the third quarter of 1999, as compared with the
year-ago period. On an absolute basis, quarter over quarter SG&A expense
remained relatively flat in constant currencies.
Pretax income as a percentage of revenues for the third quarter of 1999 declined
two percentage points versus the year-ago quarter. The primary causes of this
decline were the decrease in gross profits, the increase in SG&A, and higher
interest expense. Net interest expense for the third quarter of 1999 was $8
million compared with $4 million in the prior-year quarter. The increase was
primarily due to the increased level of borrowings outstanding during the
period. In addition, pretax income for the third quarter of 1998 included a
nonrecurring charge of $12 million ($9 million after tax), reflecting the
write-off of goodwill, cash advances, and other assets related to Raychem's
investment in Superconducting Core Technologies, Inc. (SCT), which ceased
commercial operations in early March 1998.
PROVISION FOR INCOME TAXES
The estimated annual effective tax rate for fiscal year 1999 was reduced to 33%
in the third quarter from 35% in the previous two quarters. This adjustment in
the fiscal year 1999 estimated annual effective tax rate resulted in the
inclusion of a catch-up reduction of $2 million in the current quarter's tax
provision. The adjustment in the tax rate was primarily attributable to lower
than expected earnings and a shift in the geographic distribution of profits.
The estimated annual effective tax rate for 1998 was 25% in the year-ago
quarter. The lower estimated annual effective tax rate in 1998 was attributable
primarily to recognition of a U.S. deferred tax benefit.
NET INCOME AND EPS
Net income for the third quarter of 1999 was $33 million ($0.43 per
share--assuming dilution), compared with net income of $40 million ($0.46 per
share--assuming dilution) in the year-ago quarter. The average number of shares
outstanding--assuming dilution, during the third quarter of 1999, decreased to
77.8 million from 85.9 million in the prior-year quarter, due to the company's
share repurchase program.
12
<PAGE> 15
BUSINESS SEGMENTS
During the fourth quarter of 1998, the company realigned its businesses by
combining the former telecommunications and energy networks segment and the
commercial and industrial infrastructure segment into the telecommunications,
energy and industrial business segment. The company's financial results are now
reported as two business segments, described below, and the corporate group.
ELECTRONICS OEM COMPONENTS
This business segment serves original equipment manufacturers (OEMs) in
transportation, defense, and a wide range of commercial electronics industries.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $215 $208 $627 $612
- --------------------------------------------------------------------------------------------------------
Constant currency revenue growth 1% 15% 2% 16%
- --------------------------------------------------------------------------------------------------------
Operating income $ 34 $ 37 $ 96 $117
- --------------------------------------------------------------------------------------------------------
</TABLE>
Third-quarter revenues for the electronics OEM components business segment were
$215 million, up 1% on a constant currency basis from the year-ago quarter,
reflecting a widespread slowdown in the electronics components industry.
Revenues from sales of interconnect products--including wire, cable,
heat-shrinkable tubing, marking systems, connectors, and other devices--were
$125 million, down 1% on a constant currency basis from the year-ago quarter.
Strong growth in sales to commercial aerospace customers was offset by weak
demand for electronic products. In addition, shipments to electronics components
distributors declined as they continued to reduce inventories.
Sales of circuit protection products were $57 million, down 4% on a constant
currency basis from the year-ago quarter. Strengthening demand from battery and
computer customers helped to push up unit volumes to a record annualized run
rate of 1.5 billion parts. A 10% increase in unit volumes from the strong
year-ago quarter was offset by a 13% decline in average selling prices,
reflecting overall electronics industry trends.
Elo TouchSystems' revenues grew to $32 million, up 19% on a constant currency
basis from the year-ago quarter, reflecting strong performance in Europe and
Asia due to growth in sales of touch products for point-of-sale and kiosk
applications.
The segment's operating income as a percentage of revenues in the third quarter
of 1999 was 16%, compared with 18% in the year-ago quarter. The reduction in
operating income as a percentage of revenues was primarily the result of pricing
pressures on electronics components, particularly for circuit protection
products.
13
<PAGE> 16
Segment revenues for the nine months ended March 31, 1999, were $627 million, up
2% on a constant currency basis from the same period in the prior year.
Increased unit volumes were partially offset by reductions in average selling
prices. The year-to-date operating income as a percentage of revenues was 15%,
compared with 19% in the prior-year period, primarily reflecting declines in
gross profits (resulting from price declines and mix changes) and increased SG&A
expense.
TELECOMMUNICATIONS, ENERGY AND INDUSTRIAL
This business segment serves operators of telecommunications, power, gas, and
water utilities; and industrial plants and pipelines.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $230 $ 237 $716 $756
- --------------------------------------------------------------------------------------------------------
Constant currency revenue (decline) growth (4%) 3% (5%) 7%
- --------------------------------------------------------------------------------------------------------
Operating income $ 34 $ 39 $121 $165
- --------------------------------------------------------------------------------------------------------
</TABLE>
Third-quarter revenues for the telecommunications, energy and industrial
business segment were $230 million, down 4% on a constant currency basis from
the year-ago quarter, reflecting generally weak industrial demand outside North
America.
Revenues from the sale of telecommunications products, including copper- and
fiber-based network accessories were $87 million, down 4% on a constant currency
basis from the year-ago quarter. Continuing double-digit growth in fiber-optic
components was offset by reduced demand for copper cable accessories.
Revenues for access network electronics (ANE) products were $27 million, down
20% on a constant currency basis over the prior-year quarter. Revenue growth was
impacted by the company's decision in 1998 to discontinue sales of ANE products
outside of North America, which represented revenues of approximately $4 million
for the third quarter of 1998. Revenues from sales of ANE products in North
America declined 11% when compared with a strong year-ago quarter. The company
expects strong ANE revenue growth in North America in the fourth quarter of
fiscal 1999, resulting in essentially flat ANE revenues for the year in this
region.
Revenues from sales of cable accessories for energy networks totaled $62
million, up 1% on a constant currency basis from the year-ago quarter. Sales
gains in Asia and North America were offset by declines in Eastern Europe and
Russia, where economic conditions contributed to sales declines.
Revenues from the sale of heat-tracing and corrosion-prevention products and
services were $55 million, up 2% on a constant currency basis from the year-ago
quarter. Improvements in heat-tracing sales were offset by sales declines in
corrosion prevention products due to a slowdown in oil industry projects.
The segment's operating income as a percentage of revenues in the third quarter
of 1999 was 15% compared with 16% in the year-ago quarter. The primary reason
for the reduction in operating income as a percentage of revenues was lower
profit margins resulting from product mix changes and competitive pricing
pressures. The operating income for the third quarter of 1998 included a
nonrecurring charge of $12 million, reflecting the write-off of Raychem's
investment in SCT.
14
<PAGE> 17
Segment revenues for the nine months ended March 31, 1999, were $716 million,
down 5% on a constant currency basis from the same period in the prior year. The
primary causes of the decline in revenues were lower sales volumes and price
declines in most of the segment's product lines. The year-to-date operating
income as a percentage of revenues was 17% compared with 22% in the prior-year
period, primarily reflecting declines in gross profits resulting from changes in
mix and price declines across most of the segment's product lines. Operating
income for the nine months ended March 31, 1998, included a nonrecurring charge
of $12 million, reflecting the write-off of Raychem's investment in SCT.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The company is in the process of reassessing current business segment reporting
to determine if changes in reporting will be required in adopting this new
standard. The disclosures prescribed by FAS 131 will first be included in the
company's 1999 annual report.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133).
The new standard requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives should be reported in the statement
of operations or as a deferred item, depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. The company plans to adopt FAS 133 in the first quarter of
fiscal 2000. The company expects that its adoption will not have a material
effect on the company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the company had $211 million in cash and cash equivalents and
$609 million in unused credit facilities, of which $486 million are committed
facilities. The combination of cash and cash equivalents, available lines of
credit, and future cash flows from operations is expected to be sufficient to
satisfy substantially all of the company's needs for anticipated capital
expenditures, working capital, dividends, and share repurchases, and for
potential acquisitions.
15
<PAGE> 18
The following table presents certain measures of liquidity and capital
resources:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
MARCH 31, June 30,
(dollars in millions) 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt net of cash $396 $247
- -----------------------------------------------------------------------------------------------------
Debt net of cash as a percent of stockholders' equity 53% 29%
- -----------------------------------------------------------------------------------------------------
Days' sales outstanding 69 62
- -----------------------------------------------------------------------------------------------------
Days' sales in inventory 102 104
- -----------------------------------------------------------------------------------------------------
</TABLE>
The increase in debt net of cash was primarily due to increased borrowings used
in part to fund the company's share repurchase program. During the first nine
months of 1999, the company repurchased 6.8 million shares of the company's
Common Stock for $210 million.
The table below summarizes the company's cash flows from operating, investing,
and financing activities:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31, 1999 1998
(dollars in millions)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operating activities $ 187 $165
Investing activities (122) (84)
Financing activities 53 (66)
Effect of exchange rate changes on cash
and cash equivalents 0 (5)
- -----------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents $ 118 $ 10
=====================================================================================================
</TABLE>
OPERATING ACTIVITIES
Net cash provided by operating activities during the nine months ended March 31,
1999, was $187 million, up from $165 million in the prior-year period. The
increase from 1998 primarily reflected reduced inventory levels and the absence
of employee bonus payments in 1999 (compared with $29 million in the comparable
prior-year period), partially offset by increased levels of accounts receivable.
In 1999, the company expects the U.S. tax provision to exceed cash tax payments
by an amount in the range of $5 million to $15 million. The difference results
primarily from tax benefits that were reported in the financial statements in
1996, 1997, and 1998, which will be realized in cash through reduced payments in
1999 and thereafter.
INVESTING ACTIVITIES
Net cash used in investing activities during the nine months ended March 31,
1999, was $122 million, of which $79 million was used for capital expenditures.
In October 1998, the company completed the acquisition of the telecommunications
business of Plasticos Mondragon for a cash purchase price of $41 million. Cash
used in investing activities during the nine months ended March 31, 1998,
included $77 million of capital expenditures, partially offset by $8 million in
proceeds from the sale of property, plant and equipment. In addition, in 1998
the company made an investment of $10 million in cash related to an alliance
with Tadiran Telecommunications Ltd. This investment was sold for $12.5 million
in late March 1999. The proceeds from the sale were collected in April 1999.
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<PAGE> 19
FINANCING ACTIVITIES
Net cash provided by financing activities during the nine months ended March 31,
1999, was $53 million. In July 1997, the board of directors authorized the
company's management, at its discretion, to repurchase up to $300 million of the
company's stock during any fiscal year. During the first nine months of 1999,
the company repurchased 6.8 million shares of the company's Common Stock for
$210 million. During the comparable period in 1998, the company repurchased 4.4
million shares for $192 million. Spending on share repurchases was partially
funded by increased borrowings.
In October 1998, the company issued notes in the amount of $400 million. The
notes mature on October 15, 2008, and bear interest at a rate of 7.20% per
annum. The interest rate on the notes may increase if, prior to October 23,
2002, either Moody's Investor Services, Inc. or Standard & Poor's Rating
Services reduces the rating of the notes to below investment grade. The company
used part of the net proceeds from the sale of the notes to repay borrowings of
$275 million outstanding under the company's $400 million revolving credit
facility and to finance the company's share repurchase program. The $400 million
revolving credit facility will remain available to the company until September
12, 2001.
YEAR 2000 DISCLOSURE
The company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, and suppliers that are not Year 2000 compliant, and to
develop, implement, and test remediation and contingency plans to mitigate these
risks. The project comprises four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans, and
(4) implementation and testing. In addition, the company provides its customers
with information on the Year 2000 project and the progress made towards Year
2000 compliance.
INFORMATION SYSTEMS. As part of an enterprisewide process reengineering
commenced in fiscal 1996, the company is replacing a substantial portion of its
existing information systems with a fully integrated, enterprise information
system (supplied by SAP America, Inc.), which has been certified to be Year 2000
compliant. The new system will support the majority of the company's operations,
including major plants in the United States and Europe. This project was
undertaken without regard to possible Year 2000 issues and has not been
accelerated as a result of Year 2000 issues. Therefore, the company does not
expect to record Year 2000-related expenses in connection with the
implementation of this system. However, this system will not be fully
implemented in certain of the company's locations by the calendar year 2000. A
review of the company's information systems for locations where this system will
not have been implemented prior to January 1, 2000, has been completed and the
company is engaged in the work necessary for the existing systems in these
locations to become Year 2000 compliant.
In addition to the system described above, the company uses a different
standardized enterprise information system in its Asian, Latin American, and
certain other locations, and for sales-order and supply-chain activity in
certain plants in North America. The company is currently in the process of
implementing an upgrade for this system that the vendor (QAD Inc.) has confirmed
to be Year 2000 compliant. The company expects this upgrade to be completed by
the end of the fourth quarter of fiscal 1999. Integrated testing of all critical
information systems will be conducted during the current fiscal year with
ongoing testing through calendar year 1999. The company's global electronic data
interchange applications (through which the company communicates business
transactions with certain of its customers and suppliers) has been modified to
be Year 2000 compliant. This task was completed as
17
<PAGE> 20
planned in the third quarter of fiscal 1999. The company is also actively
reviewing its hardware and systems infrastructure, such as networks, in order to
support the activities described above.
Based on the current status of the assessments and remediation plans made to
date, the company expects total Year 2000 related external costs pertaining to
its information systems to be between $5 million and $7 million.
PRODUCTS. The company has assessed the capabilities of its products sold to
customers and has developed remediation plans or replacements for almost all of
its noncompliant products. Based on the assessments made to date, only a small
number of the company's products are affected by Year 2000 issues. With one
exception, all of the products that the company will continue to sell have been
made Year 2000 compliant. The remaining non-compliant item is expected to be
compliant by the first quarter of fiscal 2000. Year 2000 costs related to the
company's products are not expected to be material.
OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used in
the operations and facilities of the company have been inventoried and assessed
for Year 2000 compliance. This assessment has not yielded any major areas of
concern. During the third quarter of fiscal 1999, the company continued to
develop remediation plans. Based on remediation plans made to date, the company
expects Year 2000 related external costs pertaining to its operations and
infrastructure to range between $4 million and $5 million.
The first phase of contingency plan development is underway and will focus on
critical elements of the supply chain that have not completed remediation and/or
replacement activity. A global contingency plan is expected to be completed by
June 30, 1999.
SUPPLIERS. The company continues to evaluate its supplier base to determine
whether Year 2000 issues affecting suppliers will adversely impact the company's
operations. The company has recently completed an assessment of its key
suppliers. Although the company does not anticipate any business disruptions
based on the assurances made by these suppliers, the company will continue to
assess and monitor key suppliers through the year 2000 transition period.
CUSTOMERS. The company has a Global Year 2000 Desk at its headquarters in
California to handle all customer requests for compliance and survey
information, and for other general information related to the company's Year
2000 programs.
GENERAL AND RISK FACTORS. Although the company expects that the Year 2000
project will be completed in a timely manner to prevent any significant
disruptions of business, unforeseen risks and delays may cause disruption in
manufacturing, order processing and distribution services or lead to additional
costs.
Because the company has less control over assessing and remediating the year
2000 problems of third parties, the company believes its most reasonably likely
worst-case scenario would relate to the failure of services provided by third
parties such as electrical power, telecommunication services, transportation and
shipping services. The company's production and distribution of products is
conducted through a network of domestic and foreign facilities. Each location
relies on local suppliers for electricity, water, and other needed supplies. The
failure of electricity and transportation services -- particularly outside of
countries such as the United States where year 2000 remediation has progressed
the furthest -- would be a worst-case scenario that would shut down the affected
facilities. The company is not in a position to identify or to avoid all
possible third-party scenarios; however, the company is currently assessing
scenarios to mitigate their impact, if they were to occur.
Based on the status of the assessments made and remediation plans developed to
date, the company is not in a position to state the total cost of remediation of
all Year 2000 issues. Internal costs incurred for the Year 2000 project are not
being tracked; they principally consist of payroll and related costs. The
company does not currently expect the total costs to be material, and it expects
to be able to fund the total costs through operating cash flows. However, the
company has not yet developed remediation or contingency plans for all problems,
or completely implemented or tested its remediation plans.
18
<PAGE> 21
As the Year 2000 project continues, the company may discover additional Year
2000 problems; may not be able to develop, implement, or test remediation or
contingency plans; or may find that the costs of these activities exceed current
expectations and become material. In many cases, the company is relying on
assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The company plans to test certain
third-party products, but cannot be sure that its tests will be adequate or
that, if problems are identified, they will be addressed by the supplier in a
timely and satisfactory way.
Because the company uses a variety of information systems and has additional
systems embedded in its operations and infrastructure, the company cannot be
sure that all of its systems will work together in a Year 2000-compliant
fashion. Furthermore, the company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems or those of
its customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the company. If the company
fails to satisfactorily resolve Year 2000 issues in a timely manner, it could be
exposed to claims by third parties.
The company is continuing to evaluate Year 2000-related risks and to design and
implement corrective actions. The risks associated with the Year 2000 problem
are pervasive and complex; they can be difficult to identify and to address and
can result in material adverse consequences to the company. Even if the company,
in a timely manner, identifies and tests remediation plans believed to be
adequate, and develops contingency plans believed to be adequate, some problems
may not be identified or corrected in time to prevent material adverse
consequences to the company. See also "Problems associated with Year 2000" under
"Forward-looking statements and risk factors" in this Report on Form 10-Q.
EURO DISCLOSURE
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and adopted the euro as their common legal currency.
The company is currently assessing the impact of the introduction of the euro on
its business and is taking steps to mitigate risks and to identify opportunities
related to the euro. These steps include reevaluating pricing and purchasing
strategies in the new economic environment and evaluating the capability of the
company's information systems to support the company's operations with respect
to euro transactions during the transition period from January 1, 1999, through
January 1, 2002. The company's existing information systems are capable of
processing transactions in euro, such as sales and order activities. The company
is in the process of implementing a fully euro-compliant enterprise information
system for the operations impacted.
The use of the euro has simplified the company's foreign exchange and hedging
activities. Although the company will continue to evaluate the impact of the
euro introduction, based on currently available information, management does not
believe that the introduction of the euro will have a material adverse impact on
the company's financial condition or results of operations. Total costs
associated with the introduction of the euro are not expected to be material and
will be expensed to operations as incurred. See also "Problems associated with
the euro conversion" under "Forward-looking statements and risk factors" in this
Report on Form 10-Q.
19
<PAGE> 22
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Statements in this Report on Form 10-Q that are not statements of historical
fact, including statements regarding revenue; gross profit, earnings and pricing
trends; tax provisions, tax payments, and tax rates; financial goals; litigation
matters; acquisitions; restructuring actions; Year 2000 readiness; euro
compliance; currency fluctuations; economic trends; and the business environment
are forward-looking statements. Forward-looking statements are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from the statements made. These risks and uncertainties include those
described below and elsewhere in this Report on Form 10-Q, as well as risk
factors included in the company's Annual Report on Form 10-K for the year ended
June 30, 1998, on file with the Securities and Exchange Commission.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES MAY AFFECT THE COMPANY'S RESULTS.
Approximately two-thirds of the company's revenues result from sales outside the
United States, a significant portion of which are denominated in foreign
currencies. In addition, the company has several production facilities located
outside the United States. The company's financial results therefore can be
affected by changes in foreign currency exchange rates. To mitigate these
effects, the company hedges its transaction exposure (i.e., the effect on
earnings and cash flows of changes in foreign exchange rates on receivables and
payables denominated in foreign currencies). The company does not hedge its
foreign currency exposure in a manner that would entirely eliminate the effects
of changes in foreign exchange rates on the company's consolidated net income.
Accordingly, the company's reported revenues and net income have been and in the
future may be affected by changes in foreign currency exchange rates.
COMPETITION AND FAILURE TO ACHIEVE PRODUCTIVITY IMPROVEMENTS MAY REDUCE THE
PROFITABILITY OF THE COMPANY. The company sells its products in highly
competitive markets, and the company's competitors include some of the largest
companies in the world. Even when the company has strong intellectual property
protection for its products, other products, sometimes based on lower-cost
technologies, compete with the company's products. In some of the company's
markets, prices trend downward over time, such as the market for circuit
protection devices. Although the company has productivity improvement
initiatives to attain the improvements in manufacturing and design necessary to
remain competitive and to keep the company's gross profits from declining, there
can be no assurance that the company will be able to attain the productivity
improvements necessary to maintain or improve the company's gross profits. In
addition, these trends may be exacerbated by weaker demand for the company's
products caused by economic conditions in many regions where the company sells
its products.
CONDITIONS IN INTERNATIONAL AND EMERGING MARKETS MAY AFFECT THE COMPANY'S
RESULTS. International and emerging markets provide the company with significant
growth opportunities. However, these markets are volatile and subject to events
which could adversely affect the company's financial results, such as:
o periodic economic downturns in different regions of the world,
o changes in trade policies or tariffs,
o political instability, and
o fluctuations in exchange rates.
The economic conditions in certain Asian countries and emerging markets in
Russia, Eastern Europe and Latin America may increase pressure on the company to
reduce prices and reduce the ability of the company's customers to purchase the
company's products. Such conditions may therefore cause revenues or gross
profits to fall below the company's expectations. In addition, economic
recession may
20
<PAGE> 23
lead to the cancellation of orders, further pressure to reduce prices,
difficulty in collecting receivables owed to the company, or other factors that
may adversely affect the company's financial results.
RESTRUCTURING ACTIONS MAY NOT ACHIEVE INTENDED RESULTS. The company continues to
implement a number of complex restructuring actions. Delay or difficulty in
implementing these actions or market factors could reduce the anticipated
benefit of these actions. The company's revenues, operating results, and
financial condition could be adversely affected by the company's ability to
manage effectively the transition to the new organizational structures, to
continually improve manufacturing processes, and to outsource certain
activities. There can be no assurance that the company will succeed in achieving
its goals or that it will do so without unintended adverse consequences.
PROBLEMS ASSOCIATED WITH YEAR 2000. As more fully described under "Year 2000
Disclosure", the company is continuing to evaluate Year 2000-related risks and
to design and implement corrective actions. The risks associated with the Year
2000 problem are pervasive and complex; they can be difficult to identify and to
address, and can result in material adverse consequences to the company. Even if
the company, in a timely manner, completes all of its assessments, identifies
and tests remediation plans believed to be adequate, and develops contingency
plans believed to be adequate, some problems may not be identified or corrected
in time to prevent material adverse consequences to the company. Additionally,
the company may acquire businesses that are not Year 2000 compliant, which may
cause disruptions to the company's operations or lead to additional costs.
PROBLEMS ASSOCIATED WITH THE EURO CONVERSION. As described under "Euro
Disclosure", the company is continuing to evaluate the impact of the
introduction of the euro. There can be no assurance that all problems will be
identified or corrected in time to prevent material adverse consequences to the
company's financial condition or results of operations. In addition, the
existence of a uniform currency across much of Europe may affect the company's
pricing policies, which may adversely impact the company's margins.
IMPLEMENTATION OF NEW INFORMATION SYSTEMS COULD CAUSE BUSINESS DISRUPTIONS. In
1996, the company began an enterprisewide process reengineering and
information-system implementation to redesign the company's supply chain and
other key business processes. This system will replace the company's core data
and information systems with a fully integrated, enterprise information system.
It will cover most of the company's major manufacturing sites and sales
locations. The change in systems and processes is substantial. During
implementation of this new system, the change could cause delays in:
o order processing,
o shipments of products,
o invoicing, and
o the accumulation and analysis of financial data.
There can be no assurance that these delays, if they occur, will not have an
adverse effect on the company's operating results or financial position.
21
<PAGE> 24
LITIGATION IS UNPREDICTABLE AND COSTLY. From time to time the company or its
subsidiaries, or both, become involved in lawsuits arising from various types of
commercial claims, including:
o product liability,
o unfair competition,
o antitrust,
o breach of contract,
o environmental, and
o intellectual property matters.
Currently, the company's principal product liability litigation involves a
variety of claims arising from the company's heat-tracing and freeze-protection
products. The company also sells other products in markets where product
liability issues could be material (for example, electronic interconnect
products--such as wire, cable, heat-shrinkable tubing, marking systems,
connectors, and other devices--for aerospace and automotive markets).
The company has a substantial investment in intellectual properties (consisting
of patents, trademarks, copyrights, and trade secrets). The company relies
significantly on the protection these intellectual property rights provide.
Accordingly, the company protects these rights and from time to time becomes
involved in issues of infringement or theft by third parties. The third parties
may assert related counterclaims against the company, including unfair
competition, antitrust or infringement claims. The company has been involved, as
both a defendant and a plaintiff, in intellectual property lawsuits and could
become involved in others in the future.
Litigation tends to be unpredictable and costly. Events outside the company's
control may affect the results of litigation. There is no assurance that
litigation will not have a material adverse effect on the company's future
financial position or results of operations.
NEW PRODUCTS AND ACQUISITIONS MAY NOT PRODUCE ANTICIPATED BENEFITS. The company
has historically achieved part of its revenue growth by developing or acquiring
new and innovative materials science technologies and products. The company
remains committed to internal research and development efforts, and will
continue to pursue the acquisition of new or compatible technologies and
businesses as an important part of the company's growth strategy. The company
also has entered into, and in the future may enter into, arrangements with other
companies to expand product offerings and to enhance its own manufacturing
capabilities. These arrangements may include minority equity investments in the
other companies. The company cannot predict success in its research and
development efforts, acquisitions of new technologies, products, or businesses,
or arrangements with third parties. Accordingly, there can be no assurance that:
o the company will successfully realize its objectives,
o the realization of these goals will not take longer or cost more
than anticipated, or
o there will not be unintended adverse financial or other
consequences from these actions.
OTHER MARKET FORCES CAN ADVERSELY AFFECT THE DEMAND FOR THE COMPANY'S PRODUCTS.
Changing market circumstances, such as fluctuations in demand and the
seasonality of certain product lines, may affect the company's operating
results. The company also sells certain of its products to customers in
industries and countries that are experiencing periods of rapid change. For
example:
22
<PAGE> 25
o the telecommunications industry is going through a period of
rapid technological change, and customers in this industry may
delay purchases of the company's products until they resolve
technology issues more clearly,
o foreign countries are privatizing many electric power utilities,
which may affect the purchasing policies of these utility
companies.
These and other types of market forces may adversely affect the company's
operations and financial performance.
CUSTOMER CONCENTRATION FOR ACCESS NETWORK ELECTRONICS PRODUCTS MAY AFFECT SALES
OF THOSE PRODUCTS. The company no longer pursues sales of its access network
electronics products outside of North America. Because these products are sold
to operators of large telecommunication systems, the customers and potential
customers for these products are now limited to the relatively few operators of
such systems in North America. A decision by one of these customers not to
purchase the company's access network electronics products, or to delay the
purchase of these products, could have a material impact on the company's sales
of these products or the growth rate of such sales.
GEOGRAPHIC AND PRODUCT MIX CHANGES AND PRICE REDUCTIONS MAY AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. The company's results of operations vary by product line
and by geographic region. Changes in the company's geographic or product mix of
sales may therefore affect the company's gross profits. In addition, reductions
in pricing to end customers may also affect the company's gross profits.
THE COMPANY'S ANNUAL EFFECTIVE TAX RATE IS DIFFICULT TO ESTIMATE. The company
determines its provision for income taxes based on the company's expected
profitability in each jurisdiction in which it is subject to tax. It is
difficult for the company to predict the geographic distribution and level of
profitability in each jurisdiction. The company's geographic distribution and
level of profitability may therefore vary from forecasts. This type of variance
could cause the company's estimated annual effective tax rate in interim
quarters to vary from the actual annual effective tax rate for the year, or
could cause variances in projections of cash required for tax payments.
REALIZATION OF ANY OF THESE RISKS MAY AFFECT THE COMPANY'S PERFORMANCE. Because
of the foregoing risks, in addition to other risks that affect the company's
operating results and financial position, investors should:
o not consider past financial performance or management's
expectations a reliable indicator of future performance, and
o not use historical trends to anticipate results or trends in
future periods.
23
<PAGE> 26
In that regard, the company's results of operations and financial condition
could be adversely affected by a number of risks in addition to those discussed
above, including overall economic conditions and lower than expected demand.
Further, the company's stock price is subject to volatility. Any of the risks
previously discussed could have an adverse effect on the company's stock price.
In addition, the company's stock price could be adversely affected if the
company's revenues or earnings in any quarter fail to meet the investment
community's expectations, or if there are broader, negative market trends.
NO DUTY TO UPDATE. The company does not undertake an obligation to update its
forward-looking statements or risk factors to reflect changes in events or
circumstances.
24
<PAGE> 27
RAYCHEM CORPORATION
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On December 19, 1994, the company filed a complaint entitled Raychem Corporation
and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior
Court of the State of California, County of San Mateo, which alleged, among
other claims, misappropriation of trade secrets. On May 2, 1995, a complaint
entitled Bourns, Inc. v. Raychem Corporation was filed in the United States
District Court, Central District of California, alleging antitrust law
violations. Many of the claims asserted in the company's state action were
consolidated with Bourns' federal action against the company. On March 9, 1998,
this case was transferred from the Eastern Division of the Central District to
the Western Division of the Central District and reassigned to a new judge. The
trial for Bourns' action against the company commenced on June 16, 1998. During
the sixth week of the trial, due to the length of the proceeding, the Judge
bifurcated the company's trade secret action against Bourns for trial at a later
date. On August 10, 1998, the trial of Bourns' action against the company ended
with a jury verdict that awarded Bourns $64 million in damages. In September,
1998, the company filed motions with the court to set aside the jury's verdict,
to reduce the damages, and to ask for a new trial on the grounds that the
verdict is contrary to the evidence presented at trial and is incorrect as a
matter of law and that the jury's damage award bears no relationship to the
market segment to which the verdict was directed. On April 28, 1999, the court
entered an order denying the company's motion for judgment as a matter of law,
but granting the company's motion for a new trial limited to the issue of
damages on the grounds that the jury's award was excessive. The court's order
also confirmed that any damages awarded to Bourns must be limited solely to the
primary lithium battery market, and must be reduced to the extent necessary to
reflect the effects of the company's lawful competition in this market. In
addition to the new damages trial, the company intends to continue with the
trial of its theft of trade secrets case against Bourns. Under applicable U.S.
antitrust law, damages awarded against the company will be trebled. A successful
antitrust plaintiff is also entitled to recover certain fees and expenses.
Following completion of the new damages and the trade secrets trial, the company
intends to appeal the decision of the court denying the company's motion for
judgment as a matter of law regarding the antitrust issues. No new trial date
has been set. Due to the foregoing, the company has not accrued any liability
with respect to this litigation.
On December 22, 1997, the company was joined, through a third party complaint
brought by defendant Herman Goldner Co., Inc., in an action entitled Zoological
Society of Philadelphia v. Barber-Coleman et al. in the Philadelphia County
Court of Common Pleas. This action is based on a fire at the Philadelphia Zoo in
December, 1995, which damaged the Zoo's House of Primates building and killed 23
of its primates. The complaint originally filed by the Zoological Society of
Philadelphia attributed the cause of the fire to a valve manufactured by
defendant Barber-Coleman and installed by the Herman Goldner Co. Herman Goldner
filed a third party complaint against the company, alleging that the company's
heating cable caused the fire. The Zoo's original claim in this action was the
subrogated claim of its insurer for $6 million. During the third quarter of
fiscal 1999, the Zoo has indicated an intent to pursue its uninsured loss, which
it claims will total approximately $16 million. The trial date has been set for
February 7, 2000. The company believes that it has meritorious defenses to the
claims asserted in this case and intends to defend itself vigorously in this
matter.
Four separate state actions based on essentially the same facts, alleging
wrongful distributor termination and antitrust claims, have been consolidated in
the Superior Court of San Mateo County, California, Unit Process Company, et al.
v. Raychem Corporation, et al. The dismissal in the United States District
Court,
25
<PAGE> 28
Northern District of California, of an action alleging essentially the same
facts was affirmed by the Ninth Circuit Court of Appeals in 1996. On February
25, 1998, the Superior Court granted the Company's motion to dismiss this
lawsuit, with leave to the plaintiffs to amend certain of their claims. In
February, 1999, second amended complaints were filed by the plaintiffs in this
case. The company is evaluating the second amended complaints and has obtained
an extension of time to respond. The company believes that it has meritorious
defenses to the claims asserted in this case and intends to defend itself
vigorously in this matter.
ITEM 5: OTHER INFORMATION
On February 9, 1999, the company announced that its board of directors elected
Thomas Jahn, 43, as vice president and general manager of the company's
worldwide energy business headquartered in Ottobrunn, Germany.
On April 23, 1999, the company announced that its board of directors has elected
Jose Flahaux vice president of worldwide logistics. Flahaux, 53, will be
responsible for Raychem's supply chain management and logistics network in North
and South America, Europe and Asia. Flahaux will report to Frans Berthels,
senior vice president for worldwide manufacturing and logistics.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
EXHIBIT NO. DESCRIPTION
10(aa) Key Employee Retention and Severance Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
None
26
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RAYCHEM CORPORATION
(Registrant)
Date: May 17, 1999 /s/ RAYMOND J. SIMS
--------------------------------------------
Raymond J. Sims
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
27
<PAGE> 30
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10(aa) Key Employee Retention and Severance Plan
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10(aa)
RAYCHEM CORPORATION
KEY EMPLOYEE RETENTION AND SEVERANCE PLAN
ADOPTED FEBRUARY 5, 1999
This Key Employee Retention and Severance Plan (this "Plan") was adopted by the
Compensation Committee of the Board of Directors of Raychem Corporation (the
"Company") at a meeting held in Menlo Park, California on February 5, 1999, and
approved and ratified by the full Board of Directors on February 5, 1999.
BACKGROUND OF THE PLAN
A. The Company draws upon the knowledge, experience and objective advice of
its executives, managers and employees in order to manage its business
for the benefit of the Company's stockholders.
B. Due to the widespread awareness of the possibility of mergers,
acquisitions and other strategic alliances, change of control is
increasingly an issue in competitive recruitment and retention efforts.
C. The Company recognizes that if there occurred a change of control or
other event that could substantially change the nature and structure of
the Company, the resulting uncertainty regarding the consequences of
such an event could adversely affect the Company's ability to attract,
retain and motivate its executives and key employees.
D. The Company initiated a project in mid-summer, 1998, to evaluate
existing Company plans and policies, industry practices and possible
standard approaches to the retention and severance of executives,
officers and key employees in the event of a change of control of the
Company.
<PAGE> 2
E. On December 11, 1998, the Compensation Committee reviewed a market
analysis and preliminary recommendations with respect to the adoption of
an executive retention plan, prepared by a team including the Vice
President Human Resources, counsel to the Company, and a compensation
consultant.
F. On February 5, 1999, the Compensation Committee of the Company's Board
of Directors reviewed, approved and adopted the general terms of the
Retention Plan, and directed the Company's counsel to prepare definitive
documentation of the Plan.
G. On February 5, 1999, the Retention Plan was approved and ratified by the
Company's Board of Directors.
1. GENERAL
1.1 Defined terms. Capitalized terms used in this Plan shall have the
meanings set forth in section 4, unless the context clearly requires a different
meaning.
1.2 Purpose. The purpose of this Plan is to aid the Company in attracting,
retaining and motivating its Executives, Officers and Employees by providing
specified compensation and benefits to selected Executives, Officers and
Employees of the Company in the event of a Covered Termination.
1.3 No employment agreement. This Plan does not obligate the Company to
continue to employ a Plan Participant for any specific period of time, or in any
specific role or geographic location. Subject to the terms of any applicable
written employment agreement between Company and a Participant, the Company may
assign a Participant to other duties, and either the Company or Participant may
terminate Participant's employment at any time for any reason.
2. TERMINATION UPON CHANGE OF CONTROL
2.1 Basic severance compensation. In the event of a Participant's Covered
Termination, the Participant shall be entitled to the basic severance
compensation described below.
2.1.1 Salary. All base salary and accrued vacation earned through the date of
Participant's termination of employment shall be paid to Participant.
2.1.2 Expense reimbursement. Within thirty (30) days of submission of proper
expense reports, the Company shall reimburse a Participant for all expenses
reasonably and necessarily incurred by the Participant in connection with the
business of the Company prior to Participant's termination of employment.
2.1.3 Employee benefits. Participant shall not receive any benefits under the
Company's other benefit plans and policies other than those to which Participant
may be entitled pursuant to the terms of such plans and policies.
<PAGE> 3
2.2 Cash severance benefits. In the event of an Executive's or Officer's
Covered Termination, such Executive or Officer shall be entitled to the
additional severance benefits described below.
2.2.1 Prorated bonus payment. Such Executive or Officer shall receive his or
her target bonus or incentive payment for the year in which termination occurs,
prorated through the date of termination.
2.2.2 Cash severance payment. A lump sum cash severance payment shall be made:
(a) to each such Officer in the amount of 200% of annual Target Annual
Earnings; and
(b) to each such Executive in the amount of 250% of Target Annual Earnings,
All cash severance payments made under this Section 2.2 shall be reduced by
applicable federal and state withholding taxes, and paid upon the later of (i)
the date of the Change of Control or (ii) thirty (30) days following such
Executive's or Officer's Covered Termination. A Participant shall not be
entitled to contribute any funds paid to such Participant pursuant to this Plan
to the Raychem Corporation Executive Deferred Compensation Plan.
2.3 Acceleration of Incentive Plan Awards.
2.3.1 Acceleration at Change of Control. All outstanding stock options granted
and restricted stock or performance shares issued by the Company to a
Participant prior to the Change of Control shall have their vesting accelerated
as to one year of additional vesting as of the date of such Change of Control.
2.3.2 Acceleration at Covered Termination.
(a) All outstanding stock options granted and restricted stock or
performance shares issued by the Company prior to the Change of Control to an
Employee who suffers a Termination Upon a Change of Control shall have their
vesting fully accelerated so as to be 100% vested on the later of (i) the date
of the Change of Control or (ii) the date of such Termination Upon Change of
Control.
(b) All outstanding stock options granted and restricted stock or
performance shares issued by the Company prior to the Change of Control to an
Executive or Officer who suffers a Termination Upon a Change of Control or a
Constructive Termination Upon a Change of Control shall have their vesting fully
accelerated so as to be 100% vested on the later of (i) the date of the Change
of Control or (ii) the date of such Termination Upon Change of Control or
Constructive Termination Upon Change of Control.
2.3.3 Acceleration upon non-assumption in a Change
<PAGE> 4
of Control. If there is a Change of Control transaction in which outstanding
stock options granted and restricted stock or performance shares issued by the
Company to any Participant prior to the transaction are not fully assumed by the
Successor, or replaced by fully equivalent substitute options, restricted stock
or performance shares, then (1) all such options and restricted stock or
performance shares shall have their vesting fully accelerated so as to be 100%
vested prior to the effective date of the Change of Control, and (2) the Company
shall provide reasonable prior written notice to the Participant of (a) the date
such unexercised options will terminate, and (b) the period during which
Participant may exercise the fully vested options. Alternatively, the Company
may elect to deliver to Participant on the effective date of the Change of
Control a cash payment equal to the difference between (i) the aggregate
exercise price of Participant's unexercised options, restricted stock or
performance shares, and (ii) the value of the consideration deliverable for an
equivalent number of shares as a result of the Change of Control transaction.
2.4 Extended medical and dental benefits.
2.4.1 Benefit continuation. Each U.S. Executive and Officer shall receive
continued provision of the Company's standard employee medical and dental
benefit coverages at standard staff rates, as elected by the Executive or
Officer and in effect immediately prior to the Change of Control, for up to two
(2) years in the case of Officers who are not Executives and for up to two and
one-half (2 1/2) years in the case of Executives. Continued health coverage for
non-U.S. Executives and Officers shall be negotiated in accordance with
applicable law and policy to provide similar coverage.
2.4.2 Continued medical coverage for U.S. residents. If the Executive or
Officer resides in the United States, such Executive or Officer shall be
entitled to continued medical and dental insurance coverage in accordance with
the applicable provisions of U.S. federal law (Title X of the Consolidated
Budget Reconciliation Act of 1985 ("COBRA")). The date of the COBRA "qualifying
event" for the Executive or Officer and his or her dependents shall be the date
of such Executive's or Officer's Covered Termination.
2.4.3 Termination of coverage. Notwithstanding the preceding provisions of
this Section 2.4, in the event an Executive or Officer dies or becomes covered
under another employer's group health plan during the continuation period (in
which case such Executive or Officer promptly shall inform the Company), the
Company shall cease provision of continued group health insurance for such
Executive or Officer and any dependents.
3. FEDERAL EXCISE TAX UNDER IRC SECTION 28OG
3.1 Adjustment of excess payments payable to a Participant. If (1) any
amounts payable to a Participant under this Plan are characterized as excess
parachute payments pursuant to Section 4999 of the Internal Revenue Code, and
(2) the Participant thereby would be subject to any United States federal excise
tax due to that characterization, then the Participant may elect, in the
Participant's sole discretion, to reduce the amounts
<PAGE> 5
payable under this Plan or to have any portion of applicable options or
restricted stock not vest in order to avoid any "excess parachute payment" under
Section 28OG(b)(1) of the Internal Revenue Code of 1986, as amended.
3.2 Determination by independent public accountants. Unless the Company and
Participant otherwise agree in writing, any determination required under this
Section 3 shall be made in writing by independent public accountants agreed to
by the Company and the Participant (the "Accountants"), whose determination
shall be conclusive and binding upon the Participant and the Company for all
purposes. For purposes of making the calculations required by this Section 3,
the Accountants may rely on reasonable, good faith interpretations concerning
the application of Sections 28OG and 4999 of the Code. The Company and the
Participant shall furnish to the Accountants such information and documents as
the Accountants may reasonably request in order to make the required
determinations. The Company shall bear all fees and expenses the Accountants may
reasonably charge in connection with the services contemplated by this Section
3.
4. DEFINITIONS
4.1 Capitalized terms defined. Capitalized terms used in this Plan shall
have the meanings set forth in this Section 4, unless the context clearly
requires a different meaning.
4.2 "Cause" means:
(a) theft; a material act of dishonesty or fraud; intentional falsification
of any employment or Company records; or the commission of any criminal act
which impairs the Participant's ability to perform appropriate employment duties
for the Company;
(b) improper disclosure or use of the Company's confidential, business or
proprietary information by the Participant;
(c) the Participant's conviction (including any plea of guilty or nolo
contendere) for a crime involving moral turpitude causing material harm to the
reputation and standing of the Company, as determined by the Company in its sole
discretion;
(d) gross negligence or willful misconduct in the performance of the
Participant's assigned duties; or
(e) repeated failure by the Participant to perform his or her job
responsibilities in accordance with written instructions from such Participant's
supervisor (which, in the case of the Company's Chief Executive Officer, shall
be the Company's Board of Directors).
4.3 "Change of Control" means:
(a) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities
<PAGE> 6
Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or
other fiduciary holding securities of the Company under an employee benefit plan
of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Company representing 30% or more of (A) the outstanding shares of common
stock of the Company or (B) the combined voting power of the Company's
then-outstanding securities;
(b) the Company is party to a merger or consolidation which results in the
holders of voting securities of the Company outstanding immediately prior
thereto failing to continue to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least 30% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation;
(c) the sale or disposition of all or substantially all of the Company's
assets (or consummation of any transaction having similar effect);
(d) there occurs a change in the composition of the Board of Directors of
the Company within a two (2) year period, as a result of which fewer than a
majority of the directors are Incumbent Directors; or
(e) the dissolution or liquidation of the Company.
4.4 "Company" shall mean Raychem Corporation and, following a Change of
Control, any Successor that agrees to assume, or otherwise becomes bound to by
operation of law, all the terms and provisions of this Plan.
4.5 "Constructive Termination Upon Change of Control" means any resignation
by an Executive or Officer for Good Reason, as defined in this Plan, within
twenty-four (24) months after the occurrence of any Change of Control; provided
that "Constructive Termination Upon Change of Control" shall not include any
termination of the employment of a Participant (i) by the Company for Cause;
(ii) by the Company as a result of the Permanent Disability of the Participant;
(iii) as a result of the death of the Participant, or (iv) as a result of the
voluntary termination of employment by the Participant for reasons other than
Good Reason.
4.6 "Covered Termination" shall mean, with respect to an Employee of the
Company, a Termination Upon Change of Control, and with respect to an Executive
or an Officer, a Termination Upon Change of Control or a Constructive
Termination Upon Change of Control.
4.7 "Effective Date" means February 5, 1999.
4.8 "Employee" shall mean each regular employee of the Company or any of its
directly or indirectly, wholly owned subsidiaries. Temporary employees of the
Company and its subsidiaries shall not be included in the definition of Employee
for purposes of
<PAGE> 7
this Plan.
4.9 "Executive" shall mean each person elected by the Board of Directors to
serve as the Chief Executive Officer of the Company or his or her direct
reports, and such additional individuals as may be designated thereafter by the
Compensation Committee of the Board of Directors.
4.10 "Good Reason" means the occurrence of any of the following conditions
following a Change of Control, without the Participant's informed written
consent, which condition(s) remain(s) in effect ten (10) days after written
notice to the Company from the Participant of such condition(s):
(a) a material decrease in the Participant's base salary or target bonus
amount;
(b) the relocation of the Participant's work place for the Company to a
location more than fifty (50) miles from the location of the work place prior to
the Change of Control;
(c) in the case of an Executive or Officer, assignment to responsibilities
or duties that are not a Substantive Functional Equivalent (as defined in this
Plan) of the position which the Executive or Officer occupied prior to the
Change of Control; or
(d) with respect to any individual Participant, any material breach by the
Company of the terms of this Plan with the Participant.
4.11 "Incumbent Director" shall mean a director who either (1) is a director
of the Company as of the Effective Date of this Plan, or (2) is elected, or
nominated for election, to the Board of Directors of the Company with the
affirmative votes of at least a majority of the directors of the Company at the
time of such election or nomination who were themselves elected, or nominated
for election, to the Board of Directors of the Company with the affirmative
votes of at least a majority of the directors of the Company at the time of his
or her election or nomination, provided that in no event shall any director be
deemed to be an Incumbent Director if such director was elected or nominated in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company.
4.12 "Officer" shall mean each Vice President of the Company, other than an
Executive, appointed from time to time by the Company's Board of Directors.
4.13 "Participant" shall mean an Executive, Officer or Employee of the
Company, and such additional individuals as may be designated to participate in
the Plan by the Compensation Committee of the Board of Directors.
4.14 "Permanent Disability" means that:
(a) the Participant has been incapacitated by bodily injury, illness or
disease so as to be prevented thereby from engaging in the performance of the
Participant's duties;
<PAGE> 8
(b) such total incapacity shall have continued for a period of six (6)
consecutive months; and
(c) such incapacity will, in the opinion of a qualified physician, be
permanent and continuous during the remainder of the Employee's life.
4.15 "Substantive Functional Equivalent" means, with respect to a Participant
who is an Executive or Officer, an employment position occupied after a Change
of Control that:
(a) is in a substantive area of competence (such as accounting; engineering
management; executive management; finance; human resources; marketing, sales and
service; operations and manufacturing; etc.) that is consistent with the
Participant's experience and not materially different from the position occupied
by the Participant prior to the Change of Control;
(b) requires the Participant to serve in a role and perform duties that are
functionally equivalent to those performed prior to the Change of Control;
(c) carries a title that does not connote a lesser rank or corporate role
than the title held by the Participant prior to the Change of Control;
(d) does not otherwise constitute a material, adverse change in the
Participant's responsibilities or duties, as measured against the Participant's
responsibilities or duties prior to the Change of Control, causing it to be of
materially lesser rank or responsibility;
(e) if prior to the Change of Control the Participant was identified as an
officer of the Company for purposes of the rules promulgated under Section 16 of
the Securities Exchange Act of 1934, identifies the Participant as a Section 16
officer of a publicly traded Successor having net assets and annual revenues not
less than eighty percent (80%) of those of the Company prior to the Change of
Control; and
(f) if prior to the Change of Control the Participant was identified as an
officer of the Company for purposes of the rules promulgated under Section 16 of
the Securities Exchange Act of 1934, requires the Participant to report directly
to an executive officer, committee or board of the Successor that is no less
senior than the executive officer, committee or board, as the case may be, to
whom the Participant reported at the Company prior to the Change of Control.
4.16 "Successor" means the Company as defined above and any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company.
4.17 "Target Annual Earnings" means the sum of annual base salary plus one
hundred percent (100%) of target annual bonus or incentive pay. If different
sums would result from calculations as of (a) the date thirty (30) days prior to
the date that the Company
<PAGE> 9
publicly announces it is conducting negotiations leading to a Change of Control,
(b) the date on which a Change of Control occurs or (c) the date of a
Participant's Covered Termination, then Target Annual Earnings shall be
determined by the calculation as of the specified date that yields the highest
value.
4.18 "Termination Upon Change of Control" means any actual termination of the
employment of a Participant by the Company without Cause during the period
commencing thirty (30) days prior to the earlier of (1) the date that the
Company first publicly announces it is conducting negotiations leading to a
Change of Control, or (2) the date that the Company enters into a definitive
agreement that would result in a Change of Control (even though still subject to
approval by the Company's stockholders and other conditions and contingencies);
and ending on the earlier of (x) the date on which the Company announces that
the definitive agreement described in clause (2) above has been terminated or
that the Company's efforts to consummate the Change of Control contemplated by
the previously announced negotiations or by a previously executed definitive
agreement have been abandoned or (y) the date which is twenty-four (24) months
after the Change of Control; provided that "Termination Upon Change of Control"
shall not include any termination of the employment of a Participant (i) by the
Company for Cause; (ii) by the Company as a result of the Permanent Disability
of the Participant; (iii) as a result of the death of the Participant, or (iv)
as a result of the voluntary termination of employment by the Participant for
reasons other than Good Reason.
5. EXCLUSIVE REMEDY
5.1 Sole remedy for Covered Terminations. The payments and benefits provided
for in Sections 2 and 3 shall constitute the Participant's sole and exclusive
remedy for any alleged injury or other damages arising out of the cessation of
the employment relationship between the Participant and the Company in the event
of the Participant's Covered Termination; provided that nothing in this Plan
shall limit or prohibit severance payments to Employees who are not Executives
or Officers under the Company's then existing policy for severance payments to
such Employees.
5.2 No other benefits payable. The Participant shall be entitled to no other
compensation, benefits, or other payments from the Company as a result of any
termination of employment with respect to which the payments and/or benefits
described in Sections 2 and 3 have been provided to the Participant, except as
expressly set forth in a written agreement or in a duly executed employment
agreement between Company and Participant; provided that nothing in this Plan
shall affect an Executive's or Officer's entitlement to receive outplacement and
financial planning services ordinarily available under the Company's Executive
Termination Compensation Policy.
5.3 Release of claims. The Company shall condition payment of the cash
severance
<PAGE> 10
benefits described in section 2.2 of this Plan and the stock option, restricted
stock or performance share acceleration described in section 2.3 upon the
delivery by Participant of a signed release of claims in a form reasonably
satisfactory to the Company.
6. PROPRIETARY AND CONFIDENTIAL INFORMATION
The Company shall condition payment of the cash severance benefits described in
section 2.2 of this Plan and the stock option, restricted stock or performance
share acceleration described in section 2.3 upon the Participant's
acknowledgment of his or her continuing obligation to abide by the terms and
conditions of the Company's confidentiality and/or proprietary rights agreement
between the Participant and the Company.
7. NON-SOLICITATION
7.1 Agreement not to solicit. The Company shall condition payment of the
cash severance benefits described in section 2.2 of this Plan and the stock
option, restricted stock or performance share acceleration described in section
2.3 upon the Participant's agreement, for a period of one (1) year after the
Participant's Covered Termination, to not, directly or indirectly, solicit the
services or business of any employee, distributor, vendor, representative or
customer of the Company, or in any other manner persuade any such person or
entity to discontinue that person's or entity's relationship with or to the
Company.
7.2 Other agreements not superseded. No provision of this Plan shall
supersede or limit the terms, including more restrictive terms, of any other
agreement by a Participant to refrain from competition with or from soliciting
the employees or customers of the Company.
8. ARBITRATION
8.1 Disputes subject to arbitration. Any claim, dispute or controversy
arising out of this Plan, the interpretation, validity or enforceability of this
Plan, or the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association; provided, however, that (1)
the arbitrator shall have no authority to make any ruling or judgment that would
confer any rights with respect to the trade secrets, confidential and
proprietary information or other intellectual property of the Company upon a
Participant or any third party; and (2) this arbitration provision shall not
preclude the Company from seeking legal and equitable relief from any court
having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's intellectual
property. Judgment may be entered on the award of the arbitrator in any court
having jurisdiction.
8.2 Site of arbitration. The site of the arbitration proceeding shall be
Santa Clara County, California.
9. INTERPRETATION
<PAGE> 11
This Plan shall be interpreted in accordance with and governed by the laws of
the State of California as applied to contracts entered into and entirely to be
performed within that state.
10. OTHER BENEFIT PLANS; NONCUMULATION OF BENEFITS
10.1 No limitation of regular benefit plans. Except as provided in Section
10.2 below, this Plan is not intended to and shall not affect, limit or
terminate any plans, programs, or arrangements of the Company that are regularly
made available to a significant number of employees, officers or executives of
the Company, including without limitation the Company's stock option plans.
10.2 Noncumulation of benefits. The Participant may not cumulate cash
severance payments, stock option acceleration and excise tax reimbursement
benefits under both this Plan and any other agreement or plan or policy of the
Company, any statutory or legal allowance or provision, or otherwise. If the
Participant has any other binding written agreement with the Company which
provides that upon a Change of Control or termination of employment the
Participant shall receive one or more of the benefits described in Sections 2
and 3 of this Plan (i.e., the payment of cash compensation or prorated bonus,
acceleration of vesting of stock options or restricted stock rights, and
adjustments or payments relating to federal excise tax), then with respect to
those benefits the aggregate amounts payable under this Plan shall be reduced by
the amounts paid or payable under such other and separate agreements.
11. SUCCESSORS AND ASSIGNS
11.1 Successors of the Company. The Company will require any Successor
expressly, absolutely and unconditionally to assume and agree to perform this
Plan in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place.
Failure of the Company to obtain such agreement shall be a material breach of
this Plan.
11.2 No assignment of rights. Except as set forth in Section 11.3, the
interest of any Participant in this Plan or in any distribution to be made under
this Plan may not be assigned, pledged, alienated, anticipated, or otherwise
encumbered (either at law or in equity) and shall not be subject to attachment,
bankruptcy, garnishment, levy, execution, or other legal or equitable process.
Any act in violation of this Section 11.2 shall be void.
11.3 Heirs and representatives of Participant. A Participant's rights under
this Plan shall inure to the benefit of and be enforceable by a Participant's
personal and legal representatives, executors, administrators, successors,
heirs, distributees, devises and legatees.
12. NOTICES
For purposes of this Plan, notices and all other communications permitted or
provided for in this Plan shall be in writing and shall be deemed to have been
duly given when
<PAGE> 12
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, as follows:
If to the Company: Raychem Corporation
Attention: General Counsel
300 Constitution Drive
Menlo Park, CA 94025-1164
and if to the Participant at the most recent address recorded in the records of
the Company. Either party may provide the other with notices of change of
address, which shall be effective upon receipt.
13. VALIDITY
13.1 Invalid provisions. If any one or more of the provisions (or any part
thereof) of this Plan shall be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
(or any part thereof) shall not in any way be affected or impaired thereby.
13.2 Certain Business Combinations. In the event it is determined by the
Company's Board of Directors, upon consultation with the Company's management
and independent auditors, that the enforcement of this Plan, including
provisions of Section 2.3 of this Plan, which allows for the acceleration of
vesting of stock options and restricted stock upon the effective date of a
Change of Control or thereafter, would preclude accounting for any proposed
business combination of the Company involving a Change of Control as a pooling
of interests, and the Company's Board of Directors otherwise desires to approve
such a proposed business transaction which requires as a condition to the
closing of such transaction that it be accounted for as a pooling of interests,
then any such provision of this Plan shall be null and void.
14. AMENDMENT, SUSPENSION OR TERMINATION
At any time after the Effective Date of this Plan and prior to the date thirty
(30) days before the earlier of (1) the date that the Company first publicly
announces it is conducting negotiations leading to a Change of Control, or (2)
the date that the Company enters into a definitive agreement that would result
in a Change of Control (even though still subject to approval by the Company's
stockholders and other conditions and contingencies), the Board of Directors of
the Company shall have the right to amend, suspend or terminate this Plan at any
time and for any reason. Notwithstanding the preceding sentence, however, no
amendment or termination of this Plan shall reduce any Participant's rights or
benefits that have accrued and become payable under this Plan before the date
the amendment is adopted or this Plan is terminated, as appropriate.
15. EFFECTIVE DATE
The Effective Date of this Plan is February 5, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED MARCH
31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 210,985
<SECURITIES> 5,251
<RECEIVABLES> 378,427
<ALLOWANCES> 8,652
<INVENTORY> 256,869
<CURRENT-ASSETS> 986,930
<PP&E> 1,200,300
<DEPRECIATION> 701,692
<TOTAL-ASSETS> 1,801,161
<CURRENT-LIABILITIES> 371,511
<BONDS> 547,903
0
0
<COMMON> 90,015
<OTHER-SE> 661,066
<TOTAL-LIABILITY-AND-EQUITY> 1,801,161
<SALES> 1,340,982
<TOTAL-REVENUES> 1,343,022
<CGS> 724,070
<TOTAL-COSTS> 725,944
<OTHER-EXPENSES> 74,482
<LOSS-PROVISION> 79
<INTEREST-EXPENSE> 19,919
<INCOME-PRETAX> 153,890
<INCOME-TAX> 50,783
<INCOME-CONTINUING> 153,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,107
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.29
</TABLE>
