<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997
REGISTRATION NO. 333-37223
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 95-1778500 3812
(STATE OR OTHER (I.R.S. EMPLOYER (PRIMARY STANDARD
JURISDICTION IDENTIFICATION NO.) INDUSTRIAL
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
7200 HUGHES TERRACE, LOS ANGELES, CALIFORNIA 90045-0066; (310) 568-7200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CHARLES S. REAM
HE HOLDINGS, INC.
7200 HUGHES TERRACE
LOS ANGELES, CALIFORNIA 90045-0066
(310) 568-7200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
WARREN G. ANDERSEN ROBERT S. OSBORNE, P.C. JOHN T. KUELBS
GENERAL MOTORS KIRKLAND & ELLIS HE HOLDINGS, INC.
CORPORATION 200 EAST RANDOLPH DRIVE 7200 HUGHES TERRACE
3031 WEST GRAND BOULEVARD CHICAGO, IL 60601-6636 LOS ANGELES, CA 90045-
DETROIT, MI 48202-3091 (312) 861-2000 0066
(313) 556-5000 (310) 568-7200
FREDERICK S. GREEN ADAM O. EMMERICH, ESQ.
WEIL, GOTSHAL & MANGES LLP WATCHELL, LIPTON, ROSEN & KATZ
767 FIFTH AVENUE 51 WEST 52ND STREET
NEW YORK, NY 10153 NEW YORK, NY 10019
(212) 310-8000 (212) 403-1000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the requisite consents are obtained pursuant to the
solicitation by General Motors Corporation referred to in the Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
LOGO
SOLICITATION OF WRITTEN CONSENT OF
GENERAL MOTORS CORPORATION
COMMON STOCKHOLDERS
THE HUGHES TRANSACTIONS
LOGO
WE ARE ASKING OUR COMMON STOCKHOLDERS TO APPROVE
THE FOLLOWING "HUGHES TRANSACTIONS" RELATING TO THE THREE PRINCIPAL BUSINESSES
OF OUR HUGHES ELECTRONICS SUBSIDIARY.
DEFENSE ELECTRONICS
WE PROPOSE TO SPIN OFF OUR DEFENSE ELECTRONICS BUSINESS, APPROXIMATELY
58.7% TO OUR CLASS H COMMON STOCKHOLDERS AND 41.3% TO OUR $1 2/3 COMMON
STOCKHOLDERS (ESTIMATED BASED ON RECENT STOCK PRICES). IMMEDIATELY AFTER
THE SPIN-OFF, THIS BUSINESS WILL MERGE WITH RAYTHEON COMPANY.
AUTOMOTIVE ELECTRONICS
WE PROPOSE TO TRANSFER OUR AUTOMOTIVE ELECTRONICS BUSINESS FROM
HUGHES ELECTRONICS TO GENERAL MOTORS. AS A RESULT, THE APPROXIMATELY
25.6% TRACKING STOCK INTEREST IN THIS BUSINESS CURRENTLY HELD BY OUR
CLASS H COMMON STOCKHOLDERS WILL IN EFFECT BE ALLOCATED TO OUR $1 2/3
COMMON STOCKHOLDERS.
TELECOMMUNICATIONS AND SPACE
WE PROPOSE TO RECAPITALIZE OUR CLASS H COMMON STOCK INTO A NEW
TRACKING STOCK INTEREST OF APPROXIMATELY 25.6% IN OUR
TELECOMMUNICATIONS AND SPACE BUSINESS. THIS BUSINESS WILL ALSO BE
PROVIDED WITH A SUBSTANTIAL AMOUNT OF NEW CAPITAL FUNDING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE HUGHES TRANSACTIONS OR THE NEW CLASS
H COMMON STOCK OR THE CLASS A COMMON STOCK TO BE ISSUED PURSUANT TO THIS
SOLICITATION STATEMENT/PROSPECTUS. THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT PASSED UPON THE FAIRNESS OR MERITS OF THE HUGHES TRANSACTIONS OR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS SOLICITATION
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS SOLICITATION STATEMENT/PROSPECTUS IS NOVEMBER 10, 1997.
<PAGE>
UNTIL 25 DAYS AFTER THE DATE OF MAILING OF THIS SOLICITATION
STATEMENT/PROSPECTUS, ALL DEALERS EFFECTING TRANSACTIONS IN CLASS A COMMON
STOCK OR NEW GM CLASS H COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHAPTER 1: INTRODUCTION................................................... 1
Introduction to the Hughes Transactions................................. 3
Summary Financial Information........................................... 10
Recent Developments..................................................... 23
CHAPTER 2: RISK FACTORS................................................... 25
Risk Factors Relating to the Hughes Transactions........................ 27
Risk Factors Relating to the Business of New Hughes Electronics......... 30
Risk Factors Relating to GM's Dual-Class Common Stock Capital Structure. 32
Additional Risk Factors Regarding New GM Class H Common Stock........... 34
Risk Factors Regarding New Raytheon After the Raytheon Merger........... 36
CHAPTER 3: THE HUGHES TRANSACTIONS
AND THE RAYTHEON MERGER................................................... 39
Special Factors......................................................... 41
Description of the Hughes Transactions.................................. 101
Description of the Raytheon Merger...................................... 113
Separation and Transition Arrangements.................................. 136
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS................................. 149
General Motors Pro Forma Consolidated Capitalization.................... 151
Introduction to the Financial and Business Reviews of Hughes Defense,
Delco and Hughes Telecom............................................... 153
Hughes Defense Selected Combined Historical Financial Data.............. 154
Hughes Defense Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 155
Business of Hughes Defense.............................................. 159
Delco Selected Combined Historical and Pro Forma Financial Data......... 168
Delco Unaudited Pro Forma Condensed Combined Financial Statements....... 169
Delco Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................................. 172
Delco Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 173
Business of Delco....................................................... 177
Hughes Telecom Selected Combined Historical and Pro Forma Financial
Data................................................................... 184
Hughes Telecom Unaudited Pro Forma Condensed Combined Financial
Statements............................................................. 185
Hughes Telecom Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................................. 189
Hughes Telecom Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 192
Business of Hughes Telecom.............................................. 197
Raytheon Selected Combined Historical and Pro Forma Financial Data...... 212
Overview of Raytheon Business........................................... 213
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
CHAPTER 5: NEW RAYTHEON................................................. 215
New Raytheon Unaudited Pro Forma Combined Condensed Financial
Statements.......................................................... 217
New Raytheon Notes to Unaudited Pro Forma Combined Condensed
Financial Statements................................................ 221
Overview of New Raytheon Business.................................... 224
New Raytheon Management.............................................. 226
New Debt of Hughes Defense to be Assumed by New Raytheon............. 231
CHAPTER 6: CAPITAL STOCK................................................ 233
Comparison of GM Class H Common Stock, New GM Class H Common Stock
and Class A Common Stock............................................ 235
Considerations Relating to GM's Dual-Class Common Stock Capital
Structure........................................................... 245
GM Class H Common Stock.............................................. 249
New GM Class H Common Stock.......................................... 253
New Raytheon Capital Stock........................................... 258
CHAPTER 7: CONSENT SOLICITATION AND CERTAIN OTHER MATTERS............... 267
Solicitation of Written Consent of GM's Common Stockholders.......... 269
Security Ownership of Certain Beneficial Owners and Management of
General Motors...................................................... 272
Forward-Looking Information May Prove Inaccurate..................... 273
Estimated Fees and Expenses.......................................... 274
Legal Matters........................................................ 275
Experts.............................................................. 275
Where You Can Find More Information.................................. 276
GLOSSARY................................................................ 279
APPENDICES
APPENDIX A GM Spin-Off Merger Agreement
Exhibit A: Article Fourth of the GM Amended and Restated
Certificate of Incorporation, After Giving Effect to the
GM Spin-Off Merger
APPENDIX B Fairness Opinions
Updated Merrill Lynch Fairness Opinion
Updated Salomon Brothers Fairness Opinion
Goldman Sachs Fairness Opinion
APPENDIX C Hughes Defense Combined Financial Statements
APPENDIX D Delco Combined Financial Statements
APPENDIX E Hughes Telecom Combined Financial Statements
</TABLE>
ii
<PAGE>
CHAPTER 1: INTRODUCTION
CHAPTER 1
INTRODUCTION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION TO THE HUGHES TRANSACTIONS........................... 3
The Hughes Transactions......................................... 3
Raytheon Stock Price............................................ 4
New Raytheon Common Stock....................................... 5
The Distribution Ratio.......................................... 5
Delco Transfer.................................................. 6
New GM Class H Common Stock..................................... 6
No Recapitalization Into GM $1 2/3 Common Stock................. 7
Tax Matters..................................................... 7
Board Recommendation............................................ 7
Risk Factors.................................................... 8
Stockholder Litigation.......................................... 8
Timing and Approvals............................................ 8
Raytheon Information............................................ 8
Consent Mechanics............................................... 9
The Issuers..................................................... 9
Additional Information.......................................... 9
SUMMARY FINANCIAL INFORMATION..................................... 10
Possible Effects of the Hughes Transactions on Your GM Common
Stock.......................................................... 10
General......................................................... 11
Hughes Electronics.............................................. 11
Purchase Accounting Adjustments................................. 12
Certain Historical and Pro Forma Per Share Information ......... 13
General Motors Selected Consolidated Historical Financial Data.. 15
Hughes Electronics Summary Consolidated Financial Data.......... 17
Hughes Defense Summary Combined Financial Data.................. 19
Delco Summary Combined Historical and Pro Forma Financial Data.. 20
Hughes Telecom Summary Combined Historical and Pro Forma
Financial Data................................................. 21
Raytheon Summary Combined Historical and Pro Forma Financial
Data........................................................... 22
RECENT DEVELOPMENTS............................................... 23
New Leadership Team at Hughes Electronics....................... 23
General Motors Competitiveness Studies.......................... 23
Raytheon........................................................ 23
</TABLE>
1
<PAGE>
CHAPTER 1: INTRODUCTION
[THIS PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
CHAPTER 1: INTRODUCTION
INTRODUCTION
We have highlighted selected information in this Introduction. However, it
may not contain all of the information that is important to you. We urge you to
read the entire document (including the Appendices) and the documents
incorporated by reference. The Glossary provides definitions for certain
capitalized terms.
We have calculated several important values for illustrative purposes in this
document based on the November 7, 1997 closing price of Raytheon Common Stock
of $51.00 per share (the "Recent Raytheon Stock Price"). These calculated
values include the percentage of Class A Common Stock that will be distributed
to holders of each class of GM common stock, the indicated value of the Class A
Common Stock to be distributed, the amount of debt that Hughes Defense will be
permitted to have when it is spun off and the amount of new capital to be made
available to Hughes Telecom. These calculations are illustrative only and will
change based on changes in the market price of Raytheon Common Stock between
now and the closing.
We also refer throughout this document to the tracking stock interest of the
GM Class H Common Stockholders in the earnings of our Hughes Electronics
subsidiary as being approximately 25%. This percentage amount, which we call
the "Class H Fraction," changes depending on the number of shares of GM Class H
Common Stock outstanding at any time. For most calculations in this document
which use the Class H Fraction, we have used the Class H Fraction as of
September 30, 1997 (approximately 25.6%).
INTRODUCTION TO THE HUGHES TRANSACTIONS
THE HUGHES TRANSACTIONS
We are proposing three related transactions to enhance the value of the
businesses operated by our Hughes Electronics subsidiary. We need your consent
in order to accomplish these "Hughes Transactions."
(1) HUGHES DEFENSE
We propose to spin off the defense electronics business of Hughes Electronics
to our common stockholders. We call this business "Hughes Defense." Immediately
after the spin-off, Hughes Defense will merge with Raytheon Company. Based on
the Recent Raytheon Stock Price, these transactions have an indicated value of
approximately $9.5 billion.
The merged company will be the nation's third largest defense company and
one of the largest providers of defense electronics in the world. The merger
should enable it to compete more effectively in the U.S. defense industry,
where significant consolidation has been occurring. We call the merged com-
pany "New Raytheon."
GM common stockholders will receive all of the Class A Common Stock of
Hughes Defense, representing approximately 30% of the common stock of New
Raytheon after the merger. This stock has an indicated value of approxi-
mately $5.2 billion based on the Recent Raytheon Stock Price. Approximately
58.7% of the Class A Common Stock would be distributed to GM Class H Common
Stockholders and approximately 41.3% would be distributed to GM $1 2/3 Com-
mon Stockholders based on the Recent Raytheon Stock Price.
Hughes Defense will be permitted to have approximately $4.3 billion of
debt when it is spun off. Substantially all of the proceeds of this debt
will be made available as new capital for Hughes Telecom. The obligation to
repay this debt, however, will remain with New Raytheon (in which GM's com-
mon stockholders will have an approximately 30% equity interest).
The indicated transaction value of approximately $9.5 billion consists of
the sum of (1) the value of the Class A Common Stock to be distributed to
GM's common stockholders and (2) the amount of debt that Hughes Defense is
permitted to have at the time of the spin-off. We believe that this amount
represents a substantial premium to the enterprise value of Hughes Defense
under its current ownership structure.
(2) DELCO ELECTRONICS
We propose to transfer Delco Electronics, our automotive electronics business,
from Hughes
3
<PAGE>
CHAPTER 1: INTRODUCTION
Electronics to General Motors. The tracking stock interest in Delco's earnings
that is currently held by GM Class H Common Stockholders will in effect be
allocated to holders of GM $1 2/3 Common Stock.
By transferring Delco to General Motors, we will be able to fully inte-
grate it with our Delphi Automotive Systems business. That should enable
these businesses to participate more effectively in a component industry
trend toward integrated automotive systems.
To compensate GM Class H Common Stockholders for the transfer of Delco and
other effects of the Hughes Transactions, we have allocated an amount of
Class A Common Stock to them which is more than the approximately 25.6% that
reflects their current tracking stock interest in Hughes Defense. The allo-
cation of Class A Common Stock to the GM Class H Common Stockholders is ap-
proximately 58.7% based on the Recent Raytheon Stock Price.
(3) HUGHES TELECOM
We propose to make about $4.0 billion of new capital funding available to the
telecommunications and space business of Hughes Electronics, which we call
"Hughes Telecom," and to recapitalize the GM Class H Common Stock into a new
tracking stock interest in that business.
Hughes Telecom will receive about $4.0 billion in cash from new debt bor-
rowed by Hughes Defense before it is spun off to our common stockholders.
This capital funding will enhance Hughes Telecom's ability to take advantage
of growth opportunities in the expanding global telecommunications market.
Hughes Telecom expects that its immediate use of approximately $3.0 billion
of the capital funding will be to repay indebtedness, including approxi-
mately $1.7 billion owed to General Motors in connection with Hughes
Telecom's acquisition of PanAmSat Corporation in May 1997. We also believe
that Hughes Telecom will benefit from having its senior management focused
on a single principal area of business.
Each share of GM Class H Common Stock will become a share of New GM Class
H Common Stock. As a result, the current approximately 25.6% tracking stock
interest of GM Class H Common Stockholders in Hughes Electronics will become
an equivalent tracking stock interest in the business of Hughes Telecom,
which will be operated after the Hughes Transactions by a GM subsidiary we
call "New Hughes Electronics."
RAYTHEON STOCK PRICE
Changes in the market price of Raytheon Common Stock will affect several
calculations relevant to the transactions.
First, we have used the Recent Raytheon Stock Price ($51.00 per share on
November 7, 1997) for illustrative calculations of the amount of the Class A
Common Stock to be distributed to the holders of each class of GM common
stock and the value of those distributions.
Second, under our agreement with Raytheon, changes in Raytheon's stock
price within a "collar" range will affect the amount of debt that Hughes
Defense is permitted to have when it is spun off, and thus the amount
available as capital for Hughes Telecom.
The actual amount of permitted debt and the allocation of Class A Common
Stock between the two classes of GM common stockholders will depend on the
average stock price of Raytheon during a specified period prior to the closing
of the Hughes Transactions. The Recent Raytheon Stock Price is not necessarily
indicative of this average price or the market value of Raytheon common stock
at the time of or after the closing of the transactions.
The collar range for Raytheon's stock price is between $44.42 and $54.29 per
share. If the price of Raytheon Common Stock is within the collar (which it was
in January 1997 when the agreement was entered into with Raytheon), the amount
of debt that Hughes Defense is permitted to have will be adjusted so that the
total transaction value will be $9.5 billion. Raytheon stock prices above
$54.29 per share would result in transaction values higher than $9.5 billion,
while Raytheon stock prices below $44.42 per share would result in transaction
values less than $9.5 billion.
Based on the Recent Raytheon Stock Price, the Class A Common Stock
distributed in the spin-off would be worth approximately $5.2 billion and
Hughes Defense would be allowed to have approximately $4.3 billion of debt.
Accordingly, the transaction would have a current indicated value to General
Motors and its common stockholders of approximately $9.5 billion.
4
<PAGE>
CHAPTER 1: INTRODUCTION
The following table shows a range of illustrative Raytheon Common Stock
prices and how they affect the total value of the transaction:
<TABLE>
<CAPTION>
RAYTHEON VALUE OF HUGHES TOTAL
COMMON CLASS A DEFENSE INDICATED
STOCK PRICE COMMON STOCK DEBT VALUE
- ----------- ------------ ------- ---------
($ BILLIONS, EXCEPT STOCK PRICE)
<S> <C> <C> <C>
$65 $6.7 $3.9 $10.6
60 6.2 3.9 10.1
55 5.6 3.9 9.5
50 5.1 4.4 9.5
45 4.6 4.9 9.5
40 4.1 4.9 9.0
</TABLE>
GM's common stockholders will directly receive the value of the Class A
Common Stock, which will be distributed to them in the spin-off of Hughes
Defense. In addition, our stockholders will benefit from the new debt borrowed
by Hughes Defense before the spin off because the proceeds (up to $4.0 billion)
will be made available to Hughes Telecom to fund growth opportunities in the
telecommunications and space business. All of our common stockholders will have
a continuing interest in that business. If Hughes Defense borrows more than
$4.0 billion of new debt, the additional proceeds will be made available to
General Motors, in which case an appropriate adjustment will be made in the
amount of Class A Common Stock to be distributed to each class of GM common
stockholders. We currently estimate that this will occur only if the Raytheon
Common Stock price is $53.59 or less.
NEW RAYTHEON COMMON STOCK
In the spin-off, GM's common stockholders will receive Class A Common Stock
of Hughes Defense. In the merger of Hughes Defense and Raytheon, this stock
will remain outstanding as Class A Common Stock of New Raytheon (except that
fractional shares will be sold for cash) and Raytheon's common stockholders
will receive Class B Common Stock of New Raytheon.
The Class A Common Stock will represent approximately 30% of the outstanding
equity value of New Raytheon. The Class B Common Stock will represent the
remaining approximately 70% of the outstanding equity value. With respect to
the election of directors of New Raytheon, the Class A
Common Stockholders will possess 80.1% of the voting power. The Class B Common
Stockholders will possess the remaining 19.9% of the voting power in the
election of directors. Each class will vote separately as to all other matters.
Except as to voting rights, the Class A Common Stock and Class B Common Stock
will be identical.
This dual class capital structure of New Raytheon was necessary in order for
General Motors to obtain an IRS letter ruling to the effect that the spin-off
of Hughes Defense will be tax-free to General Motors and its common
stockholders for U.S. federal income tax purposes.
THE DISTRIBUTION RATIO
We will distribute a total of 102,630,503 shares of Class A Common Stock to
our common stockholders. Based on the Recent Raytheon Stock Price, we estimate
that approximately 58.7% of these shares will be distributed to GM Class H
Common Stockholders and approximately 41.3% will be distributed to GM $1 2/3
Common Stockholders. We refer to the relationship between these amounts as the
"Distribution Ratio."
The Distribution Ratio is a formula that depends on certain variables that
cannot be known precisely until the closing of the Hughes Transactions. The
most significant of these variables is the average closing market price of
Raytheon Common Stock during a specified period shortly before the closing. See
"Special Factors--The Distribution Ratio" in Chapter 3.
In setting the Distribution Ratio, the GM Board determined that GM Class H
Common Stockholders should receive a portion of the Class A Common Stock equal
to the Class H Fraction to reflect their current tracking stock interest in
Hughes Defense plus an additional amount of Class A Common Stock to compensate
them for relinquishing their current tracking stock interest in Delco and for
the other net effects of the Hughes Transactions.
The GM Board determined that the additional amount of Class A Common Stock to
be issued to GM Class H Common Stockholders should have a value equal to $6.5
billion multiplied by the percentage amount of the GM Class H Common
Stockholders' tracking stock interest in Hughes Electronics (i.e., the "Class H
Fraction")
5
<PAGE>
CHAPTER 1: INTRODUCTION
immediately before the closing, plus an additional amount equal to the product
of multiplying the Class H Fraction times the amount of any proceeds of Hughes
Defense debt made available to General Motors as described above. Based on the
Recent Raytheon Stock Price, approximately $266 million of debt proceeds would
be made available to General Motors. Accordingly, based on the approximately
25.6% tracking stock interest of GM Class H Common Stockholders as of September
30, 1997, the total additional Class A Common Stock should have a value of
approximately $1.665 billion plus $68 million, or $1.733 billion in total.
The number of additional shares of Class A Common Stock needed in order to
deliver the total additional value to the GM Class H Common Stockholders will
be determined by valuing each share at the average closing market price of
Raytheon Common Stock during a specified period before the closing. Based on
the Recent Raytheon Stock Price and a total additional value of approximately
$1.733 billion, this would result in the distribution of 33,988,730 additional
shares of Class A Common Shares to the GM Class H Common Stockholders.
The foregoing calculations would result in a distribution of a total of
approximately 58.7% of the Class A Common Stock to GM Class H Common
Stockholders. The balance of 41.3% would be distributed to GM $1 2/3 Common
Stockholders.
The following table illustrates the effect the Hughes Transactions would have
on the ownership interests of a holder of one share of each class of GM common
stock, if the relevant market price of Raytheon Common Stock were equal to the
Recent Raytheon Stock Price.
<TABLE>
<CAPTION>
EXAMPLE OF EXAMPLE OF
OWNERSHIP OWNERSHIP
BEFORE THE AFTER THE
HUGHES TRANSACTIONS HUGHES TRANSACTIONS
------------------- -------------------
<S> <C>
One share of GM $1 2/3 One share of GM $1 2/3
Common Stock Common Stock
AND
0.05987 shares of Class A
Common Stock with an
indicated market value
of $3.05.
-------------
One share of GM One share of New GM
Class H Common Stock Class H Common Stock
AND
0.58836 shares of Class A
Common Stock with an
indicated market value
of $30.01.
</TABLE>
For a table showing the distribution of the Class A Common Stock between the
two classes of GM common stock based on a range of Raytheon Common Stock
prices, see "Special Factors--The Distribution Ratio" in Chapter 3.
DELCO TRANSFER
Delco will be transferred from Hughes Electronics to General Motors so that
it can be more fully integrated with Delphi. As a result of this transfer,
Delco's financial performance will not be tracked by the New GM Class H Common
Stock. In effect, the tracking stock interest in Delco's earnings that is
currently held by GM Class H Common Stockholders will be allocated to holders
of GM $1 2/3 Common Stock.
We believe that the integration of Delco's automotive electronics capability
with Delphi's systems and components expertise will create a premier global
automotive systems supplier. The combination will allow us to compete more
effectively in markets worldwide by developing new electronically enhanced
vehicle systems. We expect these systems to have improved functionality, lower
cost and higher quality. Delco will also gain access to Delphi's customer base.
In addition, the integration should allow these businesses to achieve
structural cost savings.
The GM Board took the transfer of Delco into account when it determined the
additional amount of Class A Common Stock that GM Class H Common Stockholders
should receive in addition to the approximately 25.6% of such stock that
reflects their current tracking stock interest in Hughes Defense. In so doing,
the GM Board considered the benefits of the integration of Delco and Delphi.
Thus, we believe that the Delco valuation considerations used in determining
the Distribution Ratio reflect a substantial premium to the enterprise value of
Delco under the current Hughes Electronics and GM ownership structure.
NEW GM CLASS H COMMON STOCK
Like the current GM Class H Common Stockholders, the holders of New GM Class
H Common Stock will be stockholders of General Motors, not of Hughes
Electronics. The New GM Class H Common Stock will represent an approximately
25.6% tracking stock interest in New Hughes Electronics (based on the Class H
Fraction as of September 30, 1997), which will have one principal business:
Hughes Telecom. This will be a
6
<PAGE>
CHAPTER 1: INTRODUCTION
more focused investment than the existing GM Class H Common Stock, which
currently represents an approximately 25.6% tracking stock interest in the
three principal businesses of Hughes Electronics: Hughes Defense, Delco and
Hughes Telecom.
The current policy of the GM Board is to pay a quarterly dividend of $0.25
per share on the existing GM Class H Common Stock. Because New Hughes
Electronics contemplates retaining future earnings for the development of its
business, General Motors does not anticipate that it will initially pay any
cash dividends on the New GM Class H Common Stock.
The GM Certificate of Incorporation will be amended to delete provisions
relating to the existing GM Class H Common Stock and to add new provisions
setting forth the terms of the New GM Class H Common Stock. The terms of the
New GM Class H Common Stock are described in "Chapter 6: Capital Stock."
In connection with its determination of the terms of the New GM Class H
Common Stock, the GM Board reviewed its policies and practices with respect to
its dual-class common stock capital structure and adopted a policy statement
regarding certain capital stock matters. This policy statement is effective
upon the closing of the Hughes Transactions and covers certain transactions
involving General Motors and New Hughes Electronics and the relationship
between dividends (if any) to be paid by New Hughes Electronics to General
Motors and by General Motors to the New GM Class H Common Stockholders. This
policy statement is set forth under "Considerations Relating to GM's Dual-Class
Common Stock Capital Structure" in Chapter 6.
NO RECAPITALIZATION INTO GM $1 2/3 COMMON STOCK
The Hughes Transactions will not result in a recapitalization of GM Class H
Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio as currently
provided for under certain circumstances in the GM Certificate of
Incorporation. As part of the Hughes Transactions, the GM Certificate of
Incorporation will be amended to eliminate any possible application of the
recapitalization provision to the Hughes Transactions. Even absent this
amendment, we believe that there is substantial uncertainty as to whether the
recapitalization provision would apply. By voting in favor of the Hughes
Transactions, you will in effect be waiving any application of the provision to
the Hughes Transactions. For further discussion, see "Description of the Hughes
Transactions--No Recapitalization at a 120% Exchange Ratio" in Chapter 3.
TAX MATTERS
For U.S. federal income tax purposes, the Hughes Transactions and the
Raytheon Merger will be tax-free to you as GM's common stockholders (other than
with respect to cash you will receive instead of fractional shares of Class A
Common Stock) and to General Motors. We have received an IRS letter ruling
confirming that the spin-off of Hughes Defense and the separation of Hughes
Telecom from Hughes Defense (which is required in order to prepare Hughes
Defense for the spin-off) will be tax-free. New tax rules applicable to certain
corporate spin-offs signed into law by President Clinton on August 5, 1997 will
not apply to the Hughes Transactions under the transition provisions enacted as
part of this legislation.
All GM common stockholders will be required to attach information to their
U.S. federal income tax return for the year in which the spin-off of Hughes
Defense occurs in order to show that the spin-off of Hughes Defense is tax-
free. General Motors will provide this information to you after the Hughes
Transactions and Raytheon Merger have been completed.
BOARD RECOMMENDATION
The GM Board has carefully reviewed the Hughes Transactions with the active
participation of its Capital Stock Committee, which consists entirely of
independent directors. We have received opinions from two independent
investment banking firms, Merrill Lynch and Salomon Brothers, as to the
fairness, from a financial point of view, to each class of GM common
stockholders of the consideration to be provided to General Motors and its
subsidiaries and to each class of our common stockholders in the Hughes
Transactions. We have also received an opinion from a third investment banking
firm, Goldman Sachs, as to the fairness of the aggregate consideration in the
Raytheon Merger to Hughes Defense, Hughes Electronics, General Motors, GM $1
2/3 Common Stockholders and GM Class H Common Stockholders taken as a whole.
7
<PAGE>
CHAPTER 1: INTRODUCTION
The full text of the investment bank opinions, which in each case set forth
the assumptions made, matters considered and limitations on the review
undertaken in connection with the opinions, are included in Appendix B to this
document. WE URGE YOU TO READ THESE OPINIONS CAREFULLY.
BASED ON THE FOREGOING, THE GM BOARD HAS DETERMINED THAT THE HUGHES
TRANSACTIONS ARE IN THE BEST INTERESTS OF GENERAL MOTORS AND ITS COMMON
STOCKHOLDERS AND ARE FAIR TO THE HOLDERS OF BOTH CLASSES OF GM COMMON STOCK.
THE GM BOARD HAS UNANIMOUSLY APPROVED THE HUGHES TRANSACTIONS AND RECOMMENDS
THAT GM COMMON STOCKHOLDERS APPROVE THE HUGHES TRANSACTIONS BY EXECUTING AND
RETURNING THE ENCLOSED CONSENT.
RISK FACTORS
There are significant challenges and risks involved in each of the business
strategies addressed by the Hughes Transactions. These risks include
uncertainties about achieving the expected synergies and benefits from the
merger of Hughes Defense and Raytheon and from the integration of Delco and
Delphi. There are also risks associated with separating the three businesses of
Hughes Electronics. These and other risks are addressed in "Chapter 2: Risk
Factors."
STOCKHOLDER LITIGATION
Nine lawsuits were filed in Delaware Chancery Court after we announced the
Hughes Transactions in January 1997. All of these lawsuits have been
consolidated and a consolidated amended complaint has recently been filed. That
complaint alleges that the defendants have breached and are continuing to
breach their fiduciary and alleged contractual duties to specified holders of
GM Class H Common Stock in connection with the Hughes Transactions.
The lawsuits seek injunctions against the Hughes Transactions (or any other
disposition of Hughes Defense in the absence of a recapitalization of the GM
Class H Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio) and
compensatory damages.
TIMING AND APPROVALS
We are working towards completing the Hughes Transactions as soon as
possible. We currently expect to complete the Hughes Transactions and the
Raytheon Merger before December 31, 1997. However, in the event that the
transactions are not completed before that date, each of Raytheon and Hughes
Defense has agreed that it will not assert prior to January 16, 1998 a right
that it would otherwise have to terminate the merger agreement because of the
failure to have completed the Raytheon Merger before December 31, 1997.
We will not complete the Hughes Transactions unless we obtain the approval of
the holders of:
. a majority of the outstanding shares of GM $1 2/3 Common Stock, voting as a
separate class; and
. a majority of the outstanding shares of GM Class H Common Stock, voting as
a separate class.
Only GM's common stockholders who held shares on October 15, 1997 are
entitled to vote on the Hughes Transactions.
You are not being asked to approve the Raytheon Merger, which has already
been approved by Hughes Electronics as the sole stockholder of Hughes Defense.
However, if GM's common stockholders do not approve the Hughes Transactions,
the Raytheon Merger will not occur. Completion of the Hughes Transactions is
also conditioned upon the approval of the Raytheon Merger by Raytheon's common
stockholders and satisfaction or waiver of the other conditions to the closing
of the Raytheon Merger as described under "Description of the Raytheon Merger--
Raytheon Merger Agreement--Conditions" in Chapter 3.
RAYTHEON INFORMATION
Raytheon is seeking approval of the Raytheon Merger by its existing common
stockholders and is sending a related solicitation statement (the "Raytheon
Solicitation Statement") to its common stockholders. The Raytheon Solicitation
Statement contains information about Raytheon, about the Raytheon Merger and
about the business and prospects of New Raytheon that may be of interest to you
in considering the Hughes Transactions.
In particular, a section of the Raytheon Solicitation Statement called
"Background" contains information about the background of the Raytheon Merger
from Raytheon's point of view, including information about the Raytheon board
of directors' consideration of the Raytheon Merger and its decision to approve
the Raytheon Merger and recommend it to the stockholders of Raytheon, as to
which we have no direct knowledge. That section also contains summaries of (1)
an opinion of Bear Stearns, financial advisor to Raytheon, to the effect that,
as of the date of the opinion and based upon and subject to certain matters
stated in the opinion, the Raytheon Merger is fair to Raytheon
8
<PAGE>
CHAPTER 1: INTRODUCTION
stockholders from a financial point of view and (2) an opinion of CSFB,
financial advisor to Raytheon, to the effect that, as of the date of the
opinion and based upon and subject to certain matters stated in the opinion,
the Merger Consideration (as defined in the opinion) was fair to the holders of
Raytheon Common Stock from a financial point of view. Copies of the opinions of
Bear Stearns and CSFB are attached as appendices to the Raytheon Solicitation
Statement.
As explained in "Where You Can Find More Information" in Chapter 7, we have
incorporated the "Background" section of the Raytheon Solicitation Statement as
well as the Raytheon Merger Agreement and the opinions of Bear Stearns and
CSFB, which are attached as appendices to the Raytheon Solicitation Statement,
into this document by reference. You should note, however, that these materials
were prepared for Raytheon's board of directors in connection with the Raytheon
Merger, and Raytheon's board of directors and its financial advisors did not
consider your interests as a stockholder of General Motors.
CONSENT MECHANICS
Please complete, date, sign and return the enclosed consent as soon as
possible. Your consent is important regardless of the number of shares that you
own.
YOU SHOULD NOT SEND YOUR STOCK CERTIFICATES WITH THE CONSENT CARD ENCLOSED
WITH THIS DOCUMENT. YOU WILL RECEIVE FURTHER CORRESPONDENCE AFTER THE
TRANSACTIONS HAVE BEEN COMPLETED.
You can revoke your consent at any time prior to the approval of the Hughes
Transactions. This will occur as soon as consents representing the requisite
stockholder approvals described above are delivered to General Motors, so long
as this is at least 20 business days from the date this document is mailed to
stockholders.
Revocations can be made by filing with the Secretary of General Motors either
a written notice stating that you would like to revoke your consent or another
written consent bearing a later date. Revocations should be sent to the
Secretary of General Motors at the following address:
General Motors Corporation
General Motors Building
3044 West Grand Boulevard
Detroit, Michigan 48202-3091
Attention: Secretary
THE ISSUERS
The New GM Class H Common Stock will be issued by General Motors. GM's
principal executive offices are located at 100 Renaissance Center, Detroit,
Michigan 48243-7301 (Telephone Number (313) 556-5000).
As of the Record Date, directors and executive officers of General Motors
(and their affiliates) together held less than 1% of the outstanding shares of
GM $1 2/3 Common Stock and less than 1% of the outstanding shares of GM Class H
Common Stock. To our knowledge, all of such persons currently intend to vote in
favor of the Hughes Transactions.
The Class A Common Stock to be distributed in the spin-off will be issued by
a subsidiary of Hughes Electronics which is named HE Holdings, Inc. HE Holdings
is the corporate name currently used by the corporation that was called "Hughes
Aircraft Company" when it was acquired by General Motors in 1985. HE Holdings
currently owns and operates (principally through subsidiaries) both the defense
electronics business and the telecommunications and space business of Hughes
Electronics. We refer to HE Holdings, Inc. as "Hughes Defense" because it will
own and operate the defense electronics business (but not the
telecommunications and space business) of Hughes Electronics at the time it is
spun off to GM's common stockholders and merged with Raytheon.
The principal executive offices of Hughes Defense are currently located at
7200 Hughes Terrace, Los Angeles, California 90045-0066 (Telephone Number (310)
568-7200). Upon the consummation of the Raytheon Merger, the principal
executive offices of New Raytheon will be located at 141 Spring Street,
Lexington, Massachusetts 02173 (Telephone Number (617) 862-6600).
ADDITIONAL INFORMATION
For additional information about the Hughes Transactions, including
information about how to complete and return your consent, please contact:
Morrow & Co., Inc.
909 Third Avenue, 20th Floor
New York, New York 10022
Banks and Brokers Call Toll Free:
1-800-662-5200
All Others Call Toll Free:
1-800-566-9058
9
<PAGE>
CHAPTER 1: INTRODUCTION
SUMMARY FINANCIAL INFORMATION
POSSIBLE EFFECTS OF THE HUGHES TRANSACTIONS ON YOUR GM COMMON STOCK
We are providing the following summary financial information to help you
analyze the financial aspects of the Hughes Transactions. The numbers in the
column entitled "Historical" are the actual per share numbers as of and for the
periods ended September 30, 1997 and December 31, 1996, respectively.
The numbers in the columns entitled "Assuming Hughes Transactions Occur" show
the pro forma effect on:
. book value per share, assuming the transactions were completed on September
30, 1997; and
. cash dividends per share and earnings per share, assuming the transactions
were completed on January 1 of each respective period.
In addition, you should note these numbers include the effect of the May 1997
merger of the satellite services operations of Hughes Telecom and PanAmSat and
the divestiture of Hughes Avicom.
All pro forma numbers are arithmetical combinations of GM's and Raytheon's
separate historical results and reflect certain adjustments that directly
relate to the Hughes Transactions, the Raytheon Merger, the Texas Instruments
Defense Acquisition by Raytheon, the PanAmSat Merger and the Avicom
Divestiture. You should not assume that General Motors and New Raytheon would
have actually achieved these results if the transactions had occurred on the
dates specified, or that either company will achieve similar results in the
future.
<TABLE>
<CAPTION>
ASSUMING HUGHES
HISTORICAL TRANSACTIONS OCCUR
GM $1 2/3 GM $1 2/3 + NEW RAYTHEON
---------- ----------- --------------
<S> <C> <C> <C>
GM $1 2/3 COMMON STOCK
BOOK VALUE PER SHARE
as of 9/30/97....................... $30.17 $28.47 $ 1.78
as of 12/31/96...................... $27.95 -- --
CASH DIVIDENDS PER SHARE
for the nine month period ended
9/30/97............................ $ 1.50 $ 1.50 $ 0.04
for the year ended 12/31/96......... $ 1.60 $ 1.60 $ 0.05
EARNINGS PER SHARE
(from continuing operations for
General Motors)
for the nine month period ending
9/30/97............................ $ 6.35 $ 5.99 $ 0.12
for the year ending 12/31/96........ $ 6.07 $ 5.91 $ 0.16
<CAPTION>
ASSUMING HUGHES
HISTORICAL TRANSACTIONS OCCUR
GM CLASS H GM CLASS H + NEW RAYTHEON
---------- ----------- --------------
<S> <C> <C> <C>
GM CLASS H COMMON STOCK
BOOK VALUE PER SHARE
as of 9/30/97....................... $15.09 $14.10 $17.46
as of 12/31/96...................... $13.97 -- --
CASH DIVIDENDS PER SHARE
for the nine month period ended
9/30/97............................ $ 0.75 -- $ 0.35
for the year ended 12/31/96......... $ 0.96 -- $ 0.47
EARNINGS PER SHARE
for the nine month period ending
9/30/97............................ $ 2.54 $ 0.37 $ 1.21
for the year ending 12/31/96........ $ 2.88 $ 0.33 $ 1.56
</TABLE>
The "Assuming Hughes Transactions Occur" columns in the table above show pro
forma information for each of GM's two classes of common stock on a per share
equivalent basis. We calculated the New Raytheon pro forma equivalent amounts
for each class of GM common stock on the basis of (1) the number of shares of
Class A Common Stock to be distributed to that class pursuant to the
Distribution Ratio (estimated based on the Recent Raytheon Stock Price and the
respective number of shares of GM common stock issued on
10
<PAGE>
CHAPTER 1: INTRODUCTION
September 30, 1997) and (2) the Class A Common Stock pro forma information as
set forth in the table of New Raytheon Common Stock Pro Forma Per Share Data
below. We also calculated book value per share of each class of GM common stock
based on the liquidation rights of each class under the GM Certificate of
Incorporation as proposed to be amended. For such purpose, we have assumed that
the per share liquidation unit of the New GM Class H Common Stock is 0.50,
which is the same as for the GM Class H Common Stock. See "Chapter 6: Capital
Stock."
For a more detailed explanation on how we calculated the numbers in these
charts, see the financial data that follows.
General Motors has initiated competitiveness studies which are expected to be
completed in the fourth quarter of 1997 or early 1998 and are expected to
result in charges against income totaling approximately $2 billion to $3
billion after taxes or $2.85 to $4.27 per share of GM $1 2/3 Common Stock. See
"Recent Developments--General Motors Competitiveness Studies" below for
additional information.
GENERAL
You should read the summary financial information in conjunction with the
consolidated financial statements (including the notes thereto) and
Management's Discussion and Analysis in the GM 1996 Form 10-K, including
information about Hughes Electronics in Exhibit 99 to that document. See "Where
You Can Find More Information" in Chapter 7.
Information about General Motors and Hughes Electronics for each of the
calendar years set forth below is derived from their respective consolidated
financial statements for those years, which have been audited by Deloitte &
Touche LLP, independent public accountants. The information about the three
principal businesses of Hughes Electronics is derived from their respective
combined financial statements. Their audited combined financial statements are
included in the Appendices to this document, but their combined financial
statements for other dates and periods have not been audited. Also, the
financial information about General Motors with its financing and insurance
operations on an equity basis is unaudited.
Information about General Motors, Hughes Electronics and the three principal
businesses of Hughes Electronics for each of the nine-month periods shown in
the tables is derived from their respective unaudited financial statements for
those periods. In the opinion of management, those statements reflect all
adjustments (consisting only of normal recurring items) that are necessary to
fairly present the financial information for those periods. However, the
results for interim periods are not necessarily indicative of results which may
be expected for any other interim or full year period.
Some of this information is presented on a pro forma basis to give effect to
the Hughes Transactions and to other specified transactions. Pro forma
information is not necessarily indicative of future financial position or
operating results.
HUGHES ELECTRONICS
Hughes Electronics currently has three primary business segments: Aerospace
and Defense Systems, Automotive Electronics and Telecommunications and Space.
In 1996, these segments represented, respectively, 40%, 33% and 26% of Hughes
Electronics' revenues and 44%, 41% and 16% of Hughes Electronics' operating
profit (excluding purchase accounting adjustments related to GM's acquisition
of Hughes Aircraft in 1985). Operations reported as Corporate and Other
represented approximately 1% of revenues and reported an operating loss of
$14.2 million.
The Hughes Transactions involve all three primary business segments of Hughes
Electronics, as well as the operations reported as Corporate and Other. The
Hughes Reorganization includes a number of preliminary transactions necessary
to separate the three primary business segments of Hughes Electronics, and the
operations reported as Corporate and Other, into Hughes Defense, Delco and
Hughes Telecom. See "Description of the Hughes Transactions--General--Hughes
Reorganization" and "Separation and Transition
11
<PAGE>
CHAPTER 1: INTRODUCTION
Arrangements" in Chapter 3. After giving effect to the Hughes Reorganization,
(1) Hughes Defense generally will consist of businesses currently reported in
the Aerospace and Defense Systems segment of Hughes Electronics, (2) Delco
generally will consist of businesses currently reported in the Automotive
Electronics segment of Hughes Electronics and (3) Hughes Telecom generally will
consist of businesses currently reported in the Telecommunications and Space
segment and Corporate and Other.
The separate financial statements of Hughes Defense, Delco and Hughes Telecom
contained in this document have been prepared in accordance with generally
accepted accounting principles and reflect the businesses to be included in
each after giving effect to the Hughes Reorganization. Hughes Electronics
corporate assets and liabilities have been included in the separate financial
statements to the extent identifiable to individual business units. The
separate financial statements also include allocations of corporate expenses
from Hughes Electronics. Such allocations are based either on actual usage or
on allocation methodologies which comply with U.S. government cost accounting
standards.
PURCHASE ACCOUNTING ADJUSTMENTS
The acquisition of Hughes Aircraft by General Motors in 1985 was accounted
for by General Motors as a purchase for financial accounting purposes. As a
result, General Motors recorded goodwill and other intangible assets of
approximately $4.2 billion. This amount is being amortized over periods of up
to 40 years, resulting in an annual earnings charge that is currently
approximately $122.0 million. We refer to these annual charges as purchase
accounting adjustments. As currently provided in the GM Certificate of
Incorporation, the earnings attributable to GM Class H Common Stock for
purposes of determining the amount available for the payment of dividends on GM
Class H Common Stock specifically exclude such adjustments. A significant
portion of these adjustments, which are currently charged against the earnings
available for the payment of dividends on GM $1 2/3 Common Stock, will be
eliminated as a result of the Hughes Transactions. The GM Certificate of
Incorporation, as proposed to be amended in the GM Spin-Off Merger, will also
provide that, in calculating the amount available for payment of dividends on
New GM Class H Common Stock (which amount will also be used to calculate
earnings per share of New GM Class H Common Stock), the remaining purchasing
accounting adjustments applicable to the telecommunications and space business
of Hughes Electronics will not be charged against the earnings of New Hughes
Electronics.
The Hughes Electronics Summary Consolidated Financial Data (Including
Purchase Accounting Adjustments) presented below include the application of
such purchase accounting adjustments, which are further described in Notes 1
and 7 to Hughes Electronics' Consolidated Financial Statements in Exhibit 99 to
the GM 1996 Form 10-K. More specifically, amortization and disposal of
intangible assets associated with GM's purchase of Hughes Aircraft amounted to
$122.3 million in 1996, $159.5 million in 1995 and $123.8 million in 1994, and
$91.7 million for both of the nine-month periods ended September 30, 1997 and
September 30, 1996. Such amounts were excluded from the earnings available for
the payment of dividends on GM Class H Common Stock and were charged against
the earnings available for the payment of dividends on GM $1 2/3 Common Stock.
Unamortized purchase accounting adjustments associated with GM's purchase of
Hughes Aircraft were $2,723.5 million, $2,845.8 million and $3,005.3 million at
December 31, 1996, 1995 and 1994, respectively, and $2,631.8 million and
$2,754.1 million at September 30, 1997 and 1996, respectively. In order to
assist you in understanding and analyzing Hughes Electronics' financial
results, the Hughes Electronics Unaudited Summary Consolidated Financial Data
(Excluding Purchase Accounting Adjustments) do not give effect to such purchase
accounting adjustments.
In addition, the separate financial statements of Hughes Defense and Hughes
Telecom reflect the application of the foregoing purchase accounting
adjustments applicable to each of Hughes Defense and Hughes Telecom. The
separate financial statements of Hughes Telecom exclude such purchase
accounting adjustments from the pro forma calculation of earnings available for
the payment of dividends on New GM Class H Common Stock, consistent with the
provisions of the GM Certificate of Incorporation as proposed to be amended in
the Hughes Transactions.
12
<PAGE>
CHAPTER 1: INTRODUCTION
CERTAIN HISTORICAL AND PRO FORMA PER SHARE INFORMATION
GM COMMON STOCK HISTORICAL PER SHARE DATA
This table shows historical per share information for each of the two
classes of GM common stock. We calculated book value per share based on the
liquidation rights of each class, which are described under "GM Class H Common
Stock" in Chapter 6.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------------- ------------------
GM $1 GM
GM $1 2/3 GM CLASS H 2/3 CLASS H
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Book value per share............... $30.17 $15.09 $27.95 $13.97
Cash dividends per share........... 1.50 0.75 1.60 0.96
Earnings per share from continuing
operations attributable to common
stocks............................ 6.35 2.54 6.07 2.88
</TABLE>
General Motors has initiated competitiveness studies which are expected to
be completed in the fourth quarter of 1997 or early 1998 and are expected to
result in charges against income totaling approximately $2 billion to $3
billion after taxes or $2.85 to $4.27 per share of GM $1 2/3 Common Stock. See
"Recent Developments--General Motors Competitiveness Studies" below for
additional information.
GM COMMON STOCK PRO FORMA PER SHARE DATA
This table shows pro forma information for each class of GM common stock
giving effect to the Hughes Transactions, the May 1997 merger of the satellite
services operations of Hughes Telecom and PanAmSat, which we refer to as the
"PanAmSat Merger," and the Avicom Divestiture.
The earnings per share of New GM Class H Common Stock in the table reflect
only that portion of New Hughes Electronics' earnings for the respective
periods that would have been available for the payment of dividends on the New
GM Class H Common Stock under the GM Certificate of Incorporation as proposed
to be amended. See "New GM Class H Common Stock--GM Certificate of
Incorporation Provisions Regarding Dividends" in Chapter 6. We calculated the
pro forma book value per share at September 30, 1997 based on the liquidation
rights of each class of stock under the GM Certificate of Incorporation as
proposed to be amended. For such purpose, we have assumed that the per share
liquidation unit of the New GM Class H Common Stock is 0.50, which is the same
as for the GM Class H Common Stock. See "Chapter 6: Capital Stock." We did not
calculate the pro forma book value per share at December 31, 1996.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS AS OF AND FOR THE
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
GM $1 NEW GM GM $1 NEW GM
2/3 CLASS H 2/3 CLASS H
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Book value per share..................... $ 28.47 $ 14.10 -- --
Cash dividends per share................. 1.50 -- $1.60 --
Earnings per share from continuing
operations attributable to common
stocks.................................. 5.99 0.37 5.91 $ 0.33
</TABLE>
RAYTHEON COMMON STOCK HISTORICAL PER SHARE DATA
This table shows historical per share information for Raytheon Common Stock.
We have derived this information from the "Raytheon Selected Combined
Historical and Pro Forma Financial Data" in Chapter 4.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 28, 1997 DECEMBER 31, 1996
------------------------ -----------------
<S> <C> <C>
Book value per share................. $21.22 $19.46
Cash dividends per share............. 0.60 0.80
Earnings per share................... 2.56 3.21
</TABLE>
13
<PAGE>
CHAPTER 1: INTRODUCTION
NEW RAYTHEON COMMON STOCK PRO FORMA PER SHARE DATA
This table shows pro forma per share information for each of the two proposed
classes of New Raytheon common stock. We have derived the information in this
table from the "New Raytheon Unaudited Pro Forma Combined Condensed Financial
Statements" in Chapter 5.
This table gives effect to (1) the Hughes Transactions, (2) the merger of
Raytheon with Hughes Defense and (3) Raytheon's July 1997 acquisition of the
defense business of Texas Instruments, which we refer to as the "Texas
Instruments Defense Acquisition." We calculated the pro forma book value per
share at September 28, 1997 by dividing the pro forma book value of the net
assets of New Raytheon by the number of shares of New Raytheon Common Stock
expected to be outstanding upon consummation of the Hughes Defense Spin-Off and
the Raytheon Merger. We did not calculate the pro forma book value per share at
December 31, 1996.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS
ENDED AS OF AND FOR THE
SEPTEMBER 28, YEAR ENDED
1997 DECEMBER 31, 1996
----------------- ------------------
CLASS A CLASS B CLASS A CLASS B
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Book value per share..................... $29.73 $29.73 -- --
Cash dividends per share................. 0.60 0.60 $ 0.80 $ 0.80
Earnings per share....................... 2.06 2.06 2.65 2.65
</TABLE>
14
<PAGE>
GENERAL MOTORS SELECTED
CONSOLIDATED HISTORICAL FINANCIAL DATA
The table below sets forth historical financial information about (1) General
Motors on a consolidated basis and (2) General Motors with its financing and
insurance operations presented on an equity basis.
General Motors financial statements have not been presented on a pro forma
basis to give effect to the Hughes Transactions. This is because the ongoing
effect of the Hughes Transactions on GM's overall financial condition and
results of operations will not be material. However, the Hughes Transactions
will initially increase GM's consolidated net liquidity by an amount equal to
any proceeds of new Hughes Defense debt, reduced by costs incurred in
connection with the Hughes Transactions, which are currently estimated to be
approximately $100 million.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------------------------------------
1997 (A) 1996 1996 1995 1994 1993 1992 (B)
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Total net sales and
revenues.............. $129,277 $123,100 $164,069 $160,272 $148,499 $132,991 $127,378
-------- -------- -------- -------- -------- -------- --------
Costs and expenses..... 121,602 117,575 158,120 151,923 141,401 130,562 130,440
Plant closings expense
(adjustments) and
provisions for other
restructurings........ 80 (409) (727) -- -- 950 1,237
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses............. 121,682 117,166 157,393 151,923 141,401 131,512 131,677
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before cumulative
effect of accounting
changes............... 4,961 4,167 4,953 6,033 4,866 1,777 (3,222)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 4,961 $ 4,177 $ 4,963 $ 6,881 $ 4,901 $ 2,466 $(23,498)
-------- -------- -------- -------- -------- -------- --------
EARNINGS (LOSS) PER
SHARE ATTRIBUTABLE TO
COMMON STOCKS:
GM $1 2/3 Common Stock
per share from
continuing operations
before cumulative
effect
of accounting changes.. $ 6.35 $ 5.15 $ 6.07 $ 7.14 $ 5.74 $ 1.68 $ (5.33)
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) per
share attributable to
GM $1 2/3 Common Stock. $ 6.35 $ 5.14 $ 6.06 $ 7.21 $ 5.15 $ 2.13 $ (38.28)
-------- -------- -------- -------- -------- -------- --------
Income per share from
discontinued operations
attributable to GM
Class E Common Stock... $ -- $ 0.04 $ 0.04 $ 1.96 $ 1.71 $ 1.51 $ 1.33
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) per
share attributable to
GM Class H Common
Stock.................. $ 2.54 $ 2.18 $ 2.88 $ 2.77 $ 2.62 $ 2.30 $ (2.29)
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and marketable
securities............ $ 20,896 $ 19,820 $ 22,262 $ 16,018 $ 15,331 $ 17,369 $ 14,533
-------- -------- -------- -------- -------- -------- --------
Total assets........... 233,135 215,889 222,142 213,663 191,145 182,388 184,287
-------- -------- -------- -------- -------- -------- --------
Notes and loans
payable............... 90,914 81,328 85,300 81,222 72,545 69,747 81,767
-------- -------- -------- -------- -------- -------- --------
Stockholders' equity... 23,578 21,800 23,418 23,346 12,824 5,598 6,226
-------- -------- -------- -------- -------- -------- --------
Cumulative amount
available for payment
of dividends
GM $1 2/3 Common Stock. $ 22,511 $ 21,680 $ 22,081 $ 12,475 $ 9,014 $ 4,870 $ 3,488
GM Class E Common
Stock................. -- -- -- 10,672 3,752 3,244 2,546
GM Class H Common
Stock................. 3,546 3,152 3,245 2,909 2,169 1,887 1,583
-------- -------- -------- -------- -------- -------- --------
Total................. $ 26,057 $ 24,832 $ 25,326 $ 26,056 $ 14,935 $ 10,001 $ 7,617
======== ======== ======== ======== ======== ======== ========
</TABLE>
CHAPTER 1: INTRODUCTION
15
<PAGE>
CHAPTER 1: INTRODUCTION
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------------------------------------
1997 (A) 1996 1996 1995 1994 1993 1992 (B)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH DIVIDENDS PER
SHARE:
GM $1 2/3 Common Stock. $ 1.50 $ 1.20 $ 1.60 $ 1.10 $ 0.80 $ 0.80 $ 1.40
-------- -------- -------- -------- -------- -------- --------
GM Class E Common
Stock................. -- $ 0.30 $ 0.30 $ 0.52 $ 0.48 $ 0.40 $ 0.36
-------- -------- -------- -------- -------- -------- --------
GM Class H Common
Stock................. $ 0.75 $ 0.72 $ 0.96 $ 0.92 $ 0.80 $ 0.72 $ 0.72
-------- -------- -------- -------- -------- -------- --------
GM OPERATIONS WITH
FINANCING AND INSURANCE
OPERATIONS ON AN EQUITY
BASIS:
OPERATING RESULTS:
Total net sales and
revenues.............. $114,323 $109,461 $145,427 $143,754 $134,888 $119,803 $113,489
-------- -------- -------- -------- -------- -------- --------
Costs and expenses..... 110,464 106,566 142,938 138,294 129,383 118,449 117,289
Plant closings expense
(adjustments) and
provisions for other
restructurings........ 80 (409) (727) -- -- 950 1,237
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses............. 110,544 106,157 142,211 138,294 129,383 119,399 118,526
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before cumulative
effect of accounting
changes............... 4,961 4,167 4,953 6,033 4,859 1,777 (3,504)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 4,961 $ 4,177 $ 4,963 $ 6,881 $ 4,901 $ 2,466 $(23,498)
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and marketable
securities............ $ 14,599 $ 14,543 $ 16,962 $ 10,241 $ 10,232 $ 9,891 $ 7,386
-------- -------- -------- -------- -------- -------- --------
Total assets........... 141,004 131,818 135,262 130,644 118,860 115,160 115,422
-------- -------- -------- -------- -------- -------- --------
Long-term debt and
capitalized leases.... 6,186 5,419 5,390 4,280 5,198 5,861 6,495
-------- -------- -------- -------- -------- -------- --------
Stockholders' equity... 23,578 21,800 23,418 23,346 12,824 5,598 6,226
-------- -------- -------- -------- -------- -------- --------
</TABLE>
- ----------
(a) General Motors has initiated competitiveness studies which are expected to
be completed in the fourth quarter of 1997 or early 1998 and are expected
to result in charges against income totaling approximately $2 billion to $3
billion after taxes or $2.85 to $4.27 per share of GM $1 2/3 Common Stock.
See "Recent Developments--General Motors Competitiveness Studies" below for
additional information.
(b) General Motors adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1, 1992.
The unfavorable cumulative effect of adopting SFAS No. 106 was $20.7
billion, or $33.38 per share, attributable to GM $1 2/3 Common Stock and
$150 million, or $2.08 per share, attributable to GM Class H Common Stock.
Also, effective January 1, 1992, Hughes Electronics changed its revenue
recognition policy for certain commercial businesses. The unfavorable
effect of this change on 1992 earnings was $33 million, or $0.05 per
share, attributable to GM $1 2/3 Common Stock, and $7 million, or $0.10
per share, attributable to GM Class H Common Stock.
16
<PAGE>
CHAPTER 1: INTRODUCTION
HUGHES ELECTRONICS SUMMARY CONSOLIDATED FINANCIAL DATA
The tables below set forth historical financial information about Hughes
Electronics on a consolidated basis. The first table presents the information
about Hughes Electronics including the effect of the purchase accounting
adjustments described under "Purchase Accounting Adjustments" above. The second
table presents the information about Hughes Electronics excluding the effect of
those purchase accounting adjustments.
HUGHES ELECTRONICS SUMMARY CONSOLIDATED FINANCIAL DATA
(INCLUDING PURCHASE ACCOUNTING ADJUSTMENTS)
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS AS OF AND FOR THE
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 (B) 1996 (B) 1995 (B) 1994 1993 1992 (A)
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............... $12,511.3 $11,456.3 $15,744.1 $14,714.3 $14,062.3 $13,450.2 $12,169.0
Other income--net....... 495.2 134.1 116.8 48.6 37.1 67.3 128.1
--------- --------- --------- --------- --------- --------- ---------
Total Revenues......... 13,006.5 11,590.4 15,860.9 14,762.9 14,099.4 13,517.5 12,297.1
--------- --------- --------- --------- --------- --------- ---------
Cost and Expenses....... 11,513.3 10,243.1 14,161.0 13,054.5 12,447.0 12,023.3 12,423.8
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft ....... 91.7 91.7 122.3 123.4 123.8 123.8 123.8
--------- --------- --------- --------- --------- --------- ---------
Total Costs and
Expenses.............. 11,605.0 10,334.8 14,283.3 13,177.9 12,570.8 12,147.1 12,547.6
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes and
minority interests..... 1,401.5 1,255.6 1,577.6 1,585.0 1,528.6 1,370.4 (250.5)
Income taxes (credit)... 498.1 508.4 605.7 645.6 572.8 572.6 (77.2)
Minority interests in
net losses of
subsidiaries........... 21.7 31.4 57.0 8.9 -- -- --
Cumulative effect of
accounting change...... -- -- -- -- (30.4) -- (872.1)
--------- --------- --------- --------- --------- --------- ---------
Net Income (loss)....... 925.1 778.6 1,028.9 948.3 925.4 797.8 (1,045.4)
Adjustment to exclude
the effects of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 91.7 91.7 122.3 159.5 123.8 123.8 123.8
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) used for
computation of
available separate
consolidated net income
of Hughes.............. $ 1,016.8 $ 870.3 $ 1,151.2 $ 1,107.8 $ 1,049.2 $ 921.6 $ (921.6)
========= ========= ========= ========= ========= ========= =========
Earnings (loss) per
share attributable to
GM Class H Common
Stock.................. $ 2.54 $ 2.18 $ 2.88 $ 2.77 $ 2.62 $ 2.30 $ (2.29)
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,443.1 $ 1,081.7 $ 1,161.3 $ 1,139.5 $ 1,501.8 $ 1,008.7 $ 702.7
Current assets.......... 7,498.8 7,115.6 7,079.0 6,810.8 6,243.6 5,714.3 5,546.8
Total assets............ 21,213.1 16,213.6 16,480.1 15,974.4 14,850.5 14,117.1 14,209.2
Current liabilities..... 4,361.3 4,097.9 4,199.6 4,308.8 3,548.1 3,549.1 3,854.4
Long-term debt and
capitalized leases..... 2,836.1 36.2 34.5 258.8 353.5 416.8 711.0
Stockholders' equity.... 9,810.0 9,025.9 9,179.9 8,525.7 7,975.8 7,328.1 6,815.0
OTHER DATA:
Depreciation and
amortization........... $ 582.9 $ 499.6 $ 682.6 $ 611.1 $ 594.0 $ 627.3 $ 610.9
Capital expenditures.... 761.6 627.6 840.2 820.3 746.3 580.0 558.5
</TABLE>
- ------------
(a) Includes the effect of a pre-tax restructuring charge of $1,237.0 million.
(b) Certain amounts have been reclassified to conform with the September 30,
1997 presentation.
17
<PAGE>
CHAPTER 1: INTRODUCTION
HUGHES ELECTRONICS UNAUDITED SUMMARY CONSOLIDATED FINANCIAL DATA
(EXCLUDING PURCHASE ACCOUNTING ADJUSTMENTS)
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS AS OF AND FOR THE
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 (B) 1996 (B) 1995 (B) 1994 1993 1992 (A)
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............... $12,511.3 $11,456.3 $15,744.1 $14,714.3 $14,062.3 $13,450.2 $12,169.0
Other income--net....... 495.2 134.1 116.8 84.7 37.1 67.3 128.1
--------- --------- --------- --------- --------- --------- ---------
Total Revenue.......... 13,006.5 11,590.4 15,860.9 14,799.0 14,099.4 13,517.5 12,297.1
--------- --------- --------- --------- --------- --------- ---------
Cost and Expenses....... 11,513.3 10,243.1 14,161.0 13,054.5 12,447.0 12,023.3 12,423.8
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes and
minority interests..... 1,493.2 1,347.3 1,699.9 1,744.5 1,652.4 1,494.2 (126.7)
Income taxes (credit)... 498.1 508.4 605.7 645.6 572.8 572.6 (77.2)
Minority interests in
net losses of
subsidiaries........... 21.7 31.4 57.0 8.9 -- -- --
Cumulative effect of
accounting change...... -- -- -- -- (30.4) -- (872.1)
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) used for
computation of
available separate
consolidated net
income................. $ 1,016.8 $ 870.3 $ 1,151.2 $ 1,107.8 $ 1,049.2 $ 921.6 $ (921.6)
========= ========= ========= ========= ========= ========= =========
Earnings (loss) per
share attributable to
GM Class H Common
Stock.................. $ 2.54 $ 2.18 $ 2.88 $ 2.77 $ 2.62 $ 2.30 $ (2.29)
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,443.1 $ 1,081.7 $ 1,161.3 $ 1,139.5 $ 1,501.8 $ 1,008.7 $ 702.7
Current assets.......... 7,498.8 7,115.6 7,079.0 6,810.8 6,243.6 5,714.3 5,546.8
Total assets............ 18,581.3 13,459.5 13,756.6 13,128.6 11,845.2 10,988.0 10,956.3
Current liabilities..... 4,361.3 4,097.9 4,199.6 4,308.8 3,548.1 3,549.1 3,854.4
Long-term debt and
capitalized leases..... 2,836.1 36.2 34.5 258.8 353.5 416.8 711.0
Stockholders' equity.... 7,178.2 6,271.8 6,456.4 5,679.9 4,970.5 4,199.0 3,562.1
OTHER DATA:
Depreciation and
amortization........... $ 491.2 $ 407.9 $ 560.3 $ 487.7 $ 470.2 $ 503.5 $ 487.1
Capital expenditures.... 761.6 627.6 840.2 820.3 746.3 580.0 558.5
</TABLE>
- ------------
(a) Includes the effect of a pre-tax restructuring charge of $1,237.0 million.
(b) Certain amounts have been reclassified to conform with the September 30,
1997 presentation.
18
<PAGE>
CHAPTER 1: INTRODUCTION
HUGHES DEFENSE SUMMARY COMBINED FINANCIAL DATA
The table below sets forth historical financial information about Hughes
Defense. As discussed under "Hughes Electronics" above, the financial
statements of Hughes Defense reflect the business operations that will be
included in Hughes Defense after giving effect to the Hughes Reorganization.
You should read this information in conjunction with Hughes Defense's Combined
Financial Statements (including the notes thereto) included in Appendix C to
this document.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS
ENDED AS OF AND FOR THE
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------------
1997 1996 1996 1995 1994 1993 1992 (A)
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............... $5,157.1 $4,588.8 $6,382.7 $5,921.8 $5,896.0 $6,353.5 $5,503.8
Other income (expense),
net.................... 10.3 (2.0) 9.1 43.0 22.5 24.7 45.2
-------- -------- -------- -------- -------- -------- --------
Total Revenues......... 5,167.4 4,586.8 6,391.8 5,964.8 5,918.5 6,378.2 5,549.0
-------- -------- -------- -------- -------- -------- --------
Cost and Expenses....... 4,707.7 4,152.5 5,770.3 5,309.5 5,314.5 5,605.1 5,836.8
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 75.8 75.8 101.3 101.3 101.3 101.3 101.3
-------- -------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 4,783.5 4,228.3 5,871.6 5,410.8 5,415.8 5,706.4 5,938.1
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... 383.9 358.5 520.2 554.0 502.7 671.8 (389.1)
Income taxes (credit)... 176.6 164.9 239.3 235.4 226.2 293.9 (182.9)
Cumulative effect of
accounting changes..... -- -- -- -- (7.1) -- (268.5)
-------- -------- -------- -------- -------- -------- --------
Net Income (loss)....... $ 207.3 $ 193.6 $ 280.9 $ 318.6 $ 269.4 $ 377.9 $ (474.7)
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 72.9 $ 33.4 $ 59.7 $ 15.7 $ 58.7 $ 1.6 $ 9.1
Current assets.......... 3,047.2 2,968.9 2,907.7 2,880.0 2,462.0 2,529.3 2,692.9
Total assets............ 7,162.1 7,079.9 7,028.4 7,025.9 6,249.1 6,548.6 7,012.9
Current liabilities..... 1,535.2 1,737.0 1,889.0 1,959.9 1,604.9 1,814.9 1,624.0
Long-term debt and
capitalized leases..... 32.4 36.2 34.4 49.7 57.6 83.9 38.0
Parent Company's net
investment............. 5,265.6 4,975.2 4,823.0 4,680.2 4,198.2 4,278.3 4,801.0
OTHER DATA:
Depreciation and
amortization........... $ 192.2 $ 177.5 $ 246.6 $ 240.5 $ 265.5 $ 295.9 $ 303.5
Capital expenditures.... $ 95.5 $ 113.3 $ 178.3 $ 99.4 $ 174.1 $ 119.8 $ 88.1
</TABLE>
- ----------
(a) Includes the effect of a pre-tax restructuring charge of $833.1 million.
19
<PAGE>
CHAPTER 1: INTRODUCTION
DELCO SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
The table below sets forth historical and pro forma financial information
about Delco. As discussed under "Hughes Electronics" above, the financial
statements of Delco reflect the business operations that will be included in
Delco after giving effect to the Hughes Reorganization. You should read this
information in conjunction with Delco's Combined Financial Statements
(including the notes thereto) included in Appendix D to this document.
The columns of pro forma information give effect to the Hughes Transactions
as if they had occurred at the beginning of the respective periods as to
operating results data, and on September 30, 1997 as to the balance sheet data,
but do not give effect to the planned integration of Delco and Delphi in
connection with the Hughes Transactions.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------
PRO PRO
FORMA FORMA
1997(A) 1997 1996 1996(A) 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............... $4,110.2 $4,110.2 $4,240.1 $5,560.1 $5,560.1 $5,757.2 $5,560.7 $4,808.1 $4,143.5
Other income, net....... 14.9 142.5 139.2 32.4 202.4 195.6 150.6 114.7 158.7
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues......... 4,125.1 4,252.7 4,379.3 5,592.5 5,762.5 5,952.8 5,711.3 4,922.8 4,302.2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Cost and Expenses. 3,724.3 3,724.3 3,689.7 4,901.9 4,901.9 4,869.0 4,751.6 4,219.3 3,695.1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 400.8 528.4 689.6 690.6 860.6 1,083.8 959.7 703.5 607.1
Income taxes............ 152.3 200.8 256.0 261.4 325.8 411.3 364.7 280.5 209.8
Cumulative effect of
accounting changes..... -- -- -- -- -- -- (35.2) -- (478.4)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income.............. $ 248.5 $ 327.6 $ 433.6 $ 429.2 $ 534.8 $ 672.5 $ 559.8 $ 423.0 $ (81.1)
======== ======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 40.0 $ 245.3 $ 740.0 $ 741.0 $ 926.1 $1,243.2 $ 773.2 $ 571.3
Current assets.......... 995.8 4,267.0 3,834.9 3,858.0 3,276.2 2,813.0 2,146.9 1,691.2
Total assets............ 2,397.2 5,591.4 5,466.9 5,464.1 5,186.4 4,842.4 4,205.9 3,779.8
Current liabilities..... 667.8 667.8 809.1 734.2 767.9 927.9 786.6 673.5
Parent Company's net
investment............. 561.4 3,805.6 3,629.6 3,662.1 3,402.1 2,949.4 2,566.7 2,288.3
OTHER DATA:
Depreciation and
amortization........... $ 166.5 $ 151.7 $ 204.4 $ 155.6 $ 145.0 $ 152.0 $ 125.6
Capital expenditures.... $ 101.5 $ 163.3 $ 196.5 $ 264.1 $ 165.7 $ 149.2 $ 266.1
</TABLE>
- ----------
(a) Pro forma balance sheet data as of December 31, 1996 and pro forma other
data have not been determined.
20
<PAGE>
CHAPTER 1: INTRODUCTION
HUGHES TELECOM SUMMARY COMBINED HISTORICAL
AND PRO FORMA FINANCIAL DATA
The table below sets forth historical and pro forma financial information
about Hughes Telecom. As discussed under "Hughes Electronics" above, the
financial statements of Hughes Telecom reflect the business operations that
will be included in Hughes Telecom after giving effect to the Hughes
Reorganization. You should read this information in conjunction with Hughes
Telecom's Combined Financial Statements (including the notes thereto) included
in Appendix E to this document.
The columns of pro forma operating results information for the year ended
December 31, 1996 and for the nine months ended September 30, 1997 give effect
to the PanAmSat Merger, the Avicom Divestiture and the Hughes Transactions as
if they had occurred at the beginning of the respective periods. The pro forma
balance sheet data on September 30, 1997 include the PanAmSat Merger which
occurred in May 1997 and give effect to the Avicom Divestiture and the Hughes
Transactions as if they had occurred as of September 30, 1997.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE YEARS
SEPTEMBER 30, ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------
PRO
PRO FORMA FORMA
1997(A) 1997 1996 1996(A) 1996 1995 1994 1993 1992(B)
--------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............... $ 3,553.3 $3,433.7 $2,787.5 $4,189.8 $4,008.7 $3,152.8 $2,697.0 $2,195.0 $2,214.8
Other (expense) income,
net.................... (11.3) 470.7 95.0 100.2 75.9 8.2 (9.2) 162.1 38.6
--------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues......... 3,542.0 3,904.4 2,882.5 4,290.0 4,084.6 3,161.0 2,687.8 2,357.1 2,253.4
--------- -------- -------- -------- -------- -------- -------- -------- --------
Cost and Expenses....... 3,289.7 3,277.2 2,672.8 4,001.5 3,841.5 3,042.4 2,513.7 2,067.9 2,194.6
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 15.9 15.9 15.9 21.0 21.0 21.0 21.0 21.0 21.0
--------- -------- -------- -------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 3,305.6 3,293.1 2,688.7 4,022.5 3,862.5 3,063.4 2,534.7 2,088.9 2,215.6
--------- -------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before
income taxes and
minority interests..... 236.4 611.3 193.8 267.5 222.1 97.6 153.1 268.2 37.8
Income taxes............ 98.3 244.5 82.0 149.6 104.8 31.4 55.5 102.7 7.7
Minority interests in
(income) losses of
subsidiaries........... (4.2) 16.8 29.4 (8.0) 52.6 4.6 -- -- --
--------- -------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before
cumulative effect of
accounting change...... 133.9 383.6 141.2 109.9 169.9 70.8 97.6 165.5 30.1
Income (loss) from
discontinued
operations............. -- 1.2 (6.7) -- (7.4) (64.6) (54.1) (12.6) (2.8)
Cumulative effect of
accounting changes..... -- -- -- -- -- -- (2.3) -- (112.8)
--------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income (loss)....... 133.9 $ 384.8 $ 134.5 109.9 $ 162.5 $ 6.2 $ 41.2 152.9 (85.5)
======== ======== ======== ======== ======== ======== ========
Adjustment to exclude
the effects of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 15.9 21.0
--------- --------
Earnings used for
computation of
available separate
consolidated net income
of Hughes Telecom...... $ 149.8 $ 130.9
========= ========
Earnings per share
attributable to New GM
Class H Common Stock... $ 0.37 $ 0.33
========= ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 2,912.0 $ 426.5 $ 6.6 $ 6.7 $ 7.6 $ 5.8 $ 10.2 $ 6.4
Current assets.......... 4,854.8 2,331.9 1,390.8 1,497.1 1,175.5 1,154.5 1,126.6 1,343.6
Total assets............ 12,463.6 9,486.2 4,254.9 4,416.4 3,952.6 3,609.3 3,195.5 3,085.9
Current liabilities..... 1,814.4 1,540.8 1,212.8 1,219.6 863.6 881.0 790.2 823.1
Long-term debt.......... 1,072.8 2,797.8 -- -- -- -- 1.3 125.1
Minority interests...... 643.2 643.2 45.1 21.6 40.2 -- -- --
Parent Company's net
investment............. 7,360.1 3,394.0 2,426.1 2,491.6 2,608.9 2,301.0 1,973.3 1,752.3
OTHER DATA:
Depreciation and
amortization........... $ 211.2 $ 157.6 $ 215.6 $ 200.9 $ 160.9 $ 135.7 $ 142.0
Capital expenditures.... $ 551.5 $ 347.8 $ 449.4 $ 442.3 $ 399.0 $ 274.2 $ 186.0
</TABLE>
- ------
(a) Pro forma balance sheet data as of December 31, 1996 and pro forma other
data have not been determined.
(b) Includes the effect of a pre-tax restructuring charge of $155.6 million.
21
<PAGE>
CHAPTER 1: INTRODUCTION
RAYTHEON SUMMARY COMBINED HISTORICAL
AND PRO FORMA FINANCIAL DATA
The table below sets forth historical and pro forma financial information
about Raytheon. This information should be read in conjunction with Raytheon's
Consolidated Financial Statements (including the notes thereto) which are
incorporated into this document by reference.
We derived the consolidated historical financial data for each of the
calendar years 1992 through 1996 from the consolidated financial statements of
Raytheon audited by Coopers & Lybrand L.L.P., independent public accountants.
We derived the Raytheon consolidated historical financial data as of and for
the nine-month periods ended September 28, 1997 and September 29, 1996 from the
unaudited financial statements of Raytheon for such periods included in the
Raytheon Solicitation Statement, which are incorporated into this document by
reference. In the opinion of Raytheon management, the unaudited consolidated
historical financial statements reflect all adjustments (consisting of only
normal recurring items) that are necessary for the fair presentation of
financial position and results of operations for such periods.
The columns of pro forma operating results information for the year ended
December 31, 1996 and for the nine months ended September 28, 1997 give effect
to the Hughes Transactions, the Raytheon Merger and the Texas Instruments
Defense Acquisition as if they had occurred at the beginning of the respective
periods. The pro forma balance sheet data on September 28, 1997 give effect to
the Hughes Transactions and the Raytheon Merger as if they had occurred as of
that date. We did not calculate pro forma balance sheet data as of December 31,
1996.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------- --------------------------------------------------------------------
PRO FORMA
SEPT. 28, SEPT. 28, SEPT. 29, PRO FORMA
1997(D) 1997 1996 1996(D) 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- --------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net Sales........... $15,650 $9,669.2 $8,946.7 $20,514 $12,330.5 $11,804.2 $10,097.7 $9,334.1 $9,121.7
Costs and Expenses.. 14,521 8,754.7 8,124.9(a) 19,114(a) 11,247.0(a) 10,612.5(b) 9,197.8(c) 8,286.8 8,165.7
------- -------- -------- ------- --------- --------- --------- -------- --------
Income before Taxes. 1,129 914.5 821.8(a) 1,400(a) 1,083.5(a) 1,191.7(b) 899.9(c) 1,047.3 956.0
Income Taxes........ 432 310.4 238.0 499 322.3 399.2 303.0 354.3 320.9
------- -------- -------- ------- --------- --------- --------- -------- --------
Net Income.......... $ 697 $ 604.1 $ 583.8(a) $ 901(a) $ 761.2(a) $ 792.5(b) $ 596.9(c) $ 693.0 $ 635.1
======= ======== ======== ======= ========= ========= ========= ======== ========
Earnings per common
share.............. $ 2.06 $ 2.56 $ 2.45(a) $ 2.65(a) $ 3.21(a) $ 3.25(b) $ 2.26(c) $ 2.56 $ 2.36
Dividend declared
per common share... 0.60 0.60 0.80 0.75 0.738 0.70 0.663
BALANCE SHEET DATA:
Cash and marketable
securities......... $ 268 $ 267.7 $ 161.4 $ 138.8 $ 210.3 $ 202.2 $ 190.2 $ 88.8
Current assets...... 9,338 6,554.0 6,278.3 5,603.9 5,275.2 4,985.5 4,609.2 3,775.8
Total assets........ 28,059 15,256.2 11,785.7 11,126.1 9,840.9 7,395.4 7,257.7 6,015.1
Current Liabilities. 9,734 5,345.1 5,494.4 4,691.8 3,690.4 3,283.1 2,800.3 2,136.8
Long-term debt...... 6,548 4,386.4 1,493.2 1,500.5 1,487.7 24.5 24.4 25.3
Stockholders'
Equity............. 10,080 5,015.1 4,448.4 4,598.0 4,292.0 3,928.2 4,297.9 3,843.2
OTHER DATA:
Depreciation and
amortization....... $ 325.3 $ 271.3 $ 368.9 $ 371.4 $ 304.2 $ 296.4 $ 302.1
Capital
Expenditures....... $ 305.4 $ 287.6 $ 406.0 $ 328.6 $ 267.4 $ 256.1 $ 307.7
</TABLE>
- ------
(a) Includes special charge of $34.0 million pre-tax, $22.1 million after-tax,
or $0.09 per share.
(b) Includes one-time gain of $8.0 million pre-tax, $5.2 million after-tax, or
$0.02 per share.
(c) Includes restructuring charge of $249.8 million pre-tax, $162.3 million
after-tax, or $0.61 per share.
(d) Pro forma balance sheet as of December 31, 1996 and pro forma other data
have not been determined.
22
<PAGE>
CHAPTER 1: INTRODUCTION
RECENT DEVELOPMENTS
NEW LEADERSHIP TEAM AT HUGHES ELECTRONICS
On October 20, 1997, General Motors and Hughes Electronics announced changes
to the Hughes Electronics senior management team, effective immediately. The
new appointments are as follows:
.Michael T. Smith. Mr. Michael T. Smith, age 54, was elected as Chairman and
Chief Executive Officer of Hughes Electronics. Prior to this appointment,
Mr. Smith had most recently served as Vice Chairman of Hughes Electronics.
He replaced C. Michael Armstrong, who resigned on October 20, 1997 to become
chairman and chief executive officer of AT&T Corp. Mr. Armstrong had served
as Chairman and Chief Executive Officer of Hughes Electronics since 1992.
.Charles H. Noski. Mr. Charles H. Noski, age 45, was elected President of
Hughes Electronics and a member of the Hughes Electronics Board. Mr. Noski
had previously served as Vice Chairman and Chief Financial Officer of Hughes
Electronics, but joined United Technologies Corporation as executive vice
president and chief financial officer in August 1997.
.Steven D. Dorfman. Mr. Steven D. Dorfman, age 62, was elected Vice Chairman
of Hughes Electronics and a member of the Hughes Electronics Board. He had
previously served as Executive Vice President and Chairman of Hughes
Telecommunications and Space Company.
As described below under "Business of Hughes Telecom--Directors and Executive
Officers of New Hughes Electronics" in Chapter 4, we currently expect that the
senior management and directors of Hughes Electronics, including those
individuals discussed above, will continue as the senior management and
directors of New Hughes Electronics after the completion of the Hughes
Transactions.
GENERAL MOTORS COMPETITIVENESS STUDIES
The global automotive industry, including the components and systems market,
has become increasingly competitive and is presently undergoing significant
restructuring and consolidation activities. All of the major industry
participants are continuing to increase their focus on efficiency and cost
improvements, while announced capacity increases for the North American market
and excess capacity in the European market have led to continuing price
pressures. As a result, General Motors is currently studying the
competitiveness of each of its lines of business. The findings of these studies
will result in changes to or the realignment of those activities that are not
performing as effectively as necessary to meet GM's objectives of increasing
market share, customer satisfaction and profitability. To date, Delphi has
announced its intention to seek expressions of interest from potential buyers
of its lighting, coil spring and seating businesses and Opel Belgium has
informed its unions of its intention to significantly lower structural costs,
which could include a reduction of the workforce by up to 1,900 employees. The
studies are ongoing and the majority of them are expected to be completed in
the fourth quarter of 1997 or early 1998. Currently, General Motors estimates
that the studies will result in charges against income for plant closures and
asset impairments totaling approximately $2 billion to $3 billion after taxes,
or $2.85 to $4.27 per share of GM $1 2/3 Common Stock, to be recorded in the
quarter during which the respective studies are completed. General Motors will
continue to study its efficiency and cost effectiveness and, as necessary, will
initiate further competitiveness studies.
RAYTHEON
SALE OF PORTIONS OF THE APPLIANCES BUSINESS
On September 10, 1997, Raytheon sold its home appliance, heating and air
conditioning and commercial cooking businesses to Goodman Manufacturing
Company, L.P. The total sale price was $550 million in cash, subject to
adjustment for certain changes in the net working capital of such businesses
between December 31, 1996 and the closing date of the transaction. In 1996,
these three businesses represented approximately 80% of
23
<PAGE>
CHAPTER 1: INTRODUCTION
the sales and 50% of the operating income of Raytheon's Appliance Group. In
addition, Raytheon has realized approximately $200 million from the sale of
receivables relating to the businesses which were sold. Raytheon is retaining
the commercial laundry and electronics controls businesses of the Appliance
Group, but is continuing its strategic review of these remaining businesses.
Proceeds from the sale of the three Appliance Group businesses will be used to
reduce debt incurred in connection with the Texas Instruments Defense
Acquisition. Raytheon believes that the 1996 sales, operating income, net
income and total assets of the businesses sold were not material and does not
expect the sale to have a significant effect on results of operations.
TEXAS INSTRUMENTS DEFENSE ACQUISITION
On July 11, 1997, Raytheon purchased substantially all of the assets of, and
assumed substantially all the liabilities related to, Texas Instruments Defense
for an aggregate amount of $2.875 billion in cash. The purchase price is
subject to post-closing adjustments for certain changes in the net assets of
Texas Instruments Defense between September 30, 1996 and the closing date of
such purchase. In addition, Raytheon paid $75 million for an assignment and
license of certain related intellectual property. Texas Instruments Defense had
1996 sales of approximately $1.8 billion.
DEBT FINANCINGS
In connection with the Texas Instruments Defense Acquisition and in
contemplation of the Raytheon Merger, Raytheon arranged revolving credit
facilities with a syndicate of banks totaling $7.0 billion (collectively, the
"Raytheon Facilities"). Of these, lines for $4.0 billion have a maturity of
five years and lines for $3.0 billion have a maturity of 364 days. Raytheon
incurred indebtedness in the amount of $2.95 billion under the Raytheon
Facilities in order to finance the Texas Instruments Defense Acquisition. The
Raytheon Facilities include covenants which require (1) repayment and reduction
of the outstanding commitment of such facilities or similar facilities with 75%
of the net cash proceeds from any capital markets financings and asset sales
for a period of two years from the closing date and (2) the ratio of total debt
to total capitalization not to exceed 65% until July 2, 1999, 60% from July 2,
1999 to January 1, 2002 and 55% thereafter. The Raytheon Facilities rank pari
passu with other senior unsecured indebtedness of Raytheon, including the
Raytheon Notes (as defined below), and, upon completion of the Raytheon Merger,
New Raytheon (including the debt incurred by Hughes Defense as described
herein).
On August 12, 1997, Raytheon completed a public offering of $3.0 billion
aggregate principal amount of notes offered with final maturities of three,
five, ten and thirty years (the "Raytheon Notes"). The net proceeds from the
sale of the Raytheon Notes were used primarily to reduce amounts outstanding
under the Raytheon Facilities and to refinance other debt incurred in the Texas
Instruments Defense Acquisition, including commercial paper borrowings.
Additional proceeds have been and will continue to be used by Raytheon for
capital expenditures, working capital requirements and general corporate
purposes.
24
<PAGE>
CHAPTER 2: RISK FACTORS
CHAPTER 2
RISK FACTORS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RISK FACTORS RELATING TO THE HUGHES TRANSACTIONS.................. 27
Ability of General Motors to Achieve Potential Benefits from the
Integration of Delco and Delphi................................ 27
Loss of Potential Availability of Hughes Defense Funds and
Assets......................................................... 28
Separation of Hughes Defense, Delco and Hughes Telecom.......... 28
Impact on Financial Position and Results of Operations.......... 29
RISK FACTORS RELATING TO THE BUSINESS OF NEW HUGHES ELECTRONICS... 30
No Assurance of Sufficient Funding for New Hughes Electronics... 30
New Hughes Electronics' Ability to Maintain Leading
Technological Capabilities..................................... 31
RISK FACTORS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL
STRUCTURE........................................................ 32
Potentially Diverging Interests of GM's Common Stockholders;
Fiduciary Duties of the GM Board............................... 32
GM Board Policies and Practices Are Subject to Change........... 32
New GM Class H Common Stockholders Have No Direct Interest in
New Hughes Electronics......................................... 32
Potential Recapitalization of New GM Class H Common Stock Into
GM $1 2/3 Common Stock......................................... 33
ADDITIONAL RISK FACTORS REGARDING NEW GM CLASS H COMMON STOCK..... 34
Changes in Nature of Tracking Stock Investment; Earnings
Volatility..................................................... 34
Market Volatility; No Assurance as to Market Price or
Performance of New GM Class H Common Stock..................... 34
No Current Cash Dividends on New GM Class H Common Stock........ 35
RISK FACTORS REGARDING NEW RAYTHEON AFTER THE RAYTHEON MERGER..... 36
Ability to Achieve Synergies from the Raytheon Merger;
Integration of Texas Instruments Defense....................... 36
Non-Defense Businesses of New Raytheon.......................... 36
Certain Limitations on Changes in Control of New Raytheon; New
Raytheon's Ability to Participate in Future Defense Industry
Consolidation.................................................. 36
</TABLE>
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CHAPTER 2: RISK FACTORS
[THIS PAGE INTENTIONALLY LEFT BLANK]
26
<PAGE>
CHAPTER 2: RISK FACTORS
RISK FACTORS
In addition to the other information set forth in this document, we urge you
to consider carefully each of the factors set forth below. Certain of the
following factors are relevant to both GM $1 2/3 Common Stockholders and GM
Class H Common Stockholders in connection with their consideration of the
Hughes Transactions and their investment in New Raytheon. Others are relevant
principally to GM Class H Common Stockholders in connection with their
investment in New GM Class H Common Stock.
While certain of the factors discussed below already exist with respect to
your investment in General Motors, such as the factors relating to the business
of New Hughes Electronics and those relating to GM's dual-class common stock
capital structure, you should give additional consideration to these factors in
determining whether to consent to the Hughes Transactions.
For information regarding forward-looking statements and information
contained in this document generally, see "Forward-Looking Information May
Prove Inaccurate" in Chapter 7.
RISK FACTORS RELATING TO THE HUGHES TRANSACTIONS
All of you (as GM common stockholders) should consider carefully each of the
following factors.
ABILITY OF GENERAL MOTORS TO ACHIEVE POTENTIAL BENEFITS FROM THE INTEGRATION
OF DELCO AND DELPHI
We are proposing to transfer Delco from Hughes Electronics to General Motors
in order to facilitate the integration of Delco's electronics capability with
Delphi's automotive systems and components expertise. We believe that the
combined Delco/Delphi entity will be better able to realign its product,
technical and manufacturing operations to address strategic objectives for
growth and competitiveness and will be able to compete more effectively in
markets worldwide by developing new electronically enhanced vehicle systems
with improved functionality, lower cost and higher quality. As a result, we
expect that Delco will be able to maintain a greater level of business with
GM's North American Operations ("GM NAO") than in the absence of the
combination and will have improved abilities to achieve and maintain non-GM NAO
sales due to access to a larger outside customer base. We also believe that
structural savings will accrue as a result of the full integration of Delco and
Delphi operations. We also expect General Motors to benefit from this
integration in its capacity as a manufacturer of automotive vehicles by virtue
of Delco/Delphi being a stronger supplier of automotive systems and components.
These potential benefits have been considered by the GM Board in determining
the Distribution Ratio, as described below under "Special Factors--Background
of the Hughes Transactions--Development of the Hughes Transactions and the
Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting" and "--
October 6, 1997 GM Board Meeting" in Chapter 3.
Realization of these potential benefits, however, will depend, in part, on
GM's ability to effectively integrate the operations of Delco, which are
primarily focused on automotive electronics, and the operations of Delphi,
which are primarily focused on automotive systems and components. Although we
believe that the operations of Delco and Delphi will be complementary, there
can be no assurance that General Motors will not encounter difficulties in
merging the operations of Delco with those of Delphi or that the benefits
expected from the integration will be realized. The process of fully
integrating the businesses of Delco and Delphi may also require a
disproportionate amount of time and attention of GM's management, financial and
other resources. In addition, integrating the two operations may be made more
difficult initially by the necessity of coordinating geographically separated
organizations. If General Motors is not successful in integrating the
strategies and operations of Delco and Delphi or if the integrated operations
fail to achieve market acceptance, the combined business could be adversely
affected. For additional information regarding the integration of Delco and
Delphi, see "Special Factors--Purposes of the Hughes Transactions--Integration
of Delco and Delphi" and "--Background of the Hughes Transactions--Development
of the Hughes Transactions and the Raytheon Merger--September 23, 1997 Capital
Stock Committee Meeting" and "--October 6, 1997 GM Board Meeting" in Chapter 3.
27
<PAGE>
CHAPTER 2: RISK FACTORS
LOSS OF POTENTIAL AVAILABILITY OF HUGHES DEFENSE FUNDS AND ASSETS
Upon the consummation of the Hughes Transactions, neither General Motors nor
New Hughes Electronics will have any continued ownership interest in Hughes
Defense. Accordingly, neither General Motors nor New Hughes Electronics will
have access to the funds generated by Hughes Defense to fund GM's other
businesses (including the business of New Hughes Electronics) or to satisfy
other corporate needs, including in periods of economic downturn. Similarly, as
a result of the Hughes Defense Spin-Off, the equity and assets of Hughes
Defense will no longer be available to you as GM's common stockholders in the
event of the liquidation of General Motors. See "GM Class H Common Stock" in
Chapter 6.
Under the current dividend policies and practices of Hughes Electronics and
General Motors and since Hughes Defense is a subsidiary of Hughes Electronics,
Hughes Electronics and General Motors each retain a significant portion of the
funds generated by Hughes Defense. As described elsewhere in this document, the
earnings of Hughes Electronics (which include the earnings of Hughes Defense)
are used in calculating the dividends payable by General Motors to GM Class H
Common Stockholders and by Hughes Electronics to General Motors. The earnings
generated by Hughes Defense are currently available to, and have been used to,
fund Hughes Telecom's capital needs. Although we believe that the additional
funding made available to Hughes Telecom in connection with the Hughes
Transactions will enable it to take advantage of certain growth opportunities
in the telecommunications and space industry as contemplated by its current
business plan, there is no assurance that such funding will be adequate to
allow New Hughes Electronics to take advantage of other additional
opportunities which may arise in the future, to address competitive pressures
or to satisfy all of its long-term capital requirements. Moreover, it is not
possible at this time to determine whether, over the long term, such funding
will be more or less than that which would have been available from the
earnings of Hughes Defense had it not been spun off from General Motors.
SEPARATION OF HUGHES DEFENSE, DELCO AND HUGHES TELECOM
Under the current Hughes Electronics and GM ownership structure, Hughes
Defense, Delco and Hughes Telecom have each been able to benefit from certain
synergistic alliances and shared resources, such as, among other things, shared
development of and access to technology. The Hughes Transactions involve, among
other things, the reallocation and transfer of certain assets and liabilities
among Hughes Defense, Delco and Hughes Telecom. Although we have determined
that continued ownership of Hughes Defense is no longer necessary for the
execution of our business strategy (including our strategies with respect to
Hughes Telecom and Delco) and certain separation and transitional arrangements
(including technology sharing arrangements) will be put in place in connection
with the consummation of the Hughes Transactions, there can be no assurance
that the business of Hughes Telecom (which will be conducted by New Hughes
Electronics) will not be adversely affected by its separation from Hughes
Defense and Delco (including with respect to the availability of sufficient
funding to satisfy its future capital needs) or that the business of Delco will
not be adversely affected by its separation from Hughes Defense and Hughes
Telecom. In particular, there can be no assurance that Delco and Hughes Telecom
will be able to attain the same level of synergistic benefits through the
various technology sharing and other separation and transitional arrangements
described elsewhere in this document as would be obtained through continued GM
ownership of Hughes Defense (including the benefits of the electronic and
systems integration capabilities of Hughes Defense). For additional information
regarding the separation of these businesses, see "Description of the Hughes
Transactions" in Chapter 3.
In addition, Hughes Defense has benefited directly from its status as a
wholly owned subsidiary of General Motors through access to, among other
things, GM's worldwide corporate purchasing process and related services. While
certain separation and transitional arrangement will provide Hughes Defense
with some access to GM's worldwide purchasing process and related services
following the Hughes Defense Spin-Off, there can be no assurance that Hughes
Defense's access to such services will be sustained at the same level or
provide the same benefits. Moreover, Hughes Defense will no longer benefit from
such access following the termination of such arrangements. Furthermore, there
can be no assurance that the purchasing benefits available to New Raytheon will
be similar to those available to General Motors. See "Separation and Transition
Arrangements--
28
<PAGE>
CHAPTER 2: RISK FACTORS
Summary of Other Agreements Contemplated by the Master Separation Agreement--
Corporate Purchasing" in Chapter 3.
IMPACT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS
Following the Hughes Defense Spin-Off, General Motors will no longer own any
of Hughes Defense and, accordingly, GM's consolidated balance sheet will
reflect decreased net assets and net liabilities, resulting in an overall
reduction in GM stockholders' equity of approximately $0.6 billion to $1.6
billion (based on the Recent Raytheon Stock Price and the net assets of Hughes
Defense at September 30, 1997, the overall reduction in GM stockholders' equity
is estimated to be approximately $1.1 billion). Although we expect that the
Hughes Transactions will initially increase GM's net liquidity as a result of
the proceeds from the new indebtedness to be incurred by Hughes Defense prior
to the Hughes Defense Spin-Off, we do not expect the Hughes Transactions to
have an ongoing material impact on GM's overall credit rating, financial
condition or results of operations (including with respect to its gross margin
percentage, operating margin percentage, net margin percentage and debt-to-
equity ratio). However, there can be no assurance that the Hughes Transactions,
in combination with other transactions, operating results and market conditions
will not result in a lower credit rating or weaker financial condition than in
the absence of the Hughes Transactions. For additional information, see
"Description of the Hughes Transactions--Accounting Treatment" in Chapter 3.
For a discussion of the impact of the Hughes Transactions on the amounts
available to pay dividends on GM common stocks, see "New GM Class H Common
Stock--GM Certificate of Incorporation Provisions Regarding Dividends" in
Chapter 6.
29
<PAGE>
CHAPTER 2: RISK FACTORS
RISK FACTORS RELATING TO THE BUSINESS OF NEW HUGHES ELECTRONICS
Although the following factors are currently applicable to the
telecommunications and space business of Hughes Electronics, all of you (as GM
common stockholders) should consider carefully each of the following factors in
the particular context of the Hughes Transactions.
NO ASSURANCE OF SUFFICIENT FUNDING FOR NEW HUGHES ELECTRONICS
As explained elsewhere in this document, the telecommunications and space
industry is experiencing a period of rapid expansion and change, providing
participants with many opportunities for strategic growth as well as vigorous
competition. We expect the global telecommunications services market to
continue to grow due to the high demand for communications infrastructure and
the opportunities created by industry deregulation. In this environment, many
of Hughes Telecom's competitors are committing substantial capital to capture
market opportunities and, in many instances, are forging alliances to acquire
or maintain market leadership. Therefore, key success factors include access to
capital and financial flexibility in order to take advantage of new market
opportunities, respond to competitive pressures and react quickly to other
major changes in the marketplace.
Our strategy with respect to Hughes Telecom is to leverage its leadership
position in satellite technology to be a leader with emerging
telecommunications products and services. This strategy will require
substantial investments of capital over the next several years. As part of the
Hughes Transactions, GM Class H Common Stock (which currently tracks the
financial performance of Hughes Electronics, a diversified corporation which
conducts three principal businesses: defense electronics, automotive
electronics and telecommunications and space) will be recapitalized into New GM
Class H Common Stock (which will track the financial performance of New Hughes
Electronics, which will continue the telecommunications and space business of
Hughes Electronics). As a result, under the current dividend policies and
practices of Hughes Electronics and General Motors, after the Hughes
Transactions, New Hughes Electronics will no longer have access to the
businesses of Hughes Defense and Delco, which have been used in the past to
fund Hughes Telecom, as potential sources of funding to satisfy its capital
needs. Although up to $4.0 billion of the proceeds of the debt of Hughes
Defense will be used to provide an infusion of equity into Hughes Telecom,
there can be no assurance that New Hughes Electronics' total capital
requirements over the long term will not exceed such amount due to, among other
things, presently unanticipated growth opportunities, changes in the
competitive environment and cash needs which may arise in connection with
certain post-closing adjustments as described elsewhere herein. See "Special
Factors--The Distribution Ratio--Post-Closing Payment" and "Separation and
Transition Arrangements--Summary of Master Separation Agreement--Post-Closing
Adjustment Between New Hughes Electronics and New Raytheon" in Chapter 3.
Although we currently expect that the debt of New Hughes Electronics will be
rated investment grade after the completion of the Hughes Transactions, there
can be no assurance that New Hughes Electronics will be able to satisfy its
capital requirements in the future, whether through access to the capital
markets or otherwise, including with respect to funding potentially available
through General Motors. A shortfall in such funding and inability to access the
capital markets could prevent completion of some or all components of New
Hughes Electronics' strategy and impair its ability to react to changes in its
markets. The ability of New Hughes Electronics to raise capital will be
influenced by, among other things, GM's overall financial condition and rating
objectives.
See "Special Factors--Purposes of the Hughes Transactions--Enhance Growth
Potential of Hughes Telecom" in Chapter 3 and "Hughes Telecom Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business of Hughes Telecom" in Chapter 4.
30
<PAGE>
CHAPTER 2: RISK FACTORS
NEW HUGHES ELECTRONICS' ABILITY TO MAINTAIN LEADING TECHNOLOGICAL CAPABILITIES
After the Hughes Transactions, the ability of New Hughes Electronics to
maintain leading technological capabilities will have a greater impact on the
New GM Class H Common Stock than the ability of Hughes Telecom to do so has on
the existing GM Class H Common Stock as a result of the fact that New GM Class
H Common Stock will represent a more focused investment in less diversified
businesses. The telecommunications and space industry is characterized by rapid
technological advances and innovations. There can be no assurance that one or
more of the technologies currently utilized or under development by Hughes
Telecom, or any technologies that may be developed or utilized by New Hughes
Electronics after the Hughes Transactions, may not become obsolete, or that
planned products or services will still be in demand by the time they are
offered. Competitors of New Hughes Electronics may have or obtain access to
proprietary technologies that are perceived by the market as being superior to,
or more desirable than, the technologies of New Hughes Electronics.
New Hughes Electronics' operating results will depend to a significant extent
on its ability to continue to introduce new products and services successfully
on a timely basis and to reduce costs of existing products and services. The
success of new product development is dependent upon many factors, including
proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of competitors and market
acceptance. There can be no assurance that New Hughes Electronics will
successfully identify new product or service opportunities and develop and
bring new products and services to market in a timely manner, or that products
or technologies developed by others will not render New Hughes Electronics'
product and service offerings obsolete or noncompetitive. No assurance can be
given that any of the technologies on which Hughes Telecom is currently
focusing its research and development investments will achieve acceptance in
the marketplace, and the lack of such market acceptance could have a material
adverse effect on New Hughes Electronics' future competitive position and
results of operations.
For information regarding the business of New Hughes Electronics, see
"Business of Hughes Telecom" in Chapter 4. For information regarding the
management of New Hughes Electronics and recent changes to the Hughes
Electronics senior management team, see "Recent Developments--New Leadership
Team at Hughes Electronics" in Chapter 1 and "Business of Hughes Telecom--
Directors and Executive Officers of New Hughes Electronics" in Chapter 4.
31
<PAGE>
CHAPTER 2: RISK FACTORS
RISK FACTORS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL STRUCTURE
Although the following factors are currently applicable to your investment in
General Motors, all of you (as GM common stockholders) should consider
carefully each of the following factors in the particular context of the Hughes
Transactions.
POTENTIALLY DIVERGING INTERESTS OF GM'S COMMON STOCKHOLDERS; FIDUCIARY DUTIES
OF THE GM BOARD
General Motors will continue to have a dual-class common stock structure
after the Hughes Transactions. As described below under "Considerations
Relating to GM's Dual-Class Common Stock Capital Structure" in Chapter 6, the
existence of two classes of common stock with separate dividend rights as
provided for in the GM Certificate of Incorporation, both in its current form
and as proposed to be amended in the Hughes Transactions, can give rise to
potential divergences between the interests of the holders of each of the
separate classes of GM common stock with respect to various intercompany
transactions and other matters. Because General Motors is incorporated in
Delaware, the laws of Delaware govern the duties of the GM Board. Under
Delaware law, the GM Board owes an equal fiduciary duty to all holders of GM
common stock and must act with due care and on an informed basis in the best
interests of General Motors and all such stockholders regardless of class.
General Motors is not aware of any judicial precedent directly addressing the
manner in which these fiduciary duties would be applied in the context of a
capital structure involving multiple classes or series of capital stock which
include terms designed to reflect the separate financial performance of
specified businesses. The GM Board, in the discharge of its fiduciary duties,
will continue to oversee, principally through its Capital Stock Committee, the
policies, programs and practices of General Motors which may impact the
potentially divergent interests of the two classes of GM common stock,
including the policy statement regarding certain capital stock matters as
described below under "Considerations Relating to GM's Dual-Class Common Stock
Capital Structure--New GM Board Policy Statement" in Chapter 6.
GM BOARD POLICIES AND PRACTICES ARE SUBJECT TO CHANGE
In connection with its determination of the terms of the New GM Class H
Common Stock to be issued in the Hughes Transactions, the GM Board reviewed its
policies and practices with respect to its dual-class common stock structure
and adopted, subject to the consummation of the Hughes Transactions, a policy
statement as to certain capital stock matters, including transactions between
General Motors and New Hughes Electronics and the relationship between
dividends (if any) to be paid by New Hughes Electronics to General Motors and
by General Motors to the New GM Class H Common Stockholders. See
"Considerations Relating to GM's Dual-Class Common Stock Capital Structure--New
GM Board Policy Statement" in Chapter 6. While the GM Board has no present
intention to modify or rescind this policy statement, there can be no assurance
in this regard and the policy statement, as well as other policies and
practices, may be modified or rescinded at any time and from time to time by
the GM Board and the GM Board may adopt additional policies, practices or
policy statements, in each case without the approval of GM's common
stockholders. Any such action would be taken by the GM Board in a manner
consistent with its fiduciary duties under applicable law to holders of both
classes of GM common stock and based on its reasonable business judgment that
such decision is in the best interests of General Motors and all its common
stockholders.
NEW GM CLASS H COMMON STOCKHOLDERS HAVE NO DIRECT INTEREST IN NEW HUGHES
ELECTRONICS
Although New GM Class H Common Stock will be a tracking stock relating to New
Hughes Electronics, New GM Class H Common Stockholders will continue to be
stockholders of General Motors (not New Hughes Electronics) and, accordingly,
will continue to have no direct rights in the equity or assets of New Hughes
Electronics, but rather will have rights in the equity and assets of General
Motors (which will include 100% of the stock of New Hughes Electronics). The
provisions in the GM Certificate of Incorporation, as proposed to be amended in
the Hughes Transactions, defining the amounts which may be used to pay
dividends on each class of GM common stock will not result in a physical
segregation of the assets of General Motors or New Hughes Electronics, nor will
such provisions result in the establishment of separate accounts or dividend or
liquidation
32
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CHAPTER 2: RISK FACTORS
preferences with respect to such assets for the benefit of the holders of
either of the separate classes of GM common stock. See "Considerations Relating
to GM's Dual-Class Common Stock Capital Structure" and "New GM Class H Common
Stock" in Chapter 6.
POTENTIAL RECAPITALIZATION OF NEW GM CLASS H COMMON STOCK INTO GM $1 2/3
COMMON STOCK
Under the GM Certificate of Incorporation, as proposed to be amended in the
Hughes Transactions, all outstanding shares of New GM Class H Common Stock may
be recapitalized as shares of GM $1 2/3 Common Stock at a 120% exchange ratio
(1) at any time after December 31, 2002 in the sole discretion of the GM Board
or (2) automatically, if General Motors disposes of at least 80% of the
business of New Hughes Electronics (based on the fair market value of its
assets) to a person, entity or group of which General Motors is not the
majority owner. See "New GM Class H Common Stock--Recapitalization and Certain
Other Transactions" in Chapter 6. Any such recapitalization would significantly
change both the form and nature of the investment of holders of New GM Class H
Common Stock. We cannot predict the impact on the market prices of the GM $1
2/3 Common Stock or the New GM Class H Common Stock of these recapitalization
provisions or the effect, if any, that the exercise by General Motors of its
recapitalization right would have on the market price of either or both classes
of GM common stock. Consistent with the GM Certificate of Incorporation, as
proposed to be amended in the Hughes Transactions, applicable corporate law and
the new GM Board policy statement referred to above, the GM Board may submit
from time to time to the GM common stockholders for their consideration and
approval one or more alternative transactions on terms different from those
provided for by the provisions concerning recapitalization of New GM Class H
Common Stock at a 120% exchange ratio or by the policy statement. The Hughes
Transactions and GM's split-off of EDS in 1996 are examples of such alternative
proposals. See "Considerations Relating to GM's Dual-Class Common Stock Capital
Structure" and "New GM Class H Common Stock" in Chapter 6.
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ADDITIONAL RISK FACTORS REGARDING NEW GM CLASS H COMMON STOCK
If you are a GM Class H Common Stockholder, you will receive shares of New GM
Class H Common Stock in the Hughes Transactions and should therefore consider
carefully the following factors.
CHANGES IN NATURE OF TRACKING STOCK INVESTMENT; EARNINGS VOLATILITY
Pursuant to the Hughes Transactions, GM Class H Common Stock, which tracks
the financial performance of Hughes Electronics, will be recapitalized and
converted into a new class of common stock of General Motors, New GM Class H
Common Stock, which will track the financial performance of New Hughes
Electronics. Because New Hughes Electronics will have significantly different
characteristics than Hughes Electronics on a consolidated basis prior to the
Hughes Transactions, including with respect to margins, cash flow, investment
needs, competitive environment and future growth prospects, there can be no
assurance that the returns on New GM Class H Common Stock will in any way
correspond to the historical returns on GM Class H Common Stock. In addition,
because New GM Class H Common Stock will track the financial performance of
only one of the three primary businesses comprising Hughes Electronics prior to
the Hughes Transactions, and because of the nature and characteristics of the
telecommunications and space business, the earnings per share of New GM Class H
Common Stock are expected to be substantially less than the historical earnings
per share of GM Class H Common Stock and may be subject to significantly
greater volatility. As a result of the foregoing, there can be no assurance
that the public market for New GM Class H Common Stock will be similar to the
public market which currently exists for GM Class H Common Stock.
For 1996, we reported earnings per share attributable to GM Class H Common
Stock of $2.88. In contrast, the pro forma earnings per share attributable to
New GM Class H Common Stock calculated as described herein based on the 1996
net income of New Hughes Electronics is $0.33. The pro forma earnings per share
of New Raytheon Class A Common Stock calculated as described herein for the
year ended December 31, 1996 is $2.65. Although holders of GM Class H Common
Stock will receive one share of New GM Class H Common Stock for each share of
GM Class H Common Stock they hold at the time the Hughes Transactions are
completed, they will receive only a fractional share of Class A Common Stock
for each such share (approximately 0.58836 based on the Recent Raytheon Stock
Price). Pro forma information is not necessarily indicative of future operating
results.
MARKET VOLATILITY; NO ASSURANCE AS TO MARKET PRICE OR PERFORMANCE OF NEW GM
CLASS H COMMON STOCK
In anticipation of and immediately following the consummation of the Hughes
Transactions, it is possible that a significant percentage of existing GM Class
H Common Stockholders may liquidate their holdings of GM Class H Common Stock
or New GM Class H Common Stock, as applicable, due to certain fundamental
differences in the nature of the New GM Class H Common Stock as compared to the
GM Class H Common Stock. If the market experiences heavy trading in the initial
period following the Hughes Transactions due to this turnover, trading prices
of the New GM Class H Common Stock may be volatile. Ultimately, the value of
each share of New GM Class H Common Stock will be principally determined in the
trading markets and could be influenced by many factors, including the terms of
the New GM Class H Common Stock, the earnings and financial position of New
Hughes Electronics, the growth and expansion of New Hughes Electronics'
business, investors' expectations of New Hughes Electronics' prospects, trends
and uncertainties affecting the telecommunications and space industry as a
whole, issuances and repurchases of New GM Class H Common Stock, GM's
consolidated results of operations and financial condition and general economic
and other conditions. There can be no assurance as to the market for, or market
price of, New GM Class H Common Stock following the completion of the Hughes
Transactions.
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NO CURRENT CASH DIVIDENDS ON NEW GM CLASS H COMMON STOCK
The payment of dividends on the GM Class H Common Stock is subject to the
policies and practices of the GM Board. The current dividend policy of the GM
Board is to pay quarterly dividends on GM Class H Common Stock, when, as and if
declared by the GM Board, at an annual rate equal to approximately 35% of the
Available Separate Consolidated Net Income of Hughes Electronics for the prior
year. Notwithstanding the current dividend policy of the GM Board, the
quarterly dividend paid on GM Class H Common Stock of $0.25 per share during
the first, second and third quarters of 1997 and $0.24 per share during each
quarter of 1996 was based on an annual rate higher than 35% of the Available
Separate Consolidated Net Income of Hughes Electronics for the preceding year.
See "GM Class H Common Stock--GM Certificate of Incorporation Provisions
Regarding Dividends" and "--Dividend Policy" in Chapter 6.
Following the consummation of the Hughes Transactions, the payment of
dividends on the New GM Class H Common Stock will also be subject to the
policies and practices of the GM Board. As described elsewhere in this
document, the GM Board does not currently intend to initially pay cash
dividends on New GM Class H Common Stock. Following the completion of the
Hughes Transactions, future earnings (if any) from the telecommunications and
space business of New Hughes Electronics will be retained for the development
of that business. The GM Board has adopted, subject to the completion of the
Hughes Transactions, a policy statement regarding certain capital stock
matters, including with respect to the relationship between any dividends that
may be paid by New Hughes Electronics to General Motors as its sole stockholder
and dividends to be paid by General Motors on the New GM Class H Common Stock.
See "Considerations Relating to GM's Dual-Class Common Stock Capital
Structure--New GM Board Policy Statement" in Chapter 6. The GM Board reserves
the right to reconsider from time to time its policies and practices regarding
dividends on New GM Class H Common Stock and to increase or decrease the
dividends paid on New GM Class H Common Stock on the basis of GM's consolidated
financial position, including liquidity, and other factors, including the
earnings and consolidated results of operations and financial condition of New
Hughes Electronics. See "New GM Class H Common Stock--GM Certificate of
Incorporation Provisions Regarding Dividends" and "--Dividend Policy" in
Chapter 6.
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RISK FACTORS REGARDING NEW RAYTHEON AFTER THE RAYTHEON MERGER
All of you (as GM common stockholders) will receive shares of Class A Common
Stock in the Hughes Defense Spin-Off and, upon the consummation of the Raytheon
Merger, will be stockholders of New Raytheon. As stockholders of New Raytheon,
you will continue to be subject to a number of business risks relating to the
defense electronics industry which already exist in connection with your
interest in Hughes Defense, such as the possibility of reductions or changes in
the U.S. defense budget, recent consolidation trends in the defense industry
and risks relating to U.S. government contracts. In addition to these existing
business risks, all of you should consider carefully each of the following
factors.
ABILITY TO ACHIEVE SYNERGIES FROM THE RAYTHEON MERGER; INTEGRATION OF TEXAS
INSTRUMENTS DEFENSE
The Raytheon Merger involves the integration of two companies previously
operated independently, with separate operations and management. The recent
acquisition by Raytheon of Texas Instruments Defense provides additional
integration challenges. While this integration is necessary to the future
profitability of New Raytheon, New Raytheon may encounter difficulties or may
not realize the full benefits expected from such integration. The Raytheon
Merger and the Texas Instruments Defense Acquisition will require, among other
things, integration of the Raytheon, Hughes Defense and Texas Instruments
Defense organizations, business infrastructures and products in a way that
enhances the performance of the combined businesses. The challenges posed by
these transactions include the integration of numerous geographically separated
manufacturing facilities and research and development centers. The success of
this transition to an integrated entity will be significantly influenced by New
Raytheon's ability to retain key employees, to integrate differing management
structures and to realize anticipated cost synergies, all of which will require
significant management time and resources. Any material delays or unexpected
costs incurred in connection with such integration could have a material
adverse effect on New Raytheon's business, operating results or financial
condition. New Raytheon management currently anticipates that such integration
will result in New Raytheon taking a restructuring charge in 1997, although the
amount of such charge is not currently determinable.
NON-DEFENSE BUSINESSES OF NEW RAYTHEON
Although Raytheon's principal business is the design, manufacture and
servicing of advanced electronic devices, equipment and systems for
governmental and commercial customers, Raytheon also has significant operations
in the engineering and construction, aircraft and appliances businesses. As a
result, after the consummation of the Raytheon Merger, a portion of each Class
A Common Stockholder's investment will be in these non-defense businesses. Each
of these businesses has significantly different characteristics than the
businesses of General Motors and Hughes Electronics, including with respect to
margins, competitive environment and future growth prospects. For example, the
engineering and construction business is subject to risks relating to the
uncertainty of international growth, significant start-up costs and the
cyclical nature of the engineering and construction industry and the aircraft
business is subject to risks relating to the intensely competitive aircraft
industry, product liability issues and the U.S. Federal Aviation Administration
approval and certification process. In light of these and other risks relating
to the non-defense businesses of New Raytheon, there can be no assurance that
the financial performance of any of these businesses will match the performance
of the businesses of General Motors, Hughes Electronics, Hughes Defense or the
defense business of New Raytheon. See "Recent Developments--Raytheon" in
Chapter 1 and "Overview of New Raytheon Business" in Chapter 5.
CERTAIN LIMITATIONS ON CHANGES IN CONTROL OF NEW RAYTHEON; NEW RAYTHEON'S
ABILITY TO PARTICIPATE IN FUTURE DEFENSE INDUSTRY CONSOLIDATION
The New Raytheon Certificate of Incorporation and the New Raytheon By-Laws
will contain certain provisions, such as a classified board of directors, a
provision prohibiting stockholder action by written consent, a provision
prohibiting stockholders from calling special meetings and a provision
authorizing the New Raytheon Board to consider factors other than stockholders'
short-term interests in evaluating an offer
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CHAPTER 2: RISK FACTORS
involving a change in control, which are not present in the GM Certificate of
Incorporation or the GM By-Laws. Such provisions could have the effect of
delaying, deferring or preventing a change in control of New Raytheon or the
removal of New Raytheon management, of deterring potential acquirors from
making an offer to stockholders of New Raytheon and of limiting any opportunity
to realize premiums over prevailing market prices for New Raytheon Common Stock
in connection therewith. The New Raytheon Rights Agreement, which also has no
equivalent at General Motors, could have the same effect. See "New Raytheon
Capital Stock" and "Comparison of GM Class H Common Stock, New GM Class H
Common Stock and Class A Common Stock" in Chapter 6.
Furthermore, in order to preserve the tax-free status of the Hughes Defense
Spin-Off, the Hughes Telecom Spin-Off and the Raytheon Merger, New Raytheon
will be subject to certain covenants under the Spin-Off Separation Agreement
which will prohibit New Raytheon from entering into or permitting (to the
extent that New Raytheon has the right to prohibit) certain transactions and
activities, in each case unless General Motors has, in its sole and absolute
discretion, which discretion shall be exercised in good faith solely to
preserve the tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom
Spin-Off and the Raytheon Merger, determined that such transactions and
activities would not jeopardize the tax-free status of any of the foregoing.
Such transactions and activities include (1) certain acquisition transactions,
stock issuance transactions and stock buyback transactions for two years
following the Raytheon Merger; (2) certain recapitalizations, reincorporations
and similar transactions affecting the rights and privileges of New Raytheon
Common Stock; and (3) certain amendments or changes to the New Raytheon
Certificate of Incorporation or the New Raytheon By-Laws for three years
following the Raytheon Merger. Such prohibitions, to which General Motors and
Hughes Defense are not subject, could have the effect of delaying, deferring or
preventing a change in control of New Raytheon and of limiting the opportunity
to realize premiums over prevailing market prices for New Raytheon Common Stock
in connection therewith during the period of their applicability. In addition,
although the opportunities to participate in defense industry consolidation
have become fewer as consolidation has progressed, such prohibitions could also
have the effect of delaying, deferring, hindering or preventing New Raytheon's
ability to take advantage of opportunities that do arise during the period of
such prohibitions' applicability, including transactions such as a merger of
equals or acquisitions financed by New Raytheon Capital Stock.
For additional information regarding these prohibitions, see "Separation and
Transition Arrangements--Summary of Spin-Off Separation Agreement--Preservation
of Tax-Free Status of the Hughes Transactions and the Raytheon Merger" in
Chapter 3. See also "New Raytheon Capital Stock" and "Comparison of GM Class H
Common Stock, New GM Class H Common Stock and Class A Common Stock" in Chapter
6.
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
CHAPTER 3
THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SPECIAL FACTORS................................................... 41
Purposes of the Hughes Transactions.............................. 41
Alternatives to the Hughes Transactions.......................... 44
Background of the Hughes Transactions............................ 46
The Distribution Ratio........................................... 67
Recommendations of the Capital Stock Committee and the GM Board;
Fairness of the Hughes Transactions............................. 70
Hughes Transactions Fairness Opinions: Merrill Lynch and Salomon
Brothers........................................................ 78
Requisite Stockholder Approval of the Hughes Transactions........ 94
Certain U.S. Federal Income Tax Considerations Relating to
Certain of the Hughes Transactions.............................. 95
Certain U.S. Federal Income Tax Considerations Relating to the
Raytheon Merger................................................. 97
Stockholder Litigation Relating to the Hughes Transactions....... 99
DESCRIPTION OF THE HUGHES TRANSACTIONS............................ 101
General.......................................................... 101
GM Spin-Off Merger Agreement..................................... 104
Allocation of Hughes Defense Debt Proceeds; Hughes Telecom
Funding......................................................... 109
No Recapitalization at a 120% Exchange Ratio..................... 109
Stockholder Approval of the Hughes Transactions.................. 110
No Appraisal Rights.............................................. 111
Certain U.S. Federal Income Tax Considerations................... 111
Certain Litigation............................................... 111
Accounting Treatment............................................. 111
Regulatory Requirements.......................................... 111
Sales to General Motors.......................................... 112
DESCRIPTION OF THE RAYTHEON MERGER................................ 113
General.......................................................... 113
Raytheon Merger Agreement........................................ 115
Implementation Agreement......................................... 126
GM Stockholder Approval Not Required for the Raytheon Merger..... 128
Approvals by the Capital Stock Committee and the GM Board;
Fairness of the Raytheon Merger................................. 129
Raytheon Merger Fairness Opinion: Goldman Sachs ................. 129
Certain U.S. Federal Income Tax Considerations................... 134
Accounting Treatment............................................. 134
SEPARATION AND TRANSITION ARRANGEMENTS............................ 136
Introduction..................................................... 136
Summary of Master Separation Agreement........................... 136
Summary of Spin-Off Separation Agreement......................... 139
Summary of Tax Sharing Agreement................................. 143
Summary of Other Agreements Contemplated by the Master Separation
Agreement....................................................... 144
</TABLE>
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
SPECIAL FACTORS
PURPOSES OF THE HUGHES TRANSACTIONS
The Hughes Transactions are designed to address certain strategic challenges
facing each of the three principal businesses of Hughes Electronics and to
enhance the long-term value of these businesses to General Motors and its
common stockholders. The immediate impetus for the timing of the Hughes
Transactions is the major consolidation taking place in the U.S. defense
industry and the significant opportunities for Hughes Defense presented by the
proposed merger with Raytheon.
The Hughes Transactions are intended to accomplish three principal business
objectives:
. Enable Hughes Defense to participate in U.S. defense industry consolidation
by merging with Raytheon, thereby achieving the critical mass that will be
necessary to continue to compete effectively in the defense industry;
. Better position Delco and Delphi to participate in the automotive
electronics industry trend toward integrated automotive systems procurement
by facilitating the combination of Delco and Delphi; and
. Enhance the growth potential of Hughes Telecom in the expanding global
telecommunications market through additional funding and more focused
senior management.
Each of these business objectives is discussed in greater detail below.
SPIN-OFF OF HUGHES DEFENSE AND THE RAYTHEON MERGER
The first purpose of the Hughes Transactions is to facilitate Hughes
Defense's participation in the U.S. defense industry consolidation through the
consummation of the Raytheon Merger. In the period during which Hughes Defense
has been an indirect, wholly owned subsidiary of General Motors, the U.S.
defense industry has experienced major consolidation. This industry
consolidation is the result of a decline since 1986 in the U.S. defense budget
and declining defense spending projections for the next several years. The
procurement portion of the U.S. defense budget, which has historically been a
primary revenue source for Hughes Defense, has declined steadily from
approximately $88.0 billion in 1986 (equivalent to about $120.0 billion in 1996
dollars) to approximately $48.0 billion in 1996, and is expected to grow only
nominally in the near future. These budget reductions have altered the
competitive landscape by creating overcapacity and increasing price pressure on
contractors. The nature of competition for defense business also has been
shifting and is increasingly based on systems capabilities, market presence,
cost structure and influence due to the size and scope of the contractor and
its workforce. Defense industry participants have viewed consolidation on a
major scale as the only viable way to increase product and systems scope and
achieve increasing economies of scale in an overall market that is not expected
to experience significant growth in the future.
With the July 1997 announcement of the planned merger of Lockheed Martin
Corporation ("Lockheed Martin") and Northrop Grumman Corporation ("Northrop
Grumman"), the major consolidation of the U.S. defense industry has entered its
final stage. This industry consolidation has resulted in the development of two
principal tiers of defense industry participants: the defense industry
"giants," such as Lockheed Martin, Raytheon (assuming the completion of its
merger with Hughes Defense) and The Boeing Company ("Boeing"), and the "niche"
players with annual revenues ranging from $1.0 billion to $5.0 billion. Among
the industry "giants," various strategies are currently being pursued. For
example, Lockheed Martin is vertically integrated within the defense industry,
having extensive capabilities in both "platforms" (such as military aircraft,
space launch vehicles and satellites) as well as defense electronics systems.
In contrast, Raytheon and Boeing have taken a more horizontal approach,
focusing primarily on platforms and defense electronics systems, respectively.
All three companies, however, are continuing to shape their portfolios and
divest non-core businesses while seeking to establish international alliances
and targeting occasional acquisitions.
The Raytheon Merger is intended to allow Hughes Defense to maintain a leading
position in the consolidating U.S. defense industry. We believe that the
combined businesses of Hughes Defense and Raytheon
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
will represent a strong and viable competitor in the defense electronics
industry that will be in a position to implement business synergies for the
benefit of New Raytheon, its stockholders and its principal defense electronics
customer, the U.S. government. For information regarding the Raytheon Merger,
see "Description of the Raytheon Merger" below.
In the context of these changes in the U.S. defense industry, we have been
required during the last several years to spend increasing amounts of board,
management and staff time and other resources on Hughes Defense and the
strategic challenges it currently faces. The Hughes Defense Spin-Off will also
allow us to allocate resources currently devoted to Hughes Defense to our core
automotive and other businesses.
INTEGRATION OF DELCO AND DELPHI
The second business purpose of the Hughes Transactions is to facilitate the
integration of Delco with Delphi. Automobile manufacturers are increasingly
moving toward integrated automotive systems procurement from a limited number
of suppliers. Manufacturers, including GM's North American Operations ("GM
NAO"), also are expected to continue to press their suppliers to accelerate the
introduction of new technology and otherwise to aggressively pursue cost
reductions. In connection with their ongoing long-term review and assessment of
Delco and Delphi and their business strategies, General Motors and Hughes
Electronics believe that in order to remain competitive in this industry
environment Delco and Delphi must possess the capabilities to produce high
quality and low cost fully integrated "systems" designs, as well as the
capabilities to manufacture high quality components at continuously lower
costs. Although Delco has strong capabilities and market position in various
electronic and electro-mechanical components, General Motors and Hughes
Electronics have determined that Delco will need to gain access to and
strengthen its capabilities in the integration of complete systems which
incorporate separate systems and components in powertrain, ride and handling,
cockpit and control and communications.
The transfer of Delco from Hughes Electronics to General Motors will position
the combined Delco/Delphi business to compete more effectively in the changing
market for automotive electronics by allowing General Motors to integrate more
fully Delco's electronics capability with Delphi's automotive systems and
components expertise. The integration of these operations is intended to
accelerate GM's ability to compete aggressively in high-growth markets
worldwide by developing new electronically enhanced vehicle systems with
improved functionality, lower cost and higher quality. The combined
Delco/Delphi entity will be better able to realign its product, technical and
manufacturing operations to address strategic objectives for growth and
competitiveness.
We expect that the integration of Delco and Delphi will enable Delco to be
more competitive with respect to its market share with GM NAO as a result of
its redesign of key automotive electronics systems and its introduction of
lower cost design solutions. GM NAO will benefit directly from these redesigned
automotive systems. In addition, we expect Delco to improve its capability to
achieve and maintain additional non-GM NAO sales due to its access to a larger
outside customer base. Significant structural savings are also expected to
accrue to the combined company as a result of the full integration of the two
companies.
Once the integration of Delco and Delphi is completed and we have
demonstrated the competitiveness of the combined operations, General Motors
will be able to consider the future timing of a possible partial public
offering of the combined business operations. General Motors has no present
intention to make any such offering. Business judgments regarding completion of
the integration of Delco and Delphi and satisfactory demonstration of the
competitiveness of the combined operations will be made by the GM President's
Council based upon relevant business considerations. The timing and substance
of such business judgments will depend on many subjective factors such as,
among other things, achievement by Delphi/Delco of synergies in line with
expectations, the ability of the combined businesses to sustain a satisfactory
level of market share increases based on the competitiveness of the technology,
price and quality of its products, satisfactory reductions in administrative
overhead, globalization of its operations, continued strong prospects for
growth in revenues and
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operating profit and other relevant factors relating to the overall
competitiveness of the businesses of Delphi/Delco.
In September 1997, Ford Motor Company ("Ford") announced its intention to
reorganize its component operations into a unit called "Visteon." Ford's
objectives with respect to Visteon appear to be similar to GM's strategy with
respect to the integration of Delco and Delphi, and include, among other
things, increasing sales to other original equipment manufacturers ("OEMs")
while also driving efficiencies by increasing outsourcing of Ford's automotive
business. It is not clear at this time how this will change the competitive
environment for the combined Delco/Delphi entity over time. On the one hand,
Visteon will likely be pursuing sales to many of the same OEMs targeted by the
combined Delco/Delphi entity. On the other hand, however, Delco/Delphi may have
the opportunity to sell to Ford as a result of its outsourcing initiatives.
ENHANCE GROWTH POTENTIAL OF HUGHES TELECOM
The third business purpose of the Hughes Transactions is to enhance the
ability of Hughes Telecom to take advantage of growth opportunities. The
telecommunications industry is experiencing a period of rapid expansion and
change, providing industry participants with many opportunities for strategic
growth as well as vigorous competition. We expect the global telecommunications
services market to continue to grow due to the high demand for communications
infrastructure and the opportunities created by industry deregulation. In this
environment, many of Hughes Telecom's competitors are committing substantial
capital to capturing market opportunities and to entering into strategic
alliances to acquire or maintain and strengthen market leadership. This market
will therefore remain intensely competitive and key success factors for
participants will include possession of advanced technological capability,
speed in introducing new products and services so as to capture first mover
advantages, product differentiation, including access to local and
international content, strength in partnering/strategic alliances, ability to
react quickly to rapid industry change and financial flexibility.
Hughes Electronics' strategy with respect to the Hughes Telecom business is
to leverage its leadership position in satellite technology to become a leader
in emerging telecommunications markets for products and services. This strategy
requires a significant investment of capital in Hughes Telecom.
General Motors and Hughes Electronics currently believe that Hughes Telecom
is the Hughes Electronics business which offers the greatest long-term growth
potential. By retaining ownership of Hughes Telecom, General Motors and its
stockholders will retain the ability to participate in this rapidly growing
industry. The Hughes Transactions and the Raytheon Merger, by providing funding
to Hughes Telecom, will help to enable New Hughes Electronics to take advantage
of growth opportunities in the telecommunications and space marketplace. The
Hughes Transactions will also enable New Hughes Electronics to focus its board,
management and staff time and other resources solely on the telecommunications
and space business.
We currently believe that continued ownership of the telecommunications and
space business of Hughes Electronics in a tracking stock structure will not
prevent New Hughes Electronics from executing certain types of strategic
alliances where needed to assist it to continue to compete effectively and to
grow its business. Continued ownership of the telecommunications and space
business of Hughes Electronics in a tracking stock structure also will provide
General Motors with the flexibility in the future to issue New Hughes
Electronics tracking stock in a tax-efficient manner. The New GM Class H Common
Stock will provide its holders with a more focused investment in the Hughes
Electronics' telecommunications and space business than the existing GM Class H
Common Stock.
Achievement of each of the foregoing business objectives is dependent on
numerous factors in addition to the consummation of the Hughes Transactions,
many of which are beyond the control of General Motors, Hughes Defense, Delco
and Hughes Telecom. Accordingly, there can be no assurance as to whether and to
what extent any of such objectives will in fact be achieved if the Hughes
Transactions are consummated.
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ALTERNATIVES TO THE HUGHES TRANSACTIONS
Before deciding to proceed with the Hughes Transactions, General Motors and
Hughes Electronics considered several strategic alternatives involving each of
the three Hughes Electronics businesses in an attempt to address the strategic
challenges and accomplish the business objectives outlined above under "--
Purposes of the Hughes Transactions." In considering these strategic
alternatives, we focused on whether such alternatives were in the best
interests of General Motors and its common stockholders, the effect of such
alternatives on each class of GM's common stockholders and the potential of
such alternatives to maximize value for GM common stockholders.
As a preliminary matter, the GM Board was advised by GM management that any
strategic transaction involving Hughes Defense could result in a level of
corporate and stockholder tax so high that it would make the transaction
uneconomic unless it were accomplished on a tax-free basis. Accordingly, the
GM Board determined that any potential strategic transactions involving Hughes
Electronics or any of its three principal businesses should be structured so
as to generally be tax-free for U.S. federal income tax purposes to General
Motors and its stockholders. See "--Certain U.S. Federal Income Tax
Considerations Relating to Certain of the Hughes Transactions" below.
In addition, the GM Board was advised by GM management that certain issues
would arise if any strategic transaction were to result in a recapitalization
of GM Class H Common Stock into GM $1 2/3 Common Stock at a 120% exchange
ratio, as currently provided for under certain circumstances in the GM
Certificate of Incorporation. These issues included substantial dilution that
would likely reduce the value of the GM $1 2/3 Common Stock, including the new
stock of that class to be issued to GM Class H Common Stockholders in any such
recapitalization, as well as the substantial change that would result in the
form and nature of the investment of GM Class H Common Stockholders, who would
have their tracking stock investment in Hughes Electronics replaced with a
conventional stock interest in all of GM's operations (rather than with a
conventional stock interest in New Raytheon and a more focused tracking stock
interest in Hughes Telecom as in the Hughes Transactions). The GM Board
believed that most GM Class H Common Stockholders had purchased such stock in
order to make a focused investment in the businesses of Hughes Electronics
rather than to make a conventional investment in all of GM's businesses, and
considered that the frustration of that investment objective would likely
result in substantial trading activity that would exacerbate the anticipated
adverse effect on market value for all investors. Management also advised that
the elimination of the GM Class H Common Stock through a recapitalization into
GM $1 2/3 Common Stock would result in the loss of GM's flexibility to issue
equity interests relating to Hughes Telecom without incurring corporate-level
tax and to use tracking stock as a focused security for management
compensation. See "--Hughes Telecom" below. The GM Board also noted certain
practical difficulties and uncertainties involving the application of the
recapitalization provision in the context of a complex series of strategic
transactions. These included issues relating to the timing of the announcement
of any transaction as well as uncertainty as to whether a recapitalization
would be triggered by a spin-off of Hughes Defense while Hughes Telecom was
retained by General Motors. Accordingly, and in light of the substantial
benefits that the contemplated strategic transactions would be expected to
have for the holders of both classes of GM common stock, the GM Board
determined that it would be in the best interests of all of GM's common
stockholders to structure the contemplated strategic transactions involving
Hughes Electronics or any of its three principal businesses so as not to
result in a recapitalization of GM Class H Common Stock into GM $1 2/3 Common
Stock. See "Description of the Hughes Transactions--No Recapitalization at a
120% Exchange Ratio" below.
After review and consideration of the alternatives described below, the GM
Board concluded that, in the context of the opportunities presented by the
Raytheon Merger, the Hughes Transactions, taken as a whole, represented the
best strategic alternative for Hughes Electronics and its three businesses.
HUGHES DEFENSE
As described below under "--Background of the Hughes Transactions--
Development of the Hughes Transactions and the Raytheon Merger," Hughes
Electronics determined that in order to address the strategic challenges
facing its defense electronics business and preserve stockholder value, it
would pursue a strategic combination between Hughes Defense and another
significant player in the defense industry. To do so, we
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considered two principal alternatives for Hughes Defense which would allow it
to participate in the consolidation of the U.S. defense industry in a
significant manner:
. a spin-off of Hughes Defense to GM's common stockholders in the absence of
a pre-arranged merger; and
. the acquisition of another significant player in the U.S. defense industry
under the existing GM and Hughes Electronics ownership structure.
A spin-off of Hughes Defense in the absence of a pre-arranged merger would
have better positioned Hughes Defense to effectuate its strategic objective of
participation in the ongoing U.S. defense industry consolidation by separating
Hughes Defense from General Motors. It would allow both General Motors and
Hughes Electronics to focus their board, management and staff time and other
resources on their remaining businesses. However, the opportunity currently
presented by the Raytheon Merger achieves these benefits while offering
additional advantages as well. Coupling the spin-off of Hughes Defense with the
Raytheon Merger afforded us the ability to proactively select an appropriate
merger partner well suited to Hughes Defense and provided management with the
ability to influence the strategic direction and future growth of the combined
entity, thus helping to ensure GM's common stockholders the highest long-term
value for their interest in Hughes Defense. Moreover, because of the time
required to spin off Hughes Defense, there was a significant risk that, as the
consolidation of the U.S. defense industry proceeded, the parties suitable to
combine with the free-standing Hughes Defense would undertake to pursue other
strategic transactions and, as a result, be unwilling or unable to enter into a
strategic transaction with Hughes Defense when it was a free-standing entity.
Also, in light of the ongoing consolidation taking place in the U.S. defense
industry, a spin-off of Hughes Defense in the absence of a pre-arranged merger
could expose Hughes Defense as a potential takeover target for parties who
might not offer a desirable strategic fit or provide an opportunity to realize
synergies that could optimize Hughes Defense's potential long-term value for
the benefit of GM's common stockholders. Consequently, we decided to pursue a
spin-off of Hughes Defense as part of a pre-arranged merger transaction.
We also considered from time to time the ability of Hughes Defense to execute
a large-scale defense industry acquisition under the existing General Motors
and Hughes Electronics ownership structure. We do not believe that such a
substantial acquisition is currently a viable alternative. The use of GM's
capital resources to effect an acquisition in an industry other than that of
GM's core automotive and other businesses would divert resources and management
focus and would therefore not be in the best interests of General Motors or its
common stockholders. In addition, potential merger partners in the defense
industry have expressed an unwillingness in preliminary discussions to enter
into a combination with Hughes Defense as long as General Motors owns any
material interest in Hughes Defense. Further, although GM Class H Common Stock
is currently considered to be a feasible alternative for use in funding smaller
acquisitions, we do not believe it is a viable currency for use in larger
acquisitions.
DELCO
In light of the industry-wide shift in focus from components to systems
sourcing and the continuous drive by manufacturers, including GM NAO, for
aggressive cost reductions, we considered two possible alternatives to the
Hughes Transactions to effect a strategic alliance between and more fully
integrate the operations of Delco and Delphi:
. the contribution of all or a significant portion of Delphi operations to
Hughes Electronics; and
. the formation of one or more joint ventures between Delco and Delphi.
In light of other available alternatives, we determined that a contribution
of all or a significant portion of Delphi operations to Hughes Electronics
would not be in the best interests of the GM Class H Common Stockholders
because such a transaction would materially alter the fundamental character of
GM Class H Common Stock by changing it from a tracking stock relating to the
defense electronics, automotive electronics and telecommunications businesses
to a tracking stock predominantly relating to an automotive components business
with materially different characteristics and long-term prospects. We also
determined that contributing
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only a portion of Delphi's business to Hughes Electronics would not be in the
best interests of General Motors and its common stockholders because it would
not permit the full realization of the benefits to be gained from integrating
Delco and Delphi.
We also considered the formation of one or more joint ventures in which
Delphi and Delco would each contribute certain assets to form one or more new
automotive components companies. Although this alternative would combine the
businesses, we determined that this alternative was less attractive than the
transfer of Delco from Hughes Electronics to General Motors. The formation of
joint ventures would result in a complicated ownership and organizational
structure that would not fully promote realization of potential synergies
between Delco and Delphi, and thus would not maximize the potential value for
GM's common stockholders. In addition, in light of the tracking stock nature of
GM Class H Common Stock, Hughes Electronics' ownership of a joint venture could
cause confusion in the capital markets and, as a result, adversely impact the
price of GM Class H Common Stock. Finally, joint ventures would limit GM's
overall strategic flexibility, thus hindering the full realization of the goals
of integration.
HUGHES TELECOM
The principal alternative we considered for Hughes Telecom was a spin-off of
all or a portion of the Hughes Telecom business to GM's common stockholders
(possibly in connection with an initial public offering). We believe that
Hughes Telecom represents an attractive investment for our stockholders whether
it is held by General Motors or spun off to our stockholders. However, we
believe that a spin-off of Hughes Telecom would not be in the best interests of
General Motors or its common stockholders at the present time for several
reasons. First, we believe that Hughes Telecom represents an attractive
investment for General Motors and its stockholders since it is the Hughes
Electronics business which currently offers the greatest growth potential. Both
classes of GM's common stockholders will participate in this growth through
their ownership of GM common stock. Second, a spin-off of Hughes Telecom at
this time could have potentially adverse implications for the credit ratings of
General Motors and GMAC because it would further reduce GM's book equity and
its funding flexibility. Based largely on the importance attributed to GM's
credit ratings by GM management, particularly in order to prepare for any
potential downturns in the automotive industry, General Motors and Hughes
Electronics had previously determined that they would not take any strategic
action relating to the businesses of Hughes Electronics if any of GM's
principal ratings agencies would lower GM's credit ratings as a result of such
action. Third, a spin-off of Hughes Telecom generally would reduce GM's
strategic flexibility, including the elimination of its ability to issue equity
interests relating to Hughes Telecom, such as the New GM Class H Common Stock,
without incurring corporate level tax. The proceeds of any such equity issuance
could be used to provide funding for Hughes Telecom or other GM businesses. Any
negative impacts on General Motors from credit rating downgrades and reduced
flexibility are also likely to affect negatively the interests of stockholders
in General Motors. Fourth, we believe that Hughes Telecom derives a financial
benefit from having a parent corporation that is capable of supporting its
operations, either by providing short-term loans (such as occurred in
connection with the PanAmSat Merger) or by providing new capital (in which case
an appropriate adjustment could be made to the Class H Fraction). See "New GM
Class H Common Stock" in Chapter 6.
After examining the alternatives described above, General Motors concluded
that the Hughes Transactions offered the most comprehensive solution to the
strategic challenges and business objectives described above under "--Purposes
of the Hughes Transactions."
BACKGROUND OF THE HUGHES TRANSACTIONS
This section provides information about the background of the Hughes
Transactions and the Raytheon Merger from GM's point of view. As noted above
under "Raytheon Information" in Chapter 1, a section of the Raytheon
Solicitation Statement called "Background" contains information about the
background of the Raytheon Merger from Raytheon's point of view, including
information about the Raytheon board of directors'
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consideration of the merger and its decision to approve the Raytheon Merger and
recommend it to the stockholders of Raytheon, as to which we have no direct
knowledge. That section also contains summaries of (1) an opinion of Bear
Stearns, financial advisor to Raytheon, to the effect that, as of the date of
the opinion and based upon and subject to certain matters stated in the
opinion, the Raytheon Merger is fair to Raytheon stockholders from a financial
point of view and (2) an opinion of CSFB, financial advisor to Raytheon, to the
effect that, as of the date of the opinion and based upon and subject to
certain matters stated in the opinion, the Merger Consideration (as defined in
the opinion) was fair to the holders of Raytheon Common Stock from a financial
point of view. Copies of the opinions of Bear Stearns and CSFB are attached as
appendices to the Raytheon Solicitation Statement. We have incorporated the
"Background" section of the Raytheon Solicitation Statement and the opinions of
Bear Stearns and CSFB, which are attached as appendices to the Raytheon
Solicitation Statement, into this document by reference. See "Where You Can
Find More Information" in Chapter 7. You should note, however, that these
materials were prepared for Raytheon's board of directors in connection with
the Raytheon Merger, and Raytheon's board of directors and its financial
advisors did not consider your interests as a stockholder of General Motors.
GM'S ACQUISITION OF HUGHES AIRCRAFT
General Motors organized Hughes Electronics in 1985 in connection with its
acquisition of Hughes Aircraft from the Howard Hughes Medical Institute
("HHMI"). In that transaction, General Motors paid HHMI approximately $2.7
billion in cash and delivered to HHMI 100 million shares of newly-created GM
Class H Common Stock. In connection with the Hughes Aircraft acquisition,
Hughes Aircraft and Delco (then consisting of GM's Delco Electronics division,
the instrument and display systems business unit of GM's AC Spark Plug
division, and Delco Systems Operations) were contributed to Hughes Electronics.
There were two principal reasons for GM's contribution of Delco to Hughes
Electronics, whose earnings were to be the basis for dividend payments on the
GM Class H Common Stock. First, from a financial perspective, the contribution
allowed General Motors to reduce the amount of cash otherwise required to be
paid to HHMI in order to acquire Hughes Aircraft. Moreover, the value
attributed to Delco by HHMI and General Motors in connection with the Hughes
Aircraft acquisition reflected a price/earnings multiple which was higher than
that attributed to GM's overall earnings and more consistent with multiples
applied to other automotive component manufacturers. Second, from an
operational perspective, the contribution of Delco to Hughes Electronics was
intended to facilitate the exploitation of Hughes Aircraft's electronics
experience and technology for the benefit of Delco. General Motors expected
this combination to be particularly important as the electronic content of cars
and trucks increased, with new electronic systems to improve driveability, fuel
economy, safety, comfort and emissions control and enhanced information,
communications and entertainment systems. While a portion of such synergies
have been identified and realized, especially in the areas of automotive safety
and security products, General Motors believes that it is now positioned to
attain any additional synergistic benefits through alternative mechanisms such
as the various technology sharing and other separation and transitional
arrangements which will be put in place in connection with the Hughes
Transactions. For a description of some of these arrangements, see "Separation
and Transition Arrangements--Summary of Other Agreements Contemplated by the
Master Separation Agreement" below. We therefore have determined that ownership
of Hughes Defense is not necessary for General Motors to obtain for Delco the
benefits of the electronic and systems integration capabilities of Hughes
Defense.
DEVELOPMENT OF THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
The Hughes Transactions arise out of the convergence of several initiatives
undertaken by General Motors and Hughes Electronics to assess and enhance the
long-term value of each of Hughes Electronics' three businesses to General
Motors and its common stockholders. However, the immediate impetus for the
timing of the Hughes Transactions is the major consolidation taking place in
the U.S. defense industry and the significant opportunities for Hughes Defense
presented by the Raytheon Merger.
Largely in response to the developing consolidation of the U.S. defense
industry, General Motors and Hughes Electronics engaged from time to time
during the past few years in preliminary discussions with other defense
companies regarding possible strategic transactions involving Hughes Defense.
Beginning in the fall of
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1995, Hughes Electronics management personnel and financial, legal, tax,
accounting and other advisors met from time to time as part of an intensive
assessment of the strategic objectives of each of the three principal
businesses of Hughes Electronics and to consider legal, tax and accounting
issues that would be presented by any transaction or series of transactions
involving these businesses that might be proposed. Financial advisors did not
at this time provide any reports or render any advice materially related to the
Hughes Transactions. Hughes Electronics determined in late 1995 that it must
develop certain strategies with respect to its defense electronics business in
order to address strategic challenges and preserve stockholder value.
Accordingly, Hughes Electronics identified and considered four strategic
alternatives with respect to Hughes Defense:
. Continue existing business strategy.
. Pursue selective acquisitions of smaller defense businesses.
. Proactively pursue a merger or other significant business combination.
. Exit the defense electronics business.
In connection with its evaluation of these strategic alternatives, Hughes
Electronics considered the strategic value of various combinations of Hughes
Defense with one of several other defense industry participants. After careful
consideration of each of these alternatives, Hughes Electronics determined that
a strategy of proactively pursuing a combination of Hughes Defense with the
defense business of another significant industry participant represented the
best alternative in order to maximize stockholder value with respect to Hughes
Defense. In addition, Hughes Electronics determined to continue to pursue
selective acquisitions of smaller defense businesses.
During this period, Hughes Electronics also began to consider various
strategic alternatives for Delco and Hughes Telecom, as described above under
"--Purposes of the Hughes Transactions." Hughes Electronics determined that
pursuing a combination of Hughes Defense with another defense industry
participant would be consistent with its strategies with respect to Delco
(i.e., to integrate the business operations of Delco and Delphi) and Hughes
Telecom (i.e., to enhance Hughes Telecom's growth potential).
During 1995, Hughes Electronics engaged in informal discussions at the senior
management level with Loral Corporation ("Loral") regarding the feasibility of
a strategic combination of Hughes Defense with the defense business of Loral.
There was no discussion of price or potential structure for such a combination.
Such discussions ended in late 1995 and prior to the announcement of Lockheed
Martin's agreement to acquire Loral on January 7, 1996.
In early 1996, General Motors and Hughes Electronics began to consider and
assess various alternative structures for a transaction or series of
transactions involving Hughes Defense and the other principal businesses of
Hughes Electronics. Although Hughes Electronics also continued to pursue
selective acquisitions, Hughes Electronics management believed that Lockheed
Martin's acquisition of Loral's defense business in early 1996 rendered the
pursuit of selective acquisitions ineffective as a long-term business strategy
for Hughes Defense. Hughes Electronics management determined that a strategic
combination with a significant industry participant was required because
Lockheed Martin's acquisition of Loral's defense business significantly changed
the profile of the defense industry by increasing the size, and the related
economies of scale and operating efficiencies, necessary to compete effectively
for government contracts.
Beginning in early 1996, Hughes Electronics engaged in discussions with
Raytheon regarding a combination of Raytheon's defense business with Hughes
Defense. Raytheon had been considering and assessing various alternative
structures for a transaction or series of transactions involving its defense
electronics business since 1994, resulting in its acquisition of E-Systems in
1995 and its acquisition of Chrysler Technologies in 1996. The discussions
between Hughes Electronics and Raytheon in early 1996 included potential
structures for a combination of their defense electronics businesses, tax
issues (including whether to seek an IRS ruling or to rely instead on an
opinion of tax counsel) and timing issues. In March 1996, General Motors
terminated such discussions in order to focus on other strategic activities and
due to the absence of agreement on material terms of the transaction. From time
to time thereafter, representatives of the parties had occasional contacts in
which they mutually confirmed that there was no basis upon which to reopen
discussions.
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In connection with these initial discussions with Raytheon, GM management and
Hughes Electronics management discussed with their financial, legal and tax
advisors the possibility of General Motors unilaterally
effecting a recapitalization of the GM Class H Common Stock into GM $1 2/3
Common Stock at a 120% exchange ratio based on the then prevailing market
prices of the two classes of stock, as provided for in the GM Certificate of
Incorporation. Such a unilateral action would have potentially benefited the GM
$1 2/3 Common Stockholders because the exchange ratio would be calculated based
on market prices that would have been unaffected by market rumors that might
have subsequently developed regarding a possible transaction with Raytheon or
any other strategic partner. However, the recapitalization would also have
involved substantial dilution through the issuance of GM $1 2/3 Common Stock
and would have been effected at a time of uncertainty about the ability to
consummate a transaction with Raytheon or any other party. Management and the
advisors also discussed whether a spin-off of Hughes Defense (but not of Hughes
Telecom) in connection with a strategic transaction with Raytheon or any other
strategic partner might automatically result in a recapitalization of GM Class
H Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio unless GM's
common stockholders approved changes to the GM Certificate of Incorporation.
For the reasons described above under "--Alternatives to the Hughes
Transactions," GM management considered that it would be in the best interests
of all of GM's common stockholders to structure any such transaction so as not
to result in such a recapitalization. See also "Description of the Hughes
Transactions--No Recapitalization at a 120% Exchange Ratio" below. In March
1996, these matters were reviewed on a preliminary basis with the Hughes
Electronics Board, which had an initial reaction that recapitalization at a
120% exchange ratio in connection with the contemplated transactions was
unlikely to be in the best interests of either class of GM common stockholders.
However, no final decision was made on these matters at this time in light of
the termination of discussions with Raytheon shortly thereafter. The financial
advisors participated in the foregoing discussions but did not at this time
provide any reports or render any advice materially related to the Hughes
Transactions.
In late July 1996, Hughes Electronics and Raytheon recommenced discussions
regarding a possible combination of Raytheon's defense business with Hughes
Defense. Negotiations continued through November 20, 1996, when both parties
agreed to terminate such negotiations and pursue other alternatives after they
were unable to reach agreement on senior management for the combined company.
In October 1996, Hughes Defense began to participate in the auction process
for the Texas Instruments Defense business. The process culminated on January
6, 1997, when Raytheon announced its agreement to acquire the Texas Instruments
Defense business for approximately $2.95 billion in cash.
Following the termination of discussions with Raytheon in November 1996,
General Motors and Hughes Electronics initiated preliminary discussions with
Northrop Grumman regarding a possible transaction involving Hughes Defense. On
November 23, 1996, Raytheon made a proposal, on an unsolicited basis, for a
strategic transaction with Hughes Defense. Pursuant to this proposal, Raytheon
(in its entirety) would merge with Hughes Defense. Raytheon's new proposal was
discussed by Hughes Electronics management and GM management and their
respective advisors. Although financial advisors participated in these
discussions, the financial advisors did not at this time provide any reports or
render any advice materially related to the Hughes Transactions (other than to
recommend that a formal process to solicit interest in a transaction involving
Hughes Defense be established). After consideration of such discussions,
including the recommendation to establish an appropriate process for soliciting
proposals, GM management and Hughes Electronics management determined to
recommend to the GM Board a process for soliciting appropriate merger proposals
for Hughes Defense, including from Raytheon and Northrop Grumman.
During the period when discussions were ongoing with Raytheon and during the
subsequent consideration of establishing a formal process to solicit interest
in a transaction involving Hughes Defense, GM management and Hughes Electronics
management continued to review issues relating to the possibility that a spin-
off of Hughes Defense (but not of Hughes Telecom) in connection with a
strategic transaction might automatically result in a recapitalization of GM
Class H Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio
unless GM's common stockholders approved changes to the GM Certificate of
Incorporation. The Hughes Electronics Board and the Capital Stock Committee
were advised of this ongoing review. For the reasons described above under "--
Alternatives to the Hughes Transactions," management determined to recommend
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that any such transaction be structured so as not to result in an automatic
recapitalization. See also "Description of the Hughes Transactions--No
Recapitalization at a 120% Exchange Ratio" below. On November 3, 1996, this
matter was reviewed with the Capital Stock Committee, which accepted
management's recommendation. Financial advisors participated in discussions
during this period but did not at this time provide any reports or render any
advice materially related to the Hughes Transactions.
December 1, 1996 Hughes Electronics Board Meeting. At the December 1, 1996
meeting of the Hughes Electronics Board, Hughes Electronics management
presented an update of recent developments in connection with various
discussions regarding the possible combination of Hughes Defense with another
defense industry participant, including the recent termination of discussions
with Raytheon and Raytheon's new unsolicited proposal to merge with Hughes
Defense. Following discussion of these and related matters, the Hughes
Electronics Board determined to recommend to the GM Board a process of
soliciting merger proposals for Hughes Defense from a selected group of
potential merger partners and developing definitive terms relating to a
strategic transaction involving Hughes Defense, subject to the subsequent
approval of any such terms by the Hughes Electronics Board and the GM Board. As
noted above, Hughes Electronics had for some time been reviewing and assessing
the strategic challenges facing each of its three principal businesses and it
had for some time been contemplated that any transaction involving Hughes
Defense would be a part of a series of transactions involving each of the
Hughes Electronics businesses.
December 2, 1996 Capital Stock Committee Meeting. At the December 2, 1996
meeting of the Capital Stock Committee, GM management and Hughes Electronics
management presented information regarding the termination in early November
1996 of discussions with Raytheon, the unsolicited proposal to merge with
Hughes Defense which was submitted by Raytheon, a recommended procedure for
soliciting merger proposals
for Hughes Defense from a selected group of potential merger partners, the
estimated financial results of various alternative structures for any such
merger transaction (which did not include a recapitalization of GM Class H
Common Stock at a 120% exchange ratio), a proposed timetable for performing due
diligence and receiving merger proposals based on comparable non-financial
terms and the implications of Hughes Electronics' interest in acquiring Texas
Instruments Defense. The Capital Stock Committee discussed these and other
related matters and considered the process for overseeing the development of a
potential spin-off of Hughes Defense, including the proposed formation of a
special committee of the GM Board to oversee the process, to be comprised of
the members of the Capital Stock Committee and the GM directors who also serve
on the Hughes Electronics Board. The Capital Stock Committee determined to
recommend to the GM Board that such a committee be established. In addition,
further to its discussion in November 1996, the Capital Stock Committee decided
to recommend that the GM Board determine that it would not propose in
connection with the contemplated transactions any transaction or series of
transactions that would result in a recapitalization of GM Class H Common Stock
into GM $1 2/3 Common Stock at a 120% exchange ratio.
December 2, 1996 GM Board Meeting. At its meeting on the same day, which was
attended by all but one of GM's directors, the GM Board received a report of
the matters discussed at the Capital Stock Committee meeting held earlier that
day and directed GM management to analyze further the business, financial, tax
and legal issues relating to the contemplated transactions (including matters
relating to the fairness of the transactions to the holders of both classes of
GM common stock) for the purposes of developing specific terms that would
accomplish the goals of the contemplated transactions. For the reasons
described above under "--Alternatives to the Hughes Transactions" and below
under "Description of the Hughes Transactions--No Recapitalization at a 120%
Exchange Ratio," the GM Board also determined that it would not propose in
connection with the contemplated transactions any transaction or series of
transactions that would result in the recapitalization of GM Class H Common
Stock into GM $1 2/3 Common Stock at a 120% exchange ratio as provided for
under certain circumstances in the GM Certificate of Incorporation. The GM
Board then authorized the implementation of a process to be managed by a joint
GM management and Hughes Electronics management team, in consultation with
their respective financial, legal and other advisors, to solicit expressions of
interest in a tax-free merger involving Hughes Defense from defense industry
participants who might constitute an appropriate merger partner for Hughes
Defense. The GM Board also established the special committee recommended by the
Capital Stock Committee, designated as the "Hughes Defense Spin-Off
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Committee," composed of John G. Smale, Thomas H. Wyman, John H. Bryan, Ann D.
McLaughlin, Edmund T. Pratt and Dennis Weatherstone. The GM Board authorized
the Hughes Defense Spin-Off Committee, during the periods between meetings of
the GM Board, to exercise all powers and authority of the GM Board in
connection with a spin-off or other strategic transaction involving the defense
electronics business of Hughes Electronics and related transactions and other
matters.
Soliciting a Merger Partner for Hughes Defense. In connection with the
process of soliciting a merger partner for Hughes Defense, the joint management
team was assisted by financial and legal advisors, Goldman Sachs and Weil,
Gotshal & Manges LLP, who had previously been engaged on behalf of General
Motors and Hughes Electronics in connection with the prior discussions with
Raytheon. The joint management team also received support from the financial,
legal and tax staffs of General Motors and Hughes Electronics and from GM's
legal and tax counsel, Kirkland & Ellis, who also had previously been engaged
on behalf of General Motors in connection with the prior discussions with
Raytheon. In addition, the joint management team received assistance from
Deloitte & Touche LLP on accounting issues and due diligence analyses of
prospective merger partners.
The joint management team, based on advice from Goldman Sachs and antitrust
and tax advisors, determined that certain participants in the defense industry
either could not or would not participate in the Hughes Defense bid
solicitation process for antitrust, tax or other reasons. As a result, the
joint management team invited four parties, Boeing, McDonnell Douglas
Corporation ("McDonnell Douglas"), Raytheon and Northrop Grumman, to
participate in the bid process. Boeing elected not to participate, explaining
that it did not embrace the concept of vertical integration and thus was not
interested in a strategic combination with a defense electronics systems
provider such as Hughes Defense. Subsequently, representatives of the joint
management team met with and provided access to information about Hughes
Defense to McDonnell Douglas, Raytheon and Northrop Grumman. Each was provided
a term sheet and draft agreements for its review. The term sheet and draft
agreements included certain features intended to ensure that the Hughes Defense
Spin-Off and the subsequent merger would be tax-free to General Motors and its
stockholders and provided for a transaction structure substantially similar to
that eventually contained in the agreements signed with Raytheon. The parties
were asked to submit proposals by December 13, 1996.
Proposals were submitted by Raytheon and Northrop Grumman on the date
requested and Northrop Grumman increased the value of its proposal in a
subsequent revised submission on December 17, 1996. McDonnell Douglas failed to
submit a proposal and, on December 15, 1996, announced an agreement to be
acquired by Boeing. Raytheon submitted two separate proposals. The first
proposal was to merge Hughes Defense with the defense business of Raytheon,
with a total value estimated to be approximately $8.3 billion (based on prior
estimates of synergies) to General Motors and its common stockholders,
comprised of debt of Hughes Defense and 45% of the common stock of the new
company. The second proposal was to merge Hughes Defense with Raytheon, with a
total value of approximately $8.5 billion to General Motors and its common
stockholders (subject to a "collar" mechanism designed to preserve the value of
the transaction to General Motors and its common stockholders), comprised of
debt of Hughes Defense and 30% of the common stock of the new company. Northrop
Grumman's proposal, as revised, was to form a new company which would assume
$3.8 billion of debt of Hughes Defense and in which GM's common stockholders
would own 45% to 50% of the common stock of the new company. The Northrop
Grumman proposal did not contain a "collar" mechanism. Based on the then-
current market price of Northrop Grumman's common stock, the revised proposal
submitted on December 17 was valued at approximately $8.3 billion.
December 17, 1996 Hughes Defense Spin-Off Committee Meeting. On December 17,
1996, the Hughes Defense Spin-Off Committee received a report from C. Michael
Armstrong, who at the time was Chairman and Chief Executive Officer of Hughes
Electronics, that Raytheon and Northrop Grumman had submitted proposals to
merge with Hughes Defense immediately after a spin-off of Hughes Defense from
General Motors. The Hughes Defense Spin-Off Committee reviewed and considered
the proposals. Upon the recommendation of Hughes Electronics management and GM
management and the Hughes Electronics Board, the Hughes Defense
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Spin-Off Committee authorized the joint management team to continue the
negotiation process with both Raytheon and Northrop Grumman, setting January 6,
1997 as the deadline to receive from each company a final proposal for a
strategic transaction involving Hughes Defense. The Hughes Defense Spin-Off
Committee discussed several factors that it would consider in evaluating the
proposals, including the terms of the proposed transaction, the likelihood of
completing the proposed transaction and the certainty of the valuation of the
consideration offered in connection with the proposed transaction, particularly
with regard to the long-term value of any equity in the combined company.
Further discussions were held with each of Raytheon and Northrop Grumman and
their respective financial advisors and each party was provided with further
due diligence opportunities regarding Hughes Defense. During this period,
representatives of the joint management team and its advisors also conducted
due diligence reviews of Raytheon and Northrop Grumman. In addition, the joint
management team's legal advisors discussed the draft agreements with each party
and distributed revised drafts of the proposed agreements. Each party was asked
to submit a final proposal not later than January 6, 1997.
Final Merger Proposals Received. On January 6, 1997, each of Raytheon and
Northrop Grumman submitted revised proposals with respect to the proposed
merger with Hughes Defense, including comments on the proposed agreements.
Raytheon submitted only one revised proposal, in which Hughes Defense would
merge with Raytheon, with a total value (as estimated by Raytheon at the time)
of approximately $9.0 billion to General Motors and its common stockholders,
with GM's common stockholders owning approximately 30% of the common stock of
the combined company. The basic structure of such proposal was substantially
the same as the structure of the Raytheon Merger and the relevant portions of
the Hughes Transactions proposed in this document. Northrop Grumman's revised
proposal was for the new company to assume $4.475 billion of debt of Hughes
Defense and for GM's common stockholders to own approximately 50% of the common
stock of the new company.
On January 6 and 7, 1997, the joint management team, working together with
its financial, tax and legal advisors, reviewed each party's submission and
discussed the proposals with each party and its advisors in an attempt to seek
clarification with respect to certain matters. These matters included, among
other things, total value of the proposals, the treatment of stock options held
by Hughes Defense employees and, in the case of Northrop Grumman, the addition
of a "collar" mechanism to its proposal. Based on these discussions, as
requested by the joint management team, each of Raytheon and Northrop Grumman
submitted final proposals to General Motors and Hughes Electronics on the
evening of January 8, 1997. The final proposals of Raytheon and Northrop
Grumman were substantially comparable, other than with respect to the total
value of the consideration offered (which consisted, in each case, of a
combination of common stock in the new company and debt, protected by an equity
collar) and the percentage of the equity interest of GM's common stockholders
in the combined company. Based on the market value of the equity and the debt
of each proposal, Raytheon's final proposal was valued at approximately $9.5
billion, with GM's common stockholders owning approximately 30% of the common
stock of the combined company, and Northrop Grumman's final proposal was valued
at approximately $9.3 billion, with GM's common stockholders owning
approximately 50% of the common stock of the combined company.
On January 8 and 9, 1997, the joint management team, in consultation with its
financial, legal, tax and other advisors, reviewed and discussed the final
proposals of Raytheon and Northrop Grumman. The joint management team also had
additional discussions with Raytheon regarding its final proposal, including
the definitive agreements included as part of its final proposal. Based
principally upon (1) the greater indicated value of the aggregate debt and
equity components of Raytheon's proposal as compared to that of Northrop
Grumman and (2) the joint management team's assessment that the strategic
combination of Hughes Defense with Raytheon on the terms proposed had greater
potential to produce a financially strong defense electronics business
competitive across a broader range of market segments than would a combination
with Northrop Grumman, the joint management team determined to recommend that
Raytheon be selected as the merger partner for Hughes Defense, subject to the
ability to resolve with Raytheon the remaining open issues, including, among
other things, the conditions under which a break-up fee would be payable.
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January 10, 1997 GM President's Council Meeting. On January 10, 1997, the GM
President's Council, GM's senior policy-making management body, met to discuss
and consider the final proposals of Raytheon and Northrop Grumman. For
additional information regarding the GM President's Council, including the
identity of the current members, see the definition of "GM President's Council"
in the Glossary. At such meeting, the joint management team presented its
recommendation that Raytheon be selected as the merger partner for Hughes
Defense. Goldman Sachs held discussions with the GM President's Council
concerning Raytheon and Northrop Grumman and their respective merger proposals,
including certain relevant valuation considerations. Legal counsel presented a
summary of the status of the documentation and tax counsel reviewed certain tax
considerations and presented its views on the two proposals. After discussion,
the GM President's Council concurred with the joint management team's
conclusion and determined that it would make a recommendation to the Hughes
Defense Spin-Off Committee that General Motors and Hughes Electronics proceed
with negotiations regarding the spin-off of Hughes Defense and the subsequent
merger of Hughes Defense with Raytheon (assuming that an acceptable resolution
could be reached with Raytheon regarding the few remaining open items
(discussed below)).
January 10, 1997 Hughes Defense Spin-Off Committee Meeting. Following the GM
President's Council meeting on January 10, 1997, there was a meeting of the
Hughes Defense Spin-Off Committee, at which John F. Smith, Jr., Chairman, Chief
Executive Officer and President of General Motors, presented the recommendation
of the GM President's Council described above. Mr. Smith reported that, in
concurring with the recommendation of the joint management team, the GM
President's Council considered information discussed by GM management and
Hughes Electronics management and their respective financial and legal
advisors, including the terms of the proposals, valuation matters, certain
financial data and potential synergies. In addition, Goldman Sachs distributed
materials that were substantially similar to its presentation to the GM Board
in connection with the January 16, 1997 meeting of the GM Board. See "--January
16, 1997 GM Board
Meeting" below. The only noteworthy differences between such materials and the
January 16, 1997 presentation stemmed from the fact that Goldman Sachs received
updated information from publicly available sources and the managements of
General Motors, Hughes Electronics, Hughes Defense, Raytheon and Northrop
Grumman between January 10 and January 16, 1997 and, accordingly, made certain
refinements to such materials for purposes of the January 16, 1997
presentation. These refinements included the following: (1) the backup support
relating to the "Discounted Cash Flow Analysis" was removed in order to present
the analysis in summary form to the GM Board and (2) the January 16, 1997
presentation added cost recovery and purchase accounting adjustments provided
by Raytheon management in the "Review of Synergies" analysis with respect to a
Raytheon/Hughes Defense combination, added cost recovery adjustments provided
by Raytheon management in the "Review of Synergies" analysis with respect to
the Raytheon/Texas Instruments Defense combination and included in the total of
earnings before taxes, the associated margin of the revenue synergies and the
pre-tax cost savings with respect to the Raytheon/Texas Instruments Defense
combination, which synergies were analyzed in the January 10, 1997 materials
but were not included in the total. Both the January 10, 1997 materials and the
January 16, 1997 presentation to the GM Board have been filed as exhibits to
the Schedule 13E-3 of General Motors and a copy of such materials in the form
filed with the SEC may be inspected and copied, and obtained by mail, from the
SEC as set forth under "Where You Can Find More Information" in Chapter 7 and
will be made available for inspection and copying at the principal executive
offices of General Motors at General Motors Corporation, 100 Renaissance
Center, Detroit, Michigan 48243-7301 during regular business hours by any
interested common stockholder of General Motors or his or her representative
who has been so designated in writing.
After discussion, the Hughes Defense Spin-Off Committee authorized the
management team to negotiate exclusively with Raytheon to reach a satisfactory
resolution of the remaining open items. The remaining open items included,
among other things, certain matters relating to the prompt finalization of the
legal documentation for the proposed transaction, the composition of the board
of directors and certain board committees of the post-merger company and
confidentiality with respect to the proposed transaction with Hughes Defense.
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On January 10, 1997, the joint management team received a communication from
Raytheon clarifying the remaining open items with respect to its proposal.
Thereafter, the joint management team and its advisors
negotiated with Raytheon the final terms of its merger proposal, resolved all
outstanding issues and finalized the related definitive agreements.
January 16, 1997 Hughes Defense Spin-Off Committee Meeting. At the January
16, 1997 meetings of the Hughes Defense Spin-Off Committee, the Hughes
Electronics Board, the Capital Stock Committee and the GM Board, Hughes
Electronics management and GM management reported their respective
recommendations that General Motors proceed with the Hughes Transactions and
the Raytheon Merger. The principal discussion of these matters took place
during the meeting of the Hughes Defense Spin-Off Committee. All members of the
Hughes Electronics Board and all members of the GM Board were invited to attend
this meeting. The meeting was attended by all members of the Hughes Defense
Spin-Off Committee (which included all members of the Capital Stock Committee
and all members of the GM Board who also served as members of the Hughes
Electronics Board), by all other members of the Hughes Electronics Board and by
certain other members of the GM Board. The meeting was also attended by
representatives of Weil, Gotshal & Manges LLP, legal counsel to the Capital
Stock Committee and legal counsel to Hughes Electronics in connection with the
Raytheon Merger, and Kirkland & Ellis, legal and tax counsel to General Motors.
At this meeting, the Hughes Defense Spin-Off Committee discussed and considered
the series of related transactions comprising the Hughes Transactions,
including their effects on the three businesses of Hughes Electronics and on
the holders of the two classes of GM common stock, and the merger of Hughes
Defense with Raytheon.
Thomas H. Wyman, Chairman of the Hughes Defense Spin-Off Committee, initially
observed that the meeting would be based on certain written materials that had
been previously delivered to all members of the GM Board, including management
reports on the proposed transactions, certain financial information and other
materials from GM's financial and legal advisors. Mr. Wyman then described the
process by which the Hughes Defense Spin-Off Committee would review in detail
the proposed transactions and vote upon a recommendation that would then be
considered by the Hughes Electronics Board, the Capital Stock Committee and the
GM Board in successive meetings.
Mr. Smith outlined the series of related transactions that comprise the
Hughes Transactions and summarized their effects on the three businesses of
Hughes Electronics and on holders of the two classes of GM common stock. Mr.
Smith explained that both classes of GM common stock would receive shares of
Hughes Defense in the Hughes Defense Spin-Off in accordance with the
Distribution Ratio to be discussed by Mr. Finnegan following Mr. Smith's
presentation. In addition, the GM $1 2/3 Common Stockholders would gain from
the operational synergies resulting from the combination of Delco and Delphi,
while GM $1 2/3 Common Stockholders and GM Class H Common Stockholders would
benefit from an infusion of cash into Hughes Telecom. Mr. Smith explained that
the Hughes Transactions were expected to produce these results without creating
any material tax liability for U.S. federal income tax purposes to General
Motors and its stockholders.
John D. Finnegan, Vice President and Treasurer of General Motors, presented a
detailed review of the Hughes Transactions and explained that the proposed
merger with Raytheon was conditioned on the independence of Hughes Defense
immediately prior to the merger and that the Hughes Defense Spin-Off was
intended to satisfy this condition. Mr. Finnegan noted the following underlying
economic conditions and strategic considerations that favored the Hughes
Transactions: Hughes Defense's need to participate in the continuing
consolidation of the U.S. defense industry, the benefits to Delco of
integration with Delphi to develop full in-house systems capability and Hughes
Telecom's potential for growth and related requirement for significant
investment. Mr. Finnegan described several principal benefits resulting from
the Hughes Transactions, including the receipt of cash by Hughes Telecom to
help meet its expected capital requirements, the organizational flexibility
that would permit additional reorganization of the businesses comprising Delco
and Delphi and the increased focus of the New GM Class H Common Stock on the
telecommunications and space business of Hughes Electronics.
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Mr. Finnegan noted that GM management recommended that the Distribution Ratio
be set shortly before the distribution of consent solicitation materials
relating to the Hughes Transactions in order to reflect then current business
and financial information and market data. He explained that the Distribution
Ratio would be
set at a level that would (1) enable the GM Board to conclude that, as of the
date of the determination of the Distribution Ratio, the Hughes Transactions,
taken as a whole, are in the best interests of General Motors and its common
stockholders and fair to the holders of each class of GM common stock, and (2)
enable each of GM's financial advisors in connection with the Hughes
Transactions, Merrill Lynch and Salomon Brothers, to provide a written opinion
as to the fairness, from a financial point of view, to each class of GM common
stockholders of the consideration to be provided to General Motors and its
subsidiaries and to each class of GM common stockholders in the Hughes
Transactions. For additional information regarding the Original Merrill Lynch
Fairness Opinion and the Original Salomon Brothers Fairness Opinion, each of
which was delivered to the GM Board on October 6, 1997, and the Updated Merrill
Lynch Fairness Opinion and the Updated Salomon Brothers Fairness Opinion, each
of which is dated November 10, 1997, see "--Hughes Transactions Fairness
Opinions: Merrill Lynch and Salomon Brothers" below. Copies of the Updated
Merrill Lynch Fairness Opinion and the Updated Salomon Brothers Fairness
Opinion, in each case setting forth the assumptions made, matters considered
and limitations of the review undertaken, are attached as part of Appendix B to
this document.
Mr. Finnegan also described certain studies being conducted by GM management
with respect to the possibility of realigning the businesses of Delco and
Delphi into two companies and considering various ownership structures for
these businesses. Mr. Finnegan then summarized the principal features of the
Hughes Defense Spin-Off and the Raytheon Merger, including certain
characteristics of the capital stock of the combined company and their
importance for obtaining tax-free treatment of the proposed transactions for
U.S. federal income tax purposes, and described certain conditions precedent to
proceeding with the Hughes Transactions. He also discussed the anticipated
accounting treatment, the effect of the Hughes Transactions on GM's credit
ratings and the anticipated reaction of the investment community to the Hughes
Transactions.
Mr. Armstrong then presented information relating to the proposed merger of
Raytheon with Hughes Defense, including the strategic planning efforts relating
to Hughes Defense which ultimately led to the proposed merger with Raytheon.
Mr. Armstrong described the economic conditions in the defense industry which
had earlier led Hughes Defense to pursue a selective acquisition strategy. He
explained that, as major industry consolidation increased, a more substantial
transaction involving Hughes Defense appeared desirable. Mr. Armstrong then
reviewed the prior discussions with Raytheon regarding the possibility of a
merger between Hughes Defense and Raytheon, but noted that these discussions
were unsuccessful. Mr. Armstrong then explained that industry conditions,
Hughes Defense's strategic interest in pursuing a more substantial transaction
and the discussion with Raytheon had led GM management and Hughes Electronics
management, with the approval of the Hughes Electronics Board, the Capital
Stock Committee and the GM Board, to initiate a competitive bidding process to
find an appropriate merger partner for Hughes Defense. In connection with this
discussion, Mr. Armstrong described certain significant terms of the final
merger proposals received from Raytheon and Northrop Grumman, including the
assumption of all real estate and environmental liabilities by the combined
company and the participation on the combined company's initial board of
directors of persons associated with Hughes Electronics or General Motors.
A representative of Goldman Sachs then presented a financial analysis of the
two merger proposals. See "Description of the Raytheon Merger--Raytheon Merger
Fairness Opinion: Goldman Sachs" below. A representative of Goldman Sachs
presented advice regarding the merger of Raytheon with Hughes Defense and
delivered its written opinion addressed to the GM Board, the Hughes Electronics
Board and the board of directors of Hughes Defense that, as of such date, on
the basis of and subject to the assumptions, limitations and other matters set
forth in the opinion, the Aggregate Consideration (as defined in the Goldman
Sachs Fairness Opinion) was fair to the GM Group (as defined in the Goldman
Sachs Fairness Opinion) as a whole. A copy of the Goldman Sachs Fairness
Opinion, which sets forth the assumptions made, matters considered and
limitations of the review undertaken, is attached as part of Appendix B to this
document.
Charles H. Noski, who at the time was Vice Chairman and Chief Financial
Officer of Hughes Electronics and has been recently appointed President of
Hughes Electronics, then summarized the key terms of the
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
proposed merger to which both potential merger partners had agreed, which
included the principal conditions to closing, the continuation of current
employee benefits through 1998 and the grounds for assigning technology to the
combined company (or retaining such technology within New Hughes Electronics
for its exclusive use or for licensing to the combined company for shared use).
Mr. Noski and Mr. Armstrong described the proposed treatment of Hughes Research
Labs, which would be owned jointly by the combined company and New Hughes
Electronics. Mr. Noski also explained that all owned and leased assets
currently used in the business of Hughes Defense, including the Hughes
Electronics corporate headquarters, and all environmental liabilities relating
to such business would be assumed by Hughes Defense as part of the proposed
transactions. He then stated that the draft merger agreement with Raytheon
provided for a list of directors for the combined company, which included three
individuals associated with Hughes Electronics or General Motors, and that the
combined company would add an individual associated with Hughes Electronics to
its management council for its defense business and establish two joint
management-level committees, which would be staffed by personnel formerly
associated with Raytheon, Hughes Defense and Texas Instruments Defense,
responsible for managing the transition and integration of the various
businesses. For additional information regarding the management of New Raytheon
and the New Raytheon Board, see "New Raytheon Management--Directors and
Executive Officers" in Chapter 5.
Mr. Armstrong presented a comparison of the merger proposals received from
Raytheon and Northrop Grumman on the basis of the offered price, the long-term
competitive position of the combined company, the business portfolio and
financial profile of each potential merger partner, the benefits arising from
the combination of each potential merger partner with Hughes Defense and the
strength of each potential merger partner's management team. Mr. Armstrong
noted that there were no material differences between the contract terms
offered by each potential merger partner, but that the price offered by
Raytheon was higher than that offered by Northrop Grumman. Based on the
foregoing, he then reported that the management of Hughes Electronics
recommended that Raytheon be selected as the merger partner for Hughes Defense.
Mr. Smith then commented that the GM President's Council had been kept well-
informed about the process of obtaining and pursuing the proposals for a
strategic transaction involving Hughes Defense, had authorized further
negotiations with Raytheon at the appropriate time and agreed with the
recommendation of Hughes Electronics management.
Mr. Wyman observed that all members of the Hughes Defense Spin-Off Committee
had been given pertinent information and ample opportunity for review and to
request additional information during the process of development of the
Raytheon Merger proposal and that the Hughes Defense Spin-Off Committee was
satisfied that it had been thoroughly briefed on the matter.
Representatives of Merrill Lynch and Salomon Brothers, financial advisors to
General Motors in connection with the contemplated transactions, made a joint
presentation regarding the values created by the Hughes Transactions and the
issues to be considered in establishing the Distribution Ratio that would
permit each financial advisor to deliver a fairness opinion with respect to the
Hughes Transactions. Materials used in connection with this presentation have
been filed as an exhibit to the Schedule 13E-3. See "--Hughes Transactions
Fairness Opinions: Merrill Lynch and Salomon Brothers" below. Each of Merrill
Lynch and Salomon Brothers separately concluded that, after considering all of
the factors it deemed appropriate, absent a material change in conditions as
they existed on the date of the meeting, the GM Board could reasonably expect
to be able to establish such a Distribution Ratio.
Representatives from Weil, Gotshal & Manges LLP, as counsel to the Capital
Stock Committee, reviewed the fiduciary duties of the GM Board in connection
with its consideration of the Hughes Transactions and the Raytheon Merger and
its obligation to act in the best interests of General Motors and all of its
common stockholders, both procedurally and substantively.
After considering the foregoing matters, the Hughes Defense Spin-Off
Committee determined to recommend to the GM Board that it approve and authorize
both the Hughes Transactions, subject to the GM Board's subsequent
determination of the Distribution Ratio, and the Raytheon Merger. The Hughes
Defense
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
Spin-Off Committee did not make a specific determination with respect to the
fairness of the Hughes Transactions, which determination was reserved for the
GM Board.
January 16, 1997 Hughes Electronics Board Meeting. In conjunction with the
meeting of the Hughes Defense Spin-Off Committee on January 16, 1997, the
Hughes Electronics Board met to discuss and consider the matters discussed at
the Hughes Defense Spin-Off Committee meeting. This meeting was attended by all
members of the Hughes Electronics Board.
After considering these matters, the Hughes Electronics Board determined that
it would recommend to the Capital Stock Committee that it approve and authorize
both the Hughes Transactions, subject to the GM Board's subsequent
determination of a Distribution Ratio, and the Raytheon Merger.
January 16, 1997 Capital Stock Committee Meeting. The Capital Stock Committee
met on January 16, 1997, immediately after the meetings of the Hughes Defense
Spin-Off Committee and the Hughes Electronics Board, to discuss and consider
the matters discussed at the Hughes Defense Spin-Off Committee meeting, which
had been attended by all members of the Capital Stock Committee.
After considering these matters, the Capital Stock Committee determined that
it would recommend to the GM Board that it approve and authorize both the
Hughes Transactions, subject to the GM Board's subsequent determination of a
Distribution Ratio, and the Raytheon Merger.
January 16, 1997 GM Board Meeting. The GM Board met on January 16, 1997,
immediately after the meeting of the Capital Stock Committee, to discuss and
consider the matters discussed at the Hughes Defense Spin-Off Committee
meeting, which had been attended by all but one of the members of the GM Board.
Hughes Electronics management, the Hughes Electronics Board, GM management, the
Hughes Defense Spin-Off Committee and the Capital Stock Committee each
recommended that the GM Board approve and authorize
both the Hughes Transactions, subject to the GM Board's subsequent
determination of the Distribution Ratio, and the Raytheon Merger.
After considering these matters, the GM Board unanimously determined that the
Hughes Transactions, taken as a whole, are in the best interests of General
Motors and its common stockholders, subject to the GM Board's subsequent
determination of a Distribution Ratio that would (1) enable the GM Board to
conclude that, as of the date of the determination of the Distribution Ratio,
the Hughes Transactions, taken as a whole, are in the best interests of General
Motors and its common stockholders and fair to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders and (2) enable each of
Merrill Lynch and Salomon Brothers to provide to the GM Board a written opinion
as to the fairness, from a financial point of view, to both classes of GM
common stockholders of the consideration to be provided to General Motors and
its subsidiaries and to each class of GM common stockholders in the Hughes
Transactions. For additional information regarding the Original Merrill Lynch
Fairness Opinion and the Original Salomon Brothers Fairness Opinion, each of
which was delivered to the GM Board on October 6, 1997, and the Updated Merrill
Lynch Fairness Opinion and the Updated Salomon Brothers Fairness Opinion, each
of which is dated November 10, 1997, see "--Hughes Transactions Fairness
Opinions: Merrill Lynch and Salomon Brothers" below. Accordingly, the GM Board
approved and authorized the Hughes Transactions, subject to the GM Board's
subsequent approval of the definitive terms of the transactions and
determination of a Distribution Ratio that satisfies the conditions described
above. The GM Board then directed management, in consultation with its
financial, legal, tax and other advisors, and with oversight from the Capital
Stock Committee, to develop for the GM Board's further review and consideration
the remaining definitive terms of the Hughes Transactions, including a
Distribution Ratio that satisfies the conditions described above.
After considering the foregoing matters, the GM Board also determined that
Raytheon's merger proposal was in the best interests of General Motors and its
stockholders. Accordingly, the GM Board approved the selection of Raytheon as
the merger partner for Hughes Defense and approved the Raytheon Merger.
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Immediately following the January 16, 1997 GM Board meeting, Hughes Defense
and Raytheon entered into the Raytheon Merger Agreement and General Motors and
Raytheon entered into the Implementation
Agreement. For information regarding these agreements, see "Description of the
Raytheon Merger--Raytheon Merger Agreement" and "--Implementation Agreement"
below. Immediately after the execution of these agreements, the parties
publicly announced the Hughes Transactions and the Raytheon Merger.
Subsequent Events. During the months following the January 16, 1997 GM Board
meeting, GM management and Hughes Electronics management, subject to the
oversight of the Capital Stock Committee, worked with their financial, legal,
tax and other advisors to develop recommendations for the definitive terms of
the Hughes Transactions, including a methodology for the determination of the
Distribution Ratio. Among other things, GM management and Hughes Electronics
management reviewed the business plans relating to each of the three principal
businesses of Hughes Electronics, discussed and developed the methodology for
determining the Distribution Ratio, developed the proposed terms of the New GM
Class H Common Stock, reviewed certain policies of the GM Board and developed a
recommended policy statement regarding certain capital stock matters. During
this period, the Hughes Electronics Board, the Capital Stock Committee and the
GM Board received periodic updates from management regarding the Hughes
Transactions.
September 23, 1997 Capital Stock Committee Meeting. On September 23, 1997,
the Capital Stock Committee (with all but three members in attendance) met for
the purpose of reviewing and considering the business plans of Delco and Hughes
Telecom and the proposed definitive terms of the Hughes Transactions, including
the terms of the New GM Class H Common Stock and the Distribution Ratio
formula, as developed by GM management and Hughes Electronics management, and
receiving an update regarding certain regulatory and other matters relating to
the Hughes Transactions. A meeting of the Hughes Electronics Board was held in
conjunction with this meeting, with all but one member in attendance. In
addition, all members of the GM Board were invited to attend; all but seven
members were able to do so.
At this meeting, Mr. Armstrong and Roxanne S. Austin, Senior Vice President
and Chief Financial Officer of Hughes Electronics, together with certain other
members of Hughes Electronics management, presented a 1998-2001 business plan
of Hughes Telecom as it would be configured following the completion of the
Hughes Transactions. This represented an update of the business plan for this
sector of Hughes Electronics' business that had previously been presented to
the GM Board. Mr. Eddy W. Hartenstein, President, DIRECTV, Inc., presented
information regarding the DIRECTV(R) business, including the effects of
increased competition on market share and financial results. Ms. Austin
provided an overview of the Hughes Telecom business plan. She then expressed
Hughes Electronics management's current expectation that, following the
completion of the Hughes Transactions, New Hughes Electronics would initially
be adequately capitalized to execute its business plan. Ms. Austin explained
that the equity received by Hughes Telecom in the form of a cash infusion in
connection with the consummation of the Hughes Transactions would provide New
Hughes Electronics with the means to accomplish its business plan objectives.
Michael Burns, General Manager, Delco, then presented information regarding
the 1998-2002 business plan of Delco, as it is currently configured, and a
supplemental analysis of the benefits anticipated from 1998 through 2007 in
connection with the planned integration of Delco and Delphi following
consummation of the Hughes Transactions. The Delco business plan as presented
had been developed by Delco management and reviewed and approved by both Hughes
Electronics management and the GM President's Council. Both Hughes Electronics
management and GM management reported that they considered this business plan
to be realistic and reasonably achievable. The analysis of the anticipated
benefits of the integration, including the benefits to both Delco and Delphi,
had been developed jointly by the managements of Delco and Delphi and also had
been reviewed and approved by Hughes Electronics management and the GM
President's Council.
With respect to the anticipated benefits from the planned integration of
Delco and Delphi, Mr. Burns reported that, according to studies undertaken
jointly by Delco management and Delphi management, significant savings were
expected to accrue from the integration of Delco and Delphi as a result of
enhanced systems capability of the combined business operations. The
combination would also provide Delco with access
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to a larger non-GM NAO customer base. In light of the lead time for selling and
incorporating new electronics, Delco's business plan does not reflect
significant financial benefits from the integration until sometime after the
year 2000. However, certain structural cost savings were expected to be
realized more promptly as a result of reduced management needs for the combined
operations, consolidated marketing/customer teams, finance staff and human
resources and consolidated management in manufacturing plants. In addition, the
integration is
expected to provide Delco with access to Delphi's larger non-GM NAO customer
base, resulting in greater growth of this portion of Delco's business. Mr.
Burns also noted that the operational benefits from a complete integration of
Delco and Delphi were expected to enable Delco to maintain a greater share of
the worldwide market for supplying automotive electronics, both to GM NAO and
to other customers, as well as to permit Delco to provide products and systems
at higher profit margins, than would otherwise be the case.
Mr. Burns also reported on the expected benefits to Delphi from the
integration with Delco. It was believed that the integration would produce
additional sales opportunities for Delphi for products and systems having
further electrical/electronics integration but that there would be no effect on
GM NAO or aftermarket sales. Incremental non-GM NAO sales were expected to
begin sometime after the year 2000. In concluding his presentation, Mr. Burns
noted the importance to Delco's business of gaining the systems capabilities
which the integration with Delphi was anticipated to provide.
Following the business plan presentations, Ms. Austin and Mr. Finnegan made
presentations on the Hughes Transactions. First, Ms. Austin presented an
overview of the Hughes Transactions, including a brief summary of the principal
elements of the planned transactions, and provided an update regarding the
status of various regulatory and other matters relating to the Hughes
Transactions. In particular, Ms. Austin stated that the IRS Ruling had been
obtained in July 1997 and that arrangements for clearance of the Raytheon
Merger under the Hart-Scott-Rodino Act were expected to be reached soon. She
then noted that, at the time of the initial approval of the Hughes Transactions
in January 1997, determinations regarding certain of the terms of the Hughes
Transactions had been deferred for later consideration by the GM Board. Ms.
Austin identified the principal terms of the Hughes Transactions which required
final authorization and approval by the GM Board, which included the proposed
terms of the New GM Class H Common Stock, the application of the proceeds of
the indebtedness to be incurred by Hughes Defense prior to the Hughes Defense
Spin-Off and the determination of the Distribution Ratio.
Ms. Austin noted that a substantial portion of the value of the Hughes
Transactions to holders of GM Class H Common Stock would be represented by the
New GM Class H Common Stock. She reported that, in developing the proposed
terms for the New GM Class H Common Stock, GM management and Hughes Electronics
management began with the terms of the existing GM Class H Common Stock and
made changes in response to concerns which had been raised by investors from
time to time, balanced by considerations related to the tax treatment of such
stock and maintaining flexibility for General Motors. In addition, GM
management and Hughes Electronics management and their advisors reviewed and
considered the terms of other publicly traded tracking stocks. She then
reviewed the differences in the voting and liquidation rights and
recapitalization provisions between the proposed terms of the New GM Class H
Common Stock and the terms of the GM Class H Common Stock. See "Comparison of
GM Class H Common Stock, New GM Class H Common Stock and Class A Common Stock"
and "New GM Class H Common Stock" in Chapter 6. Ms. Austin explained that the
principal differences in the stock terms were developed in order to balance the
interests of the GM Class H Common Stockholders and the GM $1 2/3 Common
Stockholders and to preserve the tax treatment of the New GM Class H Common
Stock as a stock of General Motors. Ms. Austin also described a proposed policy
statement regarding certain capital stock matters to be adopted by the GM
Board, subject to the consummation of the Hughes Transactions. See
"Considerations Relating to GM's Dual Class Common Stock Capital Structure--New
GM Board Policy Statement" in Chapter 6. She then described the recommendation
of GM management and Hughes Electronics management that, following the
completion of the Hughes Transactions, earnings from the telecommunications and
space business of New Hughes Electronics be retained for the development of
that business and that, as a result, dividends were not expected to be paid
initially by New Hughes Electronics to
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General Motors. Accordingly, it was recommended by GM management and Hughes
Electronics management that dividends not be paid initially on the New GM Class
H Common Stock.
Mr. Finnegan then reviewed the principal elements of the Hughes Transactions
and the Raytheon Merger and discussed the indicated value, based on recent
trading prices of Raytheon Common Stock, of the Hughes Defense Spin-Off and the
Raytheon Merger to General Motors and its common stockholders. See "Description
of the Hughes Transactions" and "Description of the Raytheon Merger" below. Mr.
Finnegan noted that the total indicated value of the transactions represents a
substantial premium to the enterprise value of Hughes Defense under the current
Hughes Electronics and GM ownership structure.
Mr. Finnegan then explained that the allocation of the Class A Common Stock
to be distributed to GM's common stockholders in the Hughes Defense Spin-Off
between the GM $1 2/3 Common Stockholders and the GM Class H Common
Stockholders in accordance with the Distribution Ratio would be an important
element of the fairness of the Hughes Transactions to the holders of both
classes of GM's common stock. He explained that, in accordance with the
proposed Distribution Ratio, the GM Class H Common Stockholders as a whole
would receive an amount of the Class A Common Stock which represents their
current approximately 25% tracking stock interest in Hughes Defense plus an
additional amount in order to reflect the net effect on them of all other
aspects of the Hughes Transactions, principally the transfer of Delco to
General Motors (which would result in the elimination of their tracking stock
interest in Delco). Similarly, the GM $1 2/3 Common Stockholders as a whole
would receive a distribution of the Class A Common Stock which represents less
than their current approximately 75% interest in Hughes Defense in order to
reflect the net effect on them of all other aspects of the Hughes Transactions,
principally the transfer of Delco to General Motors.
Mr. Finnegan then reviewed the GM Board's January 1997 decision to reserve
for later determination the Distribution Ratio. He noted that the key elements
in determining the Distribution Ratio were the value of the
combined Hughes Defense/Raytheon, the value of Delco and the value effects of
all other aspects of the Hughes Transactions and that the GM Board should also
consider, among the other things, stockholder expectations regarding the Hughes
Transactions. With respect to the combined Hughes Defense/Raytheon, Mr.
Finnegan stated that the value was based upon the market price of Raytheon
Common Stock. He reported that GM's financial advisors had completed due
diligence and were expected to conclude that the use of the market price was
supportable. With respect to Delco, he reported that customary valuation
methodologies had been utilized, as would be described in greater detail. He
noted that the value of the other factors (which would be reviewed later) were
more directional than quantifiable. He also reported that, as to Hughes
Telecom, the proportional interests of stockholders would not change and that
GM's financial advisors would report on their assessment as to the business and
funding plans of Hughes Telecom as they related to New Hughes Electronics'
financial strength.
Mr. Finnegan then explained that, because certain amounts relevant to the
Distribution Ratio would not be known until the closing of the Hughes
Transactions, the proposed Distribution Ratio would be expressed as a formula
which accounts for certain variable factors, rather than as a fixed number of
shares to be distributed to each class of stockholders. He then described the
proposed Distribution Ratio formula, including the Net Transaction Effect Base
Amount and the Net Transaction Effect, and explained how each component of the
formula operated. The Distribution Ratio and its components are described in
detail under "--The Distribution Ratio" below.
Mr. Finnegan noted that the value ascribed to Delco would be a key element in
determining the Distribution Ratio. Mr. Armstrong then commented on the
preparation of the Delco business plan presented earlier in the meeting. He
explained that the Delco business plan was prepared by Delco in a "bottom-up"
manner to reflect goals believed to be realistic and reasonably achievable by
Delco management; the plan was then reviewed and approved by Hughes Electronics
management, the GM President's Council and the Hughes Electronics Board. He
further noted that the Delco business plan was not prepared with a view to
influencing the valuation of Delco in favor of either class of GM's common
stockholders. Mr. Finnegan then described the valuation methodologies being
employed by each of Merrill Lynch and Salomon Brothers to consider the value
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of Delco, including the use of the Delco business plan and the Delco/Delphi
integration analysis in connection with the valuation process. He explained
that Merrill Lynch and Salomon Brothers had been provided with full access to
Delco management throughout the valuation process and described the independent
valuations of Delco undertaken by Merrill Lynch and Salomon Brothers. Mr.
Finnegan explained that he believed Merrill Lynch and Salomon Brothers employed
the same techniques within the framework of the independent methodologies used
by their respective firms. Mr. Finnegan explained that these procedures were
consistent with standard industry practice. Mr. Finnegan noted that the Delco
valuation considerations used in determining the proposed Distribution Ratio
reflect a substantial premium to the enterprise value of Delco under the
current Hughes Electronics and GM ownership structure. The valuations of Delco
(including the valuation techniques utilized) by each of Merrill Lynch and
Salomon Brothers are described below under "--Hughes Transactions Fairness
Opinions: Merrill Lynch and Salomon Brothers."
Mr. Finnegan then described certain other factors to be considered in
determining the Distribution Ratio formula and the Net Transaction Effect Base
Amount. He explained that acquisition goodwill allocated to Hughes Defense (in
an amount currently requiring amortization charges at the rate of approximately
$100 million per year) would be included in the value of the net assets of
Hughes Defense at the time of the Hughes Defense Spin-Off and thus would no
longer result in a charge to earnings attributable to GM $1 2/3 Common
Stockholders. He further explained that the Hughes Defense Spin-Off would
generate a substantial one-time gain, which could have an incremental effect on
the profit sharing payout under GM's collective bargaining agreements for the
year in which the Hughes Transactions are consummated. (The Hughes Defense
Spin-Off will not necessarily result in an equivalent effect on the payout to
plan participants because numerous other factors may affect GM's pre-tax net
income for the entire calendar year.) He noted, however, GM management's
current expectation that this incremental payment would be largely offset on a
net present value basis by the reduction in future profit sharing payments
resulting from the elimination of Hughes Defense earnings. Mr. Finnegan noted
the benefits anticipated from the elimination of the perceived discount
attributed to GM Class H Common Stockholders' current tracking stock interest
in Hughes Defense and the potential benefit to GM NAO (as a customer of Delco)
of the cost savings expected to result from the integration of Delco and
Delphi. He further explained that the Hughes Transactions would facilitate GM's
component strategy by providing electronic systems integration capability. Mr.
Finnegan then reviewed anticipated stockholder reactions to the announcement of
the definitive terms of the Hughes Transactions and current analysts'
assessments as to the value of Delco.
Mr. Finnegan then presented information relating to the value of the Hughes
Transactions to the GM $1 2/3 Common Stockholders and the value of the Hughes
Transactions to the GM Class H Common Stockholders, including an illustration
of the Distribution Ratio formula. He explained that the total value provided
to GM Class H Common Stockholders in the Hughes Transactions would consist
principally of the value of the Class A Common Stock to be distributed to such
stockholders plus the value of the New GM Class H Common Stock. He further
explained that the total benefit of the Hughes Transactions to GM $1 2/3 Common
Stockholders would consist principally of the value of the distribution of
Class A Common Stock to such holders, offset in part by some dilution of the
earnings per share of GM $1 2/3 Common Stock in 1998, as well as the benefits
derived from the transfer of Delco from Hughes Electronics to General Motors so
that its operations could be integrated with those of Delphi. In addition, he
explained that both classes of GM common stockholders would benefit from GM's
investment in Hughes Telecom, which would receive additional funding in
connection with the Hughes Transactions to better enable it to meet its capital
requirements over the business planning horizon.
Mr. Armstrong then reviewed the status of the Hughes Transactions and
discussed the anticipated timing of the consummation of the Hughes
Transactions. He explained that, subject to stockholder approval and the
satisfaction of certain other conditions, the Hughes Transactions were
currently expected to be completed in December 1997.
Upon the recommendation of Hughes Electronics management, the Hughes
Electronics Board approved each of the Hughes Telecom and Delco business plans.
After reviewing and discussing these business plans and
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the other matters discussed at the meeting, including the proposed
Distribution Ratio formula and the anticipated determination of the Net
Transaction Effect Base Amount, the Capital Stock Committee approved the use
of the Delco business plan and the Delco/Delphi integration analysis in the
determination of the Distribution Ratio. See "--The Distribution Ratio" and
"--Recommendations of the Capital Stock Committee and the GM Board; Fairness
of the Hughes Transactions" below.
October 1, 1997 GM President's Council Meeting. On October 1, 1997, the GM
President's Council met to discuss and consider the definitive terms of the
Hughes Transactions, including the proposed terms of New GM Class H Common
Stock, the Distribution Ratio formula, the determination of the Net
Transaction Effect Base Amount and related matters. The GM President's Council
received an update from GM management and Hughes Electronics management and
legal counsel regarding the status of various regulatory and other matters
relating to the Hughes Transactions. The GM President's Council then
considered and discussed the matters considered and discussed at the Capital
Stock Committee meeting on September 23, 1997. After discussion, the GM
President's Council determined to recommend to the GM Board for approval
definitive terms of the Hughes Transactions, including principally the
adoption of the Distribution Ratio formula and a determination that the amount
of the Net Transaction Effect Base Amount be $6.5 billion multiplied by the
fraction representing the tracking stock interest of GM Class H Common
Stockholders (i.e., the "Class H Fraction") at the time of the Hughes Defense
Spin-Off.
October 6, 1997 Hughes Electronics Board Meeting. On October 6, 1997, the
Hughes Electronics Board met in a joint session with the GM Board to discuss
and consider the definitive terms of the Hughes Transactions. The meeting was
attended by all members of the Hughes Electronics Board. The presentations
made and the other matters discussed at this meeting are described below as
part of the description of the October 6, 1997 meeting of the GM Board. After
considering the definitive terms of the Hughes Transactions
as presented at the meeting, the Hughes Electronics Board approved all
elements of the Hughes Transactions and related transactions requiring its
approval and recommended to the GM Board that it approve the definitive terms
of the Hughes Transactions.
October 6, 1997 Capital Stock Committee Meeting. On October 6, 1997, the
Capital Stock Committee, in conjunction with the GM Board meeting held that
day, met to discuss and consider the definitive terms of the Hughes
Transactions. All members were in attendance, as were the officers of General
Motors who are members of the GM Board (Messrs. John F. Smith and Harry J.
Pearce), certain other officers of General Motors, a member of the GM Legal
Staff and representatives of the Capital Stock Committee's outside counsel.
Also present for part of the meeting were representatives of Merrill Lynch,
Salomon Brothers and Goldman Sachs and Mr. Armstrong, who at the time was
Chairman and Chief Executive of Hughes Electronics. Among other things, the
Capital Stock Committee confirmed with the representatives of Merrill Lynch,
Salomon Brothers and Goldman Sachs their complete access to information and to
the managements of Hughes Electronics and General Motors in connection with
their assignments and the independence of their financial advice. The Capital
Stock Committee also confirmed with Mr. Armstrong the full participation of
the management of Hughes Electronics in the process of developing the terms of
the Hughes Transactions and the recommendation of Hughes Electronics
management that the GM Board approve the Hughes Transactions as proposed. The
Capital Stock Committee also considered, among other things, the presentations
concerning the Hughes Transactions that had been made to the GM Board earlier
that day and in the past by GM management and by each of Merrill Lynch,
Salomon Brothers and Goldman Sachs, the recommendations of GM management,
Hughes Electronics management and the Hughes Electronics Board, and the prior
deliberations of the Capital Stock Committee. Based on the foregoing, the
Capital Stock Committee determined to recommend to the GM Board (1) approval
of the Distribution Ratio formula and the Net Transaction Effect as described
herein, (2) establishment of the terms of the New GM Class H Common Stock and
adoption of the GM Board policy statement as described herein and (3)
determination that the Hughes Transactions and the Raytheon Merger are in the
best interests of General Motors and its common stockholders, fairly take into
account the interests of the holders of each class of GM common stock and are
fair to the holders of both classes of GM common stock and, accordingly,
approve and authorize the Hughes Transactions.
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October 6, 1997 GM Board Meeting. The GM Board met on October 6, 1997, in a
joint session with the Hughes Electronics Board, to discuss and consider the
definitive terms of the Hughes Transactions. This regular meeting of the GM
Board was attended by all members of the GM Board as well as by members of GM
management and Hughes Electronics management and representatives of Goldman
Sachs, Merrill Lynch, Salomon Brothers, Kirkland & Ellis and Weil, Gotshal &
Manges LLP.
Mr. John F. Smith commenced the meeting by providing an overview of the
Hughes Transactions, including a description of the anticipated benefits to
each class of GM stockholders. Mr. Finnegan then reviewed various aspects of
the Hughes Transactions and the Raytheon Merger, covering substantially the
same matters that he had addressed at the meeting of the Capital Stock
Committee on September 23, 1997. See "--September 23, 1997 Capital Stock
Committee Meeting" above. Mr. Finnegan also discussed the indicated value of
the Raytheon Merger (which was approximately $10.1 billion based on the then
current Raytheon Common Stock price) and valuation considerations relating to
Delco. Mr. Finnegan said that GM's financial advisors, Merrill Lynch and
Salomon Brothers, would address the valuation of Delco later in the meeting,
and that the expected benefits from the Delco/Delphi combination would
constitute an important element of their valuation analyses. In addition, Mr.
Finnegan also reviewed management's strategy for GM's components business and
discussed the Hughes Defense debt proceeds that would be made available to
Hughes Telecom as new capital.
Mr. Finnegan reviewed tax matters relating to the transactions, including an
IRS letter ruling that had been received in July 1997. See "--Certain U.S.
Federal Income Tax Considerations Relating to Certain of the Hughes
Transactions" below.
Mr. Finnegan next reviewed pertinent accounting matters. He reported that the
Hughes Defense Spin-Off would result in an approximately $4.0 billion to $5.0
billion accounting gain and a reduction in GM stockholders' equity of
approximately $0.6 billion to $1.6 billion. He also reported on the anticipated
effect on incremental profit sharing amounts which may be payable under GM's
collective bargaining agreements. (The Hughes Defense Spin-Off will not
necessarily result in an equivalent effect on the payout to plan participants
because numerous other factors may affect GM's pre-tax net income for the
entire calendar year.) From an earnings per share perspective, he noted that
the Hughes Transactions were expected to be slightly dilutive (approximately
$0.05 per share) in 1998 and neutral in 1999 for the GM $1 2/3 Common Stock and
that the earnings per share for the New GM Class H Common Stock would not be
comparable to that for the GM Class H Common Stock.
Mr. Finnegan next discussed the amounts that would be legally available for
the payment of dividends on GM's common stocks after the Hughes Transactions
under the GM Certificate of Incorporation as proposed to be amended in the
Hughes Transactions. See "New GM Class H Common Stock--GM Certificate of
Incorporation Provisions Regarding Dividends" in Chapter 6. He stated that
management recommended that, immediately after the closing of the Hughes
Transactions, the amounts available for the payment of dividends on GM $1 2/3
Common Stock and New GM Class H Common Stock equal, respectively, the amounts
available for the payment of dividends on GM $1 2/3 Common Stock and GM Class H
Common Stock immediately before the closing of the Hughes Transactions, less
the net reduction in GM stockholders' equity resulting from the Hughes
Transactions (as determined for financial reporting purposes), which he
estimated to be approximately $1.6 billion, with such net reduction allocated
to the two classes of GM common stock in proportion to their respective
interests in the earnings of Hughes Electronics at the time of closing. The GM
Board discussed the appropriateness of this allocation in the context of the
Hughes Transactions.
Mr. Finnegan also reviewed the GM Board's earlier determination to structure
the Hughes Transactions so as not to result in a recapitalization of GM Class H
Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio as currently
provided for under certain circumstances in the GM Certificate of
Incorporation. See "Description of the Hughes Transactions--No Recapitalization
at a 120% Exchange Ratio" below.
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Mr. Finnegan then discussed the Distribution Ratio, addressing substantially
the same matters that he had addressed at the meeting of the Capital Stock
Committee on September 23, 1997. See "--September 23, 1997 Capital Stock
Committee Meeting" above. In this presentation, he noted management's
recommendation that $6.5 billion be the amount to be multiplied by the Class H
Fraction in order to arrive at the Net Transaction Effect Base Amount. He
stated that this recommendation was made after discussions between GM
management and Hughes Electronics management and was based on, among other
things, the range of values for Delco calculated by GM's financial advisors,
Merrill Lynch and Salomon Brothers. He also stated that management considered
that the factors pertinent to determining the Net Transaction Effect other than
the valuation of Delco for purposes of the transfer of Delco to General Motors
were varied in their effects upon the GM $1 2/3 Common Stockholders and GM
Class H Common Stockholders and difficult to quantify but, taken as a whole,
directionally suggested that using in the Distribution Ratio formula an amount
above the mid-point of the financial advisors' Delco valuation ranges would be
appropriate.
Ms. Austin then reported on matters related to the business plan of Hughes
Telecom and the financial position of New Hughes Electronics, addressing
substantially the same matters that she had addressed at the meeting of the
Capital Stock Committee on September 23, 1997. See "--September 23, 1997
Capital Stock
Committee Meeting" above. She also reported that management expected Hughes
Telecom to use the proceeds of the debt to be incurred by Hughes Defense prior
to its spin-off (estimated at the time to be approximately $3.9 billion) to
repay $1.725 billion borrowed from General Motors in connection with the
PanAmSat Merger and to repay commercial paper borrowing of Hughes Electronics,
estimated to be $1.3 billion at the time of the closing of the Hughes
Transactions. She reported management's view that the remaining cash and
ordinary course borrowing capacity would provide New Hughes Electronics with
adequate capital to execute its business plan. See "Description of the Hughes
Transactions--Allocation of Hughes Defense New Debt Proceeds; Hughes Telecom
Funding" below. She also indicated that cash needs beyond those reflected in
the business plan, such as for large strategic acquisitions, would require
access to additional funding.
Ms. Austin then described the proposed terms for the New GM Class H Common
Stock and the recommendation of management that the GM Board adopt a policy
statement regarding certain capital stock matters, addressing substantially the
same matters that she had addressed at the meeting of the Capital Stock
Committee on September 23, 1997. See "--September 23, 1997 Capital Stock
Committee Meeting" above.
Mr. Armstrong and John J. Higgins, who at the time was General Counsel of
Hughes Electronics, reported on matters related to the merger with Raytheon,
including the status of antitrust clearance efforts and the GM personnel and
Hughes Electronics personnel who would serve as directors of New Raytheon after
the completion of the Raytheon Merger.
A representative of Goldman Sachs confirmed its opinion concerning the
Raytheon Merger delivered at the January 16, 1997 meeting of the GM Board to
the effect that, subject to the assumptions, limitations and other matters set
forth in its written opinion, the Aggregate Consideration (as defined in the
Goldman Sachs Fairness Opinion) to be provided in the Raytheon Merger was fair
to the GM Group (as defined in the Goldman Sachs Fairness Opinion) as a whole.
Goldman Sachs subsequently confirmed its earlier written opinion dated January
16, 1997 by delivery of its written opinion dated November 7, 1997 that as of
January 16, 1997 the Aggregate Consideration was fair to the GM Group as a
whole. See "--January 16, 1997 Hughes Defense Spin-Off Committee Meeting" above
and "Description of the Raytheon Merger--Raytheon Merger Fairness Opinion:
Goldman Sachs" below. It is a condition to GM's obligation to complete the
Hughes Transactions that neither the Goldman Sachs Fairness Opinion nor such
written confirmation be withdrawn.
Mr. Gottschalk summarized the pending litigation regarding the Hughes
Transactions that had been filed against General Motors and its directors. See
"--Stockholder Litigation Relating to the Hughes Transactions" below. A
representative of Weil, Gotshal & Manges LLP then discussed certain matters
relating to the fiduciary duties of the GM Board to the holders of both classes
of GM common stock in connection with its consideration of the definitive terms
for the Hughes Transactions. In this regard, he reviewed the process that
management and the GM Board had followed in developing the terms of the Hughes
Transactions and that, among other things, the Hughes Transactions had been
structured so as to be conditioned on approval from the holders of each class
of GM common stock.
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Representatives of Merrill Lynch reviewed with the GM Board their valuation
of Delco and advice with respect to the Hughes Transactions and the Raytheon
Merger, presenting certain materials that have been filed as an exhibit to the
Schedule 13E-3 filed by General Motors. See "--Hughes Transactions Fairness
Opinions: Merrill Lynch and Salomon Brothers" below. Merrill Lynch also
provided its written opinion to the GM Board that, as of October 6, 1997 and on
the basis of and subject to the assumptions, limitations and other matters set
forth therein, taking into account all relevant aspects of the Hughes
Transactions and the Raytheon Merger, the consideration to be provided to
General Motors and its subsidiaries and the GM $1 2/3 Common Stockholders and
the GM Class H Stockholders in the Hughes Transactions was fair from a
financial point of view to the GM $1 2/3 Common Stockholders and the GM Class H
Common Stockholders. This opinion, which we refer to in this document as the
"Original Merrill Lynch Fairness Opinion," has been filed as an exhibit to the
Schedule 13E-3 of General Motors. A copy of this opinion may be inspected and
copied, and obtained by mail, from the SEC as set forth under "Where You Can
Find More Information" in Chapter 7 and will be made available for inspection
and copying at the principal executive offices of General Motors at General
Motors Corporation, 100 Renaissance Center, Detroit, Michigan 48243-7301 during
regular business hours by any interested common stockholder of General Motors
or his or her representative who has been so designated in writing.
On November 10, 1997, Merrill Lynch delivered the Updated Merrill Lynch
Fairness Opinion to the GM Board confirming the Original Merrill Lynch Fairness
Opinion. A copy of the Updated Merrill Lynch Fairness Opinion, which sets forth
the assumptions made, the matters considered and limitations on the review
undertaken in connection with the opinion, is included in Appendix B to this
document and is incorporated in this document by reference. For further
information about the Updated Merrill Lynch Fairness Opinion and the October 6,
1997 presentation to the GM Board, see "--Hughes Transactions Fairness
Opinions: Merrill Lynch
and Salomon Brothers" below. It is a condition to GM's obligation to complete
the Hughes Transactions that the Updated Merrill Lynch Fairness Opinion not be
withdrawn.
Representatives of Salomon Brothers reviewed with the GM Board their
valuation of Delco and advice with respect to the Hughes Transactions and the
Raytheon Merger, presenting certain materials that have been filed as an
exhibit to the Schedule 13E-3 filed by General Motors. See "--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers" below.
Salomon Brothers also provided its written opinion to the GM Board that, as of
October 6, 1997 and on the basis of and subject to the assumptions, limitations
and other matters set forth therein, taking into account all relevant aspects
of the Hughes Transactions and the Raytheon Merger, the consideration to be
provided to General Motors and its subsidiaries and the GM $1 2/3 Common
Stockholders and the GM Class H Stockholders in the Hughes Transactions was
fair from a financial point of view to the GM $1 2/3 Common Stockholders and
the GM Class H Common Stockholders. This opinion, which we refer to in this
document as the "Original Salomon Brothers Fairness Opinion," has been filed as
an exhibit to the Schedule 13E-3 of General Motors. A copy of this opinion may
be inspected and copied, and obtained by mail, from the SEC as set forth under
"Where You Can Find More Information" in Chapter 7 and will be made available
for inspection and copying at the principal executive offices of General Motors
at General Motors Corporation, 100 Renaissance Center, Detroit, Michigan 48243-
7301 during regular business hours by any interested common stockholder of
General Motors or his or her representative who has been so designated in
writing.
On November 10, 1997, Salomon Brothers delivered the Updated Salomon Brothers
Fairness Opinion to the GM Board confirming the Original Salomon Brothers
Fairness Opinion. A copy of the Updated Salomon Brothers Fairness Opinion,
which sets forth the assumptions made, the matters considered and limitations
on the review undertaken in connection with the opinion, is included in
Appendix B to this document and is incorporated in this document by reference.
For further information about the Updated Salomon Brothers Fairness Opinion and
Salomon Brothers' October 6, 1997 presentation to the GM Board, see "--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers" below. It
is a condition to GM's obligation to complete the Hughes Transactions that the
Updated Salomon Brothers Fairness Opinion not be withdrawn.
Mr. Smith then reported the unanimous recommendation of the GM President's
Council that the GM Board approve the definitive terms of the Hughes
Transactions as presented at the meeting, including the Distribution Ratio
formula, the Net Transaction Effect, the allocation of the proceeds of the new
Hughes
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Defense indebtedness, the terms of the New GM Class H Common Stock and the GM
Board policy statement as discussed herein.
Mr. Armstrong commented on the business and financial outlook for New Hughes
Electronics. The Hughes Electronics Board then took the action described above.
See "--October 6, 1997 Hughes Electronics Board Meeting." The GM Board then
recessed for the meeting of the Capital Stock Committee described above. See
"--October 6, 1997 Capital Stock Committee Meeting."
Following such recess, Mr. Wyman, as chairman of the Capital Stock Committee,
presented the recommendation of the Capital Stock Committee on the Hughes
Transactions as described above. See "--October 6, 1997 Capital Stock Committee
Meeting."
Mr. Losh then reported on the expected timing for completing the Hughes
Transactions and the Raytheon Merger and GM's plans for filing a registration
statement with the SEC and issuing a press release regarding the GM Board's
approval of the Distribution Ratio and the other definitive terms of the Hughes
Transactions.
Mr. Gottschalk then reviewed the resolutions presented to the directors for
their consideration in connection with approving the definitive terms of the
Hughes Transactions as described at the meeting, including the Distribution
Ratio formula, the Net Transaction Effect, the allocation of the proceeds of
the new Hughes Defense indebtedness, the terms of the New GM Class H Common
Stock and the GM Board policy statement, a determination of fairness, approval
of the principal agreements and transactions, the amount to be allocated to
each class of common stock for the payment of dividends, a recommendation on
the Hughes Transactions to GM common stockholders and the establishment of a
special committee of the GM Board to act, as may be appropriate, on matters
concerning the transactions between meetings of the GM Board.
After considering the matters discussed and considered at the meeting, the GM
Board unanimously determined that the Hughes Transactions and the Raytheon
Merger, taken as a whole, are in the best interests of General Motors and its
common stockholders, fairly take into account the interests of each class of GM
common stockholders, and are fair to the GM $1 2/3 Common Stockholders and the
GM Class H Common Stockholders. Accordingly, the GM Board unanimously approved
and authorized the Hughes Transactions and determined to recommend to the
common stockholders of General Motors that they execute consents approving the
Hughes Transactions, including the adoption of the GM Spin-Off Merger
Agreement.
Further Discussions with Raytheon. From time to time after the signing of the
agreements with Raytheon in January 1997, representatives of the parties
engaged in discussions regarding various matters relating to the Raytheon
Merger, including with respect to a decision rendered after the signing of the
Raytheon Merger Agreement in a lawsuit known as the Jacobson litigation. These
discussions led to agreements concerning the Jacobson litigation and certain
other matters. The agreement relating to the Jacobson litigation requires
Hughes Telecom to provide certain indemnification to Raytheon, as described
under "Separation and Transition Arrangements--Summary of Other Agreements
Contemplated By the Master Separation Agreement--Employee Matters; Pension Plan
Litigation" below. At the same time, the parties agreed upon certain other
matters, including (1) the treatment of a reserve related to a particular
missile program of Hughes Defense for purposes of the post-closing payment
provided for by the Master Separation Agreement (which payment is described
under "Separation and Transition Arrangements--Summary of Master Separation
Agreement--Post-Closing Adjustment Between New Hughes Electronics and New
Raytheon" below), (2) the purchase by General Motors and its affiliates of
certain training services from New Raytheon through 2001 on commercially
reasonable terms to be agreed between the parties, as described under "Business
of Hughes Defense--Information Systems--Hughes Training Inc." in Chapter 4, and
(3) the allocation between Hughes Defense and Hughes Telecom of any net
proceeds realized from certain pending litigation that had been commenced by
Hughes Defense in Australia. In addition, the parties agreed that, in the event
that the Raytheon Merger has not been consummated by December 31, 1997, neither
Raytheon nor Hughes Defense will assert prior to January 16, 1998 its right to
terminate the Raytheon Merger Agreement pursuant to the terms of such agreement
because of the failure to have completed the Raytheon Merger before December
31, 1997, as described under "Description of the Raytheon Merger--Raytheon
Merger Agreement--Termination" below.
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THE DISTRIBUTION RATIO
GENERAL
We use the term "Distribution Ratio" to refer to the relationship between
the amount of Class A Common Stock of Hughes Defense to be distributed to the
holders of each of the two classes of GM common stock. Establishing an
appropriate formula to express the Distribution Ratio was an important element
in the GM Board's determination that the Hughes Transactions, taken as a
whole, are fair to the holders of both classes of GM common stock.
The Distribution Ratio is designed to provide GM Class H Common Stockholders
with an amount of Class A Common Stock of Hughes Defense that is appropriate
to reflect not only their current tracking stock interest in Hughes Defense
(approximately 25.6%, based on the Class H Fraction as of September 30, 1997)
but also the net effect on them of all other aspects of the Hughes
Transactions, principally the transfer of Delco to General Motors, which will
result in the earnings of Delco no longer being tracked by the New GM Class H
Common Stock. The balance of the Class A Common Stock of Hughes Defense will
be distributed to the GM $1 2/3 Common Stockholders and will reflect both
their current interest in Hughes Defense (approximately
74.4%, based on the Class H Fraction as of September 30, 1997) and the net
effect on them of all other aspects of the Hughes Transactions, principally
the transfer of Delco to General Motors.
DISTRIBUTION RATIO: KNOWN ELEMENTS
Two of the elements of the Distribution Ratio are known at this time:
(1) The total amount of Class A Common Stock of Hughes Defense to be
distributed to all GM common stockholders. The Raytheon Merger Agreement
provides that this amount shall be 102,630,503 shares.
(2) The total amount to be multiplied by the Class H Fraction in order to
determine the additional amount of Class A Common Stock that would fairly
compensate the GM Class H Common Stockholders for the transfer of Delco
and all other aspects of the Hughes Transactions. On October 6, 1997, the
GM Board determined this total amount to be $6.5 billion. Accordingly,
assuming a Class H Fraction of 25.6%, the additional Class A Common Stock
would have a value of approximately $1.665 billion. We refer to this
amount as the "Net Transaction Effect Base Amount." In the event that any
proceeds of Hughes Defense debt are made available to General Motors, the
Net Transaction Effect Base Amount will be increased by the amount of such
proceeds multiplied by the Class H Fraction. We refer to the result of
that adjustment as the "Net Transaction Effect." If no debt proceeds are
made available to General Motors, the Net Transaction Effect will be the
same as the Net Transaction Effect Base Amount.
For a description of the process and methodology utilized by the GM Board in
determining the Net Transaction Effect Base Amount, see "--Background of the
Hughes Transactions--Development of the Hughes Transactions and the Raytheon
Merger--September 23, 1997 Capital Stock Committee Meeting" and "--October 6,
1997 GM Board Meeting" above.
DISTRIBUTION RATIO: VARIABLE ELEMENTS
Certain elements of the Distribution Ratio cannot be known precisely until
the closing of the Hughes Transactions. For this reason, the Distribution
Ratio is expressed as a formula that will depend on the final values of the
variable elements, although we have used certain assumptions about these
values in the discussion and illustrations below.
There are three variable elements of the Distribution Ratio:
(1) The "Class H Fraction" on the closing date of the Hughes Transactions.
The Class H Fraction expresses the number of shares of GM Class H Common
Stock outstanding at any time as a percentage of the Class H Dividend
Base and reflects the amount of tracking stock interest that the GM
Class H Common Stockholders have in the earnings of Hughes Electronics
and its three principal businesses. The Class H Fraction was about 25.6%
on September 30, 1997, although we have
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sometimes referred to it in this document as "approximately 25%." Although
it may vary, we do not expect this fraction to change significantly
between now and the closing. The Class H Dividend Base is the denominator
of the fraction that is used in the GM Certificate of Incorporation to
allocate the earnings of Hughes Electronics between GM's two classes of
common stock for dividend purposes. The Class H Dividend Base was
initially established in connection with GM's acquisition of Hughes
Aircraft in 1985 and has been adjusted to reflect subsequent stock splits
and stock issuances. It is a number (currently about 400 million) that
notionally reflects 100% of the tracking stock interest in Hughes
Electronics, of which about 25.6% has been issued in the form of GM Class
H Common Stock.
(2) The per share value of the Class A Common Stock of Hughes Defense to be
distributed to GM common stockholders. This amount will determine how
many shares of that stock are needed in order to provide the GM Class H
Common Stockholders with additional value equal to the Net Transaction
Effect. The GM Board believes that the market value of the Raytheon
Common Stock near the closing date will be the best indicator of the
value of the Class A Common Stock to be distributed to GM common
stockholders. We refer to this amount on a per share basis as the "Class
A Share Value." The Class A Share Value will be measured as the average
closing market price of the
Raytheon Common Stock during the 30-day period ending on the fifth day
before the consummation of the Raytheon Merger. This is the same
valuation formula that is used in the Raytheon Merger Agreement to
determine the amount of debt that Hughes Defense may have at the time of
the
Raytheon Merger. However, the Class A Share Value will be determined
without giving effect to the
collar adjustment used in connection with the Raytheon Merger. We have
used the Recent Raytheon
Stock Price for illustrative calculations in this document, but it is not
necessarily indicative of the Class A Share Value.
(3) The amount, if any, of cash proceeds from debt incurred by Hughes
Defense that will be made available to General Motors rather than used
to fund the capital needs of Hughes Telecom. The GM Board has determined
that up to $4.0 billion of the proceeds of Hughes Defense debt incurred
prior to the Hughes Defense Spin-Off will be made available to Hughes
Telecom, with any debt proceeds over that amount being made available to
General Motors through the repayment of intercompany loans owing to
Delco, which will be transferred to General Motors as part of the Hughes
Transactions. The amount of new debt that Hughes Defense may incur prior
to the closing is limited by the Raytheon Merger Agreement and varies
based on the market price of Raytheon Common Stock and the amount of
other debt of Hughes Defense at the time of its spin-off from General
Motors. Based on our estimates of other Hughes Defense debt, if the
Raytheon Common Stock market price is above $53.59, all of the debt
proceeds will be made available to Hughes Telecom and none will be made
available to General Motors. In that event, as explained above, no
adjustment will be made to the Net Transaction Effect Base Amount, which
accordingly will be the same as the Net Transaction Effect. For a
description of the total amount of debt proceeds that will be available,
see "Description of the Raytheon Merger--Raytheon Merger Agreement--
Certain Covenants--Indebtedness" below. The Raytheon Merger Agreement
refers to this amount as the "Intercompany Payment Amount." If the
Intercompany Payment Amount exceeds $4.0 billion, the Net Transaction
Effect would be calculated by adding to the Net Transaction Effect Base
Amount an amount equal to such excess multiplied by the Class H
Fraction.
DISTRIBUTION RATIO
For purposes of this discussion and illustration, we have assumed that (1)
the Class A Share Value is equal to the Recent Raytheon Stock Price ($51.00 per
share on November 7, 1997), (2) the Class H Fraction is 25.6% and (3) there
will be no existing indebtedness of Hughes Defense at the time of the Hughes
Defense Spin-Off. As a result of the assumed Class A Share Value, approximately
$266 million of proceeds of new Hughes Defense debt would be made available to
General Motors. We have used these amounts for illustrative purposes only.
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In applying the Distribution Ratio formula, we first determine the
appropriate number of shares of Class A Common Stock to be distributed to the
holders of GM Class H Common Stock. We refer to this amount as the "Class H
Distribution." The number of shares to be distributed to the GM $1 2/3 Common
Stockholders is then determined by subtracting the Class H Distribution from
the total number of shares of Class A Common Stock to be distributed. We refer
to this amount as the "$1 2/3 Distribution." The "Distribution Ratio" expresses
the relationship between the Class H Distribution and the $1 2/3 Distribution.
Using the terms defined above, the Class H Distribution and the $1 2/3
Distribution can be calculated as follows:
. Class H Distribution = 102,630,503 times Class H Fraction
plus
(Net Transaction Effect divided by Class A Share
Value)
. $1 2/3 Distribution = 102,630,503 minus Class H
Distribution
The Class H Distribution has two components. One component is intended to
provide GM Class H Common Stockholders with a portion of the Class A Common
Stock equivalent to the amount of their current tracking stock interest in
Hughes Defense. Accordingly, this amount is equal to the total amount of Class
A Common Stock multiplied by the Class H Fraction on the closing date. Based on
the current Class H Fraction, this component would be 102,630,503 times 25.6%,
or 26,294,176 shares.
The second component of the Class H Distribution is intended to provide the
GM Class H Common Stockholders with an additional amount of Class A Common
Stock having a value equal to the Net Transaction
Effect. This amount is calculated by first multiplying $6.5 billion by the
Class H Fraction to obtain the Net Transaction Effect Base Amount ($1.665
billion based on the current Class H Fraction). Based on the assumed Class A
Share Value, approximately $266 million of debt proceeds would be made
available to General Motors. Accordingly, the Net Transaction Effect would be
the sum of the Net Transaction Effect Base Amount and the product of
multiplying $266 million by the Class H Fraction, resulting in a Net
Transaction Effect of approximately $1.733 billion. We then divide the Net
Transaction Effect by the Class A Share Value. As a result, based on the
assumptions stated above, the Class H Distribution would include an additional
number of shares of Class A Common Stock equal to $1.733 billion divided by
$51.00, or 33,988,730 shares.
Based on the assumptions stated above, the Class H Distribution would be
equal to the sum of the two components, amounting to 60,282,906 shares of Class
A Common Stock in total, and 0.58836 shares of Class A Common Stock per share
of GM Class H Common Stock. Accordingly, the Class H Distribution would amount
to approximately 58.7% of the total distribution of Class A Common Stock to GM
common stockholders.
The $1 2/3 Distribution would be equal to the total number of shares of Class
A Common Stock minus the Class H Distribution. Accordingly, the $1 2/3
Distribution would be equal to 102,630,503 minus 60,282,906, or 42,347,597
shares of Class A Common Stock in total, and 0.05987 shares of Class A Common
Stock per share of GM $1 2/3 Common Stock. This would amount to approximately
41.3% of the total distribution of Class A Common Stock to GM common
stockholders.
ILLUSTRATIVE CALCULATIONS
The following table sets forth illustrative calculations of the Distribution
Ratio and the per share distributions of Class A Common Stock to be made to
each class of GM common stock based on various average closing prices of
Raytheon Common Stock, which would determine the Class A Share Value for
purposes of the Distribution Ratio formula. In each case, the illustrations are
based on the Class H Fraction as of September 30, 1997 (approximately 25.6%)
and assume that there will be no existing indebtedness of Hughes Defense (other
than the new debt) at the time of the Hughes Defense Spin-Off. For information
about recent closing prices of Raytheon Common Stock, see "Description of the
Raytheon Merger--Raytheon Merger Agreement" below. The table does not give
effect to the treatment of fractional shares in the Raytheon
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
Merger, which provides that fractional shares of Class A Common Stock will be
converted into Class B Common Stock and sold for cash, with the proceeds being
distributed to the owners of such fractional shares. As described above, to the
extent the proceeds of the new debt incurred by Hughes Defense exceed $4.0
billion, such excess will be made available to General Motors and the
Distribution Ratio will be adjusted. We currently estimate that no debt
proceeds will be available to General Motors unless the Class A Share Value is
$53.59 or less and that the maximum amount of proceeds that could be made
available to General Motors is $0.9 billion (when the Class A Share Value is at
the bottom of the collar ($44.42 or below)).
<TABLE>
<CAPTION>
PER SHARE $1 2/3 PER SHARE CLASS H
DISTRIBUTION RATIO: DISTRIBUTION: DISTRIBUTION: ---
AGGREGATE AGGREGATE NUMBER OF VALUE OF NUMBER OF VALUE OF
$1 2/3 CLASS H CLASS A CLASS A CLASS A CLASS A
CLASS A SHARE VALUE PERCENTAGE PERCENTAGE SHARES SHARES SHARES SHARES
- ------------------- ---------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$70.00 51.2% 48.8% 0.07429 $5.20 0.48882 $34.22
$68.00 50.5% 49.5% 0.07330 $4.98 0.49565 $33.70
$66.00 49.8% 50.2% 0.07226 $4.77 0.50290 $33.19
$64.00 49.0% 51.0% 0.07114 $4.55 0.51059 $32.68
$62.00 48.2% 51.8% 0.06995 $4.34 0.51878 $32.16
$60.00 47.3% 52.7% 0.06869 $4.12 0.52752 $31.65
$58.00 46.4% 53.6% 0.06733 $3.91 0.53686 $31.14
$56.00 45.4% 54.6% 0.06589 $3.69 0.54687 $30.62
$54.00 44.3% 55.7% 0.06433 $3.47 0.55762 $30.11
$52.00 42.4% 57.6% 0.06151 $3.20 0.57705 $30.01
$51.00 41.3% 58.7% 0.05987 $3.05 0.58836 $30.01
$50.00 40.1% 59.9% 0.05817 $2.91 0.60013 $30.01
$48.00 37.6% 62.4% 0.05455 $2.62 0.62513 $30.01
$46.00 34.9% 65.1% 0.05061 $2.33 0.65231 $30.01
$44.00 32.2% 67.8% 0.04667 $2.05 0.67951 $29.90
$42.00 30.2% 69.8% 0.04375 $1.84 0.69965 $29.39
$40.00 27.9% 72.1% 0.04054 $1.62 0.72180 $28.87
</TABLE>
POST-CLOSING PAYMENT
The determination by the GM Board of the Net Transaction Effect is based on,
among other things, valuations of Delco which were based, in part, on a
December 31, 1997 projected balance sheet for Delco (which excluded all assets
and liabilities related to Delco Systems Operations, which has historically
been reported in Hughes Electronics' Aerospace and Defense Systems segment but
is being transferred to General Motors in connection with the Hughes
Reorganization as described under "Business of Delco" in Chapter 4). Within
approximately four months following the closing of the Hughes Transactions,
General Motors will prepare a balance sheet for Delco as of the closing date on
a basis consistent with such December 31, 1997 projected balance sheet. To the
extent that this closing balance sheet reflects "net investment amount" of
Delco different from the "net investment amount" of Delco as reflected on the
December 31, 1997 projected balance sheet by an amount exceeding $50 million, a
payment will be made from New Hughes Electronics to General Motors, or from
General Motors to New Hughes Electronics, as appropriate, to compensate for the
amount of such difference in excess of $50 million. For such purposes, "net
investment amount" means total assets less total liabilities, excluding cash
and cash equivalents, notes receivable from Hughes Electronics and all balances
related to Delco Systems Operations. In addition, the closing date balance
sheet "net investment amount" will exclude the effects of accounting changes,
extraordinary items and one time non-recurring gains or losses.
This adjustment will in no way affect the number of shares of Class A Common
Stock distributed to GM $1 2/3 Common Stockholders or to GM Class H Common
Stockholders in the Hughes Defense Spin-Off.
RECOMMENDATIONS OF THE CAPITAL STOCK COMMITTEE AND THE GM BOARD; FAIRNESS OF
THE HUGHES TRANSACTIONS
As described elsewhere in this document, throughout 1996, General Motors and
Hughes Electronics considered the strategic challenges facing each of the three
principal businesses of Hughes Electronics and
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
assessed various alternative structures for a transaction or series of
transactions involving these businesses. See "--Alternatives to the Hughes
Transactions" and "--Background of the Hughes Transactions" above.
At its December 2, 1996 meeting, the Capital Stock Committee considered the
proposed process for overseeing the development of the terms of transactions
which would enable the Hughes Electronics businesses to address such
challenges, including the formation of a special committee of the GM Board to
oversee the process. At its meeting on the same day, the GM Board reviewed its
determination that it would not propose a transaction or series of transactions
that would result in the recapitalization of GM Class H Common Stock into GM $1
2/3 Common Stock at the 120% exchange ratio as provided for under certain
circumstances in the GM Certificate of Incorporation. See "Description of the
Hughes Transactions--No Recapitalization at a 120% Exchange Ratio" below. The
GM Board also authorized the implementation of a process to be managed by a
joint GM management and Hughes Electronics management team, in consultation
with their financial, legal and other advisors, to solicit expressions of
interest in a tax-free merger involving Hughes Defense. At this time, the GM
Board established the Hughes Defense Spin-Off Committee to oversee the process.
From December 2, 1996 until January 16, 1997, the joint management team,
under the oversight of the Hughes Defense Spin-Off Committee and the Capital
Stock Committee, solicited expressions of interest in a tax-free merger
involving Hughes Defense and developed the proposed terms of the Hughes
Transactions, including certain features intended to ensure that the Hughes
Defense Spin-Off and the subsequent merger of Hughes Defense with another
industry participant would be tax-free to General Motors and its stockholders.
The joint management team received significant support from its financial,
legal, tax and other advisors in connection with the competitive bidding
process and negotiated separately with Raytheon and Northrop Grumman concerning
a merger transaction involving Hughes Defense prior to recommending Raytheon as
the merger partner.
On January 16, 1997, after discussion and consideration of the Hughes
Transactions and related matters as described above, each of the Hughes
Electronics Board, the Hughes Defense Spin-Off Committee and the Capital Stock
Committee recommended that the GM Board approve and authorize the Hughes
Transactions, subject to the GM Board's subsequent approval of the definitive
terms of the transactions and determination of a Distribution Ratio that would
enable the GM Board to conclude that the Hughes Transactions, taken as a whole,
were fair to both classes of GM common stockholders and enable Merrill Lynch
and Salomon Brothers to deliver the Original Merrill Lynch Fairness Opinion and
the Original Salomon Brothers Fairness Opinion, respectively. Thereafter, the
GM Board unanimously approved and authorized the Hughes Transactions, subject
to the GM Board's subsequent approval of the definitive terms of the
transactions, including the determination of a Distribution Ratio satisfying
the condition described above.
The Capital Stock Committee, in connection with its January 16, 1997
determination to recommend that the GM Board approve and authorize the Hughes
Transactions, subject to the GM Board's subsequent approval of the definitive
terms of the transactions (including an appropriate Distribution Ratio),
considered a number of factors, including, among others, the presentations made
to and discussions held at the January 16, 1997 meeting of the Hughes Defense
Spin-Off Committee (which had been attended by all members of the Capital Stock
Committee and all but one of the members of the GM Board). These presentations
included the presentation by representatives of Goldman Sachs (including its
written opinion that, as of January 16, 1997, the aggregate consideration
provided in the Raytheon Merger to Hughes Defense, Hughes Electronics, General
Motors, the GM $1 2/3 Common Stockholders and the GM Class H Common
Stockholders as a whole in connection with the Raytheon Merger was fair to such
group) and the presentations by representatives of Merrill Lynch and
representatives of Salomon Brothers relating to the values created by the
Hughes Transactions and the factors and issues to be considered in establishing
a Distribution Ratio that would permit each financial advisor to deliver a
fairness opinion with respect to the Hughes Transactions (including their
separate conclusions, after considering all factors each deemed appropriate,
that, absent a material change in conditions as they existed on such date, the
GM Board could reasonably be expected to be able to establish such a
Distribution Ratio).
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Upon the recommendation of the Capital Stock Committee, as well as the
recommendations of the Hughes Electronics Board and the Hughes Defense Spin-Off
Committee, and considering the background, oversight, deliberations and views
of the Capital Stock Committee and the Hughes Defense Spin-Off Committee with
respect to the development of the terms of the Hughes Transactions and the
process by which Raytheon was selected as the merger partner for Hughes
Defense, the GM Board approved and authorized the Hughes Transactions, subject
to its subsequent approval of the definitive terms of the transactions
(including the Distribution Ratio), and the subsequent merger of Hughes Defense
with Raytheon.
In addition to and without limiting the foregoing, in approving and
authorizing the Hughes Transactions, subject to the development by management
and approval by the GM Board of the definitive terms of the Hughes
Transactions, the GM Board considered: (1) the reports, presentation and
recommendation of GM's executive management regarding the Hughes Transactions
and the Raytheon Merger, (2) the final merger proposals by Raytheon and
Northrop Grumman regarding a transaction involving Hughes Defense, (3) the
recommendation of GM management and Hughes Electronics management that General
Motors proceed with the Hughes Transactions, (4) the recommendation of GM
management and Hughes Electronics management that Raytheon be selected as the
merger partner for Hughes Defense, (5) the presentations by representatives of
Merrill Lynch and representatives of Salomon Brothers regarding the values
created by the Hughes Transactions and the factors and issues to be considered
in establishing a Distribution Ratio that would permit the delivery by each of
Merrill Lynch and Salomon Brothers of a fairness opinion with respect to the
Hughes Transactions (including their separate conclusions, after considering
all factors each deemed appropriate, that, absent a material change in
conditions as they existed on such date, the GM Board could reasonably be
expected to be able to establish such a Distribution Ratio), (6) the
presentation and written opinion of Goldman Sachs as to the fairness of the
aggregate consideration to be provided in the Raytheon Merger to Hughes
Defense, Hughes Electronics, General Motors, the GM $1 2/3 Common Stockholders
and the GM Class H
Common Stockholders as a whole, (7) the recommendation by the Hughes
Electronics Board that General Motors proceed with the Hughes Transactions, (8)
the background, oversight, deliberations and views of the Hughes Defense Spin-
Off Committee with respect to the Hughes Transactions and the selection of a
merger partner for Hughes Defense and its recommendation that Raytheon be
selected as the merger partner for Hughes Defense and that the Raytheon Merger
be approved, (9) the background, oversight, deliberations and views of the
Capital Stock Committee with respect to the Hughes Transactions and its
recommendation that the Hughes Transactions be approved, (10) the information
previously reviewed and the prior deliberations of the GM Board concerning the
Hughes Transactions and the Raytheon Merger and (11) the other matters reported
on at the January 16, 1997 meetings of the Hughes Defense Spin-Off Committee,
the Hughes Electronics Board, the Capital Stock Committee and the GM Board. See
"--Background of the Hughes Transactions--Development of the Hughes
Transactions and the Raytheon Merger" above.
In approving the Hughes Transactions in January 1997, the GM Board had
reserved the determination of the Distribution Ratio and the other definitive
terms of the Hughes Transactions for a future time, deciding to make such
decision closer to the time when the Hughes Transactions were to be submitted
for stockholder approval. By delaying its determination of the Distribution
Ratio, the GM Board sought to shorten the interval of time between the
determination of the Distribution Ratio and the time the Hughes Transactions
would be consummated, thus reducing the likelihood of material changes in the
factors contributing to the determination of the Distribution Ratio that might
occur in the marketplace or otherwise during such interval.
From January 16 until October 6, 1997, the Capital Stock Committee and the GM
Board received updates from GM management and Hughes Electronics management and
legal counsel regarding the status of the Hughes Transactions, including the
development of the definitive terms of the transactions and the status of
various regulatory and other approvals required to be obtained in order to
consummate the transactions. On September 23, 1997, the Capital Stock Committee
met to review the development of the definitive terms of the Hughes
Transactions, including the Distribution Ratio formula and the terms of the New
GM Class H Common Stock. At this meeting, the Capital Stock Committee approved
the use of the Delco business plan and the related analysis of the anticipated
benefits of the planned Delco/Delphi integration in the determination of the
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
Net Transaction Effect Base Amount for use in the Distribution Ratio. See "--
Background of the Hughes Transactions--Development of the Hughes Transactions
and the Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting"
above.
On October 6, 1997, after discussion and consideration of the Hughes
Transactions, the Distribution Ratio and related matters, the Capital Stock
Committee recommended that the GM Board approve and authorize the definitive
terms of the Hughes Transactions, including the Distribution Ratio formula and
the Net Transaction Effect Base Amount in an amount equal to $6.5 billion
multiplied by the Class H Fraction as of the time of the Hughes Defense Spin-
Off. In making such determination, the Capital Stock Committee reviewed and
considered, among other things, the Hughes Telecom business plan, the Delco
business plan and the supplemental analysis of the benefits anticipated to be
realized from the integration of Delco and Delphi, the proposed terms of the
New GM Class H Common Stock and the related proposed GM Board policy statement
regarding certain capital stock matters, the recommended Distribution Ratio
formula and the Net Transaction Effect and the reports, presentations and
recommendation of GM management and Hughes Electronics management regarding
these and other matters relating to the Hughes Transactions. See "--Background
of the Hughes Transactions--Development of the Hughes Transactions and the
Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting" above.
Thereafter, on October 6, 1997, the GM Board unanimously determined that the
Hughes Transactions, including the Distribution Ratio formula and the Net
Transaction Effect Base Amount in an amount equal to $6.5 billion multiplied by
the Class H Fraction as of the time of the Hughes Defense Spin-Off, are in the
best interests of General Motors and you (its common stockholders) and are fair
to the GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders.
Accordingly, the GM Board approved the definitive terms of the Hughes
Transactions. On the same date, Merrill Lynch delivered the Original Merrill
Lynch Fairness Opinion and Salomon Brothers delivered the Original Salomon
Brothers Fairness Opinion.
In reviewing the definitive terms of the Hughes Transactions and the fairness
of the Hughes Transactions, the GM Board considered the Distribution Ratio
formula, including the determination of the Net Transaction Effect, to be an
important element in establishing the fairness of the Hughes Transactions to
the holders of both classes of GM common stock. In considering the Distribution
Ratio formula, the GM Board determined that the GM Class H Common Stockholders
as a whole should receive an amount of the Class A Common Stock which
represents their current tracking stock interest in Hughes Defense plus an
additional amount in order to reflect the net effect of all other aspects of
the Hughes Transactions, principally the transfer of Delco to General Motors
(which would result in the elimination of their tracking stock interest in
Delco). Similarly, the GM Board determined that GM $1 2/3 Common Stockholders
as a whole should receive an amount of the Class A Common Stock which
represents less than their current interest in Hughes Defense in order to
reflect the net effect of all other aspects of the Hughes Transactions,
principally the transfer of Delco to General Motors (which would result in the
transfer to such holders of the tracking stock interest in Delco currently held
by GM Class H Common Stockholders). Thus, in determining an appropriate ratio
for the distribution of the Class A Common Stock between the two classes of GM
common stockholders as part of the Hughes Transactions, the GM Board considered
all relevant aspects of the Hughes Transactions affecting the rights and
interests of each class of GM common stockholders.
The GM Board attributed substantial importance to the valuation of Delco
(including the benefits anticipated to be realized as a result of the
integration of Delco and Delphi) in the determination of the amount of the Net
Transaction Effect to be used in the Distribution Ratio formula and,
ultimately, in considering the fairness of the Hughes Transactions to the
holders of each class of GM common stock. In determining the value to be
ascribed to Delco for purposes of setting the Distribution Ratio, the GM Board
placed substantial reliance on the Delco business plan and the supplemental
analysis of the benefits anticipated to be realized from the integration of
Delco and Delphi, as prepared jointly by the managements of Delco and Delphi
and approved by Hughes Electronics management and GM management. In this
regard, the assessments by Hughes Electronics management and GM management that
such business plan and supplemental analysis were realistic and reasonably
achievable, and the Capital Stock Committee's approval of their use for
purposes of the valuation of
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
Delco in determining the amounts of Class A Common Stock to be distributed to
the holders of each class of GM common stock, was important. In reaching its
determination, the GM Board also placed principal reliance on the presentations
by representatives of Merrill Lynch and representatives of Salomon Brothers to
the GM Board at its October 6, 1997 meeting and noted that the Delco valuation
considerations used in determining the Distribution Ratio reflect a substantial
premium to the enterprise value of Delco under the current Hughes Electronics
and GM ownership structure. As described further below under "--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers," GM's
financial advisors, Merrill Lynch and Salomon Brothers, each presented
information to the GM Board regarding their calculations of a range of values
for Delco based on several valuation methodologies, including discounted cash
flow (reflecting both Delco as a stand-alone entity and giving effect to the
integration of Delco and Delphi), transaction comparables (reflecting prices
paid, including multiples and premiums, in numerous acquisitions of OEM
suppliers and other relevant transactions) and publicly traded comparables
(reflecting public trading market price of other OEM suppliers). The GM Board
did not separately consider the net book value, liquidation value or certain
other forms of going concern value of Delco.
In considering the other aspects of the Hughes Transactions affecting the
rights and interests of each class of GM common stockholders, the GM Board
placed substantial reliance on the presentations by GM management and
representatives of Merrill Lynch and Salomon Brothers, as described above under
"--Background of the Hughes Transactions--Development of the Hughes
Transactions and the Raytheon Merger--October 6, 1997 GM Board Meeting." The GM
Board considered that the factors other than the value of Delco in the context
of the transfer of Delco from Hughes Electronics to General Motors were largely
directional rather than quantifiable, including GM management's assessment that
such factors suggested that it would be appropriate to set the Net Transaction
Effect Base Amount above the mid-point of the financial advisors' calculations
of ranges for the value of Delco. For a description of these ranges, see "--
Hughes Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers"
below.
In determining the additional amount of Class A Common Stock to be provided
to GM Class H Common Stockholders in the Hughes Defense Spin-Off in order to
compensate them for the Net Transaction Effect, the GM Board decided that the
current market price of Raytheon Common Stock would be the best indicator of
the value of the shares of Class A Common Stock. This was based, in part, on
the conclusions of GM's financial advisors that, based on their due diligence
reviews of Hughes Defense and Raytheon, the use of the market price was
supportable. Based on the recommendation of GM management, the GM Board
determined to value Class A Common Stock for purposes of the Distribution Ratio
using the same valuation formula as used under the Raytheon Merger Agreement
for purposes of determining the amount of debt which Hughes Defense could have
at the time of the Raytheon Merger, except that no collar was placed on the
determination of this price. The collar mechanism utilized under the Raytheon
Merger Agreement was considered to be an arbitrary and inappropriate limitation
for these purposes.
In reviewing the fairness of the Hughes Transactions, the GM Board also
considered the indicated value to General Motors and its common stockholders of
the Hughes Defense Spin-Off and the Raytheon Merger. See "Description of the
Raytheon Merger--Indicated Value of the Hughes Defense Spin-Off and the
Raytheon Merger to General Motors and Its Common Stockholders" below. In this
regard, the GM Board placed substantial reliance on the Goldman Sachs Fairness
Opinion described below under "Description of the Raytheon Merger--Raytheon
Merger Fairness Opinion: Goldman Sachs" and noted that the total indicated
value of the transactions represents a substantial premium to the enterprise
value of Hughes Defense under the current General Motors and Hughes Electronics
ownership structure.
In addition, the GM Board considered the business and financial outlook for
New Hughes Electronics, including the assessment of Hughes Electronics
management that, following the completion of the Hughes Transactions, New
Hughes Electronics will be adequately capitalized to execute its business plan
as a result of the initial cash infusion of approximately $3.9 billion of the
proceeds of the new Hughes Defense debt coupled with borrowing capacity. See
"Description of the Hughes Transactions--Allocation of Hughes Defense Debt
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Proceeds; Hughes Telecom Funding" below. In this regard, the GM Board also
placed reliance on the fact that Merrill Lynch and Salomon Brothers noted that
the new funding of approximately $3.9 billion to $4.0 billion to be provided to
Hughes Telecom in connection with the Hughes Transactions, when added to
current cash and borrowing capacity, would provide adequate funding and
financial flexibility for Hughes Telecom to pursue its current business plan.
See "--Hughes Transactions Fairness Opinions: Merrill Lynch and Salomon
Brothers--October Presentation" below. In connection with its consideration of
the business and financial outlook for New Hughes Electronics, the GM Board
noted the indication by Hughes Electronics management that cash needs beyond
those reflected in the base business plan, such as for large strategic
acquisitions, would require access to additional funding. The GM Board also
considered the benefits to New Hughes Electronics of having its senior
management focused on a single principal area of business.
The GM Board also considered the fact that the proposed definitive terms of
the Hughes Transactions satisfied the condition established by the GM Board as
to the tax-free nature of the transactions. The GM Board attributed substantial
importance to the satisfaction of this condition in the context of the recently
enacted tax legislation which provides that, under certain circumstances, a
corporation will recognize gain on the distribution of the stock of a
subsidiary in a spin-off transaction coupled with a pre-arranged merger
transaction. See "--Certain U.S. Federal Income Tax Considerations Relating to
Certain of the Hughes Transactions--Certain Legislation" below. The GM Board
considered the fact that, if the Hughes Transactions are not consummated, any
future transactions involving Hughes Defense would be subject to these
legislative provisions and, if structured in a manner similar to the Hughes
Transactions, would likely cause General Motors and its common stockholders to
recognize taxable gain for U.S. federal income tax purposes if consummated.
Similarly, the GM Board considered the fact that the proposed definitive terms
of the Hughes Transactions satisfied the condition established by the GM Board
as to the absence of a recapitalization at a 120% exchange ratio.
The GM Board also considered the recommendations of GM management and Hughes
Electronics management with respect to the definitive terms of the Hughes
Transactions, as well as the recommendations of the Hughes Electronics Board
and the Capital Stock Committee. The GM Board also considered the oversight of
the Capital Stock Committee of the process of developing the definitive terms
of the Hughes Transactions.
With respect to the procedural fairness of the Hughes Transactions, the GM
Board placed substantial reliance on its determination that fair processes had
been implemented to develop the definitive terms of the Hughes Transactions and
the Raytheon Merger, including the oversight function of the Capital Stock
Committee and, in connection with the Raytheon Merger, the Hughes Defense Spin-
Off Committee. The GM Board considered the fact that the definitive terms of
the Hughes Transactions had been developed jointly by GM management and Hughes
Electronics management, working together with the advice and consultation of
their financial, legal, tax and other advisors, subject to the oversight of the
Capital Stock Committee. See "--Background of the Hughes Transactions--
Development of the Hughes Transactions and the Raytheon Merger" above. The GM
Board also considered the fact that the terms of the Raytheon Merger had been
developed as a part of a competitive process of soliciting a merger partner for
Hughes Defense, and that the final terms of the Raytheon Merger had been
developed through a process of vigorous arm's-length negotiation between
Raytheon and the joint management team, subject to the oversight of the Capital
Stock Committee and the Hughes Defense Spin-Off Committee, as described above
under "--Background of the Hughes Transactions-- Development of the Hughes
Transactions and the Raytheon Merger." In addition, the GM Board considered
that the Hughes Transactions would be submitted for the separate approvals of
the holders of a majority of the outstanding shares of each class of GM common
stock, each voting as a separate class.
In reviewing these matters, the GM Board also noted certain differences
between the contemplated Hughes Transactions, on the one hand, and the 1996
split-off of EDS from General Motors, on the other hand. These differences
included, among other things: that EDS operated in a single business segment,
whereas Hughes Electronics has three principal businesses; that 100% of the
tracking stock interest in that business had been issued to holders of GM Class
E Common Stock, whereas GM Class H Common Stockholders have only an
approximately 25% tracking stock interest in Hughes Electronics; that the GM
Class E Common Stock would
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be exchanged for EDS common stock on a share-for-share basis, whereas the
Hughes Transactions contemplate changes in the respective ownership interests
of each class of GM common stockholders in the three businesses of Hughes
Electronics; that the entire senior management of EDS would remain with that
company after the split-off, whereas certain senior management of Hughes
Electronics would remain with General Motors after the transactions; that the
negotiation of a long-term services contract between General Motors and EDS
required that EDS maintain the confidentiality of certain financial and
operating information from General Motors, whereas there is no comparable
situation in the Hughes Transactions; and that, unlike the EDS transaction,
Raytheon was present as an independent negotiating partner with respect to the
valuation of the business being spun off in connection with the Hughes
Transactions. In light of these and other differences, the GM Board considered
that certain corporate governance procedures which it had employed in
connection with the EDS split-off, including the use of separate management
negotiating teams to represent different stockholder groups, were not
appropriate or desirable in the context of the Hughes Transactions.
As noted above, the determination of the value to be ascribed to Delco for
purposes of setting the Distribution Ratio was considered by the GM Board to be
an important element in determining the fairness of the Hughes Transactions.
From a procedural point of view, the GM Board considered the "bottom up" manner
in which Delco management prepared the Delco business plan used in such
valuation, Hughes Electronics management's report that such plan was not
prepared with a view to influencing the valuation of Delco in favor of either
class of GM common stockholders and was deemed to be realistic and reasonably
achievable, the review and approval of such plan by Hughes Electronics
management, the Hughes Electronics Board and the GM President's Council and the
Capital Stock Committee's approval of the use of such plan, together with the
Delco/Delphi integration analysis, in the determination of the Distribution
Ratio.
In determining the fairness of the Hughes Transactions, taken as a whole, to
the holders of both classes of GM common stock, the GM Board considered each of
the foregoing factors. The GM Board did not formally assign weights to specific
factors, but instead considered all factors together. The GM Board placed
principal reliance on its conclusion that the Distribution Ratio formula and
the Net Transaction Effect appropriately reflected the interests of the holders
of both classes of GM common stock and that certain strategic challenges faced
by each of the three principal businesses of Hughes Electronics would be
addressed through the Hughes Transactions without significant potential adverse
consequences for General Motors or its common stockholders. The GM Board also
attributed substantial importance to its determination that a fair process had
been developed and implemented for the development of the definitive terms of
the Hughes Transactions. In addition, with respect to the fairness, from a
financial point of view, to the GM $1 2/3 Common Stockholders and the GM Class
H Common Stockholders of the consideration to be provided to General Motors and
its subsidiaries and to the GM $1 2/3 Common Stockholders and the GM Class H
Common Stockholders in the Hughes Transactions, the GM Board principally relied
on the Original Merrill Lynch Fairness Opinion and the Original Salomon
Brothers Fairness Opinion and the presentations by representatives of Merrill
Lynch and representatives of Salomon Brothers to the GM Board. General Motors
asked each financial advisor to consider whether the consideration to be
provided to General Motors and its subsidiaries and to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders in the Hughes Transactions
was fair from a financial point of view to both the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders (rather than asking one
financial advisor to consider the fairness issues only from the perspective of
the GM $1 2/3 Common Stockholders and the other financial advisor to consider
the fairness issues only from the perspective of the GM Class H Common
Stockholders) because, among other things, General Motors believed that such an
approach corresponded to the fiduciary duties of the GM Board to the holders of
both classes of GM common stock. See "--Hughes Transactions Fairness Opinions:
Merrill Lynch and Salomon Brothers" below.
In making its determination with respect to the fairness of the Hughes
Transactions, the GM Board did not specifically consider certain other factors
sometimes considered in determining the value of a transaction, such as
historical market prices of the GM Class H Common Stock, the net book values of
the Hughes Electronics
businesses and the purchase prices paid by General Motors (or its affiliates)
for GM Class H Common Stock in recent open-market or negotiated transactions,
because such factors were not deemed relevant measures of fair value in the
context of the Hughes Transactions.
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In addition to and without limiting the foregoing, in determining the
fairness of the definitive terms of the Hughes Transactions to the holders of
both classes of GM common stock, the GM Board considered: (1) the report,
presentation and recommendation of GM's executive management regarding the
Hughes Transactions, including the formula for the Distribution Ratio and the
Net Transaction Effect (including the determination of the Net Transaction
Effect Base Amount), (2) the recommendation of Hughes Electronics' executive
management regarding the Hughes Transactions, including the formula for the
Distribution Ratio and the Net
Transaction Effect (including the determination of the Net Transaction Effect
Base Amount), (3) the presentations by representatives of Merrill Lynch and
Salomon Brothers as to the fairness, from a financial point of view, to each
class of GM common stockholders of the consideration to be provided to General
Motors, its subsidiaries and each class of its common stockholders in the
Hughes Transactions, (4) the recommendation of the Capital Stock Committee that
the GM Board approve the definitive terms of the Hughes Transactions, including
the Distribution Ratio formula and the Net Transaction Effect (including the
determination of the Net Transaction Effect Base Amount) and determine that the
Hughes Transactions, taken as a whole, are in the best interests of General
Motors and its common stockholders and are fair to the holders of both classes
of GM common stock, (5) the background, oversight, deliberations and views of
the Capital Stock Committee with respect to the Hughes Transactions, (6) the
information previously reviewed and the prior deliberations of the GM Board
concerning the Hughes Transactions and (7) the other matters reported on,
considered and discussed at the September 23, 1997 Capital Stock Committee
meeting and the October 6, 1997 GM Board meeting. See "--Background of the
Hughes Transactions--Development of the Hughes Transactions and the Raytheon
Merger--September 23, 1997 Capital Stock Committee Meeting" and "--October 6,
1997 GM Board Meeting" above and "--Hughes Transactions Fairness Opinions:
Merrill Lynch and Salomon Brothers" below.
BASED ON THE FOREGOING, THE GM BOARD HAS DETERMINED THAT THE HUGHES
TRANSACTIONS ARE IN THE BEST INTERESTS OF GENERAL MOTORS AND IN YOUR BEST
INTERESTS AS COMMON STOCKHOLDERS OF GENERAL MOTORS. THE GM BOARD HAS ALSO
DETERMINED THAT THE HUGHES TRANSACTIONS ARE FAIR TO THE HOLDERS OF BOTH CLASSES
OF GM'S COMMON STOCK. THE GM BOARD HAS UNANIMOUSLY APPROVED THE HUGHES
TRANSACTIONS AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE HUGHES TRANSACTIONS.
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HUGHES TRANSACTIONS FAIRNESS OPINIONS: MERRILL LYNCH AND SALOMON BROTHERS
JANUARY PRESENTATION
On January 16, 1997, Merrill Lynch and Salomon Brothers made a joint
presentation (the "January Presentation") to the GM Board regarding the Hughes
Transactions and the issues to be considered in establishing a ratio for the
distribution of Class A Common Stock between the two classes of GM common
stockholders that would enable each financial advisor to deliver a fairness
opinion with respect to the Hughes Transactions. Merrill Lynch and Salomon
Brothers each concluded that, after considering all factors it deemed
appropriate, absent a material change in conditions as they existed on the date
of the January Presentation, the GM Board could reasonably expect to be able to
establish such a distribution ratio. A description of the January Presentation
is set forth below.
Benefits Analysis. Merrill Lynch and Salomon Brothers identified certain
potential effects of the Hughes Transactions on General Motors and on the
holders of each class of GM common stock, including (1) the premium represented
by the value of the consideration payable in the Raytheon Merger compared with
the value of Hughes Defense implied by trading prices of the common stocks of
comparable public companies, which was identified as ranging from $2.70 billion
to $3.70 billion; (2) the synergies and overhead savings expected by the
managements of Delco and Delphi to result from the Delco/Delphi Combination (as
defined below), including systems integration and cost efficiencies, which were
identified as ranging from $1.15 billion to $1.65 billion; (3) the potential
benefit resulting from the elimination of goodwill charges to General Motors,
which was identified as ranging from $0 billion to $0.80 billion; and (4) the
after-tax profit sharing and transaction fees and expenses, which were viewed
as costs ranging from $0.30 billion to $0.50 billion. The net quantifiable
value impact of these potential effects, as identified by Merrill Lynch and
Salomon Brothers, ranged from $3.55 billion to $5.65 billion. In addition,
Merrill Lynch and Salomon Brothers reviewed with the GM Board, but did not
quantify, the possible impact of the Hughes Transactions on GM's credit rating,
the benefits to General Motors, as an original equipment manufacturer, from the
Delco/Delphi Combination, the potential stock price volatility of the New GM
Class H Common Stock and the reduction of the potential tracking stock discount
then affecting the GM Class H Common Stock.
Determination of Distribution Ratio. Merrill Lynch and Salomon Brothers
identified for the GM Board the issues to be considered in establishing a ratio
for the distribution of Class A Common Stock between the two classes of GM
common stockholders that would enable each of them to deliver to the GM Board a
fairness opinion with respect to the Hughes Transactions, including (1) the
valuation of Hughes Defense after taking into account the Hughes Defense Spin-
Off and the Raytheon Merger, (2) the valuation of Delco, including an
appropriate allocation of the net benefits of the Delco/Delphi Combination and
(3) all other aspects of the Hughes Transactions affecting the rights and
derivative interests of the two classes of GM common stockholders.
MERRILL LYNCH FAIRNESS OPINION
On October 6, 1997, Merrill Lynch delivered to the GM Board its written
opinion that, as of such date and based upon and subject to the assumptions,
limitations and other matters set forth therein, taking into account all
relevant aspects of the Hughes Transactions and the Raytheon Merger, the
consideration to be provided to General Motors and its subsidiaries and to the
GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders in the
Hughes Transactions was fair from a financial point of view to the GM $1 2/3
Common Stockholders and the GM Class H Common Stockholders. On November 10,
1997, Merrill Lynch delivered the Updated Merrill Lynch Fairness Opinion to the
GM Board confirming the Original Merrill Lynch Fairness Opinion.
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
THE FULL TEXT OF THE UPDATED MERRILL LYNCH FAIRNESS OPINION, WHICH SETS FORTH
THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS INCLUDED IN APPENDIX B TO THIS DOCUMENT AND IS
INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE UPDATED MERRILL LYNCH
FAIRNESS OPINION SET FORTH IN THIS DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT THEREOF. YOU ARE URGED TO READ THE UPDATED MERRILL
LYNCH FAIRNESS OPINION IN ITS ENTIRETY. No limitations were imposed by GM or
the GM Board with respect to the investigations made or procedures followed by
Merrill Lynch in rendering its opinion, except that Merrill Lynch was not
authorized by General Motors or the GM Board to solicit, nor did Merrill Lynch
solicit, third-party indications of interest with respect to a business
combination or other extraordinary transaction involving Hughes Electronics or
any of its subsidiaries or assets.
The Original Merrill Lynch Fairness Opinion and the Updated Merrill Lynch
Fairness Opinion (together, the "Merrill Lynch Fairness Opinions") were
provided to the GM Board for its use and benefit and are directed only to the
fairness from a financial point of view of the consideration to be provided to
General Motors and its subsidiaries and to the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders in the Hughes Transactions. The Merrill
Lynch Fairness Opinions do not constitute a recommendation to any common
stockholder of General Motors as to whether such stockholder should consent to
the Hughes Transactions. The terms of the Hughes Transactions were developed by
the management of General Motors and Hughes Electronics and were approved by
the GM Board.
The summary set forth below does not purport to be a complete description of
the analyses underlying the Merrill Lynch Fairness Opinions, the October
Presentation (as defined below) or the Merrill Lynch October Presentation (as
defined below). The preparation of a fairness opinion is a complex analytic
process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Merrill Lynch did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Merrill
Lynch believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion.
In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
General Motors. Any estimates contained in the analyses performed by Merrill
Lynch are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the value of businesses or securities do not purport
to be appraisals or to reflect the prices at which such businesses or
securities might actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. In addition, as described above,
the Original Merrill Lynch Fairness Opinion, the October Presentation and the
Merrill Lynch October Presentation were among several factors taken into
consideration by the GM Board in making its determination to approve the Hughes
Transactions. Consequently, the Merrill Lynch analyses and the joint Merrill
Lynch/Salomon Brothers analyses described below should not be viewed as
determinative of the decision of the GM Board with respect to the fairness of
the Hughes Transactions.
In arriving at its opinion, Merrill Lynch, among other things: (1) reviewed
GM's Annual Reports, Forms 10-K and related financial information for the three
fiscal years ended December 31, 1996, GM's Forms 10-Q and the related unaudited
financial information for the quarterly periods ended March 31, 1997 and June
30, 1997 and unaudited financial information for the quarterly period ended
September 30, 1997; (2) reviewed Raytheon's Annual Reports, Forms 10-K and
related financial information for the three fiscal years ended December 31,
1996, Raytheon's Forms 10-Q and the related unaudited financial information for
the quarterly periods ended March 31, 1997 and June 30, 1997 and unaudited
financial information for the quarterly period ended September 30, 1997; (3)
reviewed Hughes Electronics' Annual Reports and related financial information
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
for the three fiscal years ended December 31, 1996; (4) reviewed certain
information, including historical financial data and financial projections,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of Hughes Electronics, Hughes Defense, Delco, Hughes Telecom and
Raytheon furnished to Merrill Lynch by General Motors, Hughes Electronics and
Raytheon, as the case may be; (5) conducted discussions with members of senior
management of General Motors, Hughes Electronics, Hughes Defense, Delco,
Delphi, Hughes Telecom and Raytheon concerning their respective businesses and
prospects and their views regarding the strategic rationale for, and the
financial effects on General Motors, Hughes Electronics, Hughes Defense, Delco,
Delphi, Hughes Telecom and Raytheon of the Hughes Transactions, the combination
of the operations of Delco and Delphi that is expected by GM management to be
implemented subsequent to the consummation of the Hughes Transactions (the
"Delco/Delphi Combination") and the Raytheon Merger; (6) reviewed certain
information, including financial projections relating to the amount and timing
of the revenue and cost savings synergies and related expenses expected to
result from the Raytheon Merger (the "Raytheon Merger Expected Synergies"),
furnished to Merrill Lynch by General Motors, Hughes Electronics, Hughes
Defense and Raytheon; (7) conducted discussions with members of senior
management of General Motors, Hughes Electronics, Hughes Defense and Raytheon
concerning the Raytheon Merger Expected Synergies; (8) reviewed certain
information, including financial projections relating to the amount and timing
of the revenue and cost savings synergies and related expenses expected to
result from the Delco/Delphi Combination (the "Delco/Delphi Expected
Synergies"), furnished to Merrill Lynch by General Motors, Delco and Delphi;
(9) conducted discussions with members of senior management of General Motors,
Delco and Delphi concerning the Delco/Delphi Expected Synergies; (10) conducted
discussions with members of senior management of General Motors, Hughes
Electronics and Hughes Telecom concerning recent and pending regulatory changes
in the telecommunications industry, the competitive environment of the
telecommunications and space industry and the need for Hughes Telecom to
maintain the financial flexibility to enable Hughes Telecom to respond to
competitive challenges and to avail itself of potential opportunities in such
environment; (11) compared the results of operations of Hughes Defense, Delco
and Raytheon with those of certain companies that Merrill Lynch deemed to be
reasonably similar to Hughes Defense, Delco and Raytheon, respectively; (12)
considered the pro forma effects, including accounting, profit sharing and
other pro forma effects, on each of General Motors, Hughes Defense and Hughes
Telecom of the Hughes Transactions and the Raytheon Merger; (13) reviewed the
Raytheon Merger Agreement and exhibits thereto; (14) reviewed the
Implementation Agreement; (15) reviewed the form of the Master Separation
Agreement and exhibits thereto attached to the Implementation Agreement as
Exhibit B; (16) reviewed the form of the GM Spin-Off Merger Agreement attached
to the Implementation Agreement as Exhibit A; (17) reviewed the GM Certificate
of Incorporation and the GM By-Laws; (18) reviewed this document, including the
text of Article Fourth of the GM Certificate of Incorporation, as proposed to
be amended in connection with the GM Spin-Off Merger, and the new GM Board
policy statement regarding GM's dual-class common stock capital structure set
forth herein; (19) reviewed the IRS Ruling and the request to the IRS for such
ruling; and (20) reviewed such other financial studies and analyses and
performed such other investigations and took into account such other matters as
Merrill Lynch deemed necessary, including Merrill Lynch's assessment of general
economic, market and monetary conditions.
In preparing the Updated Merrill Lynch Fairness Opinion, Merrill Lynch relied
on the accuracy and completeness of all information supplied or otherwise made
available to it, discussed with or reviewed by or for it, or publicly
available, and Merrill Lynch did not assume any responsibility for
independently verifying such information or undertake an independent evaluation
or appraisal of the assets or liabilities of General Motors, Hughes
Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom and Raytheon and was
not furnished with any such evaluation or appraisal. In addition, Merrill Lynch
did not assume any obligation to conduct, nor did Merrill Lynch conduct, any
physical inspection of the properties or facilities of General Motors, Hughes
Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom or Raytheon. With
respect to the financial projections and the analyses of the Raytheon Merger
Expected Synergies and the Delco/Delphi Expected Synergies furnished to or
discussed with Merrill Lynch by General Motors, Hughes Electronics, Hughes
Defense, Delco, Delphi, Hughes Telecom and Raytheon, as the case may be,
Merrill Lynch assumed that they are reasonably prepared and reflect the best
currently available estimates and judgments of the managements of General
Motors, Hughes Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom or
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Raytheon as to the expected future financial performance of Hughes Electronics,
Hughes Defense, Delco, Hughes Telecom or Raytheon, and as to the Raytheon
Merger Expected Synergies and the Delco/Delphi Expected Synergies, as the case
may be. Merrill Lynch assumed that each of the Hughes Transactions and the
Raytheon Merger will be consummated in accordance with its terms. Merrill Lynch
also assumed that the Hughes Transactions will have the accounting treatment
set forth in this document. The Updated Merrill Lynch Fairness Opinion is
necessarily based upon market, economic, financial and other conditions as they
existed and could be evaluated as of the date of the Updated Merrill Lynch
Fairness Opinion. Merrill Lynch was not authorized by General Motors or the GM
Board to solicit, nor did it solicit, third-party indications of interest with
respect to a business combination or other extraordinary transaction involving
Hughes Electronics or any of its subsidiaries or assets. Merrill Lynch
expressed no opinion as to the prices at which either the New GM Class H Common
Stock or the GM $1 2/3 Common Stock will trade subsequent to the consummation
of the Hughes Transactions.
As part of its investment banking business, Merrill Lynch is engaged
continually in the valuation of businesses and their securities in connection
with mergers and acquisitions and strategic transactions and for other
purposes. Merrill Lynch was retained by General Motors because Merrill Lynch is
an internationally recognized investment banking firm, with substantial
experience in complex strategic transactions, and because Merrill Lynch was
familiar with General Motors (including its capital structure) and Hughes
Electronics. Pursuant to an engagement letter dated November 22, 1996 (the
"Merrill Lynch Engagement Letter"), General Motors agreed to pay Merrill Lynch
fees of (1) $2,000,000 on the date of the Merrill Lynch Engagement Letter; (2)
$3,000,000 upon the announcement of the Hughes Transactions; (3) $5,000,000
upon the approval by the GM Board of either the Hughes Defense Spin-Off or the
transfer of Delco from Hughes Electronics to
GM (the "Delco Transfer"); (4) $5,000,000 upon consummation of the Hughes
Defense Spin-Off and (5) $5,000,000 upon consummation of the Delco Transfer.
General Motors also agreed to reimburse Merrill Lynch for its reasonable out-
of-pocket expenses incurred in connection with Merrill Lynch's activities under
the Merrill Lynch Engagement Letter, including the reasonable fees and
disbursements of its legal counsel, and to indemnify Merrill Lynch and certain
related persons and entities for certain liabilities, including liabilities
under securities laws, related to or arising out of its engagement.
Merrill Lynch has, in the past, provided financial advisory and financing
services to General Motors and its affiliates and Raytheon and may continue to
do so, and Merrill Lynch has received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of its business, Merrill
Lynch may actively trade shares of the GM $1 2/3 Common Stock, the GM Class H
Common Stock, the Raytheon Common Stock and other securities of General Motors
and Raytheon for its own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
Set forth below under "--October Presentation" and "--Merrill Lynch October
Presentation" is a summary of the analyses performed by Merrill Lynch in
connection with the preparation of the Original Merrill Lynch Fairness Opinion.
In addition to such analyses, in connection with its preparation of the Updated
Merrill Lynch Fairness Opinion, Merrill Lynch reviewed the unaudited financial
information for the quarterly period ended September 30, 1997 of each of
General Motors (including Hughes Electronics) and Raytheon (which information
was previously unavailable), discussed current developments in the businesses
of each of General Motors, Hughes Electronics and Delco with members of their
respective managements and reviewed updated stock prices for the Delco
Comparable Public Companies (as defined below under "--Merrill Lynch October
Presentation") to confirm that no material changes had occurred since its
preparation of the Original Merrill Lynch Fairness Opinion that would affect
the analyses underlying the Original Merrill Lynch Fairness Opinion but did not
prepare any new analyses in connection with the Updated Merrill Lynch Fairness
Opinion.
SALOMON BROTHERS FAIRNESS OPINION
Salomon Brothers has delivered its written opinion, dated October 6, 1997, to
the GM Board to the effect that, based upon and subject to the assumptions,
factors and limitations set forth therein, taking into account all
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relevant aspects of the Hughes Transactions and the Raytheon Merger, as of such
date, the consideration to be provided to General Motors and its subsidiaries
and to GM's common stockholders in the Hughes Transactions is fair, from a
financial point of view, to the GM $1 2/3 Common Stockholders and to the GM
Class H Common Stockholders (the "Original Salomon Brothers Fairness Opinion").
On November 10, 1997, Salomon Brothers delivered its written opinion to the GM
Board confirming, as of such date, the Original Salomon Brothers Fairness
Opinion (the "Updated Salomon Brothers Fairness Opinion").
The Original Salomon Brothers Fairness Opinion and the Updated Salomon
Brothers Fairness Opinion do not address the fairness of the Raytheon Merger,
which is addressed, to the extent specified therein, in the Goldman Sachs
Fairness Opinion. See "Description of the Raytheon Merger--Raytheon Merger
Fairness Opinion: Goldman Sachs" below. The Original Salomon Brothers Fairness
Opinion and the Updated Salomon Brothers Fairness Opinion were provided to the
GM Board for its use and benefit and are directed only to the fairness from a
financial point of view of the consideration to be provided to General Motors
and its subsidiaries and to the GM $1 2/3 Common Stockholders and the GM Class
H Common Stockholders in the Hughes Transactions. The Original Salomon Brothers
Fairness Opinion and the Updated Salomon Brothers Fairness Opinion do not
address General Motors' underlying business decision to effect the Hughes
Transactions or constitute a recommendation to any holder of GM $1 2/3 Common
Stock or any holder of GM Class H Common Stock as to how such holder should
vote with respect to the Hughes Transactions.
THE FULL TEXT OF THE UPDATED SALOMON BROTHERS FAIRNESS OPINION, WHICH SETS
FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITS ON THE REVIEW UNDERTAKEN, IS INCLUDED IN APPENDIX B TO THIS DOCUMENT AND
IS INCORPORATED INTO THIS DOCUMENT BY REFERENCE. THE SUMMARY OF THE UPDATED
SALOMON BROTHERS FAIRNESS OPINION SET FORTH IN THIS DOCUMENT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT THEREOF. GM CLASS H COMMON
STOCKHOLDERS AND GM $1 2/3 COMMON STOCKHOLDERS ARE URGED TO READ THE UPDATED
SALOMON BROTHERS FAIRNESS OPINION IN ITS ENTIRETY. NO LIMITATIONS WERE IMPOSED
BY GENERAL MOTORS OR THE GM BOARD WITH RESPECT TO THE INVESTIGATIONS MADE OR
PROCEDURES FOLLOWED BY SALOMON BROTHERS IN RENDERING ITS OPINION, EXCEPT THAT
SALOMON BROTHERS WAS NOT REQUESTED TO SOLICIT, AND ACCORDINGLY DID NOT SOLICIT,
ALTERNATIVE PROPOSALS WITH RESPECT TO THE DISPOSITION OF, OR ANY OTHER
EXTRAORDINARY TRANSACTION INVOLVING, ANY OF HUGHES DEFENSE, DELCO OR HUGHES
TELECOM.
This summary and the summary set forth below under "--October Presentation"
and "--Salomon Brothers October Presentation" do not purport to be a complete
description of the analyses performed by Salomon Brothers or of its
presentations to the GM Board. The preparation of financial analyses and
fairness opinions is a complex process involving subjective judgments as to the
significance and relevance of the
analyses and factors considered. Salomon Brothers made no attempt to assign
specific weights to particular analyses or factors considered, but rather made
qualitative judgments as to the significance and relevance of the analyses and
factors considered. Accordingly, Salomon Brothers believes that its analyses
(and the summary set forth below) must be considered as a whole, and that
selecting portions of such analyses and of the factors considered by Salomon
Brothers, without considering all of such analyses and factors, could create a
misleading or incomplete view of the processes underlying the analyses
conducted by Salomon Brothers and its opinion. With regard to the public
company analysis and the private market analysis summarized below, Salomon
Brothers selected comparable companies on the basis of various factors,
including the size of the public company and similarity of the line of
business; however, no public company or transaction utilized as a comparison is
identical to Delco, any business segment of Delco or the Hughes Transactions or
any component thereof. Accordingly, an analysis of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in the potential financial and operating characteristics
of the comparable companies and other factors in relation to the trading and
acquisition values of the comparable companies and transactions to which Delco
and the Hughes Transactions are being compared. In its analyses, Salomon
Brothers made numerous assumptions with respect to General Motors, Hughes
Defense, Delco, Delphi, Hughes Telecom and Raytheon, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of General Motors, Hughes
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Defense, Delco, Delphi, Hughes Telecom and Raytheon. Any estimates contained in
Salomon Brothers' analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. Estimates of values of
companies do not purport to be appraisals or necessarily to reflect the prices
at which companies may actually be sold. Because such estimates are inherently
subject to uncertainty, none of General Motors, Hughes Defense, Delco, Delphi,
Hughes Telecom and Raytheon, Salomon Brothers or any other person assumes
responsibility for their accuracy.
In connection with rendering its opinion, Salomon Brothers reviewed and
analyzed, among other things, (1) a draft of this document; (2) the Raytheon
Merger Agreement; (3) GM Spin-Off Merger Agreement; (4) a draft version of the
Master Separation Agreement; (5) certain publicly available information
concerning General Motors and Hughes Electronics; (6) certain publicly
available information concerning Raytheon; (7) certain internal information,
primarily financial in nature, including forecasts concerning the business and
operations of General Motors, Hughes Defense, Delco, Delphi, and Hughes Telecom
furnished by General Motors, Hughes Defense, Delco, Delphi and Hughes Telecom
for purposes of its analysis; (8) certain other internal information, primarily
financial in nature, including forecasts concerning the business and operations
of Raytheon furnished to Salomon Brothers by Raytheon for purposes of its
analysis; (9) certain publicly available information concerning the trading of,
and the trading market for, the GM $1 2/3 Common Stock, the GM Class H Common
Stock and the Raytheon Common Stock; (10) the GM Certificate of Incorporation
and the amendments thereto contemplated as part of the Hughes Transactions;
(11) the Policy Statement to be adopted by the GM Board with respect to General
Motors' two classes of common stock upon issuance of the New GM Class H Common
Stock; (12) certain publicly available information with respect to certain
other companies that it believes to be comparable to each of Hughes Defense,
Delco, Hughes Telecom and Raytheon and the trading markets for certain of such
other companies' securities; (13) the IRS Ruling and the request for such
ruling; and (14) certain publicly available information concerning the nature
and terms of certain other transactions that Salomon Brothers considered
relevant to its inquiry. Salomon Brothers also considered such other
information, financial studies, analyses, investigations and financial,
economic and market criteria that it deemed relevant. Salomon Brothers also met
with certain officers and employees of General Motors, Hughes Defense, Delco,
Delphi, Hughes Telecom and Raytheon to discuss the foregoing as well as other
matters it deemed relevant.
In its review and analysis and in arriving at its opinion, Salomon Brothers
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it or publicly available and neither
attempted independently to verify nor assumed any responsibility for verifying
any of such information. Salomon Brothers did not conduct or assume any
responsibility for conducting a physical inspection of any of
the properties or facilities of Hughes Defense, Delco, Delphi, Hughes Telecom
or Raytheon, nor has it made or obtained or assumed any responsibility for
making or obtaining any independent evaluations or appraisals of any of such
properties or facilities. With respect to projections (including estimates of
projected revenue and cost synergies resulting from the Raytheon Merger and
from the Delco/Delphi integration), Salomon Brothers
assumed that they had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of the
respective companies as to the respective future financial performances of such
companies. Salomon Brothers expressed no view with respect to the accuracy or
completeness of such projections or the assumptions on which they were based.
Salomon Brothers assumed, based upon the advice of General Motors, that in
the absence of the other Hughes Transactions (or another transaction or series
of transactions resulting in the transfer of Delco from Hughes Electronics to
General Motors such that the tracking stock interest in the earnings of Delco
held by GM Class H Common Stockholders is reallocated to GM $1 2/3 Common
Stockholders), General Motors would be unable to realize fully the anticipated
benefits of the Delco/Delphi integration. Salomon Brothers also assumed that
the Hughes Transactions will be consummated on the terms described, and in
accordance with the timing contemplated, in this document and in accordance
with all applicable laws and the provisions of the GM Certificate of
Incorporation and other constituent instruments.
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In conducting its analysis and arriving at its opinion, Salomon Brothers
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (1) the historical and
current financial position and results of operations of each of Hughes Defense,
Delco, Delphi, Hughes Telecom and Raytheon; (2) the business prospects of each
of Hughes Defense, Delco, Delphi, Hughes Telecom, Raytheon and New Raytheon;
(3) the historical and current market for the GM $1 2/3 Common Stock, the GM
Class H Common Stock, the Raytheon Common Stock and for the equity securities
of certain other companies that it believes to be comparable to Hughes Defense,
Delco, Delphi, Hughes Telecom, Raytheon and New Raytheon; (4) the prospective
market for each of the New GM Class H Common Stock and the New Raytheon Common
Stock following the Hughes Transactions; (5) the expected cost savings and
other financial synergies to be realized by General Motors as a result of the
Delco/Delphi integration; (6) the expected impact of the Hughes Transactions on
profit sharing payments from General Motors required under collective
bargaining agreements; and (7) the nature and terms of certain other
transactions that Salomon Brothers believes to be relevant. Salomon Brothers
took into account its assessment of general economic, market and financial
conditions and its knowledge of the defense, telecommunications and automotive
component industries as well as its experience in connection with similar
transactions and securities valuation generally. Salomon Brothers was not
requested to solicit, and accordingly did not solicit, alternative proposals
with respect to the disposition of, or any other extraordinary transaction
involving, any of Hughes Defense, Delco or Hughes Telecom.
Salomon Brothers is an internationally recognized investment banking firm
engaged, among other things, in the valuation of businesses and their
securities in connection with restructurings, mergers and acquisitions,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. General Motors selected
Salomon Brothers to act as its financial advisor on the basis of Salomon
Brothers' international
reputation. Salomon Brothers has previously rendered certain other investment
banking and financial advisory services to General Motors and its subsidiaries,
including Hughes Electronics, and to Raytheon, including advice with respect to
various acquisitions and capital market transactions, for which it received
substantial compensation. In the ordinary course of business, Salomon Brothers
may actively trade the debt and equity securities of General Motors (including
its subsidiaries) and Raytheon for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Pursuant to a letter agreement dated November 22, 1996 (the "Salomon Brothers
Engagement Letter"), General Motors engaged Salomon Brothers to act as its
financial advisor in connection with the Hughes Transactions. Pursuant to the
terms of the Salomon Brothers Engagement Letter, General Motors has already
paid Salomon Brothers $5 million and will be obligated to pay Salomon Brothers
additional fees of $15 million
in the event that the Hughes Transactions (or certain similar transactions) are
completed on or before December 31, 2000. General Motors has also agreed to
reimburse Salomon Brothers for its reasonable travel and other out-of-pocket
expenses incurred in connection with its engagement (including the reasonable
fees and disbursements of its counsel) and to indemnify Salomon Brothers
against certain liabilities and expenses relating to or arising out of its
engagement, including certain liabilities under the federal securities laws.
As noted above under "--Recommendations of the Capital Stock Committee and
the GM Board; Fairness of the Hughes Transactions," the Original Salomon
Brothers Fairness Opinion was only one of the many factors considered by the GM
Board in determining to approve the Hughes Transactions. The Distribution Ratio
and amount of the Class H Defense Distribution and of the $1 2/3 Defense
Distribution was determined by the GM Board, in consultation with its financial
advisors and other representatives, and was not established by such financial
advisors.
Set forth below under "--October Presentation" and "--Salomon Brothers
October Presentation" is a summary of the analyses performed by Salomon
Brothers in connection with the preparation of the Original Salomon Brothers
Fairness Opinion. In connection with its preparation of the Updated Salomon
Brothers Fairness Opinion, Salomon Brothers discussed current developments in
the businesses of each of General Motors, Hughes Electronics and Delco with
members of their respective managements and reviewed updated
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trading levels for the Comparable Companies (as defined below under "--Salomon
Brothers October Presentation") to confirm that no material changes had
occurred since its preparation of the Original Salomon Brothers Fairness
Opinion that would affect the analyses underlying the Original Salomon Brothers
Fairness Opinion but did not prepare any new analyses in connection with the
Updated Salomon Brothers Fairness Opinion.
OCTOBER PRESENTATION
On October 6, 1997, Merrill Lynch and Salomon Brothers made a joint
presentation (the "October Presentation") to the GM Board regarding the Hughes
Transactions. A description of the October Presentation is set forth below. The
written presentations of Merrill Lynch and Salomon Brothers to the GM Board in
January and October 1997 have been filed as exhibits to the Schedule 13E-3
which was filed with the SEC with respect to the Hughes Transactions and copies
of these presentations in the forms filed with the SEC may be inspected and
copied, and obtained by mail, from the SEC as set forth under "Where You Can
Find More Information" in Chapter 7 and will be made available for inspection
and copying at the principal executive offices of General Motors Corporation at
General Motors Corporation, 100 Renaissance Center, Detroit, Michigan 48243-
7301 during regular business hours by any interested common stockholder of
General Motors or his or her representative who has been so designated in
writing.
Overview of Analyses. In reviewing the Hughes Transactions, Merrill Lynch and
Salomon Brothers noted that, as a result thereof, the GM Class H Common
Stockholders will (1) relinquish their approximately 25% tracking stock
interest in Hughes Defense but will receive approximately 25% of the Class A
Common Stock, which will reflect the benefits of the Hughes Defense Spin-Off
and the Raytheon Merger; (2) relinquish their approximately 25% tracking stock
interest in Delco (in addition to that percentage of any funding from Hughes
Defense transferred by Hughes Telecom to General Motors) but will receive
additional shares of Class A Common Stock to compensate them for the Net
Transaction Effect and (3) will maintain an approximately 25% tracking stock
interest in Hughes Telecom (which will have received approximately $3.9 to $4.0
billion in new funding) through their ownership of New GM Class H Common Stock.
Merrill Lynch and Salomon Brothers also noted that, as a result of the Hughes
Transactions, the GM $1 2/3 Common Stockholders will (1) relinquish
their approximately 75% tracking stock interest in Hughes Defense but will
receive, subject to clause (2)
below, approximately 75% of the Class A Common Stock, which will reflect the
benefits of the Hughes Defense Spin-Off and the Raytheon Merger; (2) acquire
the approximately 25% tracking stock interest in Delco currently held by the GM
Class H Common Stockholders in exchange for shares of Class A Common Stock
transferred to the GM Class H Common Stockholders and (3) maintain an
approximately 75% tracking stock interest in Hughes Telecom through their
continued ownership of GM $1 2/3 Common Stock.
In connection with the October Presentation, Merrill Lynch and Salomon
Brothers each performed certain valuation analyses of Hughes Defense and New
Raytheon, as described below. In addition, Merrill Lynch and Salomon Brothers
identified for the GM Board, but did not quantify, certain effects of the
Hughes Transactions and the Raytheon Merger on the GM Class H Common
Stockholders which were not quantifiable, including (1) that the GM Class H
Common Stockholders would own an asset-based investment in New Raytheon in lieu
of a tracking stock interest in Hughes Defense and Delco, (2) that a potential
tracking stock discount might be reflected in New GM Class H Common Stock, (3)
that the terms of the New GM Class H Common Stock would prevent the GM Board
from electing to recapitalize the New GM Class H Common Stock into GM $1 2/3
Common Stock until after December 31, 2002 and would require such a
recapitalization under certain circumstances, (4) that the voting and
liquidation rights of the New GM Class H Common Stock are at least as favorable
as those of the GM Class H Common Stock and (5) that the GM Board had indicated
it did not anticipate paying dividends initially on the New GM Class H Common
Stock and that the then-current dividend policy of the GM Board was to pay
dividends on the GM Class H Common Stock at an annual rate of 35% of the
Available Separate Consolidated Net Income of Hughes Electronics for the prior
year. Merrill Lynch and Salomon Brothers also identified for the GM Board, but
did not quantify, certain effects of the Hughes Transactions and the Raytheon
Merger on the GM $1 2/3 Common Stockholders which were not quantifiable,
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including (1) that the GM $1 2/3 Common Stockholders would own an asset-based
investment in New Raytheon, (2) that the GM $1 2/3 Common Stockholders would
own a 100% interest in the Delco/Delphi Combination, (3) that there may be
indirect benefits to General Motors, as an original equipment manufacturer, of
the improved products to be produced as a result of the Delco/Delphi
Combination, (4) that the consummation of the Delco/Delphi Combination may
facilitate a possible partial initial public offering of the combined company,
(5) that a potential tracking stock discount and potential conglomerate
discount might be reflected in their approximately 75% tracking stock interest
in Hughes Telecom, (6) that the terms of the New GM Class H Common Stock would
prevent the GM Board from electing to recapitalize the New GM Class H Common
Stock into GM $1 2/3 Common Stock until after December 31, 2002 and (7) that
the voting and liquidation rights of the GM $1 2/3 Common Stockholders might be
slightly diluted, when compared to their voting and liquidation rights prior to
the Hughes Transactions, because of the voting and liquidation rights of the
New GM Class H Common Stock. Merrill Lynch and Salomon Brothers noted that the
new funding of approximately $3.9 billion to $4.0 billion to be received from
Hughes Defense prior to the Hughes Defense Spin-Off, when added to current cash
and ordinary-course borrowing capacity, will provide adequate funding and
financial flexibility for Hughes Telecom to pursue its current business plan.
With respect to GM $1 2/3 Common Stockholders, Merrill Lynch and Salomon
Brothers also noted (1) that the management of General Motors expected that the
Hughes Defense Spin-Off may result in an incremental profit sharing charge for
1997 of $236 million (although the gain on the Hughes Defense Spin-Off will not
necessarily result in a payout to plan participants equivalent to that amount
because numerous other factors may affect GM's pre-tax net income for the
entire calendar year), an amount which Merrill Lynch and Salomon Brothers noted
is approximately equal, on a net present value basis, to the amount by which
management of General Motors expects future profit sharing payments to be
reduced as a result of the elimination of Hughes Defense's net contribution to
GM's income and (2) that the Hughes Transactions would result in the
elimination of a $101 million annual charge to GM's net earnings for goodwill
related to the acquisition of Hughes Defense.
Hughes Defense Comparable Public Companies Analysis. Merrill Lynch performed
a comparable public companies analysis pursuant to which it compared certain
publicly available historical financial and operating data, estimates of future
financial performance (based on First Call estimates and available equity
research analyst reports) and market statistics (calculated based upon closing
stock prices on September 26, 1997) of Litton Industries and Lockheed Martin,
both of which are publicly traded companies that Merrill Lynch deemed to be
engaged in businesses that are reasonably similar to Hughes Defense (together,
the "Merrill Lynch Hughes Defense Comparable Public Companies"). Historical
financial information used in connection with this analysis was as of the date
of the most recent financial statements publicly available for each company.
For each of the Merrill Lynch Hughes Defense Comparable Public Companies,
Merrill Lynch calculated multiples of (1) closing stock price to estimated 1998
earnings, (2) closing stock price to adjusted estimated 1998 earnings (which
eliminate from earnings the effects of amortization of intangible assets,
including goodwill), (3) market capitalization (which was defined, for purposes
of this analysis, as the market value of
equity, plus debt minus cash ("net debt")) to estimated 1997 earnings before
interest, taxes, depreciation and amortization ("EBITDA") and (4) market
capitalization to estimated 1998 EBITDA. Such analysis yielded multiples of (1)
closing stock price to estimated 1998 earnings ranging from 14.6x to 15.8x, (2)
closing stock price to adjusted estimated 1998 earnings ranging from 12.3x to
12.8x, (3) market capitalization to estimated 1997 EBITDA ranging from 6.1x to
7.4x and (4) market capitalization to estimated 1998 EBITDA ranging from 6.9x
to 7.8x.
Salomon Brothers performed a similar comparable companies analysis using
financial information with respect to Boeing, General Dynamics, Litton
Industries, Lockheed Martin and Northrop Grumman (the "Salomon Brothers Hughes
Defense Comparable Companies"). Such analysis was based upon publicly available
company information, in the case of historical data, and brokerage research
reports reported by First Call, in the case of projected data.
Based upon its review, Salomon Brothers established, as of September 17,
1997, for each of the Salomon Brothers Hughes Defense Comparable Companies
multiples of firm value to last twelve months' ("LTM"),
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1997 estimated and 1998 estimated EBITDA and earnings before interest and taxes
("EBIT") and LTM sales revenue, and multiples of equity value to LTM, 1997
estimated and 1998 estimated earnings. The multiples obtained with respect to
the Salomon Brothers Hughes Defense Comparable Companies are as follows: (1) a
range of implied ratios of firm value to LTM EBITDA of 6.9x to 12.8x, with a
median of 8.1x; (2) a range of implied ratios of firm value to 1997 estimated
EBITDA of 7.4x to 11.4x, with a median of 7.9x; (3) a range of implied ratios
of firm value to 1998 estimated EBITDA of 6.8x to 9.7x, with a median of 7.7x;
(4) a range of implied ratios of firm value to LTM EBIT of 10.8x to 18.8x, with
a median of 12.5x; (5) a range of implied ratios of firm value to 1997
estimated EBIT of 8.9x to 16.2x, with a median of 11.0x; (6) a range of implied
ratios of firm value to 1998 estimated EBIT of 8.5x to 11.2x, with a median of
10.3x; (7) a range of implied ratios of equity value to LTM earnings of 16.4x
to 27.2x, with a median of 19.3x; (8) a range of implied ratios of equity value
to 1997 estimated earnings of 14.2x to 23.5x, with a median of 17.5x; (9) a
range of implied ratios of equity value to 1998 estimated earnings of 12.6x to
16.7x, with a median of 15.5x; (10) a range of implied ratios of equity value
to goodwill adjusted LTM earnings of 11.4x to 25.6x, with a median of 14.4x;
(11) a range of implied ratios of equity value to goodwill adjusted 1997
estimated earnings of 9.3x to 22.3x, with a median of 13.8x; and (12) a range
of implied ratios of equity value to goodwill adjusted 1998 estimated earnings
of 8.6x to 16.7x, with a median of 13.0x.
Merrill Lynch applied the multiples it derived of (1) closing stock price to
estimated 1998 earnings, (2) closing stock price to adjusted estimated 1998
earnings, (3) market capitalization to estimated 1997 EBITDA and (4) market
capitalization to estimated 1998 EBITDA, and Salomon Brothers applied the
multiples it derived of (1) firm value to LTM EBITDA, (2) firm value to
estimated 1997 EBITDA, (3) firm value to 1998 estimated EBITDA, (4) firm value
to LTM EBIT, (5) firm value to 1997 estimated EBIT, (6) firm value to 1998
estimated EBIT, (7) equity value to LTM earnings, (8) equity value to 1997
estimated earnings, (9) equity value to 1998 estimated earnings, (10) equity
value to goodwill adjusted LTM earnings, (11) equity value to goodwill adjusted
1997 estimated earnings and (12) equity value to goodwill adjusted 1998
estimated earnings, in each case to comparable data for Hughes Defense (which,
in the case of estimates of future financial performance including assumptions
regarding operations as a separate, stand-alone company, were provided to
Merrill Lynch and Salomon Brothers by management of Hughes Defense). As a
result thereof, Merrill Lynch and Salomon Brothers derived a range of estimated
enterprise value (defined, for purposes of this analysis, as equity plus net
debt) of Hughes Defense of $6.2 billion to $7.2 billion, and a range of
estimated implied equity value (assuming net debt of $3.9 billion) of Hughes
Defense of $2.3 billion to $3.3 billion.
No company used in the comparable public companies analysis was identical to
Hughes Defense. Accordingly, an analysis of the results of such a comparison is
not purely mathematical; rather, it involves complex considerations and
judgments, based on the financial advisors' professional experience, concerning
differences in historical and projected financial and operating characteristics
of the comparable companies and other factors that could affect the public
trading value of the comparable companies or company to which they are being
compared.
New Raytheon Pro Forma Comparable Public Companies Analysis. Merrill Lynch
and Salomon Brothers performed a comparable public companies analysis in which
they compared certain publicly available historical financial and operating
data, estimates of future financial performance (based on First Call estimates
and available equity research analyst reports) and market statistics
(calculated based upon closing stock prices on September 26, 1997) of Lockheed
Martin, Litton Industries and Boeing, all of which are publicly traded
companies that Merrill Lynch and Salomon Brothers deemed to be reasonably
similar to the businesses of New Raytheon (the "New Raytheon Comparable Public
Companies"). Historical financial information used in connection with this
analysis was as of the date of the most recent financial statements publicly
available for each company.
For each of the New Raytheon Comparable Public Companies and New Raytheon
(using a representative stock price for Raytheon of $60 per share), Merrill
Lynch and Salomon Brothers calculated multiples of (1) closing stock price to
estimated 1998 earnings, (2) closing stock price to adjusted estimated 1998
earnings
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(which eliminate from earnings the effect of goodwill) and (3) market
capitalization (pro forma for recent acquisitions based on publicly available
information) to estimated 1998 EBITDA. Such analysis yielded multiples of (1)
closing stock price to estimated 1998 earnings of 15.7x for New Raytheon, 15.8x
for Lockheed Martin, 14.6x for Litton Industries and 16.3x for Boeing, (2)
closing stock price to adjusted estimated 1998 earnings of 12.6x for Raytheon,
12.3x for Lockheed Martin, 12.8x for Litton Industries and 15.9x for Boeing and
(3) market capitalization to estimated 1998 EBITDA of 9.4x for New Raytheon,
7.8x for Lockheed Martin, 6.9x for Litton Industries and 8.5x for Boeing.
Merrill Lynch and Salomon Brothers observed that the multiples derived for New
Raytheon were consistent with those of the New Raytheon Comparable Public
Companies.
Given the variety of businesses of New Raytheon, among other things, no
company used in the comparable public companies analysis was identical to New
Raytheon. Accordingly, an analysis of the results of such a comparison is not
purely mathematical; rather, it involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable companies or company to which they
are being compared.
Comparable Transactions Analysis. Merrill Lynch and Salomon Brothers reviewed
certain publicly available information regarding selected transactions (the
"Selected Transactions"). The Selected Transactions comprised the business
combinations involving Lockheed Martin and Northrop Grumman, Raytheon and Texas
Instruments, Boeing and McDonnell Douglas, and Lockheed Martin and Loral. For
each of the Selected Transactions and the Raytheon Merger, Merrill Lynch and
Salomon Brothers calculated the transaction value (defined, for purposes of
this analysis, as the offer price for stock or assets purchased plus assumed
net debt) as
a multiple of LTM EBITDA. Such analysis indicated that the transaction value as
a multiple of LTM EBITDA was 10.0x for Lockheed Martin/Northrop Grumman, 9.5x
for Raytheon/Texas Instruments, 10.3x for Boeing/McDonnell Douglas, 9.0x for
Lockheed Martin/Loral and an implied multiple for Hughes Defense of 11.0x in
the Raytheon Merger. Merrill Lynch and Salomon Brothers noted that the implied
multiple of transaction value to LTM EBITDA for Hughes Defense in the Raytheon
Merger compared favorably to the multiples of transaction value to LTM EBITDA
for the Selected Transactions, and that the then-current transaction value for
Hughes Defense of $10.1 billion (assuming a per share stock price of New
Raytheon of $60) represented a 40% to 63% premium on the range of estimated
enterprise values, and an 87% to 169% premium on the range of estimated implied
equity values, of Hughes Defense.
MERRILL LYNCH OCTOBER PRESENTATION
On October 6, 1997, Merrill Lynch made a presentation (the "Merrill Lynch
October Presentation") to the GM Board regarding the Hughes Transactions. A
description of the Merrill Lynch October Presentation is set forth below.
Delco Comparable Public Companies Analysis. Merrill Lynch performed a
comparable public company analysis in which it compared certain publicly
available historical financial and operating data, estimates of future
financial performance (reflecting First Call estimates calendarized to December
year-end) and market statistics (calculated based upon closing stock prices on
September 26, 1997) of three categories of publicly traded companies that
Merrill Lynch deemed to be reasonably similar to Delco (collectively, the
"Delco Comparable Public Companies"). The first category of comparable public
companies (the "Comparable Systems Suppliers") comprised Borg-Warner Automotive
Inc., Dana Corp., Johnson Controls, Lear Corp., Magna International, Tower
Automotive and Walbro Corp. The second category of comparable public companies
(the "Comparable Non-Systems Suppliers") comprised Arvin, Breed Technologies
Inc., Donnelley Corp., Dura Automotive Systems, Excel, Gentex, Hayes Wheels
International Inc., Intermet Corp., MascoTech, Simpson Industries and Standard
Products. The third category of comparable public companies (the "Comparable
Conglomerates") comprised AlliedSignal, Eaton, ITT, Tenneco, Textron, TRW and
United Technologies. Historical financial information used in connection with
this analysis was as of the date of the most recent financial statements
publicly available for each company.
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For each of the Delco Comparable Public Companies, Merrill Lynch calculated
multiples of (1) closing stock price to estimated 1997 earnings, (2) closing
stock price to estimated 1998 earnings, (3) market capitalization to LTM
EBITDA, (4) market capitalization to estimated 1997 EBITDA, (5) market
capitalization to estimated 1998 EBITDA and (6) market capitalization to LTM
EBIT.
For the Comparable Systems Suppliers, such analysis yielded multiples
(excluding, in each case, multiples that Merrill Lynch considered anomalies) of
(1) closing stock price to estimated 1997 earnings ranging from 12.4x to 16.1x,
with a mean of 14.7x; (2) closing stock price to estimated 1998 earnings
ranging from 11.1x to 14.6x, with a mean of 13.0x; (3) market capitalization to
LTM EBITDA ranging from 5.0x to 7.9x, with a mean of 6.8x; (4) market
capitalization to estimated 1997 EBITDA ranging from 5.4x to 7.2x, with a mean
of 6.5x and (5) market capitalization to estimated 1998 EBITDA ranging from
5.3x to 6.8x, with a mean of 5.9x.
For the Comparable Non-Systems Suppliers, such analysis yielded multiples
(excluding, in each case, multiples that Merrill Lynch considered anomalies) of
(1) closing stock price to estimated 1997 earnings ranging from 10.4x to 15.6x,
with a mean of 13.4x; (2) closing stock price to estimated 1998 earnings
ranging from 9.3x to 14.2x, with a mean of 11.7x; (3) market capitalization to
LTM EBITDA ranging from 3.7x to 7.8x, with a mean of 6.1x; (4) market
capitalization to estimated 1997 EBITDA ranging from 3.7x to 8.4x, with a mean
of 5.5x and (5) market capitalization to estimated 1998 EBITDA ranging from
3.5x to 7.4x, with a mean of 5.2x.
For the Comparable Conglomerates, such analysis yielded multiples (excluding,
in each case, multiples that Merrill Lynch considered anomalies) of (1) closing
stock price to estimated 1997 earnings ranging from 14.2x to 15.9x, with a mean
of 15.2x; (2) closing stock price to estimated 1998 earnings ranging from 12.9x
to 14.5x, with a mean of 13.7x; (3) market capitalization to LTM EBITDA ranging
from 5.9x to 8.3x, with a
mean of 6.9x; (4) market capitalization to estimated 1997 EBITDA ranging from
5.5x to 8.3x, with a mean of 6.6x and (5) market capitalization to estimated
1998 EBITDA ranging from 5.0x to 7.6x, with a mean of 6.0x.
Applying the multiples of (1) closing stock price to estimated 1997 earnings,
(2) closing stock price to estimated 1998 earnings, (3) market capitalization
to LTM EBITDA, (4) market capitalization to estimated 1997 EBITDA and (5)
market capitalization to estimated 1998 EBITDA derived for the Comparable
Systems Suppliers, the Comparable Non-Systems Suppliers and the Comparable
Conglomerates to comparable data for Delco (which, in the case of estimates of
future financial performance, were provided to Merrill Lynch by management of
Delco), Merrill Lynch derived a range of implied enterprise value of Delco
(including DSO) of $4.4 billion to $5.4 billion.
No company utilized in the comparable public companies analysis was identical
to Delco. Accordingly, an analysis of the results of such a comparison is not
purely mathematical; rather, it involves complex considerations and judgments,
based on the financial advisors' professional experience, concerning
differences in historical and projected financial and operating characteristics
of the comparable companies and other factors that could affect the public
trading value of the comparable companies or company to which they are being
compared.
Comparable Transactions Analysis. Merrill Lynch reviewed certain publicly
available information regarding selected acquisitions completed from 1994 to
1996 (the "Selected Acquisitions"). The Selected Acquisitions comprised the
business combinations involving Autoliv and Morton International, Johnson
Controls and Prince Corporation, Lucas Industries and Varity, Robert Bosch GmbH
and AlliedSignal and Lucas Industries and Lake Center Industries.
For each of the Selected Acquisitions Merrill Lynch calculated, to the extent
information was publicly available, the transaction value as a multiple of (1)
LTM sales, (2) LTM EBITDA, (3) LTM EBIT, (4) estimated sales for the twelve
months following LTM ("LTM plus one"), (5) estimated LTM plus one EBITDA, (6)
LTM plus one EBIT, (7) estimated sales for the twelve months following LTM plus
one ("LTM plus two"), (8) LTM plus two EBITDA and (9) LTM plus two EBIT. Such
analysis yielded multiples of
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transaction value to (1) LTM sales ranging from 0.70x to 1.79x, with a mean of
1.16x, (2) LTM EBITDA ranging from 7.7x to 8.4x, with a mean of 8.1x, (3) LTM
EBIT ranging from 11.0x to 15.3x, with a mean of 13.3x, (4) estimated LTM plus
one sales ranging from 0.68x to 1.76x, with a mean of 1.09x, (5) estimated LTM
plus one EBITDA ranging from 6.4x to 8.2x, with a mean of 7.1x, (6) LTM plus
one EBIT ranging from
10.0x to 10.8x, with a mean of 10.4x, (7) estimated LTM plus two sales of
0.78x, (8) LTM plus two EBITDA of 6.1x and (9) LTM plus two EBIT of 9.0x. Based
on its professional judgment and expertise, Merrill Lynch selected the
following ranges of multiples, and applied such ranges to comparable data for
Delco (which, in the case of estimates of future financial performance, were
provided to Merrill Lynch by management of Delco): transaction value as a
multiple of (1) LTM EBITDA ranging from 7.5x to 8.5x, (2) LTM plus one EBITDA
ranging from 6.5x to 8.0x, (3) LTM plus one EBIT ranging from 10.0x to 11.0x
and (4) LTM sales ranging from 0.8x to 1.4x.
Merrill Lynch also reviewed certain publicly available information regarding
84 OEM supplier acquisitions completed from February 1994 to September 1997
(the "OEM Supplier Acquisitions"). For each of the OEM Supplier Acquisitions,
Merrill Lynch calculated, to the extent information was publicly available, (1)
the offer value as a multiple of (x) LTM net income and (y) last fiscal quarter
("LFQ") equity and (2) the
transaction value (which was defined, for purposes of this analysis, as the
offer value plus preferred equity at liquidation value, short-term debt, long-
term debt and minority interest, less cash and marketable securities and
exercisable options proceeds) as a multiple of (x) LTM EBITDA, (y) LTM EBIT and
(z) LTM sales. Such analysis yielded mean and median multiples (excluding, in
each case, multiples that Merrill Lynch considered anomalies) of (1) offer
value to (x) LTM net income of 16.0x and 16.2x, respectively, and (y) LFQ
equity of 3.17x and 2.51x, respectively, and (2) transaction value to (x) LTM
EBITDA of 7.31x and 7.14x, respectively; (y) LTM EBIT of 11.3x and 11.0x,
respectively, and (z) LTM sales of 0.79x and 0.74x, respectively. Based on its
professional judgment and expertise, Merrill Lynch selected the following
ranges of multiples, and applied such ranges to comparable data for Delco
(which, in the case of estimates of future financial performance, were provided
to Merrill Lynch by management of Delco): transaction value as a multiple of
(1) LTM EBITDA ranging from 6.5x to 8.0x, (2) LTM EBIT ranging from 10.0x to
12.0x and (3) LTM sales ranging from 0.6x to 1.0x.
Based on these analyses, and using comparable data for Delco (which, in the
case of estimates of future financial performance, were provided to Merrill
Lynch by management of Delco), Merrill Lynch derived an implied enterprise
value range of Delco (including DSO) of $5.6 billion to $6.6 billion.
Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash flow
analysis of Delco (1) on a stand-alone basis, based upon estimates of projected
financial performance prepared by the management of Delco (the "Stand-Alone
Case"), (2) on a stand-alone basis, based upon estimates of projected financial
performance which include certain benefits of the Delco/Delphi Combination,
prepared by the managements of Delco and Delphi (the "Competitive Case") and
(3) on a stand-alone basis, based upon estimates of projected financial
performance which include full benefits of the Delco/Delphi Combination
prepared by the managements of Delco and Delphi (the "Delco/Delphi Combination
Case"). Using these projections, Merrill Lynch calculated ranges of total
enterprise value for Delco and, in so doing, utilized (1) terminal multiples of
fiscal year 2007 EBITDA of 5.0x to 6.5x for the Stand-Alone Case, and 6.0x to
7.5x for each of the Competitive Case and the Delco/Delphi Combination Case and
(2) discount rates, reflecting Delco's weighted average cost of capital,
ranging from 10% to 12%. The analysis yielded total enterprise values for Delco
(including DSO) of (1) $3.6 billion to $4.7 billion, based upon the Stand-Alone
Case, (2) $4.6 billion to $6.0 billion, based upon the Competitive Case and (3)
$5.3 billion to $7.0 billion, based upon the Delco/Delphi Combination Case.
Merrill Lynch advised the GM Board that its discounted cash flow analysis of
each case was an appropriate and relevant method of financial analysis for the
GM Board's consideration.
Merrill Lynch performed a sensitivity analysis of the Stand-Alone Case
assuming a lower annual growth rate for non-GM NAO revenues from 1998 to 2007,
fixed structural costs through 2001 and constant operating margins from 2003 to
2007, and calculated ranges of implied enterprise value of Delco utilizing
terminal
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multiples of fiscal year 2007 EBITDA of 5.0x to 6.5x and discount rates ranging
from 10% to 12%. Such analysis resulted in a decrease in the implied enterprise
value of Delco of $500 million to $700 million. Merrill Lynch also performed a
sensitivity analysis of the Stand-Alone Case assuming a reduction in GM NAO
vehicle volume in 1999, 2000 and 2001, and fixed structural costs through 2001,
and calculated ranges of implied enterprise value of Delco utilizing terminal
multiples of fiscal year 2007 EBITDA of 5.0x to 6.5x and discount rates ranging
from 10% to 12%. Such analysis resulted in a decrease in the implied enterprise
value of Delco of $200 million.
Merrill Lynch also performed a sensitivity analysis of the Competitive Case
assuming an increase in per vehicle savings and calculated ranges of implied
enterprise value of Delco utilizing terminal multiples of fiscal year 2007
EBITDA of 6.0x to 7.5x and discount rates ranging from 10% to 12%. Such
analysis resulted in an increase in the implied enterprise value of Delco of
$100 million.
Analysis of Other Factors Impacting Net Transaction Effect Base Amount.
Merrill Lynch identified for the GM Board, but did not quantify, certain
effects of the Hughes Transactions and the Raytheon Merger on the GM Class H
Stockholders which were not quantifiable, including (1) that there would be a
potential positive impact of (a) owning an asset-based investment in New
Raytheon in lieu of a tracking stock interest in Hughes Defense and Delco, due
to the elimination of any potential tracking stock discount, (b) owning New GM
Class H Common Stock which will be a more focused tracking stock investment
than GM Class H Common Stock, thereby reducing any potential conglomerate
discount and (c) the terms of the New GM Class H Common Stock that prevent the
GM Board from electing to recapitalize the New GM Class H Common Stock into GM
$1 2/3 Common Stock until after December 31, 2002; (2) that there would be a
potential neutral impact of (a) the potential stock price volatility of the New
GM Class H Common Stock and (b) the dividend rights of the New GM Class H
Common Stock as compared to the GM Class H Common Stock; and (3) that there
would be a potential negative impact of the Hughes Transactions not resulting
in a recapitalization of GM Class H Common Stock into GM $1 2/3 Common Stock at
a 120% exchange ratio. Merrill Lynch also identified for the GM Board, but did
not quantify, certain effects of the Hughes Transactions and the Raytheon
Merger on the GM $1 2/3 Common Stockholders which were not quantifiable,
including (1) that there would be a potential positive impact of (a) owning a
conventional common stock interest in New Raytheon in lieu of a tracking stock
interest in Hughes Defense, due to the elimination of any potential tracking
stock discount, (b) General Motors, as an original equipment manufacturer,
receiving full benefits of the Delco/Delphi Combination and (c) the elimination
of a charge to GM's earnings for goodwill related to the acquisition of Hughes
Defense; and (2) that there would be a potential negative impact of the terms
of the New GM Class H Common Stock that prevent the GM Board from electing to
recapitalize the New GM Class H Common Stock into GM $1 2/3 Common Stock until
after December 31, 2002. Merrill Lynch also identified for the GM Board, but
did not quantify, certain effects of the Hughes Transactions and the Raytheon
Merger on the GM $1 2/3 Common Stockholders, including the potential neutral
impact of (1) any effects on GM's credit ratings and (2) any impact on profit
sharing costs.
Analysis of Net Transaction Effect Base Amount. Using the ranges of implied
enterprise values of Delco (including DSO) identified above, Merrill Lynch
calculated ranges of implied values of a 25% interest in Delco and compared
such ranges to $1.625 billion, which was assumed to be the Net Transaction
Effect Base Amount.
SALOMON BROTHERS OCTOBER PRESENTATION
On October 6, 1997, Salomon Brothers made a presentation (the "Salomon
Brothers Presentation") to the GM Board regarding the Hughes Transactions. The
following is a description of the Salomon Brothers Presentation and certain of
the financial analyses used by Salomon Brothers (in addition to those analyses
described above under "--October Presentation") in connection with providing
the Original Salomon Brothers Fairness Opinion.
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Summary of Analyses. Salomon Brothers considered the financial impact on the
GM $1 2/3 Common Stockholders and GM Class H Common Stockholders of the
allocation of Class A Common Stock between GM $1 2/3 Common Stockholders and GM
Class H Common Stockholders based upon the Net Transaction Effect (representing
compensation to the GM Class H Common Stockholders for relinquishing their
tracking stock interest in Delco and for other factors affecting their
interests, as determined by the GM Board, and the value of any additional
shares of Class A Common Stock to be distributed to the GM Class H Stockholders
in the event that any of the cash borrowed by Hughes Defense prior to the
Hughes Defense Spin-Off is distributed to General Motors). Salomon Brothers
performed a number of analyses with respect to the value of Delco, both on a
base case basis and after giving effect to management's estimates of the value
of the net benefits of the Delco/Delphi integration. In its analyses, Salomon
Brothers took into account an agreed value of approximately $97 million
attributed to Delco Systems Operations in connection with the agreement to
transfer the Delco Systems Operations business to General Motors in connection
with the Hughes Reorganization. Salomon Brothers compared the results of these
valuation analyses with the total value of Delco implied by the Net Transaction
Effect Base Amount. Salomon Brothers also noted that the Delco/Delphi
integration pursuant to the Hughes Transactions could facilitate a future
offering of some form of equity stock relating to the combined business of
Delco and Delphi, but did not ascribe any value thereto.
Discounted Cash Flow Analysis--Base Case. Using a discounted cash flow
("DCF") methodology, Salomon Brothers valued Delco by estimating the present
value of future free cash flows available to debt and equity holders if Delco
were to perform on a stand-alone basis in accordance with management forecasts
through 2007 (without giving effect to any operating or other efficiencies
arising from the Delco/Delphi integration). Free cash flow represents the
amount of cash generated and available for principal, interest and dividend
payments after providing for ongoing business operations. Salomon Brothers
aggregated the present value (utilizing discount rates ranging from 10.5% to
12.5%) of the free cash flow with the present value of the range of terminal
values described below. The range of terminal values was calculated by applying
multiples ranging from 5.5x to 7.5x to Delco's earnings before interest, taxes,
depreciation and amortization ("EBITDA"). This range of terminal values
represented Delco's value beyond 2007. The DCF analysis resulted in a firm
value range for Delco of approximately $3.7 billion to $5.0 billion. In
particular, Salomon Brothers focused on the results obtained by utilizing
discount rates ranging from 11% to 12% and multiples ranging from 6.0x to 7.0x,
which resulted in a firm value range for approximately $4.0 to $4.6 billion.
Discounted Cash Flow Analysis--Synergies. Starting with the firm value range
of approximately $4.0 to $4.6 billion resulting from the base DCF analysis
described above, Salomon Brothers determined a range of firm values for Delco
after taking into account the Delco profit improvement, administrative cost
savings and Delphi profit improvement expected to result from the Delco/Delphi
integration (collectively, the "Synergies"). Salomon Brothers' analysis was
based on a weighted average cost of capital of 11% to 12%, terminal EBITDA
multiples of 6.0x to 7.0x for the Delco and Delphi profit improvement, and no
growth in administrative cost savings. This analysis resulted in a value range
for the assumed Synergies of approximately $1.36 to $1.75 billion and a range
of Delco valuations, including such assumed Synergies, of approximately $5.4
billion to $6.4 billion.
Public Company Analysis. Salomon Brothers compared selected financial data of
Delco with certain financial data from publicly traded companies that
participate in the automotive components business. The comparison group
consisted of: Arvin Industries, Inc.; Dana Corporation; Eaton Corporation;
Harman International Industries, Inc.; ITT Industries Inc.; Johnson Controls
Inc.; Lear Corporation; Magna International Inc.; Simpson Industries, Inc.; and
Superior Industries International, Inc. (the "Comparable Companies").
Based upon its review of certain publicly available information, Salomon
Brothers established, as of September 26, 1997, for each of the Comparable
Companies multiples of firm value to LTM, 1997 estimated and 1998 estimated
EBITDA and EBIT, and multiples of equity value to LTM, 1997 estimated and 1998
estimated earnings. The multiples obtained by Salomon Brothers with respect to
the Comparable Companies were as follows: (1) a range of implied ratios of firm
value to LTM EBITDA of 5.4x to 9.0x, with a median of
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6.9x; (2) a range of implied ratios of firm value to 1997 estimated EBITDA of
5.9x to 8.8x, with a median of 6.6x; (3) a range of implied ratios of firm
value to 1998 estimated EBITDA of 5.2x to 7.8x, with a median of 5.7x; (4) a
range of implied ratios of firm value to LTM EBIT of 8.3x to 14.0x, with a
median of 10.2x; (5) a range of implied ratios of firm value to 1997 estimated
EBIT of 8.7x to 12.8x, with a median of 9.7x; (6) a range of implied ratios of
firm value to 1998 estimated EBIT of 7.4x to 11.1x, with a median of 8.1x; (7)
a range of implied ratios of equity value to LTM earnings of 10.5x to 20.3x,
with a median of 16.7x; (8) a range of implied ratios of equity value to 1997
estimated earnings of 14.2x to 17.1x, with a median of 15.5x; and (9) a range
of implied ratios of equity value to 1998 estimated earnings of 10.5x to 14.6x,
with a median of 13.0x. Applying these multiples of firm value to LTM, 1997
estimated and 1998 estimated EBITDA and EBIT and of equity value to LTM, 1997
estimated and 1998 estimated earnings to the financial results (actual and
estimated) of Delco, Salomon Brothers obtained a reference range for the firm
value of Delco of $4.9 billion to $5.7 billion.
For purposes of comparison, Salomon Brothers then obtained ratios of the $6.5
billion firm value of Delco (corresponding to the Net Transaction Effect Base
Amount established by the GM Board, both including and excluding $1.6 billion
of expected Synergies) to EBITDA and EBIT as follows: (1) firm value to LTM
EBITDA of 8.2x for Delco with Synergies and 6.2x without Synergies; (2) firm
value to 1997 estimated EBITDA of 8.5x for Delco with Synergies and 6.4x
without Synergies; (3) firm value to 1998 estimated EBITDA of 7.7x for Delco
with Synergies and 5.9x without Synergies; (4) firm value to LTM EBIT of 11.1x
for Delco with Synergies and 8.4x without Synergies; (5) firm value to 1997
estimated EBIT of 11.9x for Delco with Synergies and 9.0x without Synergies;
and (6) implied ratios of firm value to 1998 estimated EBIT of 11.0x for Delco
with Synergies and 8.4x without Synergies. In addition, Salomon Brothers
established ranges of ratios of equity value to earnings based upon both a $5.0
billion equity valuation derived from the Net Transaction Effect Base Amount
established by the GM Board (assuming approximately $1.5 billion of debt, a 7%
interest rate and a 38% tax rate in order to make Delco's financial results
more comparable to those of other automotive component companies) and a $3.4
billion equity valuation (after excluding $1.6 billion to reflect the mid-point
of the implied value of the Delco business without the expected Synergies): (1)
equity value to LTM earnings of 16.8x for Delco with Synergies and 11.4x
without Synergies; (2) equity value to 1997 estimated earnings of 18.3x for
Delco with Synergies and 12.5x without Synergies; and (3) equity value to 1998
estimated earnings of 16.4x for Delco with Synergies and 11.2x without
Synergies. Salomon Brothers observed that the ratios implied by the Net
Transaction Effect Base Amount generally were consistent with the ratios
obtained with respect to the Comparable Companies.
Private Market Analysis. Salomon Brothers reviewed publicly available
information regarding 37 selected transactions in the automotive components
industry between December 1995 and September 1997 and focusing in particular on
four transactions over $1 billion. These four automotive component industry
transactions in excess of $1 billion and the dates such transactions were
announced are as follows: Johnson Controls Inc.'s acquisition of Prince Holding
Corporation (July 1996); Lucas Industries Inc.'s acquisition of Varity
Corporation (May 1996); Robert Bosch GmbH's acquisition of the brake business
of AlliedSignal Inc. (February 1996); and Tomkins PLC's acquisition of The
Gates Rubber Company (December 1995) (the "Comparable Transactions"). Based
upon its review of certain publicly available information, Salomon Brothers
established, as of September 26, 1997, for each of the Comparable Transactions
multiples of firm value to LTM, 1997 estimated and 1998 estimated EBITDA and
EBIT, and multiples of equity value to LTM, 1997 estimated and 1998 estimated
earnings, from which Salomon Brothers established the following reference
ranges: (1) a range of implied ratios of firm value to LTM EBITDA of 8.5x to
9.5x; (2) a range of implied ratios of firm value to 1997 estimated EBITDA of
7.0x to 8.0x; (3) a range of implied ratios of firm value to 1998 estimated
EBITDA of 6.5x to 7.5x; (4) a range of implied ratios of firm value to LTM EBIT
of 13.5x to 14.5x; (5) a range of implied ratios of firm value to 1997
estimated EBIT of 11.0x to 13.0x; (6) a range of implied ratios of firm value
to 1998 estimated EBIT of 8.5x to 10.5x; (7) a range of implied ratios of
equity value to LTM earnings
of 18.0x to 20.0x; (8) a range of implied ratios of equity value to 1997
estimated earnings of 13.5x to 15.5x; and (9) a range of implied ratios of
equity value to 1998 estimated earnings of 12.5x to 15.0x. Applying these
multiples of firm value to LTM, 1997 estimated and 1998 estimated EBITDA and
EBIT and of equity value to
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LTM, 1997 estimated and 1998 estimated earnings to the financial results
(actual and estimated) of Delco, Salomon Brothers obtained a reference range
for the firm value of Delco of $5.4 billion to $6.4 billion. Salomon Brothers
also noted that the ratios implied by the Net Transaction Effect Base Amount
generally were consistent with the ratios obtained with respect to the
Comparable Transactions.
Other Valuation Metrics. Salomon Brothers determined a range of Delco implied
firm value of approximately $5.9 billion to $7.0 billion by applying a 30%
minority interest premium (representing Salomon Brothers' judgment of the
middle of the range of average premiums paid to stock prices one month prior to
announcement, based on a Salomon Brothers study of minority interest purchase
transactions since 1984) to the public trading equity value of approximately
$3.4 billion to $4.2 billion, which was derived from the public market
valuation described above by subtracting $1.5 billion of assumed net debt in
order to make Delco's financial results more comparable to those of other
automotive component companies. Salomon Brothers also determined a range of
Delco implied firm value of approximately $6.1 billion to $7.2 billion by
applying a 35% merger premium (representing Salomon Brothers' judgment of the
middle of the range of premiums paid in merger transactions involving public
automotive component companies) to the public market trading equity value of
approximately $3.4 billion to $4.2 billion, which was derived from the public
market valuation described above by subtracting $1.5 billion of assumed net
debt. In addition, Salomon Brothers calculated the mean of low and high
estimates of Delco's firm value as determined by selected Wall Street analysts,
which resulted in a range of $5.6 billion to $6.6 billion. Salomon Brothers
used the estimates of the following Wall Street analysts in calculating this
range of firm value: Roger R. Threlfall (J.P. Morgan Securities), Kenneth M.
Leon (ABN AMRO Chicago), von Rumohr/Wood/Staehly (Cowen & Co.), Paul H. Nisbet
(JSA Research, Inc.), J. Modzelewski (PaineWebber, Inc.) and Dennis H.
Leibowitz (Donaldson, Lufkin & Jenrette).
Premium to GM Class H Common Stockholders and IRR to GM $1 2/3 Common
Stockholders. Salomon Brothers analyzed the premium to GM Class H Common
Stockholders represented by the Delco implied firm value of $6.5 billion and
implied equity value of $5.0 billion (assuming $1.5 billion of pro forma net
debt was assumed in order to make Delco's financial results more comparable to
those of other automotive component
companies) and internal rate of return ("IRR") to GM $1 2/3 Common Stockholders
based upon the Net Transaction Effect Base Amount. Salomon Brothers computed
that the $6.5 billion implied firm value and $5.0 billion implied equity value
represented an implied firm value premium of 62%, 50% or 40% and an implied
equity premium of 98%, 77% and 59% to low, middle and high base DCF firm values
(without Synergies) of $4.0 billion, $4.3 billion and $4.6 billion,
respectively. Salomon Brothers also computed that the $6.5 billion implied firm
value and $5.0 billion implied equity value represented an implied firm value
premium of 33%, 23% or 14% and an implied equity premium of 47%, 32% and 19% to
low, middle and high estimated public market firm values (without Synergies) of
$4.9 billion, $5.3 billion and $5.7 billion, respectively. Salomon Brothers
computed low, middle and high implied IRR to GM $1 2/3 Common Stockholders of
16.7%, 17.6% and 18.4% on an investment in Delco in the amount of the Net
Transaction Effect Base Amount, assuming low, middle and high values for a
25.6% interest in Delco (representing the Class H Fraction as of September 30,
1997), before Synergies, of $1.03, $1.11 and $1.19 billion, respectively, and
low, middle and high values of 100% of the Synergies of $1.36, $1.56 and $1.75
billion, respectively.
REQUISITE STOCKHOLDER APPROVAL OF THE HUGHES TRANSACTIONS
In order to consummate the Hughes Transactions, General Motors must obtain
the consent of the holders of:
. a majority of the outstanding shares of GM $1 2/3 Common Stock, voting as a
separate class; and
. a majority of the outstanding shares of GM Class H Common Stock, voting as
a separate class.
If General Motors obtains both of these approvals, General Motors will also
have obtained, as required by applicable law, the approval of a majority of the
voting power of all outstanding shares of both classes of GM common stock,
voting together as a single class based on their respective per share power
pursuant to the provisions set forth in the GM Certificate of Incorporation. We
sometimes refer in this document to these
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approvals collectively as the "Requisite Stockholder Approval." See
"Description of the Hughes Transactions--Stockholder Approval of the Hughes
Transactions" below and "Solicitation of Written Consent of GM's Common
Stockholders" in Chapter 7.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS RELATING TO CERTAIN OF THE
HUGHES TRANSACTIONS
The following discussion is a general summary of the material U.S. federal
income tax consequences of certain of the Hughes Transactions. This discussion
does not address all aspects of U.S. federal income taxation that might be
relevant to you in light of your status or personal investment circumstances;
nor does it discuss
the consequences to those of you who are subject to special treatment under the
U.S. federal income tax laws,
such as non-U.S. persons, dealers in securities, regulated investment
companies, life insurance companies, other financial institutions, tax-exempt
organizations, pass-through entities, or taxpayers who will hold GM $1 2/3
Common Stock, New GM Class H Common Stock or Class A Common Stock as part of a
"straddle," "hedge" or "conversion transaction" or who have a "functional
currency" other than the U.S. dollar. In addition, this discussion does not
address the tax consequences to holders of options in respect of GM common
stock or other persons who have received their GM common stock as compensation.
Also, this discussion does not address the tax consequences of the Hughes
Transactions under U.S. state or local and non-U.S. tax laws. Furthermore, the
following discussion does not cover the tax consequences of every transaction
included in the Hughes Transactions or the Raytheon Merger. We assume for
purposes of this discussion that the GM common stock you now hold, and the
Class A Common Stock to be distributed to you in the Hughes Defense Spin-Off,
will be held by you as a capital asset on the date of the Hughes Defense Spin-
Off.
This discussion is based upon the Code, regulations proposed or promulgated
thereunder, judicial precedent relating thereto and current rulings and
administrative practice of the IRS, in each case as in effect as of the date of
this document and all of which are subject to change at any time, possibly with
retroactive effect.
Any such change could alter the tax consequences to General Motors or you as
its common stockholders as described directly below.
YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO
YOU OF THE HUGHES TRANSACTIONS, INCLUDING THE APPLICABILITY AND EFFECT OF U.S.
FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX LAWS. For a description
of certain U.S. federal income tax considerations relating to the Raytheon
Merger, see "--Certain U.S. Federal Income Tax Considerations Relating to the
Raytheon Merger" below.
HUGHES DEFENSE SPIN-OFF
The following discussion summarizes those U.S. federal income tax
considerations resulting from the Hughes Defense Spin-Off that materially
affect General Motors and you (its common stockholders).
General Motors has received the IRS Ruling, which holds, among other things,
that the Hughes Defense Spin-Off will be treated as a reorganization under
Section 368(a) of the Code and as a tax-free distribution under Section 355 of
the Code. Based on the foregoing IRS Ruling, for U.S. federal income tax
purposes:
. no gain or loss will be recognized by General Motors upon the distribution
of the Class A Common Stock to you (as part of the Hughes Defense Spin-
Off);
. no gain or loss will be recognized by you (and no amount will otherwise be
included in your income) upon your receipt of the Class A Common Stock (as
part of the Hughes Defense Spin-Off);
. the tax basis in the Class A Common Stock which you will receive will be
determined by allocating your existing tax basis in your GM common stock
immediately before the Hughes Defense Spin-Off between your Class A Common
Stock and GM common stock immediately after the consummation of the Hughes
Defense Spin-Off, based on the stocks' relative fair market values
immediately after such consummation; and
. the holding period of the Class A Common Stock which you will receive will
include the holding period of your GM common stock upon which such Class A
Common Stock will have been distributed.
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The IRS Ruling also holds that General Motors will not recognize any gain or
loss as a result of certain transactions included in the Hughes Reorganization
that are generally preparatory to the Hughes Defense Spin-Off, such as the
transfer of Delco from Hughes Electronics to General Motors and the Hughes
Telecom Spin-Off.
The IRS Ruling does not specifically address how tax bases and holding
periods should be allocated among shares of Class A Common Stock received in
the Hughes Defense Spin-Off by stockholders who own two or more blocks of
either the GM Class H Common Stock or the GM $1 2/3 Common Stock (or both) with
different per share bases and/or holding periods. If you fall into this
category of stockholders, you are encouraged to consult with your own tax
advisor regarding the possible tax basis and holding period consequences of the
Hughes Defense Spin-Off.
The IRS Ruling, while generally binding on the IRS, is based upon certain
factual representations and assumptions described in the IRS Ruling. If any
such factual representations or assumptions are incorrect or untrue in any
material respect, the IRS Ruling may be invalidated. We are not aware of any
facts or circumstances which would cause any such representations or
assumptions to be incorrect or untrue in any material respect. Nevertheless, if
the Hughes Defense Spin-Off were held to be taxable, both General Motors and
holders of GM common stock potentially would incur material tax liabilities.
Current Treasury Regulations require each GM common stockholder who receives
Class A Common Stock pursuant to the Hughes Defense Spin-Off to attach to such
stockholder's federal income tax return for the year in which the Hughes
Defense Spin-Off occurs a statement setting forth such data as may be
appropriate in order to show the applicability of Section 355 of the Code to
the Hughes Defense Spin-Off. We will provide such information to you after the
consummation of the Hughes Transactions and the Raytheon Merger so that you can
comply with these regulations.
TAX-FREE STATUS OF THE EDS SPLIT-OFF
The IRS Ruling also holds that the consummation of the transactions
contemplated by the Spin-Off Merger Agreement and the consummation of the
Raytheon Merger will not adversely affect the tax-free status of the EDS Split-
Off. We sometimes refer in this document to this component of the IRS Ruling as
the "IRS Supplemental Ruling." As described below under "Description of the
Hughes Transactions--GM Spin-Off Merger Agreement," the absence of any
notification from the IRS that the IRS Supplemental Ruling has been withdrawn,
invalidated or modified is a condition to GM's obligation to consummate the GM
Spin-Off Merger. As of the date of this document, this condition to the GM
Spin-Off Merger has been satisfied.
CERTAIN LEGISLATION
On August 5, 1997, President Clinton signed legislation that, under certain
circumstances, causes a corporation to recognize gain on the distribution of
the stock of a subsidiary in a spin-off transaction. This legislation will not
apply to the Hughes Defense Spin-Off and the Hughes Telecom Spin-Off under the
transition provisions enacted as part of this legislation, provided that these
transactions occur as described in this document.
If the Hughes Transactions are not consummated, any future transactions
involving Hughes Defense, if structured in a manner similar to the Hughes
Transactions, would be subject to this legislation and thus would cause General
Motors to recognize taxable gain for U.S. income tax purposes if consummated.
While there may be other transactions involving Hughes Defense that potentially
could be effected without generating taxable gain to General Motors or its
stockholders (such as, among other things, a spin-off of Hughes Defense in the
absence of a pre-arranged merger of Hughes Defense with a third party), there
can be no assurance that any such alternative transaction (or transactions)
would address Hughes Defense's strategic challenges, would be proposed or, if
proposed, consummated.
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RECAPITALIZATION AND CONVERSION OF GM CLASS H COMMON STOCK
The following discussion summarizes those U.S. federal income tax
considerations that materially affect General Motors and you as its
stockholders resulting from the recapitalization and conversion of each issued
and outstanding share of GM Class H Common Stock into one share of New GM Class
H Common Stock and the right to receive a distribution of Class A Common Stock
in accordance with the Distribution Ratio. For a description of the GM
Recapitalization, see "Description of the Hughes Transactions--GM Spin-Off
Merger Agreement--Recapitalization and Conversion of GM Class H Common Stock"
below.
The GM Spin-Off Merger is conditioned on the receipt by General Motors of an
opinion of GM's outside tax counsel, Kirkland & Ellis, to the effect that (1)
the recapitalization of GM Class H Common Stock into New GM Class H Common
Stock will be tax-free to General Motors and the GM Class H Common Stockholders
and (2) each of GM Class H Common Stock and New GM Class H Common Stock is
stock of General Motors for U.S. federal income tax purposes.
Based on the foregoing opinion of counsel, for U.S. federal income tax
purposes:
. no gain or loss will be recognized by General Motors upon the issuance of
New GM Class H Common Stock in exchange for GM Class H Common Stock as
part of the Hughes Defense Spin-Off;
. no gain or loss will be recognized by you (and no amount will otherwise be
included in your income) upon your receipt of the New GM Class H Common
Stock in exchange for GM Class H Common Stock as part of the Hughes
Defense Spin-Off;
. the tax basis in the New GM Class H Common Stock which you will receive
will be equal to your existing tax basis in your GM Class H Common Stock
immediately before the Hughes Defense Spin-Off, but reduced by the amount
of such existing tax basis which is allocated to the Class A Common Stock
which you receive in the Hughes Defense Spin-Off; and
. the holding period of the New GM Class H Common Stock which you will
receive will include the holding period of your GM Class H Common Stock.
General Motors expects to receive the GM Recapitalization Opinion from
Kirkland & Ellis described above prior to the GM Spin-Off Merger Effective
Time. Although the condition regarding receipt of the opinion described above
is waivable by General Motors, General Motors does not intend to waive such
condition to consummation of the GM Spin-Off Merger.
The GM Recapitalization Opinion is subject to certain limitations and
qualifications described therein, and will be based on current law and upon
certain factual representations and assumptions described therein, which if
incorrect or untrue in any material respect would jeopardize the conclusions
reached by counsel in the GM Recapitalization Opinion. We are not aware of any
facts or circumstances which would cause any such representations or
assumptions to be incorrect or untrue in any material respect. General Motors
has not requested a letter ruling from the IRS regarding the GM
Recapitalization. The GM Recapitalization Opinion neither binds the IRS or the
courts, nor precludes the IRS from adopting a contrary position. If the GM
Recapitalization were held to be taxable, both General Motors and holders of GM
Class H Common Stock potentially would incur material tax liabilities. In
addition, the IRS Ruling relating to the Hughes Defense Spin-Off is based in
part on a representation that the GM Recapitalization qualifies as a tax-free
reorganization for U.S. federal income tax purposes.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE RAYTHEON MERGER
GENERAL
The following discussion is a general summary of the material U.S. federal
income tax consequences of the Raytheon Merger. This discussion is based upon
the Code, regulations proposed or promulgated thereunder,
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judicial precedent relating thereto and current rulings and administrative
practice of the IRS, in each case as in effect as of the date of this document
and all of which are subject to change at any time, possibly with retroactive
effect. Any such change could alter the tax consequences to General Motors,
Hughes Defense or you as a stockholder of these corporations as described
directly below. We assume for purposes of this discussion that the Class A
Common Stock to be distributed to you in the Hughes Defense Spin-Off will be
held by you as a capital asset on the date of the Raytheon Merger. This
discussion does not address all aspects of U.S. federal income taxation that
might be relevant to you in light of your status or personal investment
circumstances; nor does it discuss the consequences to those of you who are
subject to special treatment under the U.S. federal income tax laws, such as
non-U.S. persons, dealers in securities, regulated investment companies, life
insurance companies, other financial institutions, tax-exempt organizations,
pass-through entities, or taxpayers who will hold Class A Common Stock as part
of a "straddle," "hedge" or "conversion transaction" or who have a "functional
currency" other than the U.S. dollar. In addition, this discussion does not
address the tax consequences to holders of options in respect of GM Class H
Common Stock or other persons who have received their GM common stock as
compensation.
YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO
YOU OF THE RAYTHEON MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF U.S.
FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX LAWS.
We intend that the Raytheon Merger qualify as a reorganization under Section
368(a) of the Code. It is a condition to Hughes Defense's obligation to
consummate the Raytheon Merger that Hughes Defense receive an opinion from its
outside tax counsel, Weil, Gotshal & Manges LLP, to the effect that the
Raytheon Merger will
be treated as a reorganization within the meaning of Section 368(a) of the
Code. It is a condition to Raytheon's obligation to consummate the Raytheon
Merger that Raytheon receive an opinion from its outside tax counsel, Wachtell,
Lipton, Rosen & Katz, to the same effect.
Based on the foregoing opinion of counsel to Hughes Defense, for U.S. federal
income tax purposes:
. no gain or loss will be recognized by Hughes Defense or Raytheon as a
result of the Raytheon Merger;
. no gain or loss will be recognized by you (and no amount will otherwise be
included in your income) as a result of the Raytheon Merger (other than
with respect to cash received instead of fractional shares of Class A
Common Stock, as discussed below); and
. neither the tax basis nor the holding period of your Class A Common Stock
will be affected as a result of the Raytheon Merger.
In rendering the Raytheon Merger Opinions, counsel to each of Hughes Defense
and Raytheon will rely upon certain assumptions and certain representations
made by Hughes Defense and Raytheon, and such opinions are subject to certain
limitations and qualifications set forth therein. We are not aware of any facts
or circumstances which would cause any such representations or assumptions to
be incorrect or untrue in any material respect. The Raytheon Merger Opinions
neither bind the IRS or the courts, nor preclude the IRS from adopting a
contrary position. If the Raytheon Merger were held to be taxable, Raytheon,
its stockholders and Hughes Defense potentially would incur material tax
liabilities. In addition, the IRS Ruling relating to the Hughes Defense Spin-
Off is based in part on a representation that the Raytheon Merger qualifies as
a tax-free reorganization for U.S. federal income tax purposes.
Hughes Defense and Raytheon expect to receive their respective Raytheon
Merger Opinions as described above prior to the Raytheon Merger Effective Time.
Although the Hughes Defense condition regarding receipt of its Raytheon Merger
Opinion above is waivable by Hughes Defense, Hughes Defense does not currently
intend to waive such condition to consummation of the Raytheon Merger.
RECEIPT OF CASH IN LIEU OF FRACTIONAL SHARES
Fractional shares of Class A Common Stock will be distributed to GM's common
stockholders in the Hughes Defense Spin-Off. However, all fractional shares so
distributed will be converted into an equivalent number of fractional shares of
Class B Common Stock in the Raytheon Merger, and these fractional shares will
then be aggregated and sold by the Raytheon Merger Exchange Agent and the
proceeds will be distributed to the owners of such fractional shares.
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Cash received by a holder of GM common stock in lieu of a fractional share
interest will be treated as having been received in exchange for such
fractional share interest, and gain or loss will be recognized for U.S. federal
income tax purposes. This gain or loss will be measured by the difference
between the amount of cash received and the portion of such GM common
stockholder's tax basis allocable to such fractional share interest. Such gain
or loss will generally be treated as capital gain or loss. For taxpayers who
are individuals, if their fractional share interest has a holding period for
U.S. federal income tax purposes of more than one year but
not more than 18 months, any gain will generally be subject to a maximum rate
of 28%; if their interest has a holding period of more than 18 months, any gain
will generally be subject to a maximum rate of 20%. In general, a person's
holding period for a fractional share interest will include the period during
which such person held the GM common stock with respect to which the
distribution of such fractional share interest was received.
Under the Code, as a holder of fractional share interests in Class A Common
Stock you may be subject, under certain circumstances, to backup withholding at
a 31% rate with respect to your fractional share interests unless you provide
proof of an applicable exemption or a correct taxpayer identification number,
and otherwise comply with applicable requirements of the backup withholding
rules. Any amounts withheld under the backup withholding rules are not an
additional tax and may be refunded or credited against your U.S. federal income
tax liability, provided you furnish the required information to the IRS.
STOCKHOLDER LITIGATION RELATING TO THE HUGHES TRANSACTIONS
After our announcement of the Hughes Transactions on January 16, 1997, the
following nine lawsuits were filed in Delaware Chancery Court: Levine v.
General Motors Corporation, et al.; Patinkin v. General Motors Corporation, et
al.; Rosenwald v. General Motors Corporation, et al.; Verkouteren v. General
Motors Corporation, et al.; Whited et al. v. General Motors Corporation, et
al.; Strauss v. General Motors Corporation, et al.; Andrew Carlucci, I.R.A. v.
General Motors Corporation, et al.; Mantel v. General Motors Corporation, et
al.; and John P. McCarthy Profit Sharing Plan v. General Motors Corporation, et
al. These suits were filed in February and March 1997. All of these lawsuits
have been consolidated. Each suit was denominated as a class action and was
purportedly brought on behalf of specified holders of GM Class H Common Stock
against the defendants, General Motors and its directors. The complaints made
essentially the same allegations, namely, that the defendants have breached and
are continuing to breach their fiduciary and alleged contractual duties to
specified holders of GM Class H Common Stock in connection with the Hughes
Transactions.
On October 24, 1997, plaintiffs in the consolidated actions filed a
consolidated amended complaint, which asserts three claims against General
Motors and its directors. The first claim alleges that General Motors is
breaching contractual obligations to GM Class H Common Stockholders by
effecting a disposition of the defense electronics business of Hughes
Electronics without providing for a recapitalization of the GM Class H Common
Stock into GM $1 2/3 Common Stock at a 120% exchange ratio, as currently
provided for under certain circumstances in the GM Certificate of
Incorporation. Plaintiffs contend that any amendment of the GM Certificate of
Incorporation as part of the Hughes Transactions would be invalid because
stockholders are being coerced into approving such a change. Plaintiffs' second
claim alleges that GM's directors have breached their fiduciary duties (1) by
failing to act in an informed manner and (2) by failing to act independently to
protect the interests of both classes of GM common stockholders. In particular,
this claim alleges that no processes were employed to ensure that the interests
of GM Class H Common Stockholders were adequately represented in connection
with the various aspects of the Hughes Transactions. Plaintiffs' third claim is
that GM's directors have breached their duty of candor by using false and
misleading solicitation materials to obtain approval of the Hughes
Transactions. This claim, which is based on a preliminary draft of this
document filed with the SEC, alleges, among other things, that this document
fails to disclose the consideration that GM Class H Common Stockholders would
have received in the event the Hughes Transactions triggered the provision for
nondiscretionary recapitalization of GM Class H Common Stock into GM $1 2/3
Common Stock at a 120% exchange ratio, misstates that there is substantial
uncertainty regarding application of this provision to the Hughes Transactions
and misleadingly portrays the Hughes Transactions as being fair to GM Class H
Common Stockholders.
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The consolidated amended complaint alleges that GM Class H Common
Stockholders will be irreparably damaged if the Hughes Transactions are
consummated as currently structured because they will lose their alleged right
to receive a 20% premium in the event of a disposition of Hughes Aircraft.
Plaintiffs seek, among other things, an injunction against the consummation of
the Hughes Transactions, an order requiring defendants to implement certain
procedures designed to protect the interests of GM Class H Common Stockholders,
and, in the event the transaction closes, rescission and/or compensatory
damages against the defendants. We intend to defend against this suit
vigorously.
Additional suits may be filed after the date of this document.
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DESCRIPTION OF THE HUGHES TRANSACTIONS
GENERAL
You are being asked to approve the Hughes Transactions. There are two
principal steps to the Hughes Transactions: the Hughes Reorganization and the
GM Spin-Off Merger. Each of these principal steps is described below.
If approved by GM's common stockholders and completed, the Hughes
Transactions will have the following principal effects:
. Hughes Defense will be spun off in its entirety to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders and it then will merge
with Raytheon.
. Delco will be transferred from Hughes Electronics to General Motors such
that the tracking stock interest in the earnings of Delco currently held by
GM Class H Common Stockholders will be reallocated to GM $1 2/3 Common
Stockholders and the operations of Delco can be more fully integrated with
those of Delphi.
. GM Class H Common Stock will be recapitalized and converted into New GM
Class H Common Stock, whose earnings pool for dividend purposes will track
the financial performance of New Hughes Electronics.
. Hughes Telecom will receive up to $4.0 billion of the proceeds of debt of
Hughes Defense outstanding at the time of the Hughes Defense Spin-Off,
which Hughes Telecom will use to fund its capital needs. Any proceeds in
excess of $4.0 billion will be made available to General Motors. The
obligation to repay this debt will remain with Hughes Defense.
ORGANIZATIONAL CHARTS BEFORE AND AFTER THE HUGHES TRANSACTIONS AND THE
RAYTHEON MERGER
The following charts present in simplified form the organizational structure
of General Motors and Hughes Electronics before the Hughes Transactions
(including the Hughes Reorganization) and after the completion of the Hughes
Transactions and the Raytheon Merger. The transactions are described in greater
detail after the charts.
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BEFORE THE HUGHES TRANSACTIONS
LOGO
r
AFTER THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
LOGO
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HUGHES REORGANIZATION
The Hughes Reorganization includes a number of preliminary transactions which
are necessary to prepare Hughes Defense to be spun off to GM's common
stockholders and to separate the businesses of Hughes Defense, Delco and Hughes
Telecom. The Hughes Reorganization will be effected largely pursuant to
transactions described in the Master Separation Agreement and the agreements
contemplated thereby. See "Separation and Transition Arrangements" below.
The following is a description of certain significant aspects of the Hughes
Reorganization:
. Certain assets and liabilities will be transferred among Hughes Defense,
Delco and Hughes Telecom and their respective subsidiaries so that each
will have the appropriate assets and liabilities for its business.
. Hughes Telecom will receive the proceeds of new debt (up to $4.0 billion)
incurred by Hughes Defense with third party lenders immediately prior to
the Hughes Defense Spin-Off as contemplated by the Raytheon Merger
Agreement. To the extent such proceeds exceed $4.0 billion, the excess
amount will be made available to General Motors through the repayment of
intercompany loans made by Delco to Hughes Defense. Since Delco will be
transferred to General Motors as part of the Hughes Transactions, such
funds will effectively be made available to General Motors. See
"Description of the Raytheon Merger--Raytheon Merger Agreement--Certain
Covenants--Indebtedness" below.
. Hughes Electronics will be merged with General Motors. As a result, both
Hughes Defense (i.e., HE Holdings) and Delco will be direct wholly owned
subsidiaries of General Motors.
. The subsidiary of Hughes Defense (i.e., HE Holdings) which principally
operates the defense electronics business, will be merged with Hughes
Defense.
. Hughes Defense (i.e., HE Holdings) will distribute 100% of the stock of
Hughes Telecom to General Motors in a tax-free transaction. This
distribution of Hughes Telecom stock constitutes the Hughes Telecom Spin-
Off. In connection with the Hughes Telecom Spin-Off, Hughes Telecom will be
renamed "Hughes Electronics Corporation."
After the completion of these components of the Hughes Reorganization, each
of Hughes Defense, Delco and Hughes Telecom will be a direct wholly owned
subsidiary of General Motors. Hughes Defense will hold all of the assets and
liabilities of the defense electronics business of Hughes Electronics, Delco
will continue to hold all of the assets and liabilities of the automotive
electronics business of Hughes Electronics and Hughes Telecom will hold all of
the assets and liabilities of the telecommunications and space business of
Hughes Electronics.
As part of the Hughes Reorganization, Hughes Defense will recapitalize its
capital stock so as to authorize Class A Common Stock, Class B Common Stock and
preferred stock, which will be New Raytheon Preferred Stock upon consummation
of the Raytheon Merger. These three classes of stock will represent all of the
authorized capital stock of New Raytheon upon consummation of the Raytheon
Merger. The Class A Common Stock (all of which will be held by General Motors
after the transactions described above) will be distributed by General Motors
to its common stockholders in the Hughes Defense Spin-Off. Immediately
following the Hughes Defense Spin-Off, Hughes Defense and Raytheon will merge
and Class B Common Stock will be issued to Raytheon's common stockholders in
the Raytheon Merger. See "Description of the Raytheon Merger" below. For a
description of Class A Common Stock and Class B Common Stock, see "New Raytheon
Capital Stock" in Chapter 6.
Prior to the GM Spin-Off Merger, Hughes Defense will adopt a shareholder
rights plan to be effective immediately prior to the GM Spin-Off Merger
Effective Time, which will become the shareholder rights plan of New Raytheon
upon the consummation of the Raytheon Merger. See "New Raytheon Capital Stock--
New Raytheon Rights Agreement" in Chapter 6. Each share of Class A Common Stock
distributed in the GM Spin-Off Merger, and each share of Class B Common Stock
issued in the Raytheon Merger, will have a share purchase right attached to
such share.
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GM SPIN-OFF MERGER
Subject to the terms and conditions of the GM Spin-Off Merger Agreement,
Merger Sub, a wholly owned subsidiary of General Motors formed in order to
effect the GM Spin-Off Merger, will merge with General Motors. General Motors
will be the surviving corporation of the merger. Pursuant to the GM Spin-Off
Merger, among other things, the following will occur:
. each outstanding share of GM Class H Common Stock will be recapitalized and
converted automatically into one share of New GM Class H Common Stock and
each GM Class H Common Stockholder will receive a distribution of Class A
Common Stock in accordance with the Distribution Ratio;
. each outstanding share of GM $1 2/3 Common Stock will remain outstanding
and each GM $1 2/3 Common Stockholder will receive a distribution of Class
A Common Stock in accordance with the Distribution Ratio; and
. the GM Certificate of Incorporation will be amended to delete provisions
relating to the GM Class H Common Stock and to add provisions setting forth
the terms of the New GM Class H Common Stock.
For additional information regarding the Distribution Ratio, including the
methodology used to determine the Distribution Ratio formula and the Net
Transaction Effect, see "Special Factors--The Distribution Ratio" and "--
Background of the Hughes Transactions--Development of the Hughes Transactions
and the Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting"
and "--October 6, 1997 GM Board Meeting" above. For information regarding the
provisions of the New GM Class H Common Stock, see "New GM Class H Common
Stock" in Chapter 6.
Following the Hughes Reorganization and the GM Spin-Off Merger, Hughes
Defense will be an independent, publicly held company, comprising the defense
electronics business of Hughes Electronics. Immediately thereafter, Hughes
Defense and Raytheon will merge. See "Description of the Raytheon Merger"
below.
GM SPIN-OFF MERGER AGREEMENT
INTRODUCTION
As described above, several components of the Hughes Transactions will be
effected pursuant to the GM Spin-Off Merger. The GM Spin-Off Merger will be
consummated pursuant to the GM Spin-Off Merger Agreement. The following is a
summary description of the principal provisions of the GM Spin-Off Merger
Agreement.
THE DESCRIPTION OF THE GM SPIN-OFF MERGER AGREEMENT SET FORTH BELOW, WHICH
SUMMARIZES THE MATERIAL TERMS OF THE AGREEMENT, DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE GM SPIN-OFF MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS DOCUMENT AND IS
INCORPORATED INTO THIS DOCUMENT BY REFERENCE. WE THEREFORE URGE YOU TO READ THE
GM SPIN-OFF MERGER AGREEMENT, INCLUDING EXHIBIT A THERETO, CAREFULLY.
EFFECTIVENESS OF THE GM SPIN-OFF MERGER
Promptly following the satisfaction or waiver of the conditions to the GM
Spin-Off Merger set forth in the GM Spin-Off Merger Agreement, the parties will
file a certificate of merger with the Secretary of State of the State of
Delaware, at which time (or at such later time as set forth in the certificate
of merger) the GM Spin-Off Merger will become effective. At the GM Spin-Off
Merger Effective Time, Merger Sub will merge with General Motors and the
separate corporate existence of Merger Sub will cease. General Motors will be
the surviving corporation of the GM Spin-Off Merger. The Raytheon Merger will
be completed immediately after the GM Spin-Off Merger Effective Time.
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AMENDMENT OF THE GM CERTIFICATE OF INCORPORATION
In the GM Spin-Off Merger, Article Fourth of the GM Certificate of
Incorporation will be amended to:
. Delete the provisions which relate to the GM Class H Common Stock; and
. Add provisions which relate to the New GM Class H Common Stock.
As part of the GM Spin-Off Merger, the GM Certificate of Incorporation will be
amended so that the Hughes Transactions will not result in a recapitalization
of GM Class H Common Stock into GM $1 2/3 Common Stock at a 120% exchange
ratio. As a result, by consenting to the Hughes Transactions, you will in
effect be waiving application of such recapitalization to the Hughes
Transactions. For additional information regarding the GM Class H Common Stock
and the New GM Class H Common Stock, see "GM Class H Common Stock" and "New GM
Class H Common Stock" in Chapter 6.
The GM Certificate of Incorporation, as so amended, will be the certificate
of incorporation of General Motors as the surviving corporation of the GM Spin-
Off Merger. Article Fourth of the GM Certificate of Incorporation, in the form
proposed to be amended, is included in Appendix A to this document (as Exhibit
A to the GM Spin-Off Merger Agreement). The GM By-Laws will be unchanged except
for necessary amendments to provisions regarding GM Class H Common Stock and
New GM Class H Common Stock (including with respect to uncertificated shares).
The directors and officers of General Motors will be the directors and officers
of General Motors as the surviving corporation of the GM Spin-Off Merger.
RECAPITALIZATION AND CONVERSION OF GM CLASS H COMMON STOCK
At the GM Spin-Off Merger Effective Time, each issued and outstanding share
of GM Class H Common Stock will be recapitalized and converted into one share
of New GM Class H Common Stock and the right to receive a distribution of Class
A Common Stock in accordance with the Distribution Ratio. Accordingly,
immediately after the GM Spin-Off Merger Effective Time, (1) for purposes of
determining the record holders of New GM Class H Common Stock and Class A
Common Stock, the GM Class H Common Stockholders immediately prior to the GM
Spin-Off Merger Effective Time will be deemed to be holders of New GM Class H
Common Stock and Class A Common Stock and (2) subject to any transfer of such
stock (including pursuant to the provisions of the Raytheon Merger Agreement
regarding fractional shares), such holders will be entitled to receive all
dividends payable on, and exercise voting rights and all other rights and
privileges with respect to, New GM Class H Common Stock and Class A Common
Stock. Fractional shares of Class A Common Stock will be cashed out as
described below under "Description of the Raytheon Merger--Raytheon Merger
Agreement--Treatment of Fractional Shares of Class A Common Stock."
BankBoston, N.A., as the Hughes Transactions Exchange Agent, will mail, as
promptly as practicable following the GM Spin-Off Merger Effective Time to each
record holder of GM Class H Common Stock as of the GM Spin-Off Merger Effective
Time a letter of transmittal and related materials for use in surrendering the
certificates which formerly represented such holder's GM Class H Common Stock.
GM Class H Common Stockholders will be instructed to mail the certificates
formerly representing their GM Class H Common Stock to the Hughes Transactions
Exchange Agent accompanied by such letter of transmittal. However, since New GM
Class H Common Stock will be issued as uncertificated shares registered in
book-entry form through the Direct Registration System (unless you request
certificates representing your shares of New GM Class H Common Stock), no
certificates representing shares of New GM Class H Common Stock will be mailed
to you. As a result, instead of receiving share certificates, you will receive
account statements reflecting your respective ownership interest in shares of
New GM Class H Common Stock. Your book-entry shares will be held with the GM
Transfer Agent (BankBoston, N.A.), who will serve as the record keeper for all
New GM Class H Common Stockholders. However, any stockholder who wants to
receive a physical certificate evidencing his or her shares of New GM Class H
Common Stock will be able to obtain a certificate at no charge by contacting
the GM Transfer Agent.
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After the Hughes Transactions are completed, upon the surrender by GM Class H
Common Stockholders of their share certificates, the GM Transfer Agent will
mail account statements reflecting ownership of shares of New GM Class H Common
Stock as of the close of business on the day on which the GM Spin-Off Merger
Effective Time falls.
Pursuant to the Raytheon Merger Agreement, each GM Class H Common Stockholder
will also receive a check for cash instead of fractional shares of Class A
Common Stock received by such holder as a result of the GM Spin-Off Merger. GM
Class H Common Stockholders will not need any letter of transmittal in order to
receive their whole shares of Class A Common Stock. Since Class A Common Stock
will also be issued as uncertificated shares registered in book-entry form
through the Direct Registration System (unless you request certificates
representing your shares of Class A Common Stock), no certificates representing
whole shares of Class A Common Stock will be mailed to you. As a result,
instead of receiving share certificates you will receive account statements
reflecting your respective ownership interest in shares of Class A Common
Stock. Your book-entry shares will be held with New Raytheon's transfer agent
(State Street Bank and Trust Company), who will serve as the record keeper for
all Class A Common Stockholders. However, any stockholder who wants to receive
a physical certificate evidencing his or her shares of Class A Common Stock
will be able to obtain a certificate at no charge by contacting New Raytheon's
transfer agent.
After the Hughes Transactions and the Raytheon Merger are completed, New
Raytheon's transfer agent will begin mailing account statements reflecting
ownership of shares of Class A Common Stock as of the close of business on the
day on which the GM Spin-Off Merger Effective Time falls. Since the account
statement reflecting your Class A Common Stock ownership and your check for
cash instead of fractional shares of Class A Common Stock will be sent to you
at the same time, we currently estimate that it will take approximately three
weeks following the closing of the transactions to complete such mailing.
DO NOT RETURN THE CERTIFICATES REPRESENTING YOUR SHARES OF GM CLASS H COMMON
STOCK WITH THE CONSENT CARD ENCLOSED WITH THIS DOCUMENT.
DISTRIBUTION ON AND CONVERSION OF GM $1 2/3 COMMON STOCK
At the GM Spin-Off Merger Effective Time, each issued and outstanding share
of GM $1 2/3 Common Stock will be converted into one share of GM $1 2/3 Common
Stock of General Motors as the surviving corporation of the GM Spin-Off Merger
(such that GM $1 2/3 Common Stock effectively will remain outstanding after the
consummation of the GM Spin-Off Merger) and the right to receive a distribution
of Class A Common Stock in accordance with the Distribution Ratio. Accordingly,
immediately after the GM Spin-Off Merger Effective Time, (1) for purposes of
determining the record holders of Class A Common Stock, the GM $1 2/3 Common
Stockholders immediately prior to the GM Spin-Off Merger Effective Time will be
deemed to be Class A Common Stockholders and (2) subject to any transfer of
such stock (including pursuant to the provisions of the Raytheon Merger
Agreement regarding fractional shares), such holders will be entitled to
receive all dividends payable on, and exercise voting rights and all other
rights and privileges with respect to, Class A Common Stock. Fractional shares
of Class A Common Stock will be cashed out as described under "Description of
the Raytheon Merger--Raytheon Merger Agreement--Treatment of Fractional Shares
of Class A Common Stock."
Following the GM Spin-Off Merger Effective Time, each GM $1 2/3 Common
Stockholder will receive a check for cash instead of fractional shares of Class
A Common Stock received by such holder as a result of the GM Spin-Off Merger.
GM $1 2/3 Common Stockholders will not need any letter of transmittal to
receive their whole shares of Class A Common Stock. Since Class A Common Stock
will be registered in book-entry form through the Direct Registration System
(unless you request certificates representing your shares of Class A Common
Stock), no certificates representing whole shares of Class A Common Stock will
be mailed to you. Instead, you will receive an account statement through the
Direct Registration System as described above under "--Recapitalization and
Conversion of GM Class H Common Stock." Since the account statement reflecting
your Class A Common Stock ownership and your check for cash instead of
fractional shares of Class A Common Stock will be sent to you at the same time,
we currently estimate that it will take approximately three weeks following the
closing of the transactions to complete such mailing. The certificates
representing the shares of GM $1 2/3 Common Stock outstanding prior to the GM
Spin-Off Merger Effective Time will represent
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the shares of GM $1 2/3 Common Stock of General Motors as the surviving
corporation of the GM Spin-Off Merger after the GM Spin-Off Merger Effective
Time.
DO NOT RETURN THE CERTIFICATES REPRESENTING YOUR SHARES OF GM $1 2/3 COMMON
STOCK WITH THE CONSENT CARD ENCLOSED WITH THIS DOCUMENT. THOSE CERTIFICATES
WILL CONTINUE TO REPRESENT YOUR SHARES OF GM $1 2/3 COMMON STOCK AFTER THE
HUGHES TRANSACTIONS.
CONDITIONS TO CLOSING
Under the GM Spin-Off Merger Agreement, GM's obligation to consummate the GM
Spin-Off Merger is subject to, among other things, satisfaction or waiver of
the following conditions:
. The absence of a good faith determination by the GM Board, in the exercise
of its fiduciary obligations under applicable law, on the basis of oral or
written advice of outside counsel, that the consummation of the Hughes
Transactions would not be both in the best interests of General Motors and
its common stockholders and fair to the GM $1 2/3 Common Stockholders and
to the GM Class H Common Stockholders;
. The absence of any order, injunction, decree, statute, rule or regulation
preventing the consummation of any of the transactions contemplated by the
GM Spin-Off Merger Agreement;
. The Requisite Stockholder Approval of the Hughes Transactions shall have
been obtained;
. None of the Updated Merrill Lynch Fairness Opinion, the Updated Salomon
Brothers Fairness Opinion, the Goldman Sachs Fairness Opinion and the
written confirmation, dated as of November 7, 1997, of the Goldman Sachs
Fairness Opinion shall have been withdrawn, revoked or modified;
. The absence of any notification from the IRS that the IRS Ruling has been
withdrawn, invalidated or modified in any way and the absence of a good
faith determination by the GM Board, on the basis of advice of tax counsel,
that the representations and assumptions underlying the IRS Ruling are not
true and correct in all material respects;
. The absence of any notification from the IRS that the IRS Supplemental
Ruling has been withdrawn, invalidated or modified in any way and the
absence of a good faith determination by the GM Board, on the basis of
advice of tax counsel, that the representations and assumptions underlying
the IRS Supplemental Ruling are not true and correct in all material
respects;
. The receipt of an opinion from Kirkland & Ellis, outside tax counsel to
General Motors, to the effect that, on the basis of and subject to the
assumptions, representations, limitations and other matters set forth
therein, (1) the recapitalization of GM Class H Common Stock into New GM
Class H Common Stock will be tax-free to the holders thereof and to General
Motors and (2) each of GM Class H Common Stock and New GM Class H Common
Stock is stock of General Motors for U.S. federal income tax purposes;
. The consummation of the Hughes Reorganization;
. The execution and delivery of the Separation Agreements;
. The satisfaction or waiver of all conditions to the Raytheon Merger, other
than the consummation of the GM Spin-Off Merger, and the preparedness of
Raytheon and Hughes Defense to cause the consummation of the Raytheon
Merger immediately following the GM Spin-Off Merger Effective Time;
. The absence of any issuance of, or proceeding initiated for the purpose of
issuing, a stop order suspending the effectiveness of either of the
Registration Statements of which this document forms a part by the SEC; and
. The payment in full of the Intercompany Payment.
TERMINATION
General Motors may terminate the GM Spin-Off Merger Agreement for any of the
following reasons at any time prior to the GM Spin-Off Merger Effective Time:
. In the event that the GM Board determines in good faith, in the exercise of
its fiduciary obligations under applicable law, on the basis of oral or
written advice of outside counsel, (1) that the consummation of the Hughes
Transactions would not be both in the best interests of General Motors and
its common
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stockholders and fair to the GM $1 2/3 Common Stockholders and GM Class H
Common Stockholders and (2) that such determination could not reasonably be
avoided by adjusting the Distribution Ratio to enable (A) the GM Board to
conclude, as of the date of the adjustment of the Distribution Ratio, that
the Hughes Transactions, taken as a whole, are both in the best interests of
General Motors and its common stockholders and fair to the GM $1 2/3 Common
Stockholders and GM Class H Common Stockholders and (B) Merrill Lynch to
provide the Updated Merrill Lynch Fairness Opinion and Salomon Brothers to
provide the Updated Salomon Brothers Fairness Opinion;
. In the event that any of the Updated Merrill Lynch Fairness Opinion, the
Updated Salomon Brothers Fairness Opinion, the Goldman Sachs Fairness
Opinion or the written confirmation, dated as of November 7, 1997, of the
Goldman Sachs Fairness Opinion is withdrawn or revoked;
. In the event that General Motors has been notified by the IRS that the IRS
Ruling has been withdrawn, invalidated or modified in an adverse manner or
has been notified by the IRS or otherwise reasonably determines, on the
basis of advice of outside tax counsel, that the consummation of (1) either
of (A) the distribution of Class A Common Stock to GM's common stockholders
in the Hughes Defense Spin-Off or (B) the Hughes Telecom Spin-Off will not
constitute a tax-free distribution under applicable sections of the Code or
(2) the recapitalization of GM Class H Common Stock into New GM Class H
Common Stock will not be tax-free to General Motors and the holders
thereof;
. In the event that General Motors has been notified by the IRS that the IRS
Supplemental Ruling has been withdrawn, invalidated or modified or has been
notified by the IRS or otherwise reasonably determines, on the basis of
advice of outside tax counsel, that the consummation of the transactions
contemplated by the GM Spin-Off Merger Agreement will jeopardize the tax-
free status of the EDS Split-Off;
. In the event that the Hughes Transactions fail to receive the Requisite
Stockholder Approval at the time contemplated; or
. In the event that either the Raytheon Merger Agreement or the
Implementation Agreement is terminated in accordance with its terms.
General Motors has agreed that, unless the Implementation Agreement has been
terminated, it will not, and will not permit Merger Sub to, terminate (except
as may be permitted by the terms of the GM Spin-Off Merger Agreement) or waive
any condition of the GM Spin-Off Merger Agreement, without the prior written
consent of Raytheon.
AMENDMENT
Subject to certain provisions set forth in the Implementation Agreement, the
GM Spin-Off Merger Agreement may be amended at any time and from time to time
by General Motors and Merger Sub, provided that any such amendment made after
the Hughes Transactions have been approved by GM's common stockholders may not
alter or change (1) the amount or kind of shares to be distributed in respect
of, or the rights to be received in exchange for or on recapitalization and
conversion of, the GM Class H Common Stock, (2) the amount or kind of shares to
be distributed to, or the rights to be received by, the GM $1 2/3 Common
Stockholders, (3) any term of the certificate of incorporation of General
Motors as the surviving corporation of the GM Spin-Off Merger or (4) any of the
terms and conditions of the GM Spin-Off Merger Agreement if such alteration or
change would adversely affect the holders of any class or series of GM capital
stock.
Pursuant to the Implementation Agreement, General Motors has agreed to
consult with Raytheon regarding any changes or additions that are proposed to
be made to the GM Spin-Off Merger Agreement prior to the Raytheon Merger.
General Motors has also agreed that, except for any amendment to the GM Spin-
Off Merger Agreement to adjust the Distribution Ratio (as described above),
General Motors will not permit any such change or addition to be made prior to
the Raytheon Merger Effective Time to the GM Spin-Off Merger Agreement without
Raytheon's consent (which consent will not be unreasonably withheld or
delayed), unless such change or addition could not reasonably be foreseen (1)
to have an adverse effect on the business, assets, liabilities or financial
condition of Hughes Defense or, following the Raytheon Merger, New Raytheon or
(2) to delay materially the consummation of the Raytheon Merger on the terms
and subject to the conditions of the Implementation Agreement and the other
agreements relating to the Hughes Transactions and the Raytheon Merger.
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ALLOCATION OF HUGHES DEFENSE DEBT PROCEEDS; HUGHES TELECOM FUNDING
The GM Board has determined, based on the recommendations of GM management,
Hughes Electronics management and the Capital Stock Committee, that the
proceeds of the new debt to be incurred by Hughes Defense as contemplated by
the Raytheon Merger Agreement shall be made available to Hughes Telecom (up to
$4.0 billion) and the amount, if any, in excess of $4.0 billion shall be made
available to General Motors through the repayment of amounts owed to Delco,
which will be transferred to General Motors as part of the Hughes Transactions.
See "Description of the Raytheon Merger--Raytheon Merger Agreement--Certain
Covenants--Indebtedness" below. For a description of the new debt to be
incurred by Hughes Defense, see "New Debt of Hughes Defense To Be Assumed By
New Raytheon" in Chapter 5. We currently estimate that no debt proceeds will be
made available to General Motors unless the Raytheon stock price as applied
under the Raytheon Merger Agreement is $53.59 per share or less and that in no
event will more than $0.9 billion be made available to General Motors. See
"Special Factors--The Distribution Ratio" above. Any proceeds made available to
General Motors will be used for general working capital purposes.
Based on the Recent Raytheon Stock Price, $4.0 billion of the debt proceeds
will be made available to Hughes Telecom. Hughes Electronics management
currently expects to apply the debt proceeds to the repayment of approximately
$1.725 billion borrowed from General Motors in connection with the PanAmSat
Merger and the repayment of commercial paper borrowings of Hughes Electronics,
which are currently estimated to be approximately $1.3 billion at the time of
the closing of the Hughes Transactions. As a result, Hughes Telecom would have
approximately $1.0 billion of the debt proceeds remaining. Together with other
expected Hughes Telecom cash balances as of the closing of approximately $1.1
billion, New Hughes Electronics would thus have total cash of approximately
$2.1 billion at the time of the closing of the Hughes Transactions. Since its
only significant third party debt is expected to be $1.1 billion at PanAmSat,
Hughes Electronics management expects that net liquidity would be approximately
$1.0 billion. Hughes Electronics management expects that this initial cash and
ordinary course borrowing capacity will provide New Hughes Electronics with
adequate capital to execute its business plan. In this regard, Hughes
Electronics management has indicated that cash needs beyond those reflected in
the base business plan, such as for large strategic acquisitions, will require
access to additional funding. Merrill Lynch and Salomon Brothers, financial
advisors to General Motors, also reviewed the adequacy of the funding available
to Hughes Telecom and its ability to pursue its business plan. See "Special
Factors--Hughes Transactions Fairness Opinions: Merrill Lynch and Salomon
Brothers" above.
NO RECAPITALIZATION AT A 120% EXCHANGE RATIO
In considering the possibility of strategic transactions involving Hughes
Electronics and its three principal businesses, the GM Board was advised by GM
management that substantial dilution of the GM $1 2/3 Common Stock would occur
if any such transaction were to result in a recapitalization of GM Class H
Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio, as currently
provided for under certain circumstances in the GM Certificate of
Incorporation. This dilution would be expected to have an adverse effect not
only on the market value of the GM $1 2/3 Common Stock held by existing
stockholders but also on the market value of such stock to be issued to holders
of GM Class H Common Stock in any such recapitalization. Further, if a
transaction structured along the lines of the Hughes Transactions resulted in a
recapitalization, the GM Class H Common Stock would be eliminated and investors
in that stock would be deprived of an ongoing tracking stock interest in Hughes
Electronics' telecommunications and space business, which GM management and
Hughes Electronics management believe currently offers the greatest growth
potential of the three principal businesses of Hughes Electronics. The GM Board
considered its belief that most holders of GM Class H Common Stock had
purchased such stock in order to invest in a tracking stock related to the
businesses of Hughes Electronics and that such holders would not necessarily
desire to hold GM $1 2/3 Common Stock, so that the issuance of GM $1 2/3 Common
Stock to them in a recapitalization would frustrate this investment objective
and likely result in substantial trading activity that would exacerbate the
anticipated adverse effect on market value for all stockholders. In addition,
the telecommunications and space business would be subsumed within the broader
business operations of General Motors, with a resulting loss of the benefits of
a tracking stock structure related to that business, including the flexibility
of General Motors to finance the business through the issuance of equity
interests relating to Hughes Telecom without incurring corporate-level tax and
the ability of General Motors to use tracking stock as a focused security for
management compensation.
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GM management also noted certain practical difficulties related to the
mechanics of the recapitalization provisions in the context of a complex series
of transactions such as the Hughes Transactions. These difficulties included
the difficulty of achieving an appropriate valuation period for any such
exchange in the context of the negotiation, announcement and consummation of a
strategic transaction that would be subject to substantial uncertainties as to
the timing of disclosure, the possibility of market leaks and the likelihood of
consummation. Moreover, GM management and legal counsel advised the GM Board
that there was substantial uncertainty as to whether any likely strategic
transactions would in fact trigger the nondiscretionary recapitalization
provision of the GM Certificate of Incorporation, which is only effective upon
the consummation of a sale, transfer, assignment or other disposition of
substantially all of the business of "Hughes Aircraft Company" (i.e., HE
Holdings, the entity that currently owns both the defense electronics business
and the telecommunications and space business of Hughes Electronics) or the
sale or other disposition of substantially all of the other business of Hughes
Electronics (i.e., Delco's automotive electronics business) to a person, entity
or group of which General Motors is not a majority owner. Principally, it was
not clear whether a spin-off of Hughes Defense, while retaining Hughes Telecom,
constitutes a disposition of all or substantially all of "Hughes Aircraft
Company" as that term is used in the GM Certificate of Incorporation and,
accordingly, there was substantial uncertainty whether such a disposition would
trigger the recapitalization provision. In addition, the transfer of Delco, as
contemplated by the Hughes Transactions, was believed not to trigger the
recapitalization provision because it would constitute a transfer to General
Motors.
Based on the foregoing factors, and in light of the substantial benefits that
the contemplated strategic transactions would be expected to have for the
holders of both classes of GM common stock, the GM Board determined that it
would be in the best interests of all of GM's common stockholders to structure
a potential strategic transaction involving Hughes Electronics or any of its
three principal businesses so as not to result in a recapitalization of GM
Class H Common Stock into GM $1 2/3 Common Stock. Moreover, as discussed above,
GM management and legal counsel have advised the GM Board that there is
substantial uncertainty as to whether the Hughes Transactions would trigger the
nondiscretionary recapitalization provision in the GM Certificate of
Incorporation. Accordingly, as part of the GM Spin-Off Merger, the GM
Certificate of Incorporation will be amended to eliminate any possible
application of the recapitalization provision to the Hughes Transactions and,
by voting in favor of the Hughes Transactions, you will in effect be waiving
any application of the recapitalization provision to the Hughes Transactions.
If the consummation of the Hughes Transactions were to have resulted in such
a recapitalization, the relevant date for determining the exchange ratio would
have been January 16, 1997 and, based on the market prices of GM Class H Common
Stock and GM $1 2/3 Common Stock during the measurement period specified in the
GM Certificate of Incorporation applicable to that date, each share of GM Class
H Common Stock would have been recapitalized into approximately 1.23 shares of
GM $1 2/3 Common Stock upon the consummation of the Hughes Transactions.
However, in view of the dilution and other factors discussed above, there can
be no assurance as to what the market value of 1.23 shares of GM $1 2/3 Common
Stock issued in a recapitalization would have been on any date.
STOCKHOLDER APPROVAL OF THE HUGHES TRANSACTIONS
As described above, in order to consummate the Hughes Transactions, General
Motors must obtain the Requisite Stockholder Approval, which consists of the
consent of the holders of:
. a majority of the outstanding shares of GM $1 2/3 Common Stock, voting as a
separate class; and
. a majority of the outstanding shares of GM Class H Common Stock, voting as
a separate class.
The series of related transactions comprising the Hughes Transactions are all
part of a single plan. By approving and consenting to the Hughes Transactions,
you will be ratifying each of these transactions and adopting the GM Spin-Off
Merger Agreement. You are not being asked to approve the Raytheon Merger, which
has already been approved by Hughes Electronics (in its capacity as the sole
stockholder of Hughes Defense). See "Solicitation of Written Consent of GM's
Common Stockholders" in Chapter 7.
IF THE HUGHES TRANSACTIONS ARE NOT APPROVED BY GM'S COMMON STOCKHOLDERS, NONE
OF THE HUGHES TRANSACTIONS WILL BE CONSUMMATED AND THE RAYTHEON MERGER WILL NOT
BE COMPLETED.
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In certain circumstances, termination of the Raytheon Merger Agreement
requires Hughes Defense to make certain payments to Raytheon. See "Description
of the Raytheon Merger--Raytheon Merger Agreement--Effect of Termination;
Termination Fees" below.
THE GM BOARD HAS UNANIMOUSLY APPROVED THE HUGHES TRANSACTIONS AND HAS
DETERMINED THAT THE HUGHES TRANSACTIONS ARE IN THE BEST INTERESTS OF GENERAL
MOTORS AND IN YOUR BEST INTERESTS AS COMMON STOCKHOLDERS OF GENERAL MOTORS. THE
GM BOARD ALSO HAS DETERMINED THAT THE HUGHES TRANSACTIONS ARE FAIR TO BOTH
CLASSES OF GM'S COMMON STOCKHOLDERS. THE GM BOARD RECOMMENDS THAT YOU VOTE TO
APPROVE THE HUGHES TRANSACTIONS.
NO APPRAISAL RIGHTS
The Delaware General Corporation Law does not provide appraisal rights to
GM's common stockholders in connection with the Hughes Transactions. Appraisal
rights will not be available to GM Class H Common Stockholders because, among
other things, the GM Class H Common Stock is, and the New GM Class H Common
Stock and the Class A Common Stock will both be, listed on the NYSE. GM $1 2/3
Common Stockholders will not be entitled to appraisal rights because, among
other things, GM $1 2/3 Common Stock is listed on the NYSE and the holders
thereof will not exchange or otherwise relinquish any such stock pursuant to
the GM Spin-Off Merger. Similarly, no appraisal rights will be available to
GM's common stockholders in connection with the Raytheon Merger.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
For a description of certain U.S. federal income tax considerations relating
to certain of the Hughes Transactions and the Raytheon Merger, see "Special
Factors--Certain U.S. Federal Income Tax Considerations Relating to Certain of
the Hughes Transactions" and "--Certain U.S. Federal Income Tax Considerations
Relating to the Raytheon Merger" above.
CERTAIN LITIGATION
For a description of certain stockholder litigation relating to the Hughes
Transactions, see "Special Factors--Stockholder Litigation Relating to the
Hughes Transactions" above.
ACCOUNTING TREATMENT
General Motors will record the distribution of Hughes Defense to GM $1 2/3
Common Stockholders and GM Class H Common Stockholders at "fair value" and will
recognize and report a gain of approximately $3.9 to $4.5 billion as "Other
Income" (approximately $5.56 to $6.41 per share of earnings from continuing
operations attributable to GM $1 2/3 Common Stock) in GM's consolidated
financial statements so long as the market price of Raytheon Common Stock is
within a range of $44.42 and $54.29 per share. The Recent Raytheon Stock Price
($51.00 per share on November 7, 1997) would indicate a total transaction value
of approximately $9.5 billion, with a resulting gain of approximately $4.1
billion based on the net book value of Hughes Defense at September 30, 1997
(approximately $5.89 per share of earnings from continuing operations
attributable to GM $1 2/3 Common Stock). In addition, we currently anticipate
that there will be a reduction of GM stockholders' equity of between $0.6 and
$1.6 billion as a result of the Hughes Transactions (based on the Recent
Raytheon Stock Price and the net assets of Hughes Defense at September 30,
1997, the overall reduction in GM stockholders' equity is estimated to be
approximately $1.1 billion). The exact amount of such reduction will depend on
several variables, the most significant of which is the amount of debt incurred
by Hughes Defense prior to the Hughes Defense Spin-Off.
REGULATORY REQUIREMENTS
In order to consummate the Hughes Transactions and the Raytheon Merger, we
and Raytheon must make certain filings and receive certain authorizations from
various governmental agencies, both in the United States and internationally,
with respect to the proposed transactions. These filings, notifications and
authorizations relate primarily to competition and securities law issues.
The Raytheon Merger is subject to the requirements of the Hart-Scott-Rodino
Act, which provides that certain transactions may not be consummated until
required information and materials are furnished to the
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Antitrust Division of the U.S. Department of Justice (the "Antitrust Division")
and the U.S. Federal Trade Commission (the "FTC") and the requisite waiting
period has expired or is terminated. In this case, the Antitrust Division has
review responsibility. General Motors, Raytheon and the Antitrust Division have
reached an agreement that allows the Raytheon Merger to proceed under the Hart-
Scott-Rodino Act. The agreement provides (1) for the divestiture of two
specific businesses by New Raytheon and (2) for the creation of an information
firewall and certain management incentives in connection with pending bids on a
certain defense program to be made by Hughes Defense and by a joint venture
between Raytheon and another industry participant. General Motors and Raytheon
do not expect the implementation of this agreement to be materially adverse to
New Raytheon.
The agreement was filed, in the form of a proposed final judgment, with the
U.S. District Court for the District of Columbia on October 16, 1997. On
October 24, 1997, the court entered a stipulation and order requiring the
parties to abide by the provisions of the agreement pending expiration of the
60-day statutory notice and comment period and entry of final judgment, thereby
permitting the parties to consummate the Raytheon Merger.
Under the agreement, New Raytheon is obligated to sell assets relating to
Hughes Defense's second-generation ground vehicle electro-optical systems
business located in El Segundo, California and La Grange, Georgia. New Raytheon
also is obligated to sell assets relating to the Dallas-based infrared sensor
business that it acquired from Texas Instruments. Also, under the terms of a
Hold Separate and Partition Plan, New Raytheon must preserve the assets to be
divested as separate businesses until they are sold. Both businesses are to be
sold by April 1, 1998 (or, if later, five days after notice of the entry of the
Final Judgment by the court). The sale of both businesses must be approved by
the Antitrust Division and the Department of Defense.
The other principal element of the agreement requires Raytheon to establish
information "firewalls" and certain management incentives that help assure
effective competition between the Hughes Defense and Raytheon teams for the
Department of Defense's Follow-On-To-TOW missile program. This requirement is
designed to maintain competition between the two teams pending the award of
this program, which is expected to occur in the first half of 1998.
In addition, Raytheon has entered into a fixed price agreement with the U.S.
Air Force with respect to its purchase of AMRAAM missiles during each year of
the next four years.
We believe that no material U.S., state, foreign or other regulatory
requirements remain to be complied with, and no further material approvals
thereunder must be obtained, in order to consummate the Hughes Transactions or
the Raytheon Merger.
SALES TO GENERAL MOTORS
Approximately 32% of Hughes Electronics' 1996 total revenues were
attributable to sales to General Motors and its affiliates. Substantially all
of these sales were by Delco, with approximately 81% of Hughes Electronics'
1996 revenues in its automotive electronics business segment attributable to
sales to GM NAO, and approximately 9% attributable to sales to GM operations
outside of North America and affiliates of General Motors. See "Business of
Delco--Sales to GM NAO" and "--International and Other Sales" in Chapter 4.
Hughes Electronics and General Motors periodically provide research and
technological services to each other pursuant to contractual arrangements.
Approximately 3% of Hughes Defense's 1996 total revenues were attributable to
sales to General Motors and its affiliates. Among other things, Hughes Defense
provides advanced training system services to General Motors, both in Europe
and at several GM facilities in the United States. See "Business of Hughes
Defense--Information Systems--Hughes Training Inc." in Chapter 4. After the
Hughes Transactions, all new transactions between New Raytheon on the one hand
and General Motors and its affiliates on the other hand will be subject to GM's
worldwide purchasing process.
We do not currently expect sales by New Hughes Electronics to General Motors
and its affiliates following the consummation of the Hughes Transactions to be
significant. On a pro forma basis giving effect to the consummation of the
Hughes Transactions, less than 1% of Hughes Telecom's 1996 total revenues were
attributable to General Motors and its affiliates.
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DESCRIPTION OF THE RAYTHEON MERGER
GENERAL
OVERVIEW
Immediately after the completion of the Hughes Defense Spin-Off and the other
Hughes Transactions, Raytheon and Hughes Defense will consummate the Raytheon
Merger. Hughes Defense will be the surviving corporation of this merger and
will be renamed "Raytheon Company." Pursuant to the Raytheon Merger, among
other things,
. each whole share of Class A Common Stock distributed to GM common
stockholders in the Hughes Defense Spin-Off will remain outstanding and
will be unchanged;
. all fractional shares of Class A Common Stock distributed to GM's common
stockholders in the Hughes Defense Spin-Off will be converted into an
equivalent number of fractional shares of Class B Common Stock, which will
then be aggregated and sold by the Raytheon Merger Exchange Agent and the
proceeds distributed to the owners of such fractional shares on a pro rata
basis; and
. each outstanding share of Raytheon Common Stock will be converted into one
share of Class B Common Stock.
See "--Raytheon Merger Agreement" below.
Immediately following the Raytheon Merger, the Class A Common Stock will
represent approximately 30% of the common stock of New Raytheon and the Class B
Common Stock will represent approximately 70% of the common stock of New
Raytheon. The Class A Common Stockholders will be entitled, in the aggregate,
to 80.1% of the total voting power of New Raytheon for the election and removal
of directors. The Class B Common Stockholders will be entitled, in the
aggregate, to 19.9% of the total voting power of New Raytheon for the election
and removal of directors. With respect to all other matters, separate class
approvals of the Class A Common Stockholders and the Class B Common
Stockholders will be required. See "New Raytheon Capital Stock" in Chapter 6.
Class A Common Stock and Class B Common Stock will be identical in all other
respects. General Motors, Hughes Defense and Raytheon agreed to the terms of
the Class A Common Stock and the Class B Common Stock for the sole purpose of
permitting General Motors to obtain the IRS Ruling described herein with
respect to the U.S. federal income tax consequences of the Hughes Defense Spin-
Off and certain related transactions. The IRS Ruling is premised on the fact
that GM's common stockholders will receive in the Hughes Defense Spin-Off stock
possessing at least 80% of the voting power in the election of directors of New
Raytheon.
INDICATED VALUE OF THE HUGHES DEFENSE SPIN-OFF AND THE RAYTHEON MERGER TO
GENERAL MOTORS AND ITS COMMON STOCKHOLDERS
Under the terms of the Raytheon Merger Agreement, the Hughes Defense Spin-Off
and the Raytheon Merger have a total indicated value of approximately $9.5
billion to General Motors and its common stockholders based on the Recent
Raytheon Stock Price. We believe that this value represents a substantial
premium to the enterprise value of Hughes Defense under the current General
Motors and Hughes Electronics ownership structure. The spin-off and merger
transactions would have a total indicated value of $9.5 billion so long as the
market price of Raytheon Common Stock is within a collar ranging from $44.42 to
$54.29 per share. Raytheon stock prices above $54.29 per share would result in
transaction values higher than $9.5 billion, while Raytheon stock prices below
$44.42 per share would result in transaction values less than $9.5 billion.
This total transaction value consists of a combination of:
. the Class A Common Stock to be distributed to GM's common stockholders in
the Hughes Defense Spin-Off, which has an indicated value of approximately
$5.2 billion based on the Recent Raytheon Stock Price; and
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. the amount of debt (including new debt which Hughes Defense will incur
prior to the Hughes Defense Spin-Off) that Hughes Defense is permitted to
have immediately before the Raytheon Merger Effective Time, which is
approximately $4.3 billion based on the Recent Raytheon Stock Price. This
debt will remain with New Raytheon (and not constitute obligations of
General Motors, New Hughes Electronics or their respective subsidiaries)
after the Raytheon Merger.
Because the value of the shares of Class A Common Stock which you will
receive in the Hughes Defense Spin-Off will vary based on the market price of
Raytheon Common Stock, the total value of the Hughes Defense Spin-Off and the
Raytheon Merger at the Raytheon Merger Effective Time could be either higher or
lower than that indicated by the Recent Raytheon Stock Price.
The actual amount of new debt to be incurred by Hughes Defense prior to the
Hughes Defense Spin-Off will be determined by subtracting from $9.5 billion any
other outstanding debt of Hughes Defense as of the Raytheon Merger Effective
Time and also subtracting the product of (x) the total number of shares of
Class A Common Stock to be distributed to GM common stockholders (i.e.,
102,630,503 shares) and (y) the average closing market price of Raytheon Common
Stock during the 30-day period ending on the fifth day prior to consummation of
the Raytheon Merger, provided that in the event such average price is less than
$44.42, it will be deemed to be $44.42, and in the event such price is more
than $54.29, it will be deemed to be $54.29. This amount of new debt is
referred to in the Raytheon Merger Agreement as the "Intercompany Payment
Amount." Based on the Recent Raytheon Stock Price and our expectation that
Hughes Defense will not have any other significant debt as of the time it is
spun off, the Intercompany Payment Amount is currently expected to be $4.3
billion. To the extent that such amount exceeds $4.0 billion, the excess will
be made available to General Motors as described under "Special Factors--The
Distribution Ratio" above.
The table below shows the range of reported per share closing prices on the
NYSE Composite Tape for the Raytheon Common Stock for the periods indicated.
<TABLE>
<CAPTION>
MONTH HIGH LOW
----- ------ ------
<S> <C> <C>
1996
October................................................. $55.38 $45.88
November................................................ 52.38 49.00
December................................................ 51.50 46.25
1997
January................................................. 50.00 44.75
February................................................ 47.63 44.38
March................................................... 48.63 45.13
April................................................... 45.63 42.75
May..................................................... 47.75 45.25
June.................................................... 53.75 47.38
July.................................................... 56.25 52.56
August.................................................. 57.63 55.00
September............................................... 60.56 56.94
October................................................. 60.25 53.94
November (through November 7, 1997)..................... 53.44 51.00
</TABLE>
POST-CLOSING ADJUSTMENT
Within approximately four months after completion of the Raytheon Merger, New
Hughes Electronics will prepare and deliver to New Raytheon a final balance
sheet for Hughes Defense and its subsidiaries as of immediately prior to the
Raytheon Merger (but giving effect to the Hughes Defense Spin-Off) and a
related report from New Hughes Electronics' auditors. Within 30 business days
after its receipt of this final balance sheet and related auditors' report, New
Raytheon will notify New Hughes Electronics of any objections to the balance
sheet and report. New Hughes Electronics and New Raytheon will then work
together to try to reach
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agreement on any disputed matters and, if the parties cannot reach agreement,
all disputed matters will be submitted to arbitration before independent
auditors for final resolution.
To the extent that this final balance sheet reflects an adjusted net worth
(calculated as described in the Master Separation Agreement) that deviates more
than $50 million from a target amount, a payment will be made from New Hughes
Electronics to New Raytheon, or from New Raytheon to New Hughes Electronics, as
appropriate, to compensate for the amount of such difference (plus interest
thereon from the Raytheon Merger Effective Time to the date of payment). See
"Separation and Transition Arrangements--Summary of Master Separation
Agreement--Post-Closing Adjustment Between New Hughes Electronics and New
Raytheon" below.
THE DESCRIPTIONS OF THE RAYTHEON MERGER AGREEMENT AND THE IMPLEMENTATION
AGREEMENT SET FORTH BELOW, WHICH SUMMARIZE THE MATERIAL TERMS OF SUCH
AGREEMENTS, DO NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY
BY REFERENCE TO THE RAYTHEON MERGER AGREEMENT AND TO THE IMPLEMENTATION
AGREEMENT. COPIES OF THE IMPLEMENTATION AGREEMENT AND THE RAYTHEON MERGER
AGREEMENT ARE INCLUDED IN GM'S FORM 8-K DATED JANUARY 16, 1997, WHICH WE HAVE
INCORPORATED INTO THIS DOCUMENT BY REFERENCE. IN ADDITION, A COPY OF THE
RAYTHEON MERGER AGREEMENT HAS BEEN INCLUDED AS APPENDIX A TO THE RAYTHEON
SOLICITATION STATEMENT, WHICH WE HAVE ALSO INCORPORATED INTO THIS DOCUMENT BY
REFERENCE. SEE "WHERE YOU CAN FIND MORE INFORMATION" IN CHAPTER 7.
RAYTHEON MERGER AGREEMENT
GENERAL
The Raytheon Merger Agreement is an agreement between Hughes Defense and
Raytheon which provides for the merger of Raytheon with Hughes Defense (which
at the time will comprise the defense electronics business of Hughes
Electronics). Hughes Defense will be the surviving corporation of the Raytheon
Merger. As a result of the Raytheon Merger, the separate corporate existence of
Raytheon will cease and Hughes Defense, as the surviving corporation, will
continue its existence under the laws of the State of Delaware and its name
will be changed to "Raytheon Company." The Raytheon Merger will become
effective in accordance with a certificate of merger to be filed with the
Secretary of State of the State of Delaware. The closing under the Raytheon
Merger Agreement will occur as soon as practicable after the satisfaction or
waiver of all of the conditions specified in the Raytheon Merger Agreement,
including the consummation of the Hughes Transactions. We and Raytheon are
planning to cause the Raytheon Merger to occur immediately after the completion
of the GM Spin-Off Merger. Under the Raytheon Merger Agreement, the Hughes
Defense Certificate of Incorporation and the Hughes Defense By-Laws described
in this document will continue as the certificate of incorporation and the by-
laws of New Raytheon following the Raytheon Merger.
As described above, Hughes Defense will be the surviving corporation of the
Raytheon Merger. Since Hughes Defense, as the surviving corporation of the
Raytheon Merger, will be renamed "Raytheon Company" as part of the merger, we
sometimes refer in this document to Hughes Defense as "New Raytheon,"
particularly where such references relate to periods commencing after the
Raytheon Merger Effective Time. References to "Hughes Defense" in the
descriptions below of the Raytheon Merger Agreement, the Separation Agreements
and the arrangements contemplated by such agreements should be considered, as
appropriate, also to be references to "New Raytheon." Similarly, we sometimes
refer in this document to the "Hughes Defense Certificate of Incorporation" and
the "Hughes Defense By-Laws" as the "New Raytheon Certificate of Incorporation"
and the "New Raytheon By-Laws," respectively.
CONSIDERATION TO BE RECEIVED IN THE RAYTHEON MERGER
Under the Raytheon Merger Agreement, each whole share of Class A Common Stock
that is issued and outstanding immediately prior to the Raytheon Merger
Effective Time (which will be the shares distributed to GM's common
stockholders in the Hughes Defense Spin-Off) will remain outstanding and will
be unchanged
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
after the Raytheon Merger. Each fractional share of Class A Common Stock that
is issued and outstanding immediately prior to the Raytheon Merger Effective
Time will be converted into and represent an equivalent
number of fractional shares of Class B Common Stock, which will be sold by the
Raytheon Merger Exchange Agent as described below under "--Treatment of
Fractional Shares of Class A Common Stock." Similarly, the conversion of
fractional shares of Class A Common Stock into Class B Common Stock prior to
such shares being aggregated and sold as described above is intended to permit
such sales without diluting the voting power in the election of directors of
New Raytheon to be received by GM's common stockholders in the Hughes Defense
Spin-Off, which could have prevented General Motors from receiving the IRS
Ruling.
At the Raytheon Merger Effective Time, each issued and outstanding share of
Raytheon Common Stock (other than shares to be canceled as described below)
will be converted into and represent one share of Class B Common Stock. Each
share of Raytheon capital stock held in the treasury of Raytheon or owned by
any wholly owned subsidiary of Raytheon will be canceled and retired and no
payment will be made in respect thereof.
Each option to purchase Raytheon Common Stock outstanding under stock option
plans of Raytheon in effect at the Raytheon Merger Effective Time (each, a
"Raytheon Option") will be automatically converted, at the Raytheon Merger
Effective Time, into an option to purchase shares of Class B Common Stock (a
"New Raytheon Exchange Option"). Each New Raytheon Exchange Option will allow
the holder to purchase the same number of shares of Class B Common Stock at the
same exercise price as the corresponding Raytheon Option with respect to
Raytheon Common Stock, and with other terms and conditions that are the same as
the terms and conditions of such Raytheon Option immediately before the
Raytheon Merger Effective Time (except for any changes in vesting rights or
permitted time of exercise which result from the occurrence of the Raytheon
Merger). For information regarding the treatment of stock options in respect of
GM Class H Common Stock, see "Separation and Transition Arrangements--Summary
of Other Agreements Contemplated by the Master Separation Agreement--Stock
Options" below.
TREATMENT OF FRACTIONAL SHARES OF CLASS A COMMON STOCK
As described above, fractional shares of Class A Common Stock will be
converted in the Raytheon Merger into an equivalent number of shares of Class B
Common Stock. No fractional shares of Class B Common Stock will be distributed
to Class A Common Stockholders. Instead, the aggregate number of fractional
shares of Class B Common Stock (the "Excess Shares") will be sold by the
Raytheon Merger Exchange Agent following the Raytheon Merger Effective Time at
then prevailing prices on the NYSE. The sale of the Excess Shares will be in
round lots to the extent practicable. The Raytheon Merger Exchange Agent will
use all reasonable efforts to complete the sale of the Excess Shares as
promptly following the Raytheon Merger Effective Time as is practicable
consistent with obtaining the best execution of such sales in light of
prevailing market conditions. Until the net proceeds of such sale have been
distributed to the holders of such fractional interests in the Class B Common
Stock, the Raytheon Merger Exchange Agent will hold such proceeds in trust for
such holders. The portion of the proceeds of such sale of Excess Shares to
which each holder of such fractional interests in the Class B Common Stock is
entitled, as determined by the Raytheon Merger Exchange Agent, will then be
distributed, net of any required tax withholding, to such Class B Common
Stockholders. New Raytheon will pay all commissions, transfer taxes and other
out-of-pocket expenses incurred in connection with such sale of the Excess
Shares. For purposes of determining whether a Class A Common Stockholder
immediately prior to the Raytheon Merger Effective Time holds a fractional
share of Class A Common Stock, all shares of Class A Common Stock held by such
holder will be aggregated by the Raytheon Merger Exchange Agent to the extent
practicable.
BOARDS, COMMITTEES AND OFFICERS
The Raytheon Merger Agreement provides for the composition of the New
Raytheon Board, as well as the composition of various committees of the New
Raytheon Board and certain other committees. The Raytheon Merger Agreement also
provides that the officers of Raytheon immediately prior to the Raytheon Merger
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Effective Time will be the officers of New Raytheon immediately following the
Raytheon Merger Effective Time. See "New Raytheon Management--Directors and
Executive Officers" in Chapter 5.
CERTAIN COVENANTS
The Raytheon Merger Agreement includes certain provisions which govern the
manner in which Raytheon and Hughes Defense must conduct their respective
businesses between the date of the Raytheon Merger Agreement and the Raytheon
Merger Effective Time. The purpose of these provisions is to ensure that at the
Raytheon Merger Effective Time, each company represents approximately the same
assets, liabilities and businesses as existed when the Raytheon Merger
Agreement was executed.
Conduct of Raytheon's Operations. The Raytheon Merger Agreement provides that
until the Raytheon Merger Effective Time, Raytheon will conduct its business
and operations in the ordinary course except as expressly contemplated by the
Raytheon Merger Agreement and the transactions contemplated thereby, and will
use all commercially reasonable efforts to maintain and preserve its business
organization and its material rights and franchises and to retain the services
of its officers and key employees and maintain relationships with customers,
suppliers, lessees, licensees and other third parties so that their goodwill
and ongoing business will not be impaired in any material respect.
The Raytheon Merger Agreement also provides that, except in certain
circumstances, until the Raytheon Merger Effective Time, Raytheon will not,
without the prior written consent of Hughes Defense:
. do or effect any of the following actions with respect to its securities:
(1) adjust, split, combine, recapitalize or reclassify its capital stock,
(2) declare or pay any dividend (other than regular quarterly cash
dividends consistent as to time of payment and amount with the dividends
declared and paid during 1996) or distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for
any shares of its capital stock (except for limited purchases of shares of
Raytheon Common Stock by Raytheon in the open market), (3) grant any person
any right or option to acquire any shares of its capital stock other than
in the ordinary course of business, consistent with past practice pursuant
to existing option plans or the Raytheon Company Deferral Plan for
Directors, the aggregate amount of which will not exceed certain pre-
determined limits, (4) issue or sell or agree to issue or sell any shares
of its capital stock or any securities, instruments or obligations
convertible into or exchangeable or exercisable for any shares of its
capital stock or such securities except in certain limited circumstances,
or (5) enter into any agreement, understanding or arrangement with respect
to the sale or voting of Raytheon's capital stock;
. except as may be required by changes in applicable law or accounting
principles, change any method or principle of accounting in a manner that
is inconsistent with past practice;
. take any action that would reasonably be expected to result in its
representations and warranties contained in the Raytheon Merger Agreement
becoming false or inaccurate;
. take any action which could reasonably be expected to adversely affect or
delay the ability of any of the parties to the Raytheon Merger Agreement to
obtain any approval of any governmental authority required to consummate
the transactions contemplated by the Raytheon Merger Agreement; or
. permit or cause any subsidiary to do any of the foregoing or agree or
commit to do any of the foregoing or agree in writing or otherwise to take
any of the foregoing actions.
Conduct of Hughes Defense's Operations. The Raytheon Merger Agreement
provides that, except in certain circumstances, until the Raytheon Merger
Effective Time, Hughes Defense will conduct its business and operations in the
ordinary course, and will use all commercially reasonable efforts to maintain
and preserve its business organization and its material rights and franchises
and to retain the services of its officers and key employees and maintain
relationships with customers, suppliers, lessees, licensees and other third
parties to the end that their goodwill and ongoing business will not be
impaired in any material respect.
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The Raytheon Merger Agreement also provides that, except in certain
enumerated circumstances, until the Raytheon Merger Effective Time, Hughes
Defense will not, without the prior written consent of Raytheon:
. grant any person any right or option to acquire any shares of its capital
stock (other than granting certain options for the purchase of Class B
Common Stock to certain employees of Hughes Defense who would have been
eligible to receive options to purchase GM Class H Common Stock) or enter
into any agreement, understanding or arrangement with respect to the
purchase, sale or voting of its capital stock or issue any instrument
convertible into or exchangeable for such capital stock, or make, declare
or pay any dividend or distribution in respect of any of its capital stock
other than in cash;
. sell, transfer, lease, pledge, mortgage, encumber or otherwise dispose of
any material amount of its property or assets other than in the ordinary
course of business, consistent with past practice;
. make or propose any changes in its certificate of incorporation or bylaws;
. merge or consolidate with any other persons or persons or acquire assets or
capital stock of any other person or persons the value of which
individually or in the aggregate exceeds $100 million or enter into any
confidentiality agreement with any person with respect to any such
transaction;
. create any subsidiaries which are material to Hughes Defense and which are
not, directly or indirectly, wholly owned by Hughes Defense;
. enter into or modify any employment, severance, termination or similar
agreements or arrangements with, or grant any bonuses, salary increases,
severance or termination pay to, or otherwise increase the compensation or
benefits of, any officer, director, consultant or employee other than
increases in salary, compensation or benefits granted in the ordinary
course of business consistent (including as to the amount and timing
thereof) with past practice, except as may be required by applicable law or
a binding written contract in effect on the date of the Raytheon Merger
Agreement;
. except as may be required by changes in applicable law or accounting
principles, change any method or principle of accounting in a manner that
is inconsistent with past practice;
. take any action that would reasonably be expected to result in its
representations and warranties contained in the Raytheon Merger Agreement
becoming false or inaccurate;
. enter into or carry out any other transaction which is material to Hughes
Defense other than in the ordinary and usual course of business;
. take any action which could reasonably be expected to adversely affect or
delay the ability of any parties to the Raytheon Merger Agreement to obtain
any approval of any governmental authority required to consummate the
transaction contemplated by the Raytheon Merger Agreement;
. settle any actions, whether now pending or hereafter made or brought, on
terms which include a material limitation on the business or operations of
New Raytheon; or
. permit or cause any subsidiary to do any of the foregoing or agree or
commit to do any of the foregoing or agree in writing or otherwise to take
any of the foregoing actions.
Indebtedness. The Raytheon Merger Agreement also provides that as of or prior
to the Raytheon Merger Effective Time, Hughes Defense will incur indebtedness
for borrowed money in an amount equal to the Intercompany Payment Amount (as
defined below). For a description of the new debt to be incurred by Hughes
Defense, see "New Debt of Hughes Defense To Be Assumed By New Raytheon" in
Chapter 5. The proceeds of such indebtedness (up to $4.0 billion) will be made
available as capital to Hughes Telecom. The proceeds of such indebtedness, if
any, above $4.0 billion will be made available to General Motors through the
repayment of intercompany loans owing to Delco, which will be transferred to
General Motors as part of the Hughes Transactions, any such proceeds will be
available to General Motors. See "Description of the Hughes Transactions--
Allocation of Hughes Defense Debt Proceeds; Hughes Telecom Funding" above. The
Raytheon Merger Agreement uses the term "Intercompany Payment" to apply to
these applications of proceeds. We currently estimate that such proceeds will
exceed $4.0 billion only if the average closing price of Raytheon Common Stock
as described below is $53.59 or less.
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The "Intercompany Payment Amount" will be equal to $9.5 billion minus the
"Class A Common Stock Amount" (as defined below) and minus the principal amount
of all other indebtedness for borrowed money of Hughes Defense to be
outstanding at the Raytheon Merger Effective Time. The "Class A Common Stock
Amount" is equal to 102,630,503 (the fixed number of shares of Class A Common
Stock to be distributed to GM's common stockholders in the Hughes Defense Spin-
Off) multiplied by the average closing price of
Raytheon Common Stock on the NYSE during the 30-day period ending five days
prior to the Raytheon Merger Effective Time, provided, however, that in the
event such average price is greater than $54.29 such price will be deemed to be
$54.29, and in the event such average price is less than $44.42, such price
will be deemed to be $44.42. It is this covenant that gives rise to the $9.5
billion of indicated total value in the Hughes Defense Spin-Off and Raytheon
Merger to General Motors and its common stockholders, as described elsewhere in
this document. See "--General--Indicated Value of the Hughes Defense Spin-Off
and the Raytheon Merger to General Motors and Its Common Stockholders" above.
The Raytheon Merger Agreement requires that no interest in respect of the
indebtedness comprising the Intercompany Payment Amount be accrued and unpaid
at the Raytheon Merger Effective Time.
Other Actions; Notification of Certain Matters. The Raytheon Merger Agreement
provides that, among other things, (1) during the period from and after the
date of the Raytheon Merger Agreement, each of the parties will use all
commercially reasonable efforts to consummate the Raytheon Merger and the
transactions contemplated by the Raytheon Merger Agreement and to cause the
conditions to the Raytheon Merger for which they are responsible to be
satisfied as soon as practicable and (2) neither party nor its affiliates will
take any action that would cause the Raytheon Merger, the Hughes Defense Spin-
Off or the Hughes Telecom Spin-Off not to qualify for tax-free treatment under
the Code as contemplated by the parties.
The Raytheon Merger Agreement provides that Raytheon and Hughes Defense will
promptly notify the other party of (1) the occurrence or non-occurrence of any
event which would cause any representation or warranty made by it in the
Raytheon Merger Agreement to be untrue or inaccurate in any material respect at
or prior to the Raytheon Merger Effective Time and (2) any material failure by
it to comply with or satisfy any covenant, condition or agreement to be
compiled with or satisfied by it under the Raytheon Merger Agreement, provided,
however, that no such notification will limit or otherwise affect the remedies
of the parties available under the Raytheon Merger Agreement.
Competing Transactions. The Raytheon Merger Agreement provides that, during
its term, without the consent of the other party, neither Raytheon nor Hughes
Defense will, and will not authorize or permit any of its subsidiaries or any
of its subsidiaries' directors, officers, employees, agents or representatives,
directly or indirectly, to (1) solicit, initiate, knowingly encourage or
facilitate, or furnish or disclose non-public information in furtherance of,
any inquiries or the making of any proposal with respect to a Competing
Transaction (as defined below), (2) negotiate, explore or otherwise engage in
discussions with any person (other than the other party to the Raytheon Merger
Agreement or its respective directors, officers, employees, agents and
representatives or, with respect to Hughes Defense, its affiliates) with
respect to any Competing Transaction or (3) enter into any agreement,
arrangement or understanding therefor requiring it to abandon, terminate or
fail to consummate the Raytheon Merger. This prohibition does not apply (1) to
Hughes Defense with respect to Competing Transactions that do not include the
defense electronics business of Hughes Electronics or the consummation of which
would not otherwise result in the termination or material breach of any of the
Transaction Agreements, and (2) to Raytheon, with respect to compliance with
Rule 14e-2 under the Exchange Act with regard to a tender or exchange offer. In
addition, the prohibition does not apply, subject to the observance of certain
notice, confidentiality and other requirements, to certain negotiations and
discussions relating to any Competing Transaction (1) that is superior to the
transactions contemplated by the Raytheon Merger Agreement, (2) in which the
offeror has demonstrated that the consideration necessary for such Competing
Transaction is reasonably likely to be available, and (3) that Raytheon's board
of directors or Hughes Defense's board of directors, as the case may be,
concludes in good faith, on the basis of oral or written advice of outside
counsel, that such action is necessary for it to act in a manner consistent
with its fiduciary duties under applicable law.
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In the event that Raytheon's board of directors or Hughes Defense's board of
directors, as the case may be, will have concluded in good faith, after
considering applicable provisions of state law, and after seeking to make such
adjustments in the terms and conditions of the Raytheon Merger Agreement as
would enable such party to proceed with the transactions contemplated by the
Raytheon Merger Agreement, that it must accept such Competing Transaction in
order to comply with its fiduciary duties under applicable law, then Raytheon
or Hughes Defense, as the case may be, may terminate the Raytheon Merger
Agreement and pay to the other party: (1) the expenses incurred by such other
party and its affiliates in connection with pursuing the Raytheon Merger and
the transactions contemplated by the Raytheon Merger Agreement, which amount
will not exceed $20 million, and (2) a termination fee of $200 million.
"Competing Transaction" means any merger, consolidation or other business
combination involving such party, or any acquisition of any capital stock or
any material portion of the assets (except for acquisitions of assets in the
ordinary course of business consistent with past practice and except for
consummation of the Hughes Transactions) of such party, or any combination of
the foregoing.
CONDITIONS
Each party's obligation to effect the Raytheon Merger is subject to the
satisfaction or waiver of a number of conditions. Failure to satisfy or waive
any of these conditions could, therefore, result in the delay or non-
consummation of the Raytheon Merger.
Conditions of Each Party's Obligations to Consummate the Raytheon Merger. The
respective obligations of Raytheon and Hughes Defense to consummate the
Raytheon Merger are subject to fulfillment of the following conditions:
. no order, injunction or decree which prevents the consummation of the
Raytheon Merger will have been issued and remain in effect, and no statute,
rule or regulation will have been enacted by any governmental authority
which prevents the consummation of the Raytheon Merger;
. all required approvals of, or filings with, any governmental authority will
have been obtained or made, except where failure to do so would have no
material adverse effect;
. all required consents or approvals of all persons (other than governmental
authorities) will have been obtained and will be in full force and effect,
unless the failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a material adverse
effect;
. approval of Raytheon's stockholders;
. consummation of the Hughes Transactions;
. the Goldman Sachs Fairness Opinion will not have been withdrawn, revoked or
modified;
. the opinions of Bear Stearns and CSFB, each dated January 16, 1997
(respectively, the "Bear Stearns Fairness Opinion" and the "CSFB Fairness
Opinion"), to Raytheon's board of directors, in each case to the effect
that, on the basis of and subject to the assumptions, representations,
limitations and other matters set forth therein, the financial terms of the
Raytheon Merger are fair to the stockholders of Raytheon from a financial
point of view (with respect to Bear Stearns) and the Merger Consideration
(as defined in the CSFB Fairness Opinion) is fair to the stockholders of
Raytheon from a financial point of view, will not have been withdrawn,
revoked or modified;
. receipt by Raytheon and Hughes Defense respectively, of the tax opinions of
Wachtell, Lipton, Rosen & Katz, special counsel to Raytheon, and Weil,
Gotshal & Manges LLP, special counsel to Hughes Defense, in each case to
the effect that the Raytheon Merger will qualify as a reorganization within
the meaning of Section 368 of the Code; and
. receipt of all required state securities or blue sky permits or approvals.
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Conditions to the Obligations of Raytheon. Raytheon's obligations to
consummate the Raytheon Merger are also subject to the fulfillment or waiver of
the following conditions:
. certain representations and warranties of Hughes Defense being true and
correct on the date of the Raytheon Merger Agreement and on and as of the
closing date as though made on and as of the closing date and certain other
representations and warranties of Hughes Defense being true and correct on
the date of Raytheon Merger Agreement and on and as of the closing date as
though made on and as of the closing date, except for such inaccuracies
which would not reasonably be expected to have a material adverse effect on
Hughes Defense or New Raytheon;
. Hughes Defense having performed in all material respects each obligation
and agreement and having complied in all material respects with each
covenant to be performed and complied with by it under the Raytheon Merger
Agreement at or prior to the Raytheon Merger Effective Time; and
. except to the extent contemplated by the Raytheon Merger Agreement, there
will not have been any material adverse change in the assets, liabilities,
results of operations, business or financial condition of Hughes Defense
and its subsidiaries taken as a whole or any material adverse effect on the
ability of Hughes Defense to consummate the transactions contemplated by
the Raytheon Merger Agreement.
Conditions to the Obligations of Hughes Defense. Hughes Defense's obligations
to consummate the Raytheon Merger are also subject to the fulfillment or waiver
of the following conditions:
. certain representations and warranties of Raytheon being true and correct
on the date of the Raytheon Merger Agreement and on and as of the closing
date as though made on and as of the closing date and certain other
representations and warranties of Raytheon being true and correct on the
date of the Raytheon Merger Agreement and on and as of the closing date as
though made on and as of the closing date, except for such inaccuracies
which would not reasonably be expected to have a material adverse effect on
Raytheon or New Raytheon;
. Raytheon having performed in all material respects each obligation and
agreement and having complied in all material respects with each covenant
to be performed and complied with by it under the Raytheon Merger Agreement
at or prior to the Raytheon Merger Effective Time;
. except to the extent contemplated by the Raytheon Merger Agreement, there
will not have been any material adverse change in the assets, liabilities,
results of operations, business or financial condition of Raytheon to
consummate the transactions contemplated by the Raytheon Merger Agreement;
and
. the Intercompany Payment will have been duly made in full.
REPRESENTATIONS AND WARRANTIES; NO SURVIVAL
The Raytheon Merger Agreement contains various representations and warranties
of Raytheon and Hughes Defense. The representations and warranties of Raytheon
relate generally to: due corporate organization and qualification; corporate
authority; absence of violations of, among other things, certificates of
incorporation, by-laws, contracts and laws; required filings with and consents
and approvals of governmental authorities; board recommendation and stockholder
voting requirements; the capital structure of Raytheon; the subsidiaries and
other equity or ownership interests of Raytheon; documents filed with the SEC
by Raytheon, and the accuracy of certain information, including financial
statements, contained in such documents and in the Raytheon Registration
Statement, including the Raytheon Solicitation Statement, and this document;
financial statements of Raytheon; proper accounting controls; payments to
international sales representatives; absence of certain material events and
changes; compliance with applicable laws; real estate matters; litigation;
taxes; employee benefit plans; environmental matters; takeover statutes;
brokers and finders; employees; restrictive agreements; absence of shareholder
rights plans; and opinions of financial advisors.
The representations and warranties of Hughes Defense relate generally to: due
corporate organization and qualification; corporate authority; absence of
violations of, among other things, certificates of incorporation, by-laws,
contracts and laws; required filings with and consents and approvals of
governmental authorities; board
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and stockholder approvals; the subsidiaries and other equity or ownership
interests of Hughes Defense; information filed with the SEC as part of the
Raytheon Registration Statement, including the Raytheon Solicitation Statement,
and the accuracy of information contained in such documents; financial
statements with respect to Hughes Defense; proper accounting controls; payments
to international sales representatives; absence of certain material changes and
events; conduct of operations; absence of undisclosed liabilities; employees;
employee benefits and retirement plan assets; real estate matters;
environmental matters; restrictive agreements; compliance with applicable laws;
litigation; takeover statutes; brokers and finders; and opinions of financial
advisors.
The representations and warranties made in the Raytheon Merger Agreement by
Raytheon and Hughes Defense will not survive the Raytheon Merger Effective
Time.
WAIVER AND AMENDMENT
The Raytheon Merger Agreement provides that, subject to applicable law, the
parties may (1) extend the time for the performance of any of the obligations
or other acts of the other party, (2) waive any inaccuracies in the
representations and warranties contained in the Raytheon Merger Agreement or in
any document delivered
pursuant thereto or (3) waive compliance with any of the agreements or
conditions contained in the Raytheon Merger Agreement, by action of the
parties' respective boards of directors and written agreement signed by the
party agreeing to such extension or waiver.
In addition, subject to applicable law, the parties to the Raytheon Merger
Agreement may amend the Raytheon Merger Agreement by action of their respective
board of directors, at any time, provided that after adoption of the Raytheon
Merger Agreement by Raytheon's common stockholders or approval of the Hughes
Transactions by GM's common stockholders, amendments which by law require
further approval or authorization by the stockholders of Raytheon or General
Motors, as the case may be, may not be made without such further approval or
authorization. In either case, the Raytheon Merger Agreement may not be amended
except by a written instrument signed by each party.
TERMINATION
The Raytheon Merger Agreement may be terminated at any time prior to the
Raytheon Merger Effective Time by mutual written consent of Raytheon and Hughes
Defense or, by either Raytheon or Hughes Defense:
. if any permanent injunction or other order of a court or other competent
governmental authority preventing the consummation of the Raytheon Merger
or the Hughes Transactions has become final and nonappealable;
. in the event of a material breach by the other party of any representation
or warranty, or any of the covenants or agreements contained in the
Raytheon Merger Agreement which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach;
. if the Raytheon Merger is not consummated before December 31, 1997, unless
such date is extended by the board of directors of both Raytheon and Hughes
Defense (see the immediately following full paragraph), provided that the
terminating party (or its affiliates) has not failed to perform any
material covenant or obligation under the Raytheon Merger Agreement or
under the Implementation Agreement, which failure has been the cause of or
resulted in the failure of the Raytheon Merger to occur on or before such
date;
. if the requisite vote of Raytheon stockholders to approve the Raytheon
Merger and the transactions contemplated hereby is not obtained;
. if the approval by the GM $1 2/3 Common Stockholders and the GM Class H
Common Stockholders of the Hughes Transactions sought pursuant to this
document is not obtained;
. upon the occurrence of any event or effect not contemplated by the Raytheon
Merger Agreement that has resulted in a material adverse change after the
date of the Raytheon Merger Agreement in the assets,
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liabilities, results of operations, businesses or financial condition of
the other party and its subsidiaries, taken as a whole, or upon the
occurrence of an event which could reasonably be expected to result in such
a material adverse change with respect to such party or, after the Raytheon
Merger Effective Time, New Raytheon;
. if the board of directors of the other party or any committee of the board
of directors of the other party (1) withdraws or modifies in any adverse
manner its approval or recommendation of the Raytheon Merger Agreement or
the Raytheon Merger, (2) fails to reaffirm such approval or recommendation
upon such party's request, (3) approves or recommends any acquisition of
the other party or a material portion of its assets or any tender offer for
shares of its capital stock, in each case, other than by a party to the
Raytheon Merger Agreement or an affiliate thereof, or (4) resolves to take
any of the actions specified in clause (1) above;
. under the circumstances described above under "--Certain Covenants--
Competing Transactions"; or
. if the Implementation Agreement is terminated pursuant to its terms.
As described above under "Special Factors--Background of the Hughes
Transactions--Development of the Hughes Transactions and the Raytheon Merger--
Further Discussions With Raytheon," each of Raytheon and Hughes Defense has
agreed that, in the event that the Raytheon Merger is not consummated before
December 31, 1997, neither party will assert prior to January 16, 1998 its
right to terminate the Raytheon Merger Agreement pursuant to the terms of that
agreement because of the failure to have consummated the Raytheon Merger before
December 31, 1997.
In the event of a termination of the Raytheon Merger Agreement pursuant to
its terms, the Raytheon Merger Agreement (except with respect to payment of the
expenses of the other party and payment of a termination fee in certain
circumstances, as described below under "--Effect of Termination; Termination
Fees") will become void and have no effect, without any liability, however, on
the part of the parties or their directors, officers or stockholders. Nothing
in the Raytheon Merger Agreement relieves any party of liability for a willful
breach of any provisions of the Raytheon Merger Agreement.
EFFECT OF TERMINATION; TERMINATION FEES
Termination Fees Payable by Hughes Defense: The Raytheon Merger Agreement
obligates Hughes Defense to pay all Raytheon Expenses (as defined below) if the
Raytheon Merger Agreement is terminated in accordance with its terms in any of
the following circumstances:
. by Raytheon in response to any resolution or action by Hughes Defense's
board of directors (i) to withdraw, modify in any adverse manner or decline
to reaffirm upon request, its approval or recommendation of the Raytheon
Merger Agreement or the Raytheon Merger or (ii) to approve or recommend any
acquisition of Hughes Defense or a material portion of its assets by any
person other than Raytheon and its affiliates;
. by Hughes Defense if Hughes Defense's board of directors concludes that, as
a result of a Competing Transaction, such action is necessary in order for
it to comply with its fiduciary duties under applicable law as described
above;
. by either Raytheon or Hughes Defense if the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders fail to approve the Hughes
Transactions as contemplated in this document;
. by either Raytheon or Hughes Defense in the event that the Implementation
Agreement has been terminated for any of the following reasons:
(1) by General Motors in the event that the GM Board has determined in good
faith, in the exercise of its fiduciary obligations, under applicable
law, on the basis of advice of outside counsel, that it must revoke or
withdraw its recommendation in favor of the Hughes Transactions set
forth in this document and such conclusion cannot reasonably be avoided
by adjusting the Distribution Ratio;
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(2) by Raytheon in the event that the GM Board has made a determination
described in paragraph (1) above and has not terminated the Raytheon
Merger Agreement within 10 business days thereof;
(3) by Raytheon in the event that General Motors revokes, withdraws,
modifies in an adverse manner or fails to reaffirm upon request the
recommendation of the GM Board in favor of the Hughes Transactions set
forth in this document; or
(4) by either General Motors or Raytheon as a result of the termination of
the GM Spin-Off Merger Agreement as a result of: (A) a determination by
the GM Board (and such determination cannot reasonably be avoided by
adjusting the Distribution Ratio) that consummation of the Hughes
Transactions would not be both in the best interests of General Motors
and its common stockholders and fair to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders; (B) the Updated
Merrill Lynch Fairness Opinion, the Updated Salomon Brothers Fairness
Opinion or (other than in certain limited circumstances) the Goldman
Sachs Fairness Opinion or the written confirmation, dated as of November
7, 1997, of the Goldman Sachs Fairness Opinion being revoked or
withdrawn; or (C) the Hughes Transactions failing to receive the
requisite approval of GM stockholders; or
. by either Raytheon or Hughes Defense if the Raytheon Merger is not
consummated before December 31, 1997, or such later date as agreed by
Raytheon and Hughes Defense, and the failure to consummate the Raytheon
Merger is based on the failure of General Motors to consummate the GM Spin-
Off Merger because either (1) the Updated Merrill Lynch Fairness Opinion or
the Updated Salomon Brothers Fairness Opinion is withdrawn or revoked or
(2) the GM Board determines in good faith, in the exercise of its fiduciary
duties under applicable law, on the basis of the advice of outside counsel,
that consummation of the Hughes Transactions would not be in the best
interests of General Motors and its common stockholders and fair to the
holders of both classes of GM common stock.
Hughes Defense also will be obligated to pay Raytheon $200 million in the
event that the Raytheon Merger Agreement is terminated as described above and
either (1) prior to the time of such termination a Competing Transaction
involving Hughes Defense is commenced, publicly proposed, publicly disclosed or
communicated to Hughes Defense's board of directors or (2) at any time within
three months following such termination any agreement with respect to a
Competing Transaction involving the defense electronics business of Hughes
Electronics is entered into or any such Competing Transaction is consummated.
"Raytheon Expenses" means an amount in cash equal to the aggregate amount of
Raytheon's and its affiliates' actual documented out-of-pocket expenses
incurred in connection with pursuing the transactions contemplated by the
Raytheon Merger Agreement, including legal, accounting and investment banking
fees, in an aggregate amount not to exceed $20 million.
Termination Fees Payable by Raytheon. The Raytheon Merger Agreement obligates
Raytheon to pay all Hughes Defense Expenses (as defined below) if the Raytheon
Merger Agreement is terminated in accordance with its terms in the following
circumstances:
. by Hughes Defense (1) if the requisite vote of Raytheon stockholders to
approve the Raytheon Merger is not obtained; or (2) in response to any
resolution or action by Raytheon's board of directors to withdraw, modify
in any adverse manner or decline to reaffirm upon request, its approval or
recommendation of the Raytheon Merger Agreement or the Raytheon Merger or
to approve or recommend any acquisition of Raytheon or a material portion
of its assets by any person other than Hughes Defense and its affiliates;
. by Raytheon if (1) the requisite vote of Raytheon stockholders to approve
the Raytheon Merger is not obtained; or (2) Raytheon's board of directors
concludes that, as a result of a Competing Transaction, such action is
necessary in order for it to comply with its fiduciary duties under
applicable law as described above; or
. by either Raytheon or Hughes Defense if the Raytheon Merger shall not have
been consummated before December 31, 1997, or such later date as agreed by
Raytheon and Hughes Defense, and the failure to consummate the Raytheon
Merger because the Bear Stearns Fairness Opinion or the CSFB Fairness
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Opinion has been withdrawn or revoked when all other conditions to the
Raytheon Merger (other than the consummation of the Hughes Transactions)
have been satisfied or are capable of being satisfied if such withdrawal or
revocation of the Bear Stearns Fairness Opinion or the CSFB Fairness Opinion
does not result from a breach of the representations and warranties of
Hughes Defense set forth in the Raytheon Merger Agreement.
In addition, Raytheon will be obligated to pay Hughes Defense $200 million in
the event that the Raytheon Merger Agreement is terminated as described above
and either (1) prior to the time of such termination a Competing Transaction
involving Raytheon is commenced, publicly proposed, publicly disclosed or
communicated to Raytheon's board of directors, or (2) at any time within three
months following such termination any agreement with respect to a Competing
Transaction involving Raytheon is entered into or any such Competing
Transaction is consummated.
"Hughes Defense Expenses" means an amount in cash equal to the aggregate
amount of Hughes Defense's and its affiliates' actual documented out-of-pocket
expenses incurred in connection with pursuing the transactions contemplated by
the Raytheon Merger Agreement, including legal, accounting and investment
banking fees, in an aggregate amount not to exceed $20 million.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Raytheon Merger Agreement provides that from and after the Raytheon
Merger Effective Time, New Raytheon will indemnify, defend and hold harmless
each individual who was, at any time prior to the Raytheon Merger Effective
Time, an officer or director of Raytheon or Hughes Defense or any of their
respective subsidiaries (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts that are paid in
settlement with the approval of New Raytheon (which approval will not
be unreasonably withheld) arising out of or in connection with any claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of (1) the fact that such person is or was a
director or officer of Raytheon or Hughes Defense or their respective
subsidiaries, as the case may be, whether pertaining to any matter existing or
occurring at or prior to the Raytheon Merger Effective Time and whether
asserted or claimed prior to, or at or after, the Raytheon Merger Effective
Time and (2) the Raytheon Merger Agreement or the transactions contemplated
thereby, in each case to the full extent Raytheon or Hughes Defense, as the
case may be, would have been permitted under Delaware law and its certificate
of incorporation and bylaws to indemnify such person, and New Raytheon will pay
expenses reasonably incurred by an Indemnified Party in advance of the final
disposition of any such action or proceeding to such Indemnified Party to the
full extent permitted by law upon receipt of the undertaking contemplated by
Section 145(e) of the Delaware General Corporation Law.
Without limiting the generality of the foregoing, in the event any such
claim, action, suit, proceeding or investigation is brought against any
Indemnified Party (whether arising before or after the Raytheon Merger
Effective Time), after the Raytheon Merger Effective Time, New Raytheon (1)
will pay all reasonable fees and expenses of any counsel retained by any
Indemnified Parties promptly as statements therefor are received, and (2) will
use its commercially reasonable efforts to assist in the vigorous defense of
any such matter, provided that New Raytheon will not be liable for any
settlement of any claim effected without its written consent, which consent,
however, will not be unreasonably withheld. Pursuant to the terms of the
Raytheon Merger Agreement, any Indemnified Party wishing to claim
indemnification, upon learning of any such claim, action, suit, proceeding or
investigation, will notify New Raytheon (but the failure so to notify New
Raytheon will not relieve it from any liability which it may have except to the
extent such failure materially prejudices New Raytheon), and will deliver to
new Raytheon the undertaking, if any, contemplated by Section 145(e) of the
Delaware General Corporation Law. Under the terms of the Raytheon Merger
Agreement, the indemnification provisions are intended to be for the benefit
of, and will be enforceable by, each Indemnified Party, his or her heirs and
his or her legal representatives.
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IMPLEMENTATION AGREEMENT
GENERAL
The Implementation Agreement is an agreement between General Motors and
Raytheon, pursuant to which General Motors has agreed to take certain actions
to effect the Hughes Transactions.
PROPOSAL OF THE HUGHES TRANSACTIONS
The Implementation Agreement provides that, following the determination of
the Distribution Ratio and the execution of the GM Spin-Off Merger Agreement
and provided that none of the Original Merrill Lynch Fairness Opinion, the
Original Salomon Brothers Fairness Opinion and the Goldman Sachs Fairness
Opinion has been revoked, withdrawn or modified in a manner adverse to General
Motors or to the GM Board or to either class of GM's common stockholders,
General Motors will:
(1) take all commercially reasonable action in accordance with the federal
securities laws, the Delaware General Corporation Law, the GM
Certificate of Incorporation and the GM By-Laws necessary to present the
Hughes Transactions to GM's common stockholders for their consideration
and approval;
(2) include in this document the recommendation of the GM Board in favor of
the Hughes Transactions; and
(3) use all commercially reasonable efforts to solicit from GM's common
stockholders consents with respect to the Hughes Transactions.
Each of these obligations is subject to the fiduciary duties of the GM Board
under applicable law.
COVENANTS OF GENERAL MOTORS
No Solicitation. The Implementation Agreement provides that until the
Raytheon Merger Effective Time, without the prior written consent of Raytheon,
General Motors will not, and will not authorize or permit any of its
subsidiaries or any of its or its subsidiaries' directors, officers, employees,
agents or representatives to, directly or indirectly, solicit, initiate,
knowingly encourage or facilitate, or furnish or disclose non-public
information in furtherance of, any inquiries or the making of any proposal with
respect to any Competing Transaction (as defined in the Raytheon Merger
Agreement) relating to Hughes Defense or the consummation of which would
otherwise result in the termination or material breach of any of the
Transaction Agreements, or negotiate, explore or otherwise engage in
discussions with any person (other than Raytheon or its respective directors,
officers, employees, agents and representatives) with respect to any Competing
Transaction or enter into any agreement, arrangement or understanding therefor
requiring them to abandon, terminate or fail to consummate the Raytheon Merger.
The foregoing limitation, however, does not prohibit any of such parties from
taking any action to the extent (including compliance by General Motors with
the conditions set forth therein) that Hughes Defense could do so pursuant to
the comparable provision of the Raytheon Merger Agreement. See "--Raytheon
Merger Agreement--Certain Covenants--Competing Transactions" above.
Transaction Agreements. The Implementation Agreement also provides that:
. General Motors will enter into, and to cause its subsidiaries to enter
into, the Transaction Agreements, as and when contemplated by the
Implementation Agreement and the other Transaction Agreements;
. General Motors will consult with Raytheon regarding any changes, amendments
or additions that are proposed to be made to the Transaction Agreements
prior to the Raytheon Merger Effective Time, whether before or after any
such agreement is entered into by the respective parties to such agreement;
. General Motors will not permit (except for any amendment to the GM Spin-Off
Merger Agreement to adjust the Distribution Ratio under certain
circumstances) any change, amendment or addition to be made prior to the
Raytheon Merger Effective Time to the forms or terms of the Transaction
Agreements without Raytheon's consent (which consent shall not be
unreasonably withheld or delayed), unless such change,
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amendment or addition could not reasonably be foreseen (1) to have an
adverse effect on the business, assets, liabilities or financial condition
of Hughes Defense or (2) to delay materially the consummation of the
Raytheon Merger on the terms and subject to the conditions of the
Implementation Agreement and the other Transaction Agreements;
. General Motors will not, and will not permit any of its subsidiaries to,
terminate (except as may be permitted by the terms of any of the
Transaction Agreements) or waive any condition of the Transaction
Agreements, without the prior written consent of Raytheon, unless the
Implementation Agreement has been terminated; and
. General Motors will not permit Hughes Defense to make prior to the Raytheon
Merger Effective Time any formal election expressly referenced in the
Master Separation Agreement to be made by Hughes Defense unless such
election is acceptable to Raytheon.
CERTAIN OTHER COVENANTS
The Implementation Agreement further provides that, among other things, each
of General Motors and Raytheon will, and will cause its subsidiaries to, use
all commercially reasonable efforts to consummate the Hughes Transactions and
the Raytheon Merger.
The Implementation Agreement provides that General Motors and Raytheon will
promptly notify the other party of (1) the occurrence or non-occurrence of any
event which would cause any representation or warranty made by it contained in
the Implementation Agreement to be untrue or inaccurate in any material respect
at or prior to the Raytheon Merger Effective Time and (2) any material failure
by it to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it under the Implementation Agreement, provided,
however, that no such notification will limit or otherwise affect the remedies
of the parties available under the Implementation Agreement.
REPRESENTATIONS AND WARRANTIES; NO SURVIVAL
The Implementation Agreement contains various representations and warranties
of General Motors and Raytheon. The representations and warranties of General
Motors relate generally to: due corporate organization and qualification;
corporate authority; ownership of the capital stock of Hughes Defense; absence
of violations of, among other things, certificates of incorporation, by-laws,
contracts and laws; required filings with and consents and approvals of
governmental authorities; litigation; brokerage and finder's fees; stockholder
voting requirements; and the accuracy of certain information contained in the
Raytheon Registration Statement and the Raytheon Solicitation Statement.
The representations and warranties of Raytheon relate generally to: due
corporate organization and qualification; corporate authority; and the accuracy
of certain information contained in this document. Raytheon also confirms in
the Implementation Agreement all of the representations and warranties of
Raytheon set forth in the Raytheon Merger Agreement. See "--Raytheon Merger
Agreement--Representations and Warranties; No Survival" above.
The representations and warranties made in the Implementation Agreement by
General Motors and Raytheon will not survive the Raytheon Merger Effective
Time.
WAIVER AND AMENDMENT
The Implementation Agreement provides that, subject to applicable law, the
parties may (1) extend the time for the performance of any of the obligations
or other acts of the other party, (2) waive any inaccuracies in the
representations and warranties contained in the Implementation Agreement or in
any document delivered pursuant thereto and (3) waive compliance with any of
the agreements or conditions contained in the Implementation Agreement, by
action of the parties' respective boards of directors and written agreement
signed by the party agreeing to such extension or waiver.
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In addition, subject to applicable law, the parties to the Implementation
Agreement may amend the Implementation Agreement by action of their respective
boards of directors, at any time, provided, that after
adoption of the Raytheon Merger Agreement by stockholders or approval of the
Hughes Transactions by GM stockholders, amendments which by law require further
approval or authorization by the stockholders of Raytheon or General Motors, as
the case may be, may not be made without such further approval or
authorization. In either case, the Implementation Agreement may not be amended
except by a written instrument signed by each party.
TERMINATION OF THE IMPLEMENTATION AGREEMENT
The Implementation Agreement may be terminated at any time prior to the
Raytheon Merger Effective Time by mutual written consent of General Motors and
Raytheon or as follows:
. by either General Motors or Raytheon at any time following the termination
of either of the Raytheon Merger Agreement or the GM Spin-Off Merger
Agreement in accordance with the terms thereof;
. by either General Motors or Raytheon in the event of either: (1) a material
breach by the other party of any representation or warranty contained in
the Implementation Agreement which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach; or (2) a material breach by the other party of any of the
covenants or agreements contained in the Implementation Agreement which
breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach;
. by General Motors in the event that the GM Board determines in good faith,
in the exercise of its fiduciary obligations under applicable law, on the
basis of oral or written advice of outside counsel, (1) that it must revoke
or withdraw its recommendation in this document in favor of the Hughes
Transactions and (2) that the foregoing determination could not reasonably
be avoided by adjusting the Distribution Ratio so as to
enable (A) the GM Board to determine that the Hughes Transactions, taken as
a whole, are in the best interests of General Motors and its common
stockholders and fair to the GM $1 2/3 Common Stockholders and the GM Class
H Common Stockholders and (B) the Original Merrill Lynch Fairness Opinion
and the Original Salomon Brothers Fairness Opinion to be applicable to the
Hughes Transactions with the Distribution Ratio as adjusted; or
. by Raytheon in the event that: (1) the GM Board makes a determination
regarding the Distribution Ratio as described in the immediately preceding
paragraph and does not terminate the Implementation Agreement within ten
business days thereof; or (2) the GM Board withdraws or modifies in any
adverse manner its approval or recommendation of the Hughes Transactions or
fails to reaffirm such approval or recommendation upon Raytheon's request.
EFFECT OF TERMINATION
In the event of the termination of the Implementation Agreement, the
Implementation Agreement will become void and have no effect, without any
liability on the part of either party or its subsidiaries or their respective
directors, officers or stockholders, except for payment of expenses and a
termination fee to the extent provided in the Raytheon Merger Agreement. See
"--Raytheon Merger Agreement--Effect of Termination; Termination Fees" above.
Notwithstanding the foregoing, nothing in the Implementation Agreement is
intended to relieve either party to the Implementation Agreement of liability
for a willful breach of any provision of the Implementation Agreement.
GM STOCKHOLDER APPROVAL NOT REQUIRED FOR THE RAYTHEON MERGER
You are not being asked to approve the Raytheon Merger, which has already
been approved by Hughes Electronics as the sole stockholder of Hughes Defense.
Although you are not being asked to approve the Raytheon Merger, consummation
of the Raytheon Merger is conditioned upon, among other things, the
consummation of the Hughes Transactions, which requires the approval of GM's
common stockholders. IF
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GM'S COMMON STOCKHOLDERS APPROVE THE HUGHES TRANSACTIONS AND ALL OTHER
CONDITIONS ARE SATISFIED OR WAIVED, THE RAYTHEON MERGER WILL BE CONSUMMATED
IMMEDIATELY AFTER THE CONSUMMATION OF THE HUGHES
DEFENSE SPIN-OFF. IF GM'S COMMON STOCKHOLDERS DO NOT APPROVE THE HUGHES
TRANSACTIONS, NEITHER THE HUGHES TRANSACTIONS NOR THE RAYTHEON MERGER WILL BE
CONSUMMATED.
APPROVALS BY THE CAPITAL STOCK COMMITTEE AND THE GM BOARD; FAIRNESS OF THE
RAYTHEON MERGER
The Raytheon Merger was approved by the GM Board on January 16, 1997. This
approval was based on, among other things, recommendations of the Capital Stock
Committee, the Hughes Defense Spin-Off Committee, Hughes Electronics management
and GM management. The Raytheon Merger was also approved by the Hughes
Electronics Board. Additional information regarding the January 16, 1997
meetings of the Hughes Electronics Board, the Hughes Defense Spin-Off
Committee, the Capital Stock Committee and the GM Board, and certain factors
considered at these and other meetings, is set forth above under "Special
Factors--Background of the Hughes Transactions." For a description of certain
matters considered by the Capital Stock Committee and the GM Board in approving
the Raytheon Merger, see "Special Factors--Recommendations of the Capital Stock
Committee and the GM Board; Fairness of the Hughes Transactions" above.
RAYTHEON MERGER FAIRNESS OPINION: GOLDMAN SACHS
On January 16, 1997, Goldman Sachs delivered its written opinion to the
boards of directors of General Motors, Hughes Electronics and Hughes Defense
that, as of the date of such opinion, the Aggregate Consideration (as defined
below) is fair to the GM Group (as defined below) as a whole. Goldman Sachs
subsequently confirmed its earlier written opinion dated January 16, 1997 by
delivery of its written opinion dated November 7, 1997 that as of January 16,
1997 the Aggregate Consideration was fair to the GM Group as a whole. Goldman
Sachs did not perform any additional procedures in connection with the delivery
of its confirming opinion dated November 7, 1997. It is a condition to GM's
obligation to complete the Hughes Transactions that neither the Goldman Sachs
Fairness Opinion nor such written confirmation be withdrawn.
For purposes of the Goldman Sachs Fairness Opinion, Hughes Defense, Hughes
Electronics, General Motors and the GM $1 2/3 Common Stockholders and the GM
Class H Common Stockholders are collectively referred to as the "GM Group."
For purposes of the Goldman Sachs Fairness Opinion, the ownership by the
Class A Common Stockholders, in the aggregate, of approximately 30% of the
outstanding common stock of New Raytheon upon the consummation of the Raytheon
Merger and the indebtedness for borrowed money of Hughes Defense immediately
prior to the Hughes Defense Spin-Off and the Raytheon Merger (which will become
the indebtedness of New Raytheon upon the consummation of the Raytheon Merger)
are together referred to as the "Aggregate Consideration."
The Goldman Sachs Fairness Opinion does not address the fairness of the
Hughes Transactions or the fairness of the distribution to and allocation among
the GM $1 2/3 Common Stockholders and GM Class H Common Stockholders of Class A
Common Stock in the Hughes Defense Spin-Off. These matters are addressed, to
the extent specified therein, in the Updated Merrill Lynch Fairness Opinion and
the Updated Salomon Brothers Fairness Opinion. See "Special Factors--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers" above.
The Goldman Sachs Fairness Opinion is directed only to the fairness of the
Aggregate Consideration to be received by the GM Group as a whole and does not
(1) address GM's underlying business decision to effect the Hughes
Transactions, (2) address the fairness of the allocation of the Aggregate
Consideration among the members of the GM Group or (3) constitute a
recommendation concerning whether GM $1 2/3 Common Stockholders and GM Class H
Common Stockholders should approve the Hughes Transactions.
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THE FULL TEXT OF THE GOLDMAN SACHS FAIRNESS OPINION, WHICH SETS FORTH
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN
IN CONNECTION WITH THE OPINION, IS INCLUDED IN APPENDIX B TO THIS DOCUMENT AND
IS INCORPORATED INTO THIS DOCUMENT BY REFERENCE. WE URGE YOU TO READ THE
GOLDMAN SACHS FAIRNESS OPINION CAREFULLY. A COPY OF THE WRITTEN PRESENTATION BY
GOLDMAN SACHS TO THE GM BOARD IN JANUARY 1997 AND THE WRITTEN CONFIRMATION,
DATED AS OF NOVEMBER 7, 1997, OF THE GOLDMAN SACHS FAIRNESS OPINION HAVE BEEN
FILED AS EXHIBITS TO THE SCHEDULE 13E-3 FILED WITH THE SEC WITH RESPECT TO THE
HUGHES TRANSACTIONS AND COPIES OF THE MATERIALS IN THE FORMS FILED WITH THE SEC
MAY BE INSPECTED AND COPIED, AND OBTAINED BY MAIL, FROM THE SEC AS SET FORTH
UNDER "WHERE YOU CAN FIND MORE INFORMATION" IN CHAPTER 7 AND WILL BE MADE
AVAILABLE FOR INSPECTION AND COPYING AT THE PRINCIPAL EXECUTIVE OFFICES OF
GENERAL MOTORS AT GENERAL MOTORS CORPORATION, 100 RENAISSANCE CENTER, DETROIT,
MICHIGAN, 48243-7301 DURING REGULAR BUSINESS HOURS BY ANY INTERESTED COMMON
STOCKHOLDER OF GENERAL MOTORS OR HIS OR HER REPRESENTATIVE WHO HAS BEEN SO
DESIGNATED IN WRITING.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(1) the form of the Raytheon Merger Agreement; (2) the form of the
Implementation Agreement; (3) the form of the GM Spin-Off Merger Agreement; (4)
the form of the Master Separation Agreement; (5) the form of the Spin-Off
Separation Agreement; (6) the Annual Reports of Hughes Electronics for the five
years ended December 31, 1995; (7) the Annual Reports to Stockholders of
Raytheon on Form 10-K for the five years ended December 31, 1995; (8) certain
interim reports to stockholders and Quarterly Reports on Form 10-Q for
Raytheon; (9) certain other communications from General Motors and Raytheon to
their respective stockholders; and (10) certain internal financial analyses and
forecasts for Hughes Defense and Raytheon prepared by their respective
managements. Goldman Sachs also held discussions with members of the senior
management of Hughes Defense and Raytheon regarding the past and current
business operations, financial condition, and future prospects of their
respective companies, including forecasts of revenue and cost synergies that
are expected to result from the Raytheon Merger (collectively, the
"Synergies"). In addition, Goldman Sachs reviewed the reported price and
trading activity for the shares of Raytheon Common Stock; compared certain
financial and stock market information for Raytheon with similar information
for certain other companies the securities of which are publicly traded,
reviewed the financial terms of certain recent business combinations in the
aerospace and defense industry specifically and in other industries generally
and performed such other studies and analyses as it considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed the accuracy and
completeness thereof in all material respects for purposes of its opinion. In
that regard, Goldman Sachs assumed, with the consent of General Motors, Hughes
Electronics and Hughes Defense, that the financial forecasts prepared by Hughes
Defense and Raytheon, including without limitation, the Synergies resulting
from the Raytheon Merger, have been reasonably prepared on a basis reflecting
the best currently available judgments and estimates of Hughes Defense and
Raytheon and that such forecasts will be realized in all material respects in
the amounts and at the times contemplated thereby. Goldman Sachs did not make
an independent evaluation or appraisal of the assets and liabilities of Hughes
Defense or Raytheon or any of their subsidiaries and Goldman Sachs was not
furnished with any such evaluation or appraisal. Goldman Sachs' advisory
services and opinion were provided for the information and assistance of the
boards of directors of each of General Motors, Hughes Electronics and Hughes
Defense in connection with their consideration of the Raytheon Merger. Goldman
Sachs was informed that the boards of directors of each of General Motors,
Hughes Electronics and Hughes Defense were considering the Raytheon Merger in
the context of the Hughes Transactions.
In the Goldman Sachs Fairness Opinion, Goldman Sachs does not express any
opinion as to the prices at which the Class A Common Stock, the Class B Common
Stock or the New GM Class H Common Stock will trade if and when they are
issued.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing the Goldman Sachs Fairness Opinion
and in analyzing the Northrop Grumman proposal (as filed with the SEC).
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(1) Selected Companies Analysis. Goldman Sachs reviewed certain financial
information, ratios and public market multiples for six publicly traded
corporations: The Boeing Company (adjusted pro forma for the acquisition of
Rockwell International Corporation's Aerospace and Defense business but not
including the impact of the then-pending acquisition of McDonnell Douglas
Corporation), General Dynamics Corporation, Hughes Electronics, Lockheed
Martin Corporation, Northrop Grumman Corporation and Raytheon (adjusted for
the then-pending acquisition of Texas Instruments Defense) (the "Selected
Companies"). The Selected Companies were chosen because they are publicly
traded companies with operations (or, in the case of
Hughes Electronics, track operations) that for purposes of analysis may be
considered similar to Hughes Defense. Goldman Sachs calculated and compared
various financial multiples and ratios. With respect to the Selected
Companies, Goldman Sachs considered levered market capitalization (i.e.,
market value of common equity plus estimated market value of debt less cash)
as a multiple of 1997 estimated earnings before interest, taxes, depreciation
and amortization ("EBITDA") and stock price as a multiple of 1997 and 1998
estimated earnings per share ("EPS"). The levered market capitalizations were
based on closing stock prices as of January 11, 1997 and balance sheet data
as of September 30, 1996. January 11, 1997 represented the most recent
closing stock prices and September 30, 1996 represented the most recent
publicly available balance sheet information for the Selected Companies at
the time the analysis was performed. The analysis was performed in advance of
the GM Board meeting on January 16, 1997 in order to distribute material to
the GM Board prior to such meeting. The 1997 EBITDA multiples estimates for
each of the Selected Companies were based on Goldman Sachs research as of
November 1996 (excluding pension and non-cash income). The 1997 and 1998
price/earnings ("P/E") multiples were based on stock prices as of January 11,
1997 and Institutional Brokers Estimate Service ("IBES") estimates for EPS as
of January 8, 1997 (estimates for companies with non-calendar fiscal years
ends were calendarized). Goldman Sachs' analysis of the Selected Companies
indicated levered market capitalization multiples of 1997 estimated EBITDA
ranging from 6.6x to 9.5x with a median of 8.4x and a mean of 8.2x. Goldman
Sachs also considered for the
Selected Companies estimated 1997 P/E multiples, which ranged from 13.1x to
23.6x with a median of 14.7x and a mean of 16.5x, estimated 1998 P/E
multiples, which ranged from 11.8x to 20.4x with a median of 13.8x and a mean
of 14.5x, and debt to capitalization ratios, which ranged from 3.0% to 62.6%.
(2) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to eight selected transactions in the aerospace and
defense industry since 1994 (listed by acquirer/target): (1) Raytheon
Company/Texas Instruments Defense, (2) The Boeing Company/McDonnell Douglas
Corporation, (3) The Boeing Company/Rockwell International Corporation's
Aerospace and Defense business, (4) Lockheed Martin Corporation/Loral
Corporation, (5) Northrop Grumman Corporation/Westinghouse's Electronic
Systems Group business, (6) Raytheon Company/E-Systems, (7) Martin Marietta
Corp./Lockheed Corporation and (8) Northrop Corporation/Grumman Corporation
(the "Selected Transactions"). Such analysis indicated that for the Selected
Transactions levered consideration as a multiple of (1) current year sales
ranged from 0.56x to 1.68x, as compared to 1.53x for the Raytheon Merger and
1.50x for a merger of Northrop Grumman with Hughes Defense, (2) current year
earnings before interest and taxes ("EBIT") ranged from 8.6x to 12.9x, as
compared to 13.7x for the Raytheon Merger and 13.4 for a merger of Northrop
Grumman with Hughes Defense, (3) current year EBITDA ranged from 5.4x to
10.6x, as compared to 11.7x for the Raytheon Merger and 11.4x for a merger of
Northrop Grumman with Hughes Defense, (4) next year sales ranged from 0.57x
to 1.66x, as compared to 1.43x for the Raytheon Merger and 1.40x for a merger
of Northrop Grumman with Hughes Defense, (5) next year EBIT ranged from 8.2x
to 12.9x, as compared to 13.0x for the Raytheon Merger and 12.7x for a merger
of Northrop Grumman with Hughes Defense and (6) book value ranged from 1.9x
to 9.6x, as compared to 1.9x for the Raytheon Merger and 1.8x for a merger of
Northrop Grumman with Hughes Defense.
(3) Discounted Cash Flow Analysis. Goldman Sachs performed a discounted cash
flow analysis using Hughes Defense management projections. Goldman Sachs
calculated the net present value of the cash flows of Hughes Defense as of
January 1, 1997 using discount rates from 10% to 12%. Goldman Sachs
calculated terminal values of Hughes Defense based on a multiple of trailing
EBITDA in the year 2001 ranging from 7.0x EBITDA to 8.0x EBITDA. These
terminal values were then discounted to present value (as of January 1, 1997)
using discount rates from 10% to 12%. Such analysis indicated a range of
$6.482 billion to $7.757
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billion. The discount rates used were determined using a number of different
factors, including (1) a weighted average cost of capital analysis and (2)
expected internal rates of return for Hughes Defense as well as for other
companies in the aerospace and defense industry.
(4) Discounted Cash Flow Analysis--Synergies--Raytheon/Hughes Defense.
Goldman Sachs performed a discounted cash flow analysis of the Synergies
using Raytheon's management projections. Goldman Sachs calculated the net
present value of the cash flows as of January 1, 1997 using discount rates
from 10% to 12%. Goldman Sachs calculated the terminal values based on a
multiple of trailing EBIT in the year 2001
ranging from 8.0x EBIT to 10.0x EBIT. These terminal values were then
discounted to present value (as of January 1, 1997) using discount rates from
10% to 12%. Such analysis indicated a range from $3.396 billion to $4.321
billion. The discount rates used were determined using a number of different
factors, including (1)
a weighted average cost of capital analysis and (2) expected internal rates
of return for each of Hughes Defense and Raytheon as well as for other
companies in the aerospace and defense industry.
(5) Discounted Cash Flow Analysis--Synergies--Northrop Grumman/Hughes
Defense. Goldman Sachs performed a discounted cash flow analysis of the
Synergies using Northrop Grumman's management projections. Goldman Sachs
calculated the net present value of the cash flows as of January 1, 1997
using discount rates from 10% to 12%. Goldman Sachs calculated the terminal
values based on a multiple of trailing EBIT in the 2001 ranging from 8.0x
EBIT to 10.0x EBIT. These terminal values were then discounted to present
value (as of January 1, 1997) using discount rates from 10% to 12%. Such
analysis indicated a range from $1.632 billion to $2.049 billion.
(6) Contribution Analysis--Raytheon. Goldman Sachs reviewed certain
estimated future operating and financial information (including, among other
things, revenues, EBITDA, operating income and levered value) for Hughes
Defense, Raytheon and the pro forma combined entity resulting from the
Raytheon Merger based on Hughes Defense and Raytheon managements' financial
forecasts for each of Hughes
Defense and Raytheon (which included a pro forma base forecast for the impact
of Texas Instruments Defense, before the impact of synergies) and the pro
forma combined entity. Goldman Sachs also analyzed the relative income
statement contribution of Hughes Defense and Raytheon to the combined company
on a pro forma basis based on financial data and on the assumptions provided
to Goldman Sachs by Hughes Defense and Raytheon managements. This analysis
indicated that in 1997 Hughes Defense would have
contributed 28.4% to combined revenues, 27.7% to combined EBITDA and 29.1% to
combined operating income. Based on the Aggregate Consideration of $9.5
billion for Hughes Defense and market prices of Raytheon as of January 10,
1997, Hughes Defense would receive 34.1% of the combined levered value. The
34.1% figure was calculated by taking (a) Hughes Defense's levered value of
$9,500 million as reflected by the Raytheon proposal and dividing it by (b)
the combined levered value of $27,876 million consisting of (x) Hughes
Defense's levered value of $9,500 million plus (y) Raytheon's levered value
as of January 10, 1997 of $18,376 million, which was adjusted to include an
additional $2,950 million of debt from the then-pending acquisition of Texas
Instruments Defense business. The figure of 34.1% is the result of dividing
$9,500 million by $27,786 million.
(7) Contribution Analysis--Northrop Grumman. Goldman Sachs reviewed certain
estimated future operating and financial information (including, among other
things, revenues, EBITDA, operating income and levered value) for Hughes
Defense, Northrop Grumman and the pro forma combined entity resulting from
the merger of Hughes Defense and Northrop Grumman based on Hughes Defense and
Northrop Grumman managements' financial forecasts for each of Hughes Defense
and Northrop Grumman and the pro forma combined entity. Goldman Sachs also
analyzed the relative income statement contribution of Hughes Defense and
Northrop Grumman to the combined company on a pro forma basis based on
financial data and on the assumptions provided to Goldman Sachs by Hughes
Defense and Northrop Grumman managements. This analysis indicated the
percentage that Hughes Defense in 1997 would have contributed to combined
revenues, to combined EBITDA and to combined operating income and based on
the aggregate consideration of $9,301 million for Hughes Defense and market
prices of Northrop Grumman as of January 10, 1997, the percentage of the
combined levered value that Hughes Defense would have received. The
percentage of combined levered value was calculated by taking (a) Hughes
Defense's levered value of $9,301 million as
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reflected by the Northrop Grumman proposal and dividing it by (b) the
combined levered value consisting of (x) Hughes Defense's levered value of
$9,301 million plus (y) Northrop Grumman's levered value as of January 10,
1997. The percentage of combined levered value is the result of dividing
$9,301 million by the sum of (x) and (y) above.
(8) Pro Forma Trading Analysis--Raytheon. Goldman Sachs prepared pro forma
analyses of the financial impact of the Raytheon Merger. Using earnings
estimates for Raytheon prepared by its management for the years 1997 and
1998, Goldman Sachs compared the EPS of Raytheon Common Stock, on a stand-
alone basis, to the EPS of the common stock of the combined companies on a
pro forma basis (including the impact of Raytheon's acquisition of Texas
Instruments Defense). Goldman Sachs performed this analysis based on a price
of $49.35 per share (the midpoint of the range used in determining the amount
of indebtedness Hughes Defense may have at the Raytheon Merger Effective
Time) of Raytheon Common Stock. Based on such analysis the proposed
transaction would be dilutive to Raytheon's stockholders on an earnings per
share basis in 1997 by 4.7% and accretive to Raytheon's stockholders on an
earnings per share basis in 1998 by 1.0%.
(9) Pro Forma Trading Analysis--Northrop Grumman. Goldman Sachs prepared pro
forma analyses of the financial impact of a merger between Hughes Defense and
Northrop Grumman. Using earnings estimates for Northrop Grumman prepared by
its management for the years 1997 and 1998, Goldman Sachs compared the EPS of
Northrop Grumman's common stock, on a standalone basis, to the EPS of the
common stock of the combined companies on a pro forma basis. Goldman Sachs
performed this analysis based on a price of $81.00 per share (the midpoint of
the collar) of Northrop Grumman's common stock. Based on this analysis, the
proposed transaction would be dilutive to Northrop Grumman's stockholders on
an earnings per share basis in both 1997 and 1998.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying the Goldman Sachs Fairness Opinion. In arriving at its fairness
determination, Goldman Sachs considered the results of all such analyses.
Goldman Sachs reaches a single conclusion as to fairness based on its
experience and professional judgment and its analysis as a whole. Goldman Sachs
does not, as part of its process, isolate the
various analyses and reach separate conclusions with respect thereto. No
company or transaction used in the above analyses as a comparison (other than
Hughes Electronics and Raytheon) is directly comparable to General Motors,
Hughes Electronics, Hughes Defense or Raytheon or the contemplated transaction.
The analyses were prepared solely for purposes of Goldman Sachs providing its
opinion to the board of directors of each of General Motors, Hughes Electronics
and Hughes Defense as to the fairness of the Aggregate Consideration to the GM
Group as a whole and do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold. Analyses based
upon forecasts of future results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties or their respective advisors, none of General Motors, Hughes
Electronics, Hughes Defense, Raytheon, Goldman Sachs or any other person
assumes responsibility if future results are materially different from those
forecast.
As described above, the Goldman Sachs Fairness Opinion was one of many
factors taken into consideration by the board of directors of each of General
Motors, Hughes Electronics and Hughes Defense in making their respective
determinations to approve the Raytheon Merger Agreement. THE FOREGOING SUMMARY
DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE ANALYSIS PERFORMED BY
GOLDMAN SACHS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE GOLDMAN
SACHS FAIRNESS OPINION INCLUDED IN APPENDIX B TO THIS DOCUMENT.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and
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valuations for estate, corporate and other purposes. General Motors, Hughes
Electronics and Hughes Defense selected Goldman Sachs as their financial
advisor because it is a nationally recognized investment banking firm that has
substantial experience in transactions similar to the Raytheon Merger. Goldman
Sachs is familiar with Hughes Defense having provided certain investment
banking services to Hughes Defense and Hughes Electronics from time to time and
having acted as financial advisor to Hughes Defense, Hughes Electronics and
General Motors in connection with, and having participated in certain of the
negotiations leading to, the Raytheon Merger Agreement. Goldman Sachs is also
familiar with Raytheon having provided certain investment banking services to
Raytheon from time to time, including having acted as its financial advisor in
connection with the acquisition of Chrysler Technologies Airborne Systems in
June 1996 and acting as a dealer in connection with Raytheon's issuance of
commercial paper.
Goldman Sachs is a full service securities firm and as such may from time to
time effect transactions, for its own account or the account of customers, and
hold positions in the securities or options on securities of General Motors
and/or Raytheon.
Pursuant to a letter agreement dated October 23, 1996 (the "Engagement
Letter"), General Motors and Hughes Electronics engaged Goldman Sachs to act as
their financial advisor in connection with the Hughes Defense Spin-Off and the
Raytheon Merger. Pursuant to the terms of the Engagement Letter, General Motors
and Hughes Electronics have agreed to pay Goldman Sachs upon the consummation
of the Raytheon Merger a transaction fee based on 0.30% of the aggregate
consideration of the Raytheon Merger. General Motors and Hughes Electronics
have agreed to reimburse Goldman Sachs for its reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of its attorneys, and
to indemnify Goldman Sachs against certain liabilities, including certain
liabilities under the U.S. federal securities laws. In the opinion of the SEC,
indemnification for liabilities arising under the Securities Act is against
public policy as expressed in the Securities Act and is, therefore, in its
view, unenforceable.
Raytheon's board of directors also has considered from its point of view and
decided to approve the Raytheon Merger, and is recommending it to the
stockholders of Raytheon. In connection with its consideration of the Raytheon
Merger, Raytheon has received (1) an opinion of Bear Stearns, financial advisor
to Raytheon, to the effect that, as of the date of the opinion and based upon
and subject to certain matters stated in the opinion, the Raytheon Merger is
fair to Raytheon stockholders from a financial point of view and (2) an opinion
of CSFB, financial advisor to Raytheon, to the effect that, as of the date of
the opinion and based upon and subject to certain matters stated in the
opinion, the Merger Consideration (as defined in the opinion) was fair to the
holders of Raytheon Common Stock from a financial point of view. Copies of the
opinions of Bear Stearns and CSFB are attached as Appendices B-I and B-II,
respectively, to the Raytheon Solicitation Statement. In addition, summaries of
these opinions are contained in the "Background" section of the Raytheon
Solicitation Statement. We have incorporated the "Background" section of the
Raytheon Solicitation Statement and Appendices B-I and B-II to the Raytheon
Solicitation Statement into this document by reference. See "Where You Can Find
More Information" in Chapter 7. You should note, however, that these materials
were prepared for Raytheon's board of directors in connection with the Raytheon
Merger, and Raytheon's board of directors and its financial advisors did not
consider your interests as a stockholder of General Motors.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
For a description of certain U.S. federal income tax considerations relating
to the Raytheon Merger, see "Special Factors--Certain U.S. Federal Income Tax
Considerations Relating to the Raytheon Merger" above.
ACCOUNTING TREATMENT
The Raytheon Merger will be accounted for by New Raytheon as a purchase for
financial accounting purposes in accordance with GAAP. Raytheon will be treated
as the acquiror of Hughes Defense for purposes of preparing the consolidated
financial statements of New Raytheon, and New Raytheon will establish a new
accounting basis for assets and liabilities of Hughes Defense based upon the
fair values thereof and the value of
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the consideration deemed to be provided to General Motors, its subsidiaries and
its common stockholders in connection with the Raytheon Merger, and the costs
of the Raytheon Merger. New Raytheon will record as goodwill the excess, if
any, of such consideration over such fair values. A final determination of
required purchase accounting adjustments, including the allocation of such
consideration to the assets acquired and liabilities assumed based on their
respective fair values, has not yet been made. Accordingly, the purchase
accounting adjustments made in connection with the development of the pro forma
condensed combined financial information of New Raytheon appearing elsewhere in
this document are preliminary and have been made solely for purposes of
developing such pro forma condensed combined financial information. New
Raytheon will undertake a study to determine the fair value of certain of
Hughes Defense's assets and liabilities (as so adjusted) and will make
appropriate purchase accounting adjustments upon completion of that study. For
financial reporting purposes, the results of operations of Hughes Defense will
be included in New Raytheon's consolidated statement of income following the
Raytheon Merger Effective Time. New Raytheon's financial statements for prior
periods will not be restated as a result of the Raytheon Merger or related
transactions. See "New Raytheon Unaudited Pro Forma Combined Condensed
Financial Statements" in Chapter 5.
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SEPARATION AND TRANSITION ARRANGEMENTS
INTRODUCTION
As a condition to the consummation of the Raytheon Merger, Raytheon has
required that Hughes Defense be, at the time of the consummation of the
Raytheon Merger, an independent, publicly owned company comprising the defense
electronics business of Hughes Electronics. This condition will be satisfied by
means of the Hughes Reorganization and the Hughes Defense Spin-Off.
The Hughes Reorganization generally will be effected pursuant to the terms of
the Master Separation Agreement among General Motors, Hughes Defense, Delco and
Hughes Telecom and the agreements contemplated thereby. See "Description of the
Hughes Transactions--General--Hughes Reorganization" above. As the surviving
corporation of the Raytheon Merger, Hughes Defense (which will be renamed
"Raytheon Company") will continue to have rights and obligations pursuant to
each of these agreements after the consummation of the Raytheon Merger, except
as otherwise described below. Accordingly, references to "Hughes Defense" in
the descriptions below of such agreements should be considered, as appropriate,
also to be references to "New Raytheon." In addition, in connection with the
consummation of the Hughes Transactions, Hughes Telecom will become a direct
wholly owned subsidiary of General Motors and will be renamed "Hughes
Electronics Corporation." Accordingly, references to "Hughes Telecom" in the
descriptions below of such agreements should be considered, as appropriate,
also to be references to "New Hughes Electronics."
THE FOLLOWING IS A SUMMARY DESCRIPTION OF CERTAIN OF THE PRINCIPAL PROVISIONS
OF THE SEPARATION AGREEMENTS. THIS DESCRIPTION OF THE SEPARATION AGREEMENTS,
WHICH SUMMARIZES THE MATERIAL TERMS OF SUCH AGREEMENTS, DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE SEPARATION
AGREEMENTS. THE FORMS OF EACH OF THE MASTER SEPARATION AGREEMENT, THE SPIN-OFF
SEPARATION AGREEMENT AND THE TAX SHARING AGREEMENT HAVE BEEN FILED WITH THE SEC
AS EXHIBITS TO THE REGISTRATION STATEMENTS OF WHICH THIS DOCUMENT IS A PART AND
ARE INCORPORATED INTO THIS DOCUMENT BY REFERENCE.
SUMMARY OF MASTER SEPARATION AGREEMENT
GENERAL
The Master Separation Agreement is an agreement among General Motors, Hughes
Defense, Delco and Hughes Telecom, pursuant to which, among other things, the
transfers of certain assets and liabilities (which are required so that each of
Hughes Defense, Delco and Hughes Telecom will consist of the respective
businesses described in this document after the completion of the Hughes
Reorganization) will be effected. The Master Separation Agreement also includes
indemnification provisions and provides for a post-closing adjustment between
New Hughes Electronics and New Raytheon based on an adjusted net worth of
Hughes Defense as of immediately prior to the Raytheon Merger and for certain
other separation and transition arrangements. The Master Separation Agreement
also requires that certain parties to such agreement enter into the Spin-Off
Separation Agreement, the Tax Sharing Agreement and certain other agreements.
See "Description of the Hughes Transactions--General--Hughes Reorganization"
above.
ASSET AND LIABILITY TRANSFERS
Pursuant to the Master Separation Agreement, prior to the GM Spin-Off Merger
Effective Time, General Motors will cause Hughes Electronics (or the
appropriate subsidiary of Hughes Electronics) to transfer, as appropriate, to
each of Hughes Defense, Delco and Hughes Telecom all of Hughes Electronics'
right, title and interest in the assets of Hughes Electronics that are used or
held for use primarily in (but not presently owned by) the respective
businesses of these entities. See "Description of the Hughes Transactions--
General-- Hughes Reorganization" above. The assets transferred will be
transferred "as is where is" and, except as set forth below under "--
Indemnification," no transferor of the assets described above will make any
warranty,
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either express or implied, including, without limitation, warranties of
merchantability or fitness for a particular purpose, with respect to any of the
assets transferred. For a description of the transfers with respect to Hughes
Electronics' intellectual property, see "--Summary of Other Agreements
Contemplated by the Master Separation Agreement--Intellectual Property" below.
Simultaneously with the transfers described above, each of Hughes Defense,
Delco and Hughes Telecom, in partial consideration for such transfers, will
assume and agree on a timely basis to pay and discharge in accordance with
their terms any and all liabilities relating to or arising out of the assets
transferred to such entity. Each of Hughes Defense, Delco and Hughes Telecom
will also retain or assume, as the case may be, and no other party to the
Master Separation Agreement will assume or have any liability with respect to,
liabilities relating primarily to, or arising primarily out of, the defense
electronics business, the automotive electronics business or the
telecommunications and space business, respectively, of Hughes Electronics as
conducted at any time prior to, on or after the GM Spin-Off Merger Effective
Time, as well as certain other liabilities as identified in the Master
Separation Agreement.
Pursuant to the Master Separation Agreement, immediately following the
transfers described above, Hughes Electronics will merge with General Motors,
with General Motors as the surviving corporation, and the subsidiary of Hughes
Defense which principally operates the defense electronics business will merge
with Hughes Defense, with Hughes Defense as the surviving corporation. Hughes
Defense will then transfer to General Motors all of its right, title and
interest in and to the shares of capital stock of Hughes Telecom in the Hughes
Telecom Spin-Off. See "Description of the Hughes Transactions--General--Hughes
Reorganization" above.
INDEMNIFICATION
Under the Master Separation Agreement, Hughes Telecom will represent and
warrant to Hughes Defense that the assets of Hughes Defense (except for cash
and cash equivalents and without giving effect to the sale or anticipated sale
of, or other action with respect to, the assets of Hughes Defense relating to
the approval process under the Hart-Scott-Rodino Act) as of immediately
following the GM Spin-Off Merger Effective Time will include all assets owned
by Hughes Electronics (and all assets in which Hughes Electronics has
contractual rights) which are primarily used in, or held primarily for use in,
the defense electronics business of Hughes Electronics as of the GM Spin-Off
Merger Effective Time and will be sufficient to conduct such business after the
GM Spin-Off Merger Effective Time as it is conducted immediately prior to the
GM Spin-Off Merger Effective Time. Hughes Telecom will indemnify, defend and
hold harmless Hughes Defense, New Raytheon, General Motors, Hughes Electronics
and Delco, their respective successors-in-interest, subsidiaries and their
respective past and present directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives against any
losses, claims, damages, liabilities or actions arising, whether prior to or
following the transfers contemplated by the Master Separation Agreement, out of
or in connection with any violation of such representation and warranty and
will reimburse them for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
damage, liability or action.
Hughes Defense, Delco and Hughes Telecom will each indemnify, defend and hold
harmless each other and General Motors and Hughes Electronics, and their
respective successors-in-interest, subsidiaries, past and present directors,
officers, employees, agents, consultants, advisors, accountants, attorneys and
representatives, against any losses, claims, damages, liabilities or actions
arising, whether prior to or following the transfers contemplated by the Master
Separation Agreement, out of or in connection with their respective assets and
liabilities and the conduct of their respective businesses (including, in the
case of Hughes Defense, in connection with any breach by Hughes Defense or any
of its subsidiaries after the GM Spin-Off Merger Effective Time of any terms of
the Transaction Agreements) and will reimburse them for any legal or any other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action.
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Each of Hughes Telecom and Delco will also indemnify, defend and hold
harmless General Motors, its successors-in-interest, subsidiaries and past and
present directors, officers, employees, agents, consultants, advisors,
accountants, attorneys and representatives against any losses, claims, damages,
liabilities or actions arising, whether prior to or following the transfers
contemplated by the Master Separation Agreement, out of or in connection with
the merger of Hughes Electronics with General Motors (other than, in each case,
those that primarily relate to the assets, liabilities and conduct of the
business of Delco) and will reimburse them for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action. The indemnification by Hughes
Telecom of General Motors will include indemnification for losses arising from
any guarantees and similar arrangements of Hughes Electronics that become
obligations of General Motors as a result of the merger of Hughes Electronics
into General Motors as part of the Hughes Reorganization.
POST-CLOSING ADJUSTMENT BETWEEN NEW HUGHES ELECTRONICS AND NEW RAYTHEON
The Master Separation Agreement provides for a payment to be made under the
circumstances described below by either New Hughes Electronics or New Raytheon
to the other party following the consummation of the Raytheon Merger based upon
a comparison of (1) the "adjusted net worth" of Hughes Defense (as determined
pursuant to the Master Separation Agreement) as reflected on the September 30,
1996 balance sheet provided to Raytheon as part of the negotiations relating to
the Raytheon Merger Agreement, as adjusted pursuant to the terms of the Master
Separation Agreement (the "Target Amount"), and (2) the "adjusted net worth" of
Hughes Defense as of immediately prior to the Raytheon Merger Effective Time
and after the consummation of the Hughes Reorganization as reflected in an
audited balance sheet prepared as of such time and in such manner and with such
adjustments as described in the Master Separation Agreement (the "Closing Date
Final Amount").
Within approximately four months after the completion of the Raytheon Merger,
New Hughes Electronics will prepare, and its auditors will audit, the final
balance sheet for Hughes Defense and its subsidiaries as of immediately prior
to the Raytheon Merger Effective Time (but giving effect to the Hughes
Reorganization), which will set forth the Closing Date Final Amount, and a
related report from New Hughes Electronics' auditors. Within approximately 30
business days after its receipt of this final balance sheet and related
auditors' report, New Raytheon will notify New Hughes Electronics of any
objections to the balance sheet and report. New Hughes Electronics and New
Raytheon will then work together to try to reach agreement on any disputed
matters and, if the parties cannot reach agreement, all disputed matters will
be submitted to arbitration before independent auditors for final resolution.
If the Target Amount exceeds the Closing Date Final Amount by $50 million or
more, then New Hughes Electronics will be obligated to pay to New Raytheon in
cash the amount in excess of $50 million by which the Target Amount exceeds the
Closing Date Final Amount, plus interest thereon from the Raytheon Merger
Effective Time to the date of such payment thereof at the per annum rate equal
to the rate announced by Citibank, N.A. in the City of New York as its base
rate as in effect on the Raytheon Merger Effective Time. If the Closing Date
Final Amount exceeds the Target Amount by $50 million or more, then New
Raytheon will be obligated to pay to New Hughes Electronics in cash the amount
in excess of $50 million by which the Closing Date Final Amount exceeds the
Target Amount, plus interest thereon calculated in the same manner as described
above. In addition to the foregoing, any cash reflected in such audited balance
sheet of Hughes Defense will be transferred to New Hughes Electronics at the
time of the cash payment described above, or, if no such payment is made, as
soon as practicable after the completion of such audited balance sheet,
together with interest thereon calculated in the same manner as described
above.
CONDITIONS TO CLOSING
The obligations of each of the parties to the Master Separation Agreement to
consummate the transactions contemplated by the Master Separation Agreement
will be subject to the satisfaction or waiver (by the party for whose benefit
such condition exists) of each of the conditions to the closing of the Raytheon
Merger as set
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forth in the Raytheon Merger Agreement (other than the consummation of the
Hughes Transactions). See "Description of the Raytheon Merger--Raytheon Merger
Agreement--Conditions" above.
SUMMARY OF SPIN-OFF SEPARATION AGREEMENT
GENERAL
The Master Separation Agreement contemplates that, prior to the Raytheon
Merger Effective Time, General Motors and Hughes Defense will enter into the
Spin-Off Separation Agreement. As noted above, the obligations of Hughes
Defense under the Spin-Off Separation Agreement will be obligations of New
Raytheon after the Raytheon Merger.
PRESERVATION OF TAX-FREE STATUS OF THE HUGHES TRANSACTIONS AND THE RAYTHEON
MERGER
The Spin-Off Separation Agreement contains covenants intended to protect the
tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off and
the Raytheon Merger. These covenants could have the effect of delaying,
deferring or preventing a change in control of New Raytheon and of limiting the
opportunity to realize premiums over prevailing market prices for New Raytheon
Common Stock in connection therewith during the period of their applicability.
See "Risk Factors Regarding New Raytheon After the Raytheon Merger--Certain
Limitations on Changes in Control of New Raytheon; New Raytheon's Ability to
Participate in Future Defense Industry Consolidation" in Chapter 2.
Hughes Defense will indemnify, defend and hold harmless General Motors and
its affiliates against any and all tax-related losses incurred by General
Motors in connection with any proposed tax assessment or tax controversy with
respect to the Hughes Defense Spin-Off or the Raytheon Merger to the extent
caused by any breach by Hughes Defense of any of the following covenants,
unless, with respect to violation of the following covenants, General Motors
has delivered to Hughes Defense notice that General Motors has determined that
such action will not jeopardize the tax-free status of the Hughes Defense Spin-
Off, the Hughes Telecom Spin-Off or the Raytheon Merger (except in certain
limited circumstances).
Hughes Defense will agree that, unless General Motors determines, in its sole
and absolute discretion, which discretion will be exercised in good faith
solely to preserve the tax-free status of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off and the Raytheon Merger, that any of the following
transactions would not jeopardize the tax-free status of the Hughes Defense
Spin-Off, the Hughes Telecom Spin-Off or the Raytheon Merger, Hughes Defense
will not:
. for two years after the Raytheon Merger Effective Time, enter into or
permit (to the extent Hughes Defense has the right to prohibit) any
transaction or series of transactions as a result of which any person or
any group of related persons would acquire, or have the right to acquire,
(1) from one or more holders of outstanding shares of New Raytheon Capital
Stock, a number of shares of New Raytheon Capital Stock that would comprise
more than 15% of (A) the value of all outstanding shares of New Raytheon
Capital Stock as of the date of such transaction, or in the case of a
series of transactions, the date of the last transaction of such series, or
(B) the number of the issued and outstanding shares of Class A Common Stock
or Class B Common Stock as of the date of such transaction, or in the case
of a series of transactions, the date of the last transaction of such
series, or (2) from Hughes Defense, all or a substantial portion of its
assets or business in exchange in whole or in part for equity interests in
such person or group which are received by holders of New Raytheon Capital
Stock (a "Proposed Acquisition Transaction");
. for two years after the Raytheon Merger Effective Time, enter into any
transaction or series of transactions as a result of which any person would
acquire, or have the right to acquire, from Hughes Defense or an affiliate
of Hughes Defense, one or more shares of New Raytheon Capital Stock (a
"Proposed Stock Issuance Transaction") if, as a result of such Proposed
Stock Issuance Transaction, Hughes Defense would issue a number of shares
of New Raytheon Capital Stock that, when aggregated with all other shares
of New Raytheon Capital Stock issued pursuant to any Proposed Stock
Issuance Transaction occurring prior to or simultaneously with such
Proposed Stock Issuance Transaction, would cause (A) the number of shares
of Class A Common Stock distributed to GM's common stockholders in the
Hughes
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Defense Spin-Off to constitute less than 80% of the total combined voting
power of all outstanding shares of the New Raytheon Capital Stock entitled
to vote generally in the election of directors or (B) the issuance of
outstanding shares of any class or series of New Raytheon Capital Stock
other than New Raytheon Capital Stock which is entitled to vote generally in
the election of directors;
. for two years after the Hughes Defense Spin-Off, enter into any transaction
as a result of which Hughes Defense or an affiliate of Hughes Defense would
acquire, or have the right to acquire, one or more shares of New Raytheon
Capital Stock if, as a result of such transaction, the then-outstanding
shares of Class A Common Stock would constitute less than 80% of the total
combined voting power of all outstanding shares of New Raytheon Capital
Stock entitled to vote generally in the election of directors; and
. for three years after the Hughes Defense Spin-Off, amend or change the New
Raytheon Certificate of Incorporation or New Raytheon By-Laws in such a way
as to affect the composition or size of the New Raytheon Board, the manner
in which the New Raytheon Board is elected or the duties and
responsibilities of the New Raytheon Board.
For two years after the Hughes Defense Spin-Off, Hughes Defense will also
agree:
. to continue the active conduct of the trade or business (as defined in
Section 355(b)(2) of the Code) conducted by Hughes Defense immediately
prior to the Raytheon Merger Effective Time (the "Active Trade or
Business");
. not to (A) liquidate, dispose of, or otherwise discontinue the conduct of
any portion of the Active Trade or Business with a value in excess of $1.0
billion or (B) dispose of any business or assets that would cause Hughes
Defense to be operated in a manner inconsistent in any material respect
with the business purposes for the Hughes Defense Spin-Off as set forth in
the representation letters, tax opinions and tax rulings related to the
Hughes Transactions and the Raytheon Merger (including, among other things,
the IRS Ruling), in each case unless General Motors has determined, in its
sole and absolute discretion, which discretion will be exercised in good
faith solely to preserve the tax-free status of the Hughes Defense Spin-
Off, the Hughes Telecom Spin-Off and the Raytheon Merger, that such
liquidation, disposition or discontinuance would not jeopardize the tax-
free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off or
the Raytheon Merger;
. not to liquidate, dispose of, or otherwise discontinue the conduct of any
portion of the Active Trade or Business if such liquidation, disposition or
discontinuance would constitute a breach of Section 4.2(e) of the Spin-Off
Separation Agreement (which requires that, until two years after the
Raytheon Merger Effective Time, and except in the ordinary course of
business, neither Hughes Defense nor any of its subsidiaries sell,
transfer, or otherwise dispose of or agree to dispose of assets (including
any shares of capital stock of such subsidiaries) that, in the aggregate,
constitute more than (A) 60% of the gross assets of Hughes Defense (based
on the fair market value of each such asset as of the Raytheon Merger
Effective Time) or (B) 60% of the consolidated gross assets of Hughes
Defense (based on the fair market value of each such asset as of the
Raytheon Merger Effective Time), unless prior to the consummation of such
transaction General Motors has determined, in its sole and absolute
discretion, which discretion will be exercised in good faith solely to
preserve the tax-free status of the Hughes Defense Spin-Off, the Hughes
Telecom Spin-Off and the Raytheon Merger, that such transaction would not
jeopardize the tax-free status of the Hughes Defense Spin-Off, the Hughes
Telecom Spin-Off or the Raytheon Merger); and
. not to voluntarily dissolve or liquidate, and except in the ordinary course
of business, not to sell, transfer, or otherwise dispose of or agree to
dispose of assets (including, for such purpose, any shares of capital stock
of its subsidiaries) that, in the aggregate, constitute more than (1) 60%
of the gross assets of Hughes Defense (based on the fair market value of
each such asset as of the Raytheon Merger Effective Time) or (2) 60% of the
consolidated gross assets of Hughes Defense (based on the fair market value
of each such asset as of the Raytheon Merger Effective Time), unless prior
to the consummation of such transaction General Motors has determined, in
its sole and absolute discretion, which discretion will be exercised in
good faith solely to preserve the tax-free status of the Hughes Defense
Spin-Off, the Hughes Telecom
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Spin-Off and the Raytheon Merger, that such transaction would not jeopardize
the tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-
Off or the Raytheon Merger.
Hughes Defense also will agree not to propose at any time a plan of
recapitalization (including a Proposed Acquisition Transaction, if, as a result
of such transaction, holders of New Raytheon Common Stock immediately before
the Proposed Acquisition Transaction will own more than 50% of the common
equity of the person (or group of related persons) acquiring the New Raytheon
Capital Stock immediately after consummation of the Proposed Acquisition
Transaction, and, in such case, the person acquiring New Raytheon Capital Stock
pursuant to a Proposed Acquisition Transaction will be treated as if such
person were Hughes Defense) or amendment to the New Raytheon Certificate of
Incorporation or other action providing for (1) the conversion of shares of any
class of New Raytheon Common Stock into a different class of New Raytheon
Capital Stock, (2) a change in the absolute or relative voting rights of any
class of New Raytheon Common Stock from the rights existing at the Raytheon
Merger Effective Time or (3) any other action having an effect similar to that
described in clause (1) or (2), unless prior to the consummation of such action
General Motors has determined, in its sole and absolute discretion, which
discretion will be exercised in good faith solely to preserve the tax-free
status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off and the
Raytheon Merger, that such action would not jeopardize the tax-free status of
the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off or the Raytheon
Merger.
For two years after the Hughes Defense Spin-Off, Hughes Defense also will
agree not to take, or permit any of its subsidiaries to take, any other actions
or enter into any transaction or series of transactions or agree to enter into
any other transactions that would be reasonably likely to jeopardize the tax-
free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off or the
Raytheon Merger, including any action or transaction that would be reasonably
likely to be inconsistent with any representation made in the representation
letters related to the Hughes Transactions and the Raytheon Merger, unless
prior to the consummation of such action or transaction General Motors has
determined, in its sole and absolute discretion, which discretion will be
exercised in good faith solely to preserve the tax-free status of the Hughes
Defense Spin-Off, the Hughes Telecom Spin-Off and the Raytheon Merger, that
such action or transaction would not jeopardize the tax-free status of the
Hughes Defense Spin-Off, the Hughes Telecom Spin-Off or the Raytheon Merger.
In the event that Hughes Defense notifies General Motors that it desires to
take one of the actions described above and General Motors concludes that such
action would jeopardize the tax-free status of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off or the Raytheon Merger, General Motors will, at the
request of Hughes Defense, elect either to (1) use all commercially reasonable
efforts to obtain a tax opinion or ruling that would permit Hughes Defense to
take the specified action or (2) provide all reasonable cooperation to Hughes
Defense in connection with Hughes Defense obtaining such tax ruling or opinion
in form and substance reasonably satisfactory to General Motors. The reasonable
costs and expenses of obtaining any such tax opinion or ruling will be borne by
Hughes Defense.
For purposes of this description of the Spin-Off Separation Agreement, "New
Raytheon Capital Stock" means all classes or series of capital stock of Hughes
Defense and, upon the consummation of the Raytheon Merger, New Raytheon.
INDEMNIFICATION
In addition to the indemnification for tax matters described above, Hughes
Defense will also indemnify, defend and hold harmless General Motors, all of
GM's affiliates and each of their respective directors, officers and employees
(in their capacities as such), from and against:
. all losses relating to, arising out of, or due to, directly or indirectly,
any breach by Hughes Defense or any affiliate of Hughes Defense of any of
the provisions of the Spin-Off Separation Agreement;
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. all losses relating to, arising out of, or due to (1) any untrue statement
or alleged untrue statement of a material fact contained in the Hughes
Defense Registration Statement or the Raytheon Registration Statement
relating to (A) Raytheon, the capital stock of Raytheon, the Raytheon
business, financial information and data relating to Raytheon (including
both historical and pro forma financial data) or (B) the Raytheon Merger,
plans regarding Hughes Defense after the Raytheon Merger (i.e., New
Raytheon) and other forward-looking information regarding Hughes Defense
(the "Hughes Defense Disclosure Portions") or (2) the omission or alleged
omission to state in the Hughes Defense Disclosure Portions a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and
. all losses relating to or arising out of actions taken (or omitted to be
taken) by Raytheon or any affiliate of Raytheon in violation of the
Raytheon Merger Agreement.
General Motors will agree to indemnify, defend, and hold harmless Hughes
Defense, all affiliates of Hughes Defense, and each of their respective
directors, officers and employees (in their capacities as such), from and
against:
. all losses relating to, arising out of, or due to, directly or indirectly,
any breach by General Motors or any affiliate of General Motors (excluding
Hughes Defense) of any of the provisions of the Spin-Off Separation
Agreement;
. all losses relating to, arising out of, or due to (1) any untrue statement
or alleged untrue statement of a material fact contained in any material
set forth in either the Hughes Defense Registration Statement or the
Raytheon Registration Statement (A) relating to (x) Hughes Defense, the
capital stock of Hughes Defense, the business of Hughes Defense, financial
information and data relating to Hughes Defense (including both historical
and pro forma financial data), in each case prior to the consummation of
the Raytheon Merger, or (y) the Hughes Transactions or (B) that otherwise
does not constitute a part of a Hughes Defense Disclosure Portion (the "GM
Disclosure Portions") or (2) the omission or alleged omission to state in
the GM Disclosure Portions a material fact required to be stated therein or
necessary to make the statements therein not misleading; and
. all losses relating to or arising out of any breach of GM's representation
that neither the execution and delivery of the Transactions Agreements by
General Motors or any of its subsidiaries (other than Hughes Defense) nor
the consummation of the transactions on the part of General Motors or any
such subsidiary contemplated by the Implementation Agreement will conflict
with or result in a breach of any provision of the certificate of
incorporation or bylaws of General Motors or any such subsidiary.
ALLOCATION OF COSTS AND EXPENSES
The Spin-Off Separation Agreement allocates responsibility for the payment of
fees and expenses incurred in connection with the Hughes Transactions and the
Raytheon Merger between (1) Raytheon and Hughes Defense on the one hand and (2)
General Motors and its subsidiaries (other than Hughes Defense) on the other
hand.
Hughes Defense will pay all costs and expenses relating exclusively to the
Raytheon Merger, including, without limitation, all reasonable out-of-pocket
costs and expenses of printing and distributing any materials to be sent to
Raytheon's stockholders in connection with the Raytheon Merger (including SEC
filing fees), the fees associated with making any other federal, state, local
or foreign governmental securities law or other regulatory filings exclusively
in connection with the Raytheon Merger, the fees and expenses of the New
Raytheon Transfer Agent and any proxy or consent solicitation agents,
information agents or similar consultants engaged by Raytheon in connection
with effecting the Raytheon Merger. Hughes Defense will also pay, unless
otherwise agreed between General Motors and Hughes Defense, the fees and
expenses of Goldman Sachs and the fees and expenses of Weil, Gotshal & Manges
LLP in connection with the Raytheon Merger, provided that such fees and
expenses, to the extent to be paid by Hughes Defense after the Raytheon Merger
Effective Time, will be included as current liabilities of Hughes Defense on
the balance sheet prepared for the
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purpose of calculating the post-closing adjustment. See "--Summary of Master
Separation Agreement--Post-Closing Adjustment Between New Hughes Electronics
and New Raytheon" above.
General Motors or one of its subsidiaries (excluding Hughes Defense) will pay
all costs and expenses relating to the Hughes Transactions except (1) those
relating exclusively to the Raytheon Merger and (2) the fees of any transfer or
exchange agent engaged by Hughes Defense and all fees relating to listing New
Raytheon Common Stock on any domestic or foreign stock exchange or similar
organization, which will be paid by Hughes Defense. The costs and expenses to
be paid by General Motors or one of such subsidiaries will include, without
limitation, the fees and expenses of Merrill Lynch, Salomon Brothers and
Kirkland & Ellis, and all costs and expenses relating exclusively to the GM
Spin-Off Merger, including, without limitation, all reasonable out-of-pocket
costs and expenses of printing and distributing this document and any related
materials (including SEC filing fees), the fees associated with making any
other federal, state, local or foreign governmental securities law or other
regulatory filings exclusively in connection with the GM Spin-Off Merger, and
the fees and expenses of the GM Transfer Agent and any proxy or consent
solicitation agents, information agents or similar consultants engaged by
General Motors in connection with effecting the GM Spin-Off Merger.
SUMMARY OF TAX SHARING AGREEMENT
As part of the Master Separation Agreement and as a condition to the
consummation of the Raytheon Merger, General Motors, Hughes Defense and Hughes
Telecom will enter into the Tax Sharing Agreement. The Tax Sharing Agreement
sets outs certain duties and obligations of General Motors, Hughes Defense
(i.e., New Raytheon) and Hughes Telecom (i.e., New Hughes Electronics)
regarding the preparation and filing of returns relating to and the payment of
the liability for U.S. federal, state and local (but not foreign) income taxes
("Income Taxes") of Hughes Defense. Among other things, the Tax Sharing
Agreement establishes (1) the obligations for paying Hughes Defense's Income
Taxes for taxable periods ending on or before the date of the Hughes Defense
Spin-Off (each a "Pre-Distribution Taxable Period"), (2) the obligations for
paying New Raytheon's Income Taxes for taxable periods which begin after the
date of the Hughes Defense Spin-Off (each a "Post-Distribution Taxable
Period"), (3) the obligations for paying New Raytheon's Income Taxes for
taxable periods which include but do not end on date of the Hughes Defense
Spin-Off (each a "Straddle Period") and (4) certain indemnification rights and
obligations among New Raytheon, New Hughes Electronics and General Motors. The
Tax Sharing Agreement also sets out the rights of General Motors, New Hughes
Electronics and New Raytheon to any refunds of Income Taxes and the rights and
obligations of such parties with respect to the effects of certain timing
differences and the carryback of certain tax benefits for the various taxable
periods. The following summary describes certain of the operative elements of
the Tax Sharing Agreement.
Pre-Distribution Taxable Period. General Motors or New Hughes Electronics
generally will pay all Income Taxes attributable to Hughes Defense and its
subsidiaries for Pre-Distribution Taxable Periods.
Post-Distribution Taxable Period. New Raytheon generally will pay all Income
Taxes due with respect to all tax returns required to be filed by New Raytheon
for Post-Distribution Taxable Periods.
Straddle Period. The Income Tax liability attributable to Hughes Defense and
its subsidiaries for a Straddle Period generally will be allocated between New
Hughes Electronics or General Motors, on the one hand, and New Raytheon, on the
other hand, based on an interim closing of the books on the date of the Hughes
Defense Spin-Off. New Raytheon generally will be allocated the Income Tax
liability for income (1) attributable to a member of the Hughes Defense Group
(as defined in the Tax Sharing Agreement) for the period subsequent to the date
of the Hughes Defense Spin-Off or (2) attributable to any entity which becomes
a member of the Hughes Defense Group after the Hughes Defense Spin-Off.
Government Contracts. The Tax Sharing Agreement contains special provisions
relating to Income Taxes which may be reimbursed pursuant to government
contracts.
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Indemnification. Except as provided in the Spin-Off Separation Agreement,
General Motors and New Hughes Electronics generally will indemnify New Raytheon
for all liabilities (other than foreign income tax liabilities) related to the
following:
. Income Tax liabilities incurred by a member of the GM Consolidated Group
(as defined in the Tax Sharing Agreement) arising out of the Hughes Defense
Spin-Off or the Raytheon Merger;
. all costs, expenses and damages from stockholder litigation or
controversies arising in connection with any proposed tax with respect to
the Hughes Defense Spin-Off or the Raytheon Merger;
. all Income Tax liabilities which General Motors or New Hughes Electronics
is obligated to pay as set out in the sections above captioned "Post-
Distribution Taxable Period," "Pre-Distribution Taxable Period" or
"Straddle Period"; and
. any Income Tax liabilities of the Hughes Defense Group resulting from a
breach by New Hughes Electronics or General Motors of any of their
covenants contained in the Tax Sharing Agreement.
Under the terms of the Tax Sharing Agreement, New Raytheon generally will
indemnify General Motors for all liabilities (other than foreign income tax
liabilities) related to the following:
. all Income Tax liabilities which Hughes Defense/New Raytheon is obligated
to pay as set out in the sections above captioned "Post-Distribution
Taxable Period," "Pre-Distribution Taxable Period" or "Straddle Period";
and
. any Income Tax liabilities of any member of the GM Consolidated Group
resulting from a breach by New Raytheon of any of its covenants contained
in the Tax Sharing Agreement.
The Tax Sharing Agreement provides for arbitration to resolve any disputes in
respect of matters covered thereby.
For a description of certain covenants of and related indemnification of
General Motors and certain of its affiliates by Hughes Defense (and, after the
Raytheon Merger, New Raytheon) which are intended to protect the tax-free
status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off and the
Raytheon Merger, see "--Summary of Spin-Off Separation Agreement--Preservation
of Tax-Free Status of the Hughes Transactions and the Raytheon Merger" above.
SUMMARY OF OTHER AGREEMENTS CONTEMPLATED BY THE MASTER SEPARATION AGREEMENT
Pursuant to the Master Separation Agreement, the parties to that agreement
will enter into certain other agreements to implement transitional and
separation arrangements with respect to such matters as intellectual property,
Hughes Research Labs, real estate and environmental matters, employee matters,
stock options, insurance, supply arrangements, transition services and
corporate purchasing. SET FORTH BELOW IS A SUMMARY DESCRIPTION OF THE MATERIAL
TERMS OF SUCH ARRANGEMENTS WITH RESPECT TO EACH OF THESE MATTERS. THIS
DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH AGREEMENTS.
INTELLECTUAL PROPERTY
Pursuant to the provisions of the Master Separation Agreement and the
agreements to be entered into pursuant thereto, Hughes Telecom will acquire or
otherwise own, and Hughes Defense will assign to Hughes Telecom, all of Hughes
Defense's right, title and interest in and to all of Hughes Electronics' or
Hughes Electronics' subsidiaries' intellectual property (including trademarks),
other than the intellectual property relating primarily to the defense
electronics business. Additionally, Hughes Defense will assign to Hughes
Telecom (1) Dual Use Technology, which is intellectual property developed by
Hughes Defense for the defense electronics business (A) that is useful in the
telecommunications and space business as conducted immediately
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prior to the GM Spin-Off Merger Effective Time and (B) which covers components
manufactured or processes that are to be utilized by Hughes Telecom, (2) the
intellectual property of Hughes Research Labs that exists as of the GM Spin-Off
Merger Effective Time and (3) any trademark, service mark or trade name which
contains the name "Hughes." Hughes Defense will grant to Hughes Telecom and
Delco a non-exclusive, perpetual, royalty-free license to make, have made, use,
sell and import products under Hughes Defense's retained intellectual property
for use only in the business of Hughes Telecom and the business of Delco,
respectively, and any new but related businesses that may be conducted by
Hughes Telecom or its affiliates or Delco or its affiliates, as the case may
be, after the GM Spin-Off Merger Effective Time that can be reasonably
classified under the broad category of a telecommunications or space business
or an automotive electronics business, as the case may be. Hughes Telecom will
grant a non-exclusive, perpetual, royalty-free license to Hughes Defense to
make, have made, use, sell and import products under the Dual Use Technology
for use in any business that is not competitive with Hughes Telecom or Delco,
in each case as conducted at the GM Spin-Off Merger Effective Time. Hughes
Telecom will also grant a non-exclusive, perpetual, royalty-free license to
Hughes Defense with respect to the use of certain intellectual property
specified in the Master Separation Agreement that is necessary for the business
of Hughes Defense as conducted at the GM Spin-Off Merger Effective Time.
Hughes Telecom will grant a non-exclusive, perpetual, royalty-free license to
Hughes Defense to make, have made, use, sell and import products under the
intellectual property of Hughes Research Labs that exists as of the GM Spin-Off
Merger Effective Time for use in any business that is not competitive with
Hughes Telecom or Delco, in each case as conducted at the GM Spin-Off Merger
Effective Time.
In addition, effective at the GM Spin-Off Merger Effective Time, Hughes
Telecom will grant a non-exclusive, perpetual, royalty-free trademark and trade
and company name license to Hughes Defense to use the name "Hughes" solely in
connection with the business of Hughes Defense as part of any trade and company
name of New Raytheon (or any subsidiary or division thereof), provided that the
"Raytheon" name is also used as part of such trade or company name and provided
further that "Raytheon" precedes the name "Hughes." In no event, however, will
Hughes Defense have rights to use the logo of the word "Hughes" in the round-
cornered blue rectangle, except for limited circumstances during a transitional
period following the Raytheon Merger.
HUGHES RESEARCH LABS
Hughes Defense and Hughes Telecom each will continue to have an interest in
Hughes Research Labs, Hughes Electronics' research facility located in Malibu,
California. After completion of the transactions contemplated by the Master
Separation Agreement, the research facility will be owned and funded 50% by
each party.
In general, Hughes Research Labs will own the intellectual property resulting
from general research projects and each of Hughes Defense and Hughes Telecom
will have a perpetual, royalty-free license to such intellectual property for
their respective businesses. In addition, each of Hughes Defense and Hughes
Telecom may fund research for special research projects (so long as such
projects do not interfere with general research projects) at cost and the
funding party will be granted a royalty-free, exclusive license from Hughes
Research Labs to intellectual property resulting from such projects. Pursuant
to the contemplated arrangements, each of Hughes Defense and Hughes Telecom can
dissolve Hughes Research Labs after five years (or earlier if one party becomes
affiliated with a competitor of the other party), subject to certain
conditions, including a buy-out arrangement which permits the non-dissolving
party to purchase the other party's interest.
REAL ESTATE AND ENVIRONMENTAL MATTERS
As contemplated by the Master Separation Agreement, substantially all real
property owned or leased by Hughes Electronics and occupied by Hughes Defense
will be retained by Hughes Defense, including Hughes Electronics' present
corporate headquarters building in Los Angeles. Similarly, substantially all
real property
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owned or leased by Hughes Electronics and occupied by Hughes Telecom will be
transferred to Hughes Telecom. Certain facilities, however, will be shared by
Hughes Defense and Hughes Telecom, with one party leasing or sub-leasing the
shared premises from the other. Additionally, all environmental liabilities
will be the responsibility of the business that created the contamination.
Thus, for example, the ongoing environmental litigation in Tucson, Arizona will
be a liability of New Raytheon after the Raytheon Merger.
EMPLOYEE MATTERS; PENSION PLAN LITIGATION
Pursuant to the Master Separation Agreement, Hughes Defense will agree to
maintain for its employees through the end of 1998 compensation and benefits
which are, in the aggregate, substantially comparable to those currently
provided. Hughes Defense will also agree to continue indefinitely, for
contributory participants, without adverse change, the features of the
retirement plans which provide for the determination of benefits, the early
retirement subsidy and cost of living adjustments. Additionally, Hughes Defense
will agree to continue company-paid retiree medical benefits for contributory
participants for a period of five years and thereafter as long as such benefits
are provided to other retirees of New Raytheon. The aggregate assets and
liabilities of the Hughes Bargaining and Nonbargaining Retirement Plans for
active and inactive employees will be allocated between Hughes Defense and
Hughes Telecom with those allocated to Hughes Defense transferred to separate
plans of Hughes Defense.
We have reached an agreement with Raytheon concerning a litigation involving
the Hughes Nonbargaining Retirement Plan. The agreement was negotiated as a
result of a decision rendered in a lawsuit entitled Jacobson, et al. v. Hughes
Aircraft Co. et al after the Raytheon Merger Agreement was signed.
The complaint in Jacobson was filed in January 1992 by five retired employees
against Hughes Defense and the Hughes Nonbargaining Retirement Plan as a
putative class action on behalf of all participants who contributed to the
plan. It alleges, among other things, that the Hughes Nonbargaining Retirement
Plan was effectively split into two separate plans (one contributory and one
non-contributory) by virtue of amendments made in 1991, when Hughes Electronics
provided for non-contributory benefits for newly hired employees and certain
other employees, and that the resulting contributory plan was thereby
constructively terminated. The complaint further alleges that certain
amendments to the plan permitted surplus assets to be used to fund benefits for
newly hired and certain other employees in violation of Hughes Defense's
fiduciary duties to plan participants. The complaint seeks, among other relief,
(1) supplemental benefits to contributory participants attributable to surplus
plan assets, (2) the allocation of plan assets so as to provide benefits solely
to contributory participants and not to provide benefits to non-contributory
participants and (3) a prohibition on the use of surplus assets to provide
benefits to non-contributory plan participants. Based on the current assets and
liabilities of the plan, the amount of surplus assets subject to reallocation
based on the claims asserted could range from approximately $200 million to
$600 million. The complaint does not quantify the amount of the plaintiffs'
claims and Hughes Defense is unable to estimate an amount at this time.
At the time the Raytheon Merger Agreement was executed, the Jacobson
plaintiffs were appealing a decision of the U.S. District Court in Los Angeles,
which had dismissed their lawsuit for failure to state a claim on which any
relief could be granted under applicable law. Subsequently, a decision by the
U.S. Court of Appeals for the Ninth Circuit reversed the dismissal and remanded
the case for further proceedings. Hughes Defense filed with the Court of
Appeals a request for a rehearing seeking to reinstate the trial court's
dismissal of the claims. The Court of Appeals recently denied Hughes Defense's
request for a rehearing.
Hughes Defense maintains, among other things, that a termination of the
Hughes Nonbargaining Retirement Plan could only be effectuated in accordance
with regulations of the U.S. Pension Benefit Guaranty Corporation (the "PBGC"),
the governmental agency that regulates pension plan terminations, and that such
regulations do not provide for termination in the manner asserted by the
plaintiffs. In a friend-of-the-court brief in support of Hughes Defense's
request for rehearing, the PBGC took the position that a pension plan may be
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CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
terminated only in accordance with PBGC regulations and not constructively.
Hughes Defense intends to seek review of the amended Court of Appeals decision
by the U.S. Supreme Court.
The agreement with Raytheon contemplates that Hughes Telecom would have the
sole right to control, at its expense, the defense of the Jacobson litigation
as against both the Hughes Nonbargaining Retirement Plan and the plan of Hughes
Defense to be established after the Raytheon Merger with certain of the assets
of that plan, and to settle the litigation at any time. Further, in the event a
final judgment adverse to the defendants is entered in the Jacobson case or a
settlement thereof, Hughes Telecom would indemnify such plan or New Raytheon,
as appropriate, for certain resulting liabilities. However, Hughes Telecom
would have such indemnity obligation in the case of a judgment only if a
finding were to be made by an arbitration panel that the Raytheon Merger
Agreement would have permitted Raytheon to refuse to consummate the Raytheon
Merger, solely by reason of the pendency of the Jacobson litigation, in the
absence of a resolution of this dispute as contemplated by the agreement. Under
the agreement, in consideration for Hughes Telecom's undertaking, Raytheon
agreed that it will not assert that any past or future development in the
Jacobson litigation constitutes a breach of any representation or warranty of
Hughes Defense contained in the Raytheon Merger Agreement or results in any
condition to Raytheon's obligation to consummate the Raytheon Merger not being
satisfied.
STOCK OPTIONS
Pursuant to the Master Separation Agreement, all stock options in respect of
GM Class H Common Stock, vested and non-vested, held by Hughes Defense
employees will be converted into stock options in respect of Class B Common
Stock. The formula for conversion is intended to preserve the value of all such
stock options (i.e., market value as of the effective time of the transactions
less exercise price) in all material respects. The GM Board, based on the
recommendation of its Executive Compensation Committee, also has determined
that all stock options in respect of GM Class H Common Stock held by Hughes
Telecom employees will be converted into stock options in respect of New GM
Class H Common Stock and those held by Delco employees will be converted into
stock options in respect of GM $1 2/3 Common Stock. The formulas for conversion
are similarly intended to preserve the value of all such options in all
material respects. In addition, appropriate adjustments will be made to
preserve value in all material respects on options in respect of GM $1 2/3
Common Stock.
INSURANCE
Hughes Defense will institute a separate insurance program after the GM Spin-
Off Merger Effective Time while remaining entitled to assert claims for events,
acts or omissions first occurring under policies maintained by Hughes Telecom
or General Motors prior to the GM Spin-Off Merger Effective Time. To the extent
permitted by law and contract, such policies will remain under the control and
administration of Hughes Telecom or General Motors with settlement authority on
site-specific environmental claims afforded to Hughes Defense on a basis not
prejudicial to Hughes Telecom or General Motors.
SUPPLY ARRANGEMENTS
Hughes Defense and Hughes Telecom will continue to supply various technical
services to each other after the GM Spin-Off Merger Effective Time. In
addition, Hughes Telecom will procure as prime contractor, and Hughes Defense
will make available as subcontractor, certain products and services for a
period of two years after the GM Spin-Off Merger Effective Time. The products
and services generally will be provided to the other party at market prices.
TRANSITION SERVICES
Hughes Defense and Hughes Telecom will continue to provide various
transitional services to each other at cost for a minimum transition period of
twelve months after the GM Spin-Off Merger Effective Time (with longer periods
for certain information systems services such as payroll). The services to be
provided will be substantially similar in scope, level and cost with services
provided at the GM Spin-Off Merger Effective Time.
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If the periods of providing such services are extended beyond the initial
transition period pursuant to agreement of New Raytheon and New Hughes
Electronics, the applicable services generally will then be provided at cost
plus six percent.
CORPORATE PURCHASING
For an initial period of one year after the GM Spin-Off Merger Effective Time
(with termination upon 90-day notice thereafter), (1) New Raytheon will have
access to GM's Worldwide Purchasing Process, (2) General Motors, New Hughes
Electronics and New Raytheon will continue to work together under joint
purchasing agreements and (3) General Motors will continue to support Hughes
Defense's Tomahawk procurement activities in the manner supported prior to the
GM Spin-Off Merger Effective Time until completion of New Raytheon's
participation in such program.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
CHAPTER 4
FINANCIAL AND BUSINESS REVIEWS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL MOTORS PRO FORMA CONSOLIDATED
CAPITALIZATION................................................... 151
INTRODUCTION TO THE FINANCIAL AND BUSINESS REVIEWS
OF HUGHES DEFENSE, DELCO AND HUGHES TELECOM...................... 153
Overview......................................................... 153
Purchase Accounting Adjustments.................................. 153
HUGHES DEFENSE SELECTED COMBINED HISTORICAL
FINANCIAL DATA................................................... 154
HUGHES DEFENSE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................... 155
BUSINESS OF HUGHES DEFENSE........................................ 159
Introduction..................................................... 159
Sensors & Communications Systems................................. 160
Weapons Systems.................................................. 162
Information Systems.............................................. 164
Defense Systems.................................................. 166
U.S. Government Contracts........................................ 167
DELCO SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA... 168
DELCO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS. 169
DELCO NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS....................................................... 172
DELCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 173
BUSINESS OF DELCO................................................. 177
Introduction..................................................... 177
Principal Products and Sales..................................... 178
Automotive....................................................... 179
Sales to GM NAO.................................................. 179
International and Other Sales.................................... 181
Acquisitions and Alliances....................................... 182
Competition...................................................... 182
Integration of Delco and Delphi.................................. 183
HUGHES TELECOM SELECTED COMBINED HISTORICAL AND
PRO FORMA FINANCIAL DATA......................................... 184
HUGHES TELECOM UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS.......................... 185
HUGHES TELECOM NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS............................................. 189
HUGHES TELECOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 192
</TABLE>
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BUSINESS OF HUGHES TELECOM........................................ 197
Introduction..................................................... 197
Satellite Manufacturing.......................................... 197
Network Systems.................................................. 199
Direct-to-Home Broadcast......................................... 200
Satellite Services............................................... 203
Hughes Avicom.................................................... 204
Corporate and Other.............................................. 205
Strategy and Growth.............................................. 205
Acquisitions, Strategic Alliances and Divestitures............... 206
Regulation....................................................... 206
U.S. Government Contracts........................................ 206
Competition...................................................... 207
Research and Intellectual Property............................... 208
Employees........................................................ 208
Real Property.................................................... 208
Legal Proceedings................................................ 209
Directors and Executive Officers of New Hughes Electronics....... 211
RAYTHEON SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL
DATA............................................................. 212
OVERVIEW OF RAYTHEON BUSINESS..................................... 213
General.......................................................... 213
Electronics...................................................... 213
Engineering and Construction..................................... 213
Aircraft......................................................... 214
Appliances....................................................... 214
</TABLE>
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
GENERAL MOTORS PRO FORMA CONSOLIDATED CAPITALIZATION
The following table sets forth the capitalization of General Motors and its
consolidated subsidiaries at September 30, 1997, and as adjusted to reflect
consummation of the Hughes Transactions. The following table should be read in
conjunction with GM's Consolidated Financial Statements (including the notes
thereto) and Management's Discussion and Analysis in the GM 1996 Form 10-K,
which is incorporated into this document by reference, including the
information with respect to Hughes Electronics in Exhibit 99 thereto.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------
PRO
ACTUAL (A) ADJUSTMENTS FORMA
---------- ----------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Notes and loans payable .................... $ 90,914 $ 4,212 (d)
(4,266)(e)
(629)(g) $ 90,231
Minority interests.......................... 735 -- 735
General Motors--obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely junior
subordinated debentures of General Motors--
Series D................................... 79 -- 79
General Motors--obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely junior
subordinated debentures of General Motors--
Series G................................... 143 -- 143
STOCKHOLDERS' EQUITY
Preference stocks.......................... 1 -- 1
GM common stock
GM $1 2/3 Common Stock (b)................ 1,180 -- 1,180
GM Class H Common Stock................... 10 (10)(f) --
New GM Class H Common Stock............... -- 10 (f) 10
Capital surplus (principally paid-in
capital) (b).............................. 16,211 -- 16,211
Retained earnings.......................... 9,846 4,134 (c)
(5,234)(e)
(112)(e)
8,634
-------- ------- --------
Subtotal.................................. 27,248 (1,212) 26,036
Minimum pension liability adjustment....... (3,490) 86 (e) (3,404)
Accumulated foreign currency translation
adjustments............................... (727) 26 (e) (701)
Net unrealized gains on investments in
certain debt and equity securities........ 547 -- 547
-------- ------- --------
Total stockholders' equity................ 23,578 (1,100) 22,478
-------- ------- --------
Total capitalization...................... $115,449 $(1,783) $113,666
======== ======= ========
<CAPTION>
PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Amount Available for the Payment of
Dividends
GM $1 2/3 Common Stock..................... $ 22,511 $ (822)(h) 21,689
GM Class H Common Stock.................... 3,546 (278)(h)
(3,268)(f) --
New GM Class H Common Stock................ -- 3,268 (f) 3,268
-------- ------- --------
$ 26,057 $(1,100) $ 24,957
======== ======= ========
</TABLE>
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- ----------
(a) General Motors has initiated competitiveness studies which are expected to
be completed in the fourth quarter of 1997 or early 1998 and are expected
to result in charges against income totaling approximately $2 billion to $3
billion after taxes or $2.85 to $4.27 per share of GM $1 2/3 Common Stock.
See "Recent Developments--General Motors Competitiveness Studies" in
Chapter 1 for additional information.
(b) During the nine months ended September 30, 1997, General Motors used $2.85
billion in cash to acquire 49.2 million shares of GM $1 2/3 Common Stock,
which completed GM's $2.5 billion stock repurchase program announced in
January 1997 and represented 14 percent of GM's second $2.5 billion stock
repurchase program announced in August 1997. General Motors also used
approximately $503 million to repurchase shares of GM $1 2/3 Common Stock
for certain employee benefit plans during the nine months ended September
30, 1997. The stock repurchases to be made under the second repurchase
program would represent about 5% of the outstanding shares of GM $1 2/3
Common Stock based on the NYSE's closing price of $64.44 per share on
Friday, August 1, 1997.
(c) Represents the gain on the Hughes Defense Spin-Off, assuming the price of
Raytheon Common Stock is $51.00 (i.e., the Recent Raytheon Stock Price) at
the time of the Hughes Defense Spin-Off, calculated as follows (in
millions):
<TABLE>
<S> <C>
Assumed market value of Hughes Defense Net Assets before additional
borrowing by Hughes Defense........................................ $9,500
Less: Net Book Value of Hughes Defense Net Assets at September 30,
1997............................................................... 5,266
Estimated Transaction Costs......................................... 100
------
Gain............................................................. $4,134
======
</TABLE>
The Hughes Defense Spin-Off and the Raytheon Merger would have a total value
of $9.5 billion (so long as the market price of Raytheon Common Stock is
within a collar range of $44.42 and $54.29 per share). The Recent Raytheon
Stock Price ($51.00 per share on November 7, 1997) would indicate a total
transaction value of approximately $9.5 billion. For additional information
about the collar range, see "Description of the Raytheon Merger--General--
Indicated Value of the Hughes Defense Spin-Off and the Raytheon Merger to
General Motors and Its Common Stockholders."
(d) Reflects additional borrowings incurred by Hughes Defense prior to the
Hughes Defense Spin-Off.
(e) Represents the impact of the Hughes Defense Spin-Off, including the
additional borrowings of $4.2 billion incurred by Hughes Defense prior to
the Hughes Defense Spin-Off, as well as the elimination of certain minimum
pension liability and foreign currency translation adjustments relating to
Hughes Defense.
(f) Reflects the recapitalization of GM Class H Common Stock into New GM Class
H Common Stock.
(g) Reflects the repayment of Hughes Electronics commercial paper with proceeds
of the additional borrowings incurred by Hughes Defense prior to the Hughes
Defense Spin-Off.
(h) Based on the Recent Raytheon Stock Price, reflects the allocation of the
estimated net reduction in GM stockholders' equity. For additional
information, see "New GM Class H Common Stock--GM Certificate of
Incorporation Provisions Regarding Dividends" in Chapter 6.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
INTRODUCTION TO THE
FINANCIAL AND BUSINESS REVIEWS OF
HUGHES DEFENSE, DELCO AND HUGHES TELECOM
OVERVIEW
Hughes Electronics currently conducts its operations in three primary
business segments: Aerospace and Defense Systems, Automotive Electronics and
Telecommunications and Space. In 1996, these segments represented,
respectively, 40%, 33% and 26% of Hughes Electronics' revenues and 44%, 41% and
16% of Hughes Electronics' operating profit (excluding purchase accounting
adjustments related to GM's acquisition of Hughes Aircraft in 1985), and
operations reported as Corporate and Other represented approximately 1% of
revenues and reported an operating loss of $14.2 million. Information
concerning Hughes Electronics' consolidated financial performance, including
Management's Discussion and Analysis, may be found in certain documents
incorporated into this document by reference, including in Exhibit 99 to the GM
1996 Form 10-K and GM's Forms 10-Q for the periods ended March 31, 1997, June
30, 1997 and September 30, 1997 (currently expected to be filed on or about
November 12, 1997). For various ways you can obtain this information, see
"Where You Can Find More Information" in Chapter 7.
The Hughes Transactions involve all three primary business segments of Hughes
Electronics, as well as the operations reported as Corporate and Other. The
Hughes Reorganization includes a number of preliminary transactions necessary
to separate the three primary business segments of Hughes Electronics, and the
operations reported as Corporate and Other, into Hughes Defense, Delco and
Hughes Telecom. See "Description of the Hughes Transactions--General--Hughes
Reorganization" and "Separation and Transition Arrangements" in Chapter 3.
After giving effect to the Hughes Reorganization, (1) Hughes Defense generally
will consist of businesses currently reported in the Aerospace and Defense
Systems segment of Hughes Electronics, (2) Delco generally will consist of
businesses currently reported in the Automotive Electronics segment of Hughes
Electronics and (3) Hughes Telecom generally will consist of businesses
currently reported in the Telecommunications and Space segment and Corporate
and Other.
The separate financial statements of Hughes Defense, Delco and Hughes Telecom
contained in this document have been prepared in accordance with generally
accepted accounting principles and reflect the businesses to be included in
each after giving effect to the Hughes Reorganization. Hughes Electronics
corporate assets and liabilities have been included in the separate financial
statements to the extent identifiable to individual business units. The
separate financial statements also include allocations of corporate expenses
from Hughes Electronics. Such allocations are based either on actual usage or
on allocation methodologies which comply with U.S. government cost accounting
standards.
PURCHASE ACCOUNTING ADJUSTMENTS
The separate financial statements of Hughes Defense and Hughes Telecom
reflect the application of purchase accounting adjustments arising from GM's
acquisition of Hughes Aircraft in 1985. The GM Certificate of Incorporation, as
proposed to be amended in the GM Spin-Off Merger, will provide that, in
calculating the amount available for payment of dividends on New GM Class H
Common Stock (which amount will also be used to calculate earnings per share of
New GM Class H Common Stock), amortization of excess purchase price for GM's
acquisition of Hughes Aircraft in 1985 applicable to Hughes Telecom will not be
charged against the earnings of Hughes Telecom. See "New GM Class H Common
Stock--GM Certificate of Incorporation Provisions Regarding Dividends" in
Chapter 6.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES DEFENSE SELECTED COMBINED HISTORICAL FINANCIAL DATA
The following Hughes Defense selected combined historical financial data have
been derived from the financial statements of Hughes Defense. The data should
be read in conjunction with Hughes Defense's Combined Financial Statements
(including the notes thereto) included in Appendix C to this document. The
income statement data for the periods ended December 31, 1996, 1995 and 1994
and the balance sheet data as of December 31, 1996 and 1995 have been derived
from the combined financial statements of Hughes Defense audited by Deloitte &
Touche LLP, independent public accountants. The income statement data for the
periods ended December 31, 1993 and 1992 and September 30, 1997 and 1996 and
the balance sheet data as of September 30, 1997 and 1996 and December 31, 1994,
1993 and 1992 have been derived from unaudited combined financial statements of
Hughes Defense. In the opinion of management, the unaudited combined financial
statements reflect all adjustments (consisting only of normal recurring items)
that are necessary for the fair presentation of financial position and results
of operations for such periods. Operating results for the nine-month periods
ended September 30, 1997 and 1996 are not necessarily indicative of the results
that may be expected for the entire year.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------------
1997 1996 1996 1995 1994 1993 1992 (A)
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............... $5,157.1 $4,588.8 $6,382.7 $5,921.8 $5,896.0 $6,353.5 $5,503.8
Other income (expense),
net.................... 10.3 (2.0) 9.1 43.0 22.5 24.7 45.2
-------- -------- -------- -------- -------- -------- --------
Total Revenues......... 5,167.4 4,586.8 6,391.8 5,964.8 5,918.5 6,378.2 5,549.0
-------- -------- -------- -------- -------- -------- --------
Cost and Expenses....... 4,707.7 4,152.5 5,770.3 5,309.5 5,314.5 5,605.1 5,836.8
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 75.8 75.8 101.3 101.3 101.3 101.3 101.3
-------- -------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 4,783.5 4,228.3 5,871.6 5,410.8 5,415.8 5,706.4 5,938.1
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... 383.9 358.5 520.2 554.0 502.7 671.8 (389.1)
Income taxes (credit)... 176.6 164.9 239.3 235.4 226.2 293.9 (182.9)
Cumulative effect of
accounting changes..... -- -- -- -- (7.1) -- (268.5)
-------- -------- -------- -------- -------- -------- --------
Net Income (loss)....... $ 207.3 $ 193.6 $ 280.9 $ 318.6 $ 269.4 $ 377.9 $ (474.7)
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 72.9 $ 33.4 $ 59.7 $ 15.7 $ 58.7 $ 1.6 $ 9.1
Current assets.......... 3,047.2 2,968.9 2,907.7 2,880.0 2,462.0 2,529.3 2,692.9
Total assets............ 7,162.1 7,079.9 7,028.4 7,025.9 6,249.1 6,548.6 7,012.9
Current liabilities..... 1,535.2 1,737.0 1,889.0 1,959.9 1,604.9 1,814.9 1,624.0
Long-term debt and
capitalized leases..... 32.4 36.2 34.4 49.7 57.6 83.9 38.0
Parent Company's net
investment............. 5,265.6 4,975.2 4,823.0 4,680.2 4,198.2 4,278.3 4,801.0
OTHER DATA:
Depreciation and
amortization........... $ 192.2 $ 177.5 $ 246.6 $ 240.5 $ 265.5 $ 295.9 $ 303.5
Capital expenditures.... $ 95.5 $ 113.3 $ 178.3 $ 99.4 $ 174.1 $ 119.8 $ 88.1
</TABLE>
- ----------
(a) Includes the effect of a pre-tax restructuring charge of $833.1 million.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES DEFENSE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996.
RESULTS OF OPERATIONS
Revenues. Hughes Defense reported revenues for the first nine months of 1997
of $5,167.4 million, an increase of 12.7% from the $4,586.8 million reported in
the first nine months of 1996. The growth was primarily the result of the
build-up of several newer programs, particularly information systems and
service programs such as Desktop V, Wide Area Augmentation System and Hughes
Air Warfare Center. Additionally, revenues increased due to the acquisition of
the Marine Systems Group of Alliant Techsystems in March 1997, increased
engineering effort on several missile programs including Standard, EKV and ESSM
and increased activity on the Phalanx program. Finally, Sensors &
Communications Systems had increased revenues on certain radar production
programs.
Other Income (Expense)--Included in revenues is other income of $10.3
million for the first nine months of 1997 and other expense of $2.0 million for
the same period in the prior year.
Operating Profit. Operating profit for the first nine months of 1997 was
$445.7 million, a 4.3% increase from the $427.2 million reported during the
comparable period in the prior year. The operating profit margin for 1997 was
8.6% compared with 9.3% in the prior year's period. The increase in operating
profit was due primarily to the revenue growth described above, partially
offset by lower operating margins. The reduced operating profit margin was
primarily due to provisions taken on certain air traffic control and training
contracts, offset in part by strong performance on several radar programs.
Future operating profits could be adversely impacted by reductions in the U.S.
defense budget.
Costs and Expenses. Selling, general and administrative expenses for the
first nine months of 1997 were $273.6 million, an increase of $46.2 million
from $227.4 million in the same period last year. The increase was principally
due to the addition of Hughes Air Warfare Center and the acquisition of Alliant
Techsystems in 1997 and increased business effort within Information Systems.
The effective income tax rate was 46.0% for the first nine months of 1997 and
1996.
Earnings. Hughes Defense earnings increased 7.1% to $207.3 million in the
first nine months of 1997 compared with $193.6 million reported in the same
period in 1996. The increase was principally due to the increase in operating
profit discussed above.
Backlog. The backlog at September 30, 1997 of $7,300.6 million decreased from
the $7,558.5 million reported at September 30, 1996, primarily due to declines
at Weapon Systems.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $72.9 million at
September 30, 1997, an increase of $13.2 million from the $59.7 million
reported at December 31, 1996. The increase was due primarily to net
contributions from the Parent Company of $243.3 million, net increase in short-
term borrowings of $24.1 million and proceeds from the disposal of certain
property, offset by cash used in operations, the acquisition of the Marine
Systems Group of Alliant Techsystems for $143.3 million, and capital
expenditures.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.98 at September 30, 1997 and 1.54
at December 31, 1996. Working capital was $1,512.0 million at September 30,
1997 compared to $1,018.7 million at December 31, 1996.
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Property and Equipment. Property, net of accumulated depreciation, increased
$9.4 million to $1,094.5 million at September 30, 1997, compared to $1,085.1
million reported at December 31, 1996. Expenditures for
property were $95.5 million through September 30, 1997 compared with $113.3
million for the comparable period in 1996. The decrease was largely the result
of lower expenditures in Information Systems which was partially offset by
increased expenditures in Weapon Systems for various missile programs.
Debt and Capitalized Leases. Long-term debt and capitalized leases at
September 30, 1997 were $32.4 million compared to $34.4 million at December 31,
1996.
Acquisitions. In March 1997, Hughes Defense acquired the Marine Systems Group
of Alliant Techsystems, Inc. for $143.3 million in cash. The Marine Systems
Group is a leader in lightweight torpedo manufacturing and the design and
manufacturing of underwater surveillance, sonar and mine warfare systems.
1996 COMPARED TO 1995
RESULTS OF OPERATIONS
Revenues. Hughes Defense revenues were $6,391.8 million in 1996, a 7.2%
increase from the $5,964.8 million reported in 1995. The growth was primarily
attributable to additional revenues resulting from the December 1995
acquisition of Hughes Defense Communications (formerly Magnavox Electronic
Systems Company) and the build-up of newer programs including Desktop V, Wide
Area Augmentation System and Land Warrior. Further increases were attributable
to the full year impact of the CAE-Link acquisition, increases in certain
international training and in civil systems contracts. These increases were
partially offset by lower production rates on several missile programs
including Stinger, Standard and Sparrow and the divestiture of certain product
lines.
Other Income--Included in revenues is other income of $9.1 million for 1996
and $43.0 million for 1995. The decrease from 1995 was primarily the result of
lower royalty income in 1996 and gains realized from selling certain product
lines and businesses and the favorable settlement of an environmental insurance
claim in 1995.
Operating Profit. Operating profit was $603.4 million in 1996 compared to
$586.9 million in 1995. The increase in operating profit was due primarily to
the increased revenues described above, offset in part by the lower operating
margin. The operating profit margin on the same basis for 1996 declined to 9.5%
from 9.9% in 1995 primarily due to a continued shift from production programs
to engineering and development programs, and growth in information systems and
services revenues.
Costs and Expenses. Selling, general and administrative expenses were $321.6
million in 1996 compared to $311.0 million in 1995. The increase was primarily
due to increased bidding costs in 1996 on certain programs within Information
Systems.
The effective income tax rate was 46.0% in 1996 and 42.5% in 1995. The lower
effective tax rate in 1995 was the result of an investment tax credit.
Earnings. Hughes Defense 1996 earnings were $280.9 million compared with
$318.6 million reported in 1995. The decrease in 1996 earnings was primarily
related to higher interest expense and the decreases in other income described
above.
Backlog. The 1996 year-end backlog of $7,889.1 million increased from the
$7,518.1 million reported at the end of 1995, primarily due to the acquisition
of Hughes Defense Communications (formerly Magnavox Electronics Systems
Company) in 1995 and activity related to Tube-launched, Optically-tracked,
Wire-guided ("TOW") missile and UAE Frigate programs.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $59.7 million at
December 31, 1996, an increase of $44.0 million from the $15.7 million reported
at December 31, 1995. Operating activities generated cash of $353.0 million
which was partially offset by capital expenditures of $178.3 million and net
distributions to the Parent Company of $136.1 million.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.54 at December 31, 1996 and 1.47
at December 31, 1995. Working capital was $1,018.7 million at December 31, 1996
as compared to $920.1 million at December 31, 1995. The increases were
principally due to the increase in cash described above.
Property and Equipment. Property, net of accumulated depreciation, increased
$23.2 million to $1,085.1 million in 1996 from $1,061.9 million reported in
1995. Expenditures for property were $178.3 million and $99.4 million, in 1996
and 1995, respectively. The increase was related to capital expenditures to
support expanding business requirements, primarily within Information Systems.
Debt and Capitalized Leases. Long-term debt and capitalized leases were $34.4
million at December 31, 1996 compared to $49.7 million at December 31, 1995.
The decline was due to scheduled principal repayments and the reclassification
of certain amounts to current liabilities.
1995 COMPARED TO 1994
RESULTS OF OPERATIONS
Revenues. Hughes Defense revenues were $5,964.8 million in 1995, a 0.8%
increase from the $5,918.5 million reported in 1994. The increase was due to
additional revenues related to the 1995 acquisition of CAE-Link Corporation and
increased effort on the Tomahawk program. Such revenue increases were offset in
part by lower production rates on several missile programs, including Advanced
Medium-Range Air-to-Air Missile ("AMRAAM"), TOW and Advanced Cruise Missile
("ACM").
Other Income--Included in revenues is other income of $43.0 million in 1995
and $22.5 million in 1994. The increase was largely attributable to gains
recognized from the sale in 1995 of certain product lines and businesses and
the favorable settlement of an environmental insurance claim in 1995.
Operating Profit. Operating profit was $586.9 million in 1995 compared to
$545.1 million in 1994. The operating profit margin on the same basis for 1995
increased to 9.9% from 9.2% in 1994 largely due to a provision taken in 1994
for certain air traffic control contracts.
Costs and Expenses. Selling, general and administrative expenses were $311.0
million in 1995 compared to $323.2 million in 1994. The decline was primarily
attributable to facilities consolidation costs incurred in 1994 offset by the
acquisition of CAE-Link in 1995.
The effective income tax rate was 42.5% in 1995 and 45.0% in 1994. The lower
tax rate in 1995 was the result of an investment tax credit.
Earnings. Hughes Defense 1995 earnings were $318.6 million compared with
$269.4 million reported in 1994. The increase was largely due to increased
operating profit as described above, the lower effective tax rate in 1995 and
the other income increases. Earnings in 1994 included the unfavorable effect of
an accounting change for postemployment benefits other than pensions. Excluding
the accounting change, Hughes Defense earnings in 1994 would have been $276.5
million.
Backlog. The 1995 year-end backlog of $7,518.1 million decreased from the
$8,465.6 million reported at the end of 1994, due to several large orders
received in 1994 on Tomahawk production and engineering, F-15 and B-2 radar
production and TOW missile awards.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $15.7 million at
December 31, 1995, a decrease of $43.0 million from the $58.7 million reported
at December 31, 1994. The decrease in cash was primarily due to the
acquisitions of CAE-Link and Magnavox Electronic Systems Company for $176.0
million and $373.2 million, respectively, partially offset by cash provided by
operating activities and proceeds from the sale of the certain product lines
and businesses and the disposal of certain property.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.47 at December 31, 1995 and 1.53
at December 31, 1994, relatively unchanged. Working capital was $920.1 million
at December 31, 1995 compared to $857.1 million at December 31, 1994.
Property and Equipment. Property, net of accumulated depreciation, decreased
$34.6 million to $1,061.9 million in 1995 from $1,096.5 million in 1994.
Expenditures for property were $99.4 million and $174.1 million, in 1995 and
1994, respectively. The decrease in 1995 expenditures was due to the high level
of expenditures in 1994 related to the consolidation of facilities in an effort
to increase the operational efficiencies of manufacturing and engineering
activities.
Debt and Capitalized Leases. Long-term debt and capitalized leases were $49.7
million at December 31, 1995, a decrease of $7.9 million from the $57.6 million
reported at December 31, 1994. The decline was primarily due to scheduled
principal repayments.
Acquisitions and Divestitures. In February 1995, Hughes Defense completed the
acquisition of CAE-Link Corporation, an established supplier of simulation,
training and technical services, primarily to the U.S. military and NASA, for
$176.0 million. In December 1995, Hughes Defense acquired Magnavox Electronics
Systems Company, a leading supplier of military tactical communications,
electronic warfare and command and control systems, for $382.4 million,
consisting of cash, notes and additional amounts to be paid.
During 1995, Hughes Defense divested several non-strategic enterprises
resulting in aggregate proceeds of approximately $23.6 million with no
significant net income impact.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
BUSINESS OF HUGHES DEFENSE
INTRODUCTION
The following description of the business of Hughes Defense gives effect to
the Hughes Reorganization but does not give effect to the Raytheon Merger.
Accordingly, the following description does not address the strategy or
business plans of New Raytheon, which are separately addressed under "Overview
of New Raytheon Business" in Chapter 5.
Hughes Defense has been a major producer of electronics-based aerospace and
defense products and systems for more than four decades and is a leading
supplier of defense electronics products and services to the U.S. government.
Hughes Defense has positioned itself as a leading developer and producer of a
variety of tactical programs and as a subcontractor for certain types of
subsystems for strategic purposes rather than seeking to become a prime
contractor for major strategic weapons platforms such as tanks and aircraft.
This permits Hughes Defense to participate in major segments of the defense
market while reducing the impact of specific program cancellations. During
1996, no single Department of Defense program accounted for more than 6% of
Hughes Defense's revenues, and the ten largest Department of Defense programs,
in the aggregate, accounted for less than 33% of Hughes Defense's revenues.
Approximately 64% of Hughes Defense's 1996 revenues were attributable to sales
to the Department of Defense.
Hughes Defense's business strategy has been to strengthen its leadership
position in aerospace and defense electronics products, systems and services
through continued emphasis on technological advances, operational efficiencies,
cost reduction and competitiveness. Due to its technological capabilities and
the volume of its products and systems in operation around the world, Hughes
Defense believes that it has capitalized on the opportunities presented by the
continuing trend toward upgrading and retrofitting electronic systems as a
cost-effective alternative to developing new strategic weapons platforms.
Hughes Defense also has been pursuing its strategy of reducing its
vulnerability to reductions in U.S. defense spending by diversifying its
customer base and product line, with emphasis on international markets and non-
defense government agencies. Hughes Defense has been seeking to expand its non-
defense businesses by building on its expertise and experience in developing
and manufacturing defense electronics systems and providing related services.
Hughes Defense has also sought to diversify both its product line and its
customer base with respect to its sales to the Department of Defense. By
positioning itself as a leading developer and producer of a variety of tactical
programs and as a subcontractor for certain types of subsystems for strategic
programs, Hughes Defense participates in major segments of the defense market
while reducing the impact of specific program cancellations. As the U.S.
defense budget has declined in recent years, the Pentagon has increasingly used
electronic and tactical weapons upgrades to extend the capabilities of existing
platforms. Tactical programs, such as airborne radar systems and missile
programs, typically involve the large-scale production of expendable products
or electronics systems which are later upgraded. Hughes Defense provides
subsystems for a variety of strategic programs in which its technological
capabilities may offer it a competitive advantage. Hughes Defense's strategy
has also included diversification of its customer base. In 1996, no single
branch of the U.S. Armed Forces accounted for more than 25% of Hughes Defense's
revenues.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Hughes Defense currently conducts its operations through three principal
business units: Sensors & Communications Systems, Weapons Systems and
Information Systems. In addition, Hughes Defense has a Defense Systems business
unit which engages in systems integration work. The following table sets forth
the revenues of each of these business units for each of the last three years.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Sensors & Communications Systems........................ $2,522 $2,214 $2,351
Weapons Systems......................................... 1,979 2,066 2,387
Information Systems..................................... 2,202 1,923 1,529
Defense Systems......................................... 56 35 --
Intercompany Sales (a).................................. (367) (273) (348)
------ ------ ------
$6,392 $5,965 $5,919
====== ====== ======
</TABLE>
- ------------
(a) Represents intercompany sales between Hughes Defense business units, which
are eliminated in consolidation.
SENSORS & COMMUNICATIONS SYSTEMS
Hughes Defense's Sensors & Communications Systems ("SCS") business unit
designs, develops and produces sophisticated radar (ground and airborne),
communications and electro-optical equipment systems for military use. SCS also
produces some of the critical high value components within these systems, such
as processors and focal planes.
SENSOR SYSTEMS
Hughes Defense's sensor systems consist of radars, electro-optical systems,
electronic warfare systems and processors.
Radars. The principal product groups of the radar business are as follows:
<TABLE>
<CAPTION>
BUSINESS DESCRIPTION
-------- -----------
<S> <C>
Airborne Radar Multi-mode fire control, reconnaissance and surveillance
radar and related upgrades for military aircraft for sale
to the U.S. and other governments. Radar Systems for use
in customs, law enforcement, environmental monitoring and
military applications.
Ground-Based Radar Ground-based radar and short-range air defense systems.
</TABLE>
Airborne Radar--Hughes Defense is a leading developer and producer of
sophisticated airborne radar systems. Its airborne fighter radar units are
among the most sophisticated in the world. They are deployed by the U.S.
military aboard four of its five front-line fighter aircraft (the F-14, the F-
15, the F/A-18 and the AV-8B Harrier jet), the AC-130U gunship, the U-2R
reconnaissance aircraft and the B-2 stealth bomber, as well as by a number of
foreign militaries.
Ground-Based Radar--Hughes Defense supplies a variety of ground-based radar
products and short-range air defense systems. Hughes Defense's ground-based
radar products are deployed in the U.S. Army's Forward Area Air Defense system,
the NASAMS, other medium- and short-range air defense systems and the
Firefinder family of weapon-locating radars in use by the military forces of
the United States and 16 other nations.
Electro-Optical Systems. Electro-optical systems use advanced sensors to
detect radiated energy in the form of heat or light, high-speed data and signal
processors to analyze the sensor data and sophisticated
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
communications and display technology to deliver that information to commanders
and other decision makers. Electro-optical systems employ thermal imaging,
laser guidance, infrared sensors and advanced optics technologies for a variety
of tactical, space and strategic applications. Of strategic importance to the
electro-optical systems business is Hughes Defense's Santa Barbara Research
Center, which designs and produces infrared focal plane detectors and civilian
space sensors.
In early 1996, Hughes Defense acquired Itek Optical Systems ("Itek"), an
expert in large space optics, and combined this business with Hughes Danbury
Optical Systems. The acquisition has strengthened Hughes Defense's position as
a leader in the large space optics field. Itek is also important to Hughes
Defense because it specializes in airborne, visible image reconnaissance. This
expertise has improved Hughes Defense's competitive position in reconnaissance.
The principal product groups of the electro-optical systems business are as
follows:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Tactical EO Systems Systems for use in military aircraft, tanks and
ground defense systems, including weapon fire
control systems, night and obscured vision systems
and sensors.
Space and Strategic Systems for earth monitoring and planetary
Systems exploration and ballistic missile warning, tracking
and guidance systems.
</TABLE>
Tactical EO Systems--Hughes Defense is a leading producer of tactical
military laser and thermal electro-optical systems. Hughes Defense provides
night vision systems incorporating its thermal imaging and laser technologies
for aircraft, tanks and armored personnel carriers. Together with its
licensees, Hughes Defense has built more than 30,000 tactical laser
rangefinders and more than 20,000 thermal imaging systems. Hughes Defense is a
contractor for the U.S. Army's Horizontal Technology Integration program to
provide improved electro-optical sights on armored vehicles and is a supplier
of thermal imaging target acquisition fire control system upgrades for the
Bradley Fighting Vehicle.
For light-armored vehicles, Hughes Defense produces a high performance fire
control thermal imaging system that is being used in conjunction with fire
control and Tube-launched, Optically tracked, Wire-guided ("TOW") missile
programs and has been installed on a variety of vehicles. For infantry
application, Hughes Defense has developed an infrared Thermal Weapon Sight
("TWS") for the U.S. Army that is light enough to be used with rifles, machine
guns and shoulder-launched missiles.
Airborne systems being developed by Hughes Defense include an infrared system
for the U.S. Marine Corps' V-22 Osprey that incorporates advanced staring focal
plane array technology. Hughes Defense also provides a night targeting system
for the AH-1 Cobra attack helicopter, and night vision systems for a variety of
other helicopters in service with the U.S. and other armed forces. Fixed-wing
electro-optical products include the infrared navigation and targeting pods for
the F/A-18 Hornet aircraft.
Under the agreement that allows the Raytheon Merger to proceed under the
Hart-Scott-Rodino Act, New Raytheon is obligated to sell assets relating to
Hughes Defense's second-generation ground vehicle electro-optical systems
business. See "Description of the Hughes Transactions--Regulatory Requirements"
in Chapter 3.
Space and Strategic Systems--Hughes Defense is a leading designer and
producer of visible light wavelength and infrared detector sensors for imaging
products deployed on satellites and used for a variety of earth monitoring,
planetary exploration and commercial purposes. In the area of earth remote
sensing for civil space applications, Hughes Defense has manufactured key
instruments for a majority of the imaging weather satellites launched since the
late 1960s and is currently performing on several major civil earth monitoring
contracts (such as LANDSAT).
Hughes Defense has pioneered the technologies for telescopes that can
maintain high performance at extremely low temperatures and which are
fundamental to space sensors and interceptors used by the Department of
Defense. In addition, for both tactical and space and strategic applications,
advances in wide
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field of view reflective optics for land and airborne applications are
permitting increased capability in increasingly smaller packages by enabling
visible, infrared and laser wavelengths to use a single aperture. Precision
machining and diamond turning technology are being used to enable production of
these optics with fewer parts and lower cost.
Hughes Defense is currently developing space-based infrared sensors to detect
and track ballistic missiles in flight, providing data for early warning and
tracking. Hughes Defense is a contractor on the U.S. Air Force's Space Based
Infrared Low ("SBIRs-Low") program.
Electronic Warfare Systems. Electronic Warfare Systems are used for the
passive detection, tracking and identification of signals. In 1994, Hughes
Defense was awarded a contract to demonstrate and validate the precision
direction finding system for the Manned Destructive Suppression of Enemy Air
Defenses mission of the U.S. Air Force and two other electronic warfare
contracts. Hughes Defense has also developed an advanced special receiver which
is expected to become the standard radar warning receiver for U.S. Navy and
U.S. Marine Corps tactical aircraft.
Processors. Hughes Defense is a leading developer and producer of
sophisticated processors for use in aerospace and defense products and systems.
Hughes Defense is developing the Common Integrated Processor, an advanced,
ultra high-speed modular computer developed for the avionics systems on the F-
22 Advanced Tactical Fighter ("ATF").
COMMUNICATIONS SYSTEMS
Hughes Defense supplies communications products and command and control
systems that can efficiently gather, process and transmit large amounts of
information for military use. The strategic acquisition of Magnavox Electronic
Systems Company in 1995 significantly added to Hughes Defense's long-range
satellite communications customer base and has contributed significantly toward
Hughes Defense's goal of becoming the industry's tactical communications market
leader. Hughes Defense communications products include the Enhanced Position
Location Reporting System ("EPLRS"), a digital locator and communications
system. This system provides secure tactical data communications, friendly
identification, position reporting and navigation services to the U.S. Army.
WEAPONS SYSTEMS
Hughes Defense is a leading developer and producer of tactical missile
systems as well as naval and maritime systems. The principal product groups of
these businesses are as follows:
<TABLE>
<CAPTION>
BUSINESS DESCRIPTION
-------- -----------
<S> <C>
Missile Systems Tactical guided missiles (including air-to-air, air-
to-surface, surface-to-surface and surface-to-air
missiles),
guidance and control systems, sensor systems and
missile launchers.
Naval and Maritime Torpedoes, sonar and other acoustics systems, ship
Systems defense and display systems and underwater
surveillance systems.
</TABLE>
MISSILE SYSTEMS
Hughes Defense develops and produces tactical guided missiles, guidance and
control systems, sensor systems and missile launchers. With its air-to-air,
air-to-surface, surface-to-surface and surface-to-air missile products, Hughes
Defense participates in all portions of the tactical missile systems market and
believes it is a leader in the tactical missile systems business.
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Hughes Defense has been a long-time developer, supplier and leader in radar
guided air-to-air missiles, such as the Phoenix used on the F-14 fighter and
the Advanced Medium Range Air-to-Air Missile ("AMRAAM"), which has become a
primary weapon system on front-line fighter aircraft for the U.S. Air Force and
the U.S. Navy. In addition, AMRAAM is the missile of choice for a growing
number of foreign militaries. In 1996, Hughes Defense was selected to produce
the AIM-9X, the next generation replacement for the existing AIM-9M
"Sidewinder" short-range air-to-air missile.
Hughes Defense is one of the primary subcontractors to Standard Missile
Company for engineering and production services for all elements of STANDARD
Missile. Standard Missile Company is the prime contractor for STANDARD Missile,
and is owned by Hughes Missile Systems Company and Raytheon. STANDARD Missile
is the primary surface launched area air defense weapon for the U.S. Navy and
many allied countries. It is currently in service in several variants--the SM-1
Block VI and SM-2 Block II, III, IIIA and IIIB. The SM-2 Block IV extended
range variant has just entered low-rate production. The U.S. Navy is developing
the next evolutionary generations of STANDARD Missile capable of intercepting
tactical ballistic missiles.
In 1994, Hughes Defense was awarded a sole source contract for the production
of the Tomahawk Cruise Missile, and also is developing the next version of
Tomahawk, the Block IV. Hughes Defense is also pursuing the growth aspects of
the Tomahawk program, including the new Tactical Tomahawk, which currently is
expected to be awarded in 1998.
Hughes Defense is also one of two producers of the Sparrow missile, a medium-
range, semi-active guided missile used in multiple roles by multiple services.
In its air-to-air role, the missile is used on fighter aircraft of the U.S.
Navy and U.S. Air Force and allied countries. The surface-to-air version, the
SeaSparrow, is used for shipboard point defense on more than 150 ships of
various classes for the United States and numerous other countries. In addition
to the SeaSparrow, Hughes Defense plays a major role in the self defense of
ships as the producer of the Rolling Airframe Missile ("RAM") and the Phalanx
Close-in Weapon System. RAM is a surface-to-air missile and launcher system
that was developed and is produced by the United States and Germany under a
cooperative agreement. Phalanx is a computer-controlled radar and gun system
used to defeat anti-ship missiles and other close-in surface and air threats.
In addition, Hughes Defense is leading a 10-country NATO consortium to develop
the Evolved SeaSparrow Missile ("ESSM"), a kinematics upgrade to the
SeaSparrow. ESSM will primarily target enemy aircraft and anti-ship missiles.
The armed forces of more than 40 nations rely on Hughes Defense's TOW
missile. Hughes Defense has produced more than 600,000 TOW antitank missiles,
which can be fired from ground tripods, armored and unarmored vehicles and
helicopters against tanks, armored personnel carriers, bunkers and small boats.
Hughes Defense also is the sole-source producer of the Stinger family of
missiles, the basis for the most advanced, accurate, shoulder-fired anti-
aircraft weapon system in the world. In addition to being shoulder-launched,
Stinger is adaptable to a variety of launch platforms, including helicopters,
ground combat vehicles and U.S. Navy ships.
Hughes Defense is a leader in Theater Ballistic Missile Air Defense systems.
Hughes Defense is developing the Exoatmospheric Kill Vehicle, a well
established program which started in 1990. Flight tests in 1998 and 1999 are
expected to lead into the National Missile Defense System Testing Phase.
Additionally, Hughes Defense is the sole developer of the Lightweight
Exoatmospheric Projectile--Kinetic Warhead ("LEAP-KW") for the U.S. Navy. The
LEAP-KW will be integrated with a unique variant of STANDARD Missile (also
being developed by Hughes Defense) and will have the capability to acquire,
track, intercept, and destroy Theater Ballistic Missiles in flight.
Hughes Defense also has been a significant developer and producer of air-to-
surface and surface-to-surface missiles. The versatile Maverick family of
missiles can be fired from a variety of aircraft. Infrared-guided Mavericks
offer all-weather, around-the-clock attack capability and the U.S. Marine
Corps' laser-guided Maverick allows pin-point accuracy on the battlefield.
Mavericks are employed by the armed forces of many other countries.
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NAVAL AND MARITIME SYSTEMS
Naval and maritime systems products include torpedoes, antisubmarine warfare
systems, naval combat systems, mine warfare systems, ocean surveillance systems
and ship system integration, principally for the U.S. Navy. For decades, the
UYQ-21 family of display systems has been a standard for the combat information
centers of U.S. Navy surface ships. Hughes Defense's MK23 Target Acquisition
System, an advanced radar system, permits ships to detect low-flying, high
speed missiles and aircraft. Hughes Defense also supports the U.S. Navy's
Surveillance Towed Array Sensor Segment ("SURTASS") system, a passive
underwater surveillance sensing system that utilizes an acoustic sensor array
towed from a dedicated surface ship to acquire data. Hughes Defense believes
that technology developed through its current participation in key U.S. Navy
programs presents opportunities for international sales. These programs, which
are shifting from development to production, include the Airborne Low Frequency
Sonar ("ALFS") and the Surface Search Radar ("SSR"). Hughes Defense was
recently selected as the ship electronics system integrator for the U.S. Navy's
new amphibious San Antonio class of ships of which the LPD-17 is first in
class.
This business unit also includes operations acquired from Alliant
Techsystems' Marine Systems Group in March 1997 for $143.3 million. The group,
which is based in Mukilteo, Washington, manufactures MK46, MK50 and NT37
torpedoes and underwater surveillance systems.
INFORMATION SYSTEMS
Hughes Defense's information systems business unit is involved in developing,
supporting and providing training for key information technologies. The unit
includes four principal businesses: Hughes Information Technology Systems;
Hughes Training Inc.; Hughes Technical Services Company; and Hughes Data
Systems. Information technologies are driving the evolving joint command and
intelligence networks which, in turn, influence all defense systems, including
weapons systems. Advanced distributed simulation is becoming a more important
military tool for weapons development, operational planning and training.
HUGHES INFORMATION TECHNOLOGY SYSTEMS
Hughes Information Technology Systems consists of four principal product
groups as described below:
<TABLE>
<CAPTION>
BUSINESS DESCRIPTION
-------- -----------
<S> <C>
Command and Control Military command and control systems for air defense
Systems systems;
air traffic control systems; airport information and
operations
management systems.
Defense Systems Mapping and weather systems.
Space Systems Classified and commercial ground station systems.
Civil Systems Earth Observing System Data Information Systems
("EOSDIS").
</TABLE>
Command and Control Systems. Hughes Defense's command and control air defense
systems utilize modular software to integrate large amounts of data from a
variety of sensors, rapidly process the data using proprietary algorithms and
then communicate information to decision makers in command and control centers
on a real-time basis. Hughes Defense's systems are deployed in the United
States and over 20 other nations. Hughes Defense has designed, developed and
implemented a $1.3 billion Command, Control and Communication system for Saudi
Arabia called Peace Shield. Hughes Defense is currently providing contractor
technical services for this operational system under a separate $386 million
contract ending in December 1997. Hughes Defense is also currently under
contract to design, develop and implement air defense systems for Egypt,
Iceland, Kuwait, Taiwan and NATO.
Hughes Defense has applied its technology and experience in air defense
systems to develop civilian air traffic control systems. Hughes Defense offers
a full range of systems to the air traffic control market, with
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
products that range from systems that integrate multiple support centers and
radar installations for large countries to systems servicing a single airport
tower.
Hughes Defense is working on contracts to modernize and better integrate
Canada's civil and military air traffic control systems. Hughes Defense also is
under contract to provide air traffic control systems in a number of countries,
including Indonesia, Saudi Arabia, Switzerland and China. In addition, Hughes
Defense has become a major supplier to the Federal Aviation Administration
("FAA"). The Wide Area Augmentation System ("WAAS") is a $480 million five-year
contract to develop and deploy a satellite based navigation and air traffic
control system over the United States. The Oceanic Systems Development Support
("OSDS") is an $200 million eight-year contract to improve air traffic control
capabilities offshore. Finally, Hughes Defense and Raytheon teamed to win the
Standard Terminal Replacement System ("STARS") contract to replace and upgrade
equipment in 172 FAA air traffic control terminals and 199 Department of
Defense facilities. Hughes Defense's share of the contract is $125 million.
Defense Systems. Hughes Defense has expertise in processing large quantities
of data in real time, storing data in secure data bases accessible to
geographically distributed users and handling the requirements of complex
communications networks.
For the U.S. government, Hughes Defense has developed Command, Control,
Communications and Intelligence ("C/3/I") systems and support for classified
military requirements as well as missions and sensor data processing for
national security applications. In addition, Hughes Defense provides systems
engineering services to the U.S. Defense Information Systems Agency. Defense
systems also include terrain mapping and weather information.
Space Systems. Hughes Defense develops and supports classified government and
commercial ground station systems which control the operations of satellites
while in orbit.
Civil Systems. Hughes Defense also provides scientific and engineering
services for the National Aeronautics and Space Administration ("NASA") and the
National Oceanic and Atmospheric Administration ("NOAA") such as Mission to
Planet Earth, an international research effort to understand the planet's eco-
systems and climatic changes, and other planetary and astrophysical research.
In 1993, Hughes Defense was awarded a 10-year contract currently valued at
approximately $800 million by NASA to develop the EOSDIS Core System. Hughes
Defense also has developed law enforcement applications for the U.S.
Immigration and Naturalization Services and is currently pursuing opportunities
in information technology for the U.S. government in health care and other non-
defense areas.
HUGHES TRAINING INC.
Hughes Defense has been a pioneer, and continues to be a leader in, the field
of advanced training systems, services and equipment (including simulators) for
a variety of military requirements. With the acquisition of CAE-Link in
February 1995, Hughes Defense is now a leading supplier of training systems and
services to the Department of Defense. Hughes Defense also provides training
systems and services for NASA and industrial customers. Hughes Training
consists of three principal product groups as described below:
<TABLE>
<CAPTION>
BUSINESS DESCRIPTION
-------- -----------
<C> <S>
Military Training Systems Training simulators and equipment for the
Department of Defense and NASA.
Training Operations Training services to the Department of
Defense and NASA.
Commercial/Industrial Training Equipment, systems and programs for
industrial training and
testing applications.
</TABLE>
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Military Training Systems and Training Operations. For military applications,
Hughes Defense has focused its resources on opportunities that permit it to
take advantage of ongoing Hughes Defense and similar programs held by other
defense contractors, such as training programs for the B-2, F/A-18, F-16 and C-
141 aircraft. Hughes Defense is also well positioned to provide combined arms
tactics training for the U.S. Army and U.S. Navy. Hughes Defense's flight
training systems include sophisticated simulators in which pilots practice
combat tactics as well as emergency procedures and standard maneuvers. The
flexible software of these simulators can be adapted so that pilots can also
train for specific missions. Hughes Defense's training systems are capable of
teaching all phases of operations and maintenance for aircraft as diverse as
the F-16 and F/A-18 fighters and the C-141 cargo aircraft. Hughes Defense also
designs and produces multi-platform training equipment for the U.S. Navy. Using
Hughes Defense's Anti-Submarine Warfare Tactical Team Trainers, teams of navy
personnel train in coordinating ships, submarines and aircraft in simulated
anti-submarine and fleet defense warfare maneuvers.
Commercial/Industrial Training. Hughes Defense also develops equipment,
systems and programs for industrial training and testing applications,
including curriculum and coursework and training delivery and management. In
1995, Hughes Defense was selected by General Motors Europe to be its single
training integrator and to provide various dealer training programs. Hughes
Defense also has advanced training system projects with General Motors Europe
and several of GM's facilities in the United States. As described under
"Special Factors--Background of the Hughes Transactions--Development of the
Hughes Transactions and the Raytheon Merger--Further Discussions With Raytheon"
in Chapter 3, General Motors and its affiliates have agreed to purchase certain
training services from New Raytheon through 2001 (totalling approximately $1.0
billion) on commercially reasonable terms, including competitiveness of price,
service and technology, to be agreed between the parties. Counting towards this
commitment will be that portion of New Raytheon's revenues during that four
year period which are derived from a 10-year $500 million contract with General
Motors Europe, which Hughes Defense was awarded in 1995. Hughes Defense is
exploring training opportunities for General Motors in Asia as well as other
customers domestically and internationally.
HUGHES TECHNICAL SERVICES COMPANY
Hughes Defense provides a wide range of scientific, technical and support
services, primarily to the Department of Defense and other military customers,
both through direct contracts and through support of other Hughes Defense
projects. Hughes Defense specializes in the areas of operation and maintenance
of customer equipment and systems; repair and supply depot operations;
logistics engineering; space and Earth sciences; commercial services; remote
logistics; range support; and privatization of government services. In 1996,
Hughes Electronics was selected by the U.S. Navy and the City of Indianapolis
to privatize the Naval Air Warfare Center in Indianapolis. The Indianapolis
facility, renamed the Hughes Air Warfare Center, represents the Department of
Defense's largest privatization initiative to date and provides engineering and
technical support of advanced avionics and electronic systems.
HUGHES DATA SYSTEMS
The Hughes Data Systems unit is responsible for procurement and delivery of
system hardware and software. This unit primarily supports certain long-
standing customer relationships. Primary products include the Desktop V, USAF
Workstation, Patent Trademark Office and Desktop Computers.
DEFENSE SYSTEMS
In addition to the three major business units addressed above, Hughes Defense
is also developing its defense systems integration business. This Defense
Systems business unit is approaching new contracts essentially as a "prime"
contractor in which Hughes Defense serves as a system integrator to combine the
best components for a system. Defense Systems supports customers in the
Ballistic Missile Defense Organization ("BMDO") and the U.S. Army in air and
missile defense systems and solider systems. An example of these systems
integration efforts is a cost effective short range air defense system that
integrates radars and communications equipment from Hughes Defense's Sensors &
Communications Systems business unit and a ground launched version of the
Weapons Systems business unit's AMRAAM missile. Other major programs include
the Medium Extended Air Defense System ("MEADS") for preliminary development of
a new multinational ground-based air defense system between the U.S., Germany
and Italy; Aerostat CMD for the concept development of a tethered aerostat
airborne surveillance and targeting system for cruise missile
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
defense; and the Land Warrior EMD program for development and fielding of an
integrated soldier fighting system.
U.S. GOVERNMENT CONTRACTS
Hughes Defense acts as a prime contractor or major subcontractor with respect
to many different U.S. government programs. Government acquisition programs
typically follow a life cycle that begins with the research and development
stage and progresses into full-scale production which may continue, with
refinements and improvements, for several years. Because of significant start-
up costs, many programs are not expected to become profitable until well into
the full-scale production phase. Moreover, not all programs are selected for
full-scale production, even when considerable resources have been expended in
pre-production phases. The U.S. government has historically used multiple
supply sources for a single program to further intensify competition and add to
the number of experienced contractors available for future programs. It is
anticipated that the ability to use multiple sources for production will be
limited by declines in U.S. defense spending.
A portion of Hughes Defense's contracts with the U.S. government which are
the basis of Hughes Defense's backlog are subject to appropriations decisions
subsequent to award. This results in many long-term programs being funded
annually. Changes in government policy/priorities may lead to the cancellation
of the remaining portion of a program. Some Hughes Defense contracts contain
options which may or may not be exercised at the discretion of the U.S.
government. Also, once awarded, contracts may be contested by other bidders.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following Delco selected combined historical financial data have been
derived from the financial statements of Delco. The data should be read in
conjunction with Delco's Combined Financial Statements (including the notes
thereto) included in Appendix D to this document. The income statement data for
the periods ended December 31, 1996, 1995 and 1994 and the balance sheet data
as of December 31, 1996 and 1995 have been derived from the combined financial
statements of Delco audited by Deloitte & Touche LLP, independent public
accountants. The income statement data for the periods ended December 31, 1993
and 1992 and September 30, 1997 and 1996 and the balance sheet data as of
September 30, 1997 and 1996 and December 31, 1994, 1993 and 1992 have been
derived from unaudited combined financial statements of Delco. In the opinion
of management, the unaudited combined financial statements reflect all
adjustments (consisting only of normal recurring items) that are necessary for
the fair presentation of financial position and results of operations for such
periods. The Delco unaudited selected pro forma operating results for the nine
months ended September 30, 1997 and for the year ended December 31, 1996 give
effect to the Hughes Transactions as if they had occurred at the beginning of
each respective period but do not give effect to the planned integration of
Delco and Delphi. The Delco unaudited selected pro forma balance sheet data as
of September 30, 1997 give effect to the Hughes Transactions as if they had
occurred at that date. Operating results for the nine-month periods ended
September 30, 1997 and 1996 are not necessarily indicative of the results that
may be expected for the entire year. Pro forma data are not necessarily
indicative of future financial position or operating results.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS AS OF AND FOR THE YEARS
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------
PRO PRO
FORMA FORMA
1997 (A) 1997 1996 1996 (A) 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............... $4,110.2 $4,110.2 $4,240.1 $5,560.1 $5,560.1 $5,757.2 $5,560.7 $4,808.1 $4,143.5
Other income, net....... 14.9 142.5 139.2 32.4 202.4 195.6 150.6 114.7 158.7
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues......... 4,125.1 4,252.7 4,379.3 5,592.5 5,762.5 5,952.8 5,711.3 4,922.8 4,302.2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Cost and Expenses. 3,724.3 3,724.3 3,689.7 4,901.9 4,901.9 4,869.0 4,751.6 4,219.3 3,695.1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 400.8 528.4 689.6 690.6 860.6 1,083.8 959.7 703.5 607.1
Income taxes............ 152.3 200.8 256.0 261.4 325.8 411.3 364.7 280.5 209.8
Cumulative effect of
accounting changes..... -- -- -- -- -- -- (35.2) -- (478.4)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income.............. $ 248.5 $ 327.6 $ 433.6 $ 429.2 $ 534.8 $ 672.5 $ 559.8 $ 423.0 $ (81.1)
======== ======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 40.0 $ 245.3 $ 740.0 $ 741.0 $ 926.1 $1,243.2 $ 773.2 $ 571.3
Current assets.......... 995.8 4,267.0 3,834.9 3,858.0 3,276.2 2,813.0 2,146.9 1,691.2
Total assets............ 2,397.2 5,591.4 5,466.9 5,464.1 5,186.4 4,842.4 4,205.9 3,779.8
Current liabilities..... 667.8 667.8 809.1 734.2 767.9 927.9 786.6 673.5
Parent Company's net
investment............. 561.4 3,805.6 3,629.6 3,662.1 3,402.1 2,949.4 2,566.7 2,288.3
OTHER DATA:
Depreciation and
amortization........... $ 166.5 $ 151.7 $ 204.4 $ 155.6 $ 145.0 $ 152.0 $ 125.6
Capital expenditures.... $ 101.5 $ 163.3 $ 196.5 $ 264.1 $ 165.7 $ 149.2 $ 266.1
</TABLE>
- ------------
(a) Pro forma balance sheet data as of December 31, 1996 and pro forma other
data have not been determined.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of Delco have
been derived from the historical combined financial statements of Delco, and
give effect to the Hughes Transactions. The unaudited summary pro forma
condensed combined statements of income for the nine months ended September 30,
1997 and for the year ended December 31, 1996 give effect to the Hughes
Transactions as if they had occured at the beginning of each respective period
but do not give effect to the planned integration of Delco and Delphi. The
unaudited pro forma condensed combined balance sheet as of September 30, 1997
gives effect to the Hughes Transactions as if they had occured at that date.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with Delco's Combined Financial Statements (including the
notes thereto) included in Appendix D to this document as of and for the period
ended December 31, 1996, and the unaudited combined financial statements
(including the notes thereto) of Delco included in Appendix D to this document
as of and for the period ended September 30, 1997.
The pro forma condensed combined balance sheet is not necessarily indicative
of the financial position of Delco that would have been attained had the Hughes
Transactions been consummated on September 30, 1997. The pro forma condensed
combined statements of income are not necessarily indicative of the results of
operations of Delco that would have been attained had the Hughes Transactions
been consummated on January 1, 1996 and 1997, nor are they necessarily
indicative of any future operating results.
DELCO
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HUGHES
TRANSACTIONS
HISTORICAL PRO FORMA PRO FORMA
DELCO ADJUSTMENTS COMBINED
---------- ------------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Net Sales
General Motors and affiliates.............. $3,740.8 $3,740.8
Outside.................................... 369.4 369.4
Other income (expense), net
Interest income--General Motors and
affiliates................................ 143.6 $(127.6)(a) 16.0
Other...................................... (1.1) (1.1)
-------- ------- --------
Total Revenues.......................... 4,252.7 (127.6) 4,125.1
-------- ------- --------
COSTS AND EXPENSES
Cost of sales and other operating charges,
exclusive of items listed below........... 3,388.2 3,388.2
Selling, general and administrative
expenses.................................. 169.6 169.6
Depreciation and amortization.............. 166.5 166.5
-------- ------- --------
Total costs and expenses................ 3,724.3 3,724.3
-------- ------- --------
INCOME BEFORE INCOME TAXES.................. 528.4 (127.6) 400.8
Income taxes............................... 200.8 (48.5)(b) 152.3
-------- ------- --------
Net Income.............................. $ 327.6 $ (79.1) $ 248.5
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HUGHES
TRANSACTIONS
HISTORICAL PRO FORMA PRO FORMA
DELCO ADJUSTMENTS COMBINED
---------- ------------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Net Sales
General Motors and affiliates.............. $4,990.2 $4,990.2
Outside customers.......................... 569.9 569.9
Other income--net
Interest income--General Motors and
affiliates................................ 180.2 $(170.0)(a) 10.2
Other...................................... 22.2 22.2
-------- ------- --------
Total Revenues.......................... 5,762.5 (170.0) 5,592.5
-------- ------- --------
COSTS AND EXPENSES
Cost of sales and other operating charges,
exclusive of items listed below........... 4,421.0 4,421.0
Selling, general and administrative
expenses.................................. 276.5 276.5
Depreciation and amortization.............. 204.4 204.4
-------- ------- --------
Total costs and expenses................ 4,901.9 4,901.9
-------- ------- --------
INCOME BEFORE INCOME TAXES.................. 860.6 (170.0) 690.6
Income taxes................................ 325.8 (64.4)(b) 261.4
-------- ------- --------
Net Income.............................. $ 534.8 $(105.6) $ 429.2
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HUGHES
TRANSACTIONS
HISTORICAL PRO FORMA PRO FORMA
DELCO ADJUSTMENTS COMBINED
---------- ------------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 245.3 $ (205.3)(c) $ 40.0
Accounts receivable (less allowances)
General Motors and affiliates............ 65.0 65.0
Trade receivables........................ 142.0 142.0
Notes Receivable--Hughes Electronics...... 3,065.9 (3,065.9)(d) --
Contracts in process...................... 44.0 44.0
Inventories............................... 629.3 629.3
Deferred income taxes..................... 58.9 58.9
Prepaid expenses.......................... 16.6 16.6
-------- --------- --------
Total Current Assets................... 4,267.0 (3,271.2) 995.8
-------- --------- --------
Property, net.............................. 974.9 974.9
-------- --------- --------
Investments and Other Assets--principally
at cost (less allowances)................. 138.9 138.9
-------- --------- --------
Deferred Income Taxes...................... 210.6 77.0 (b) 287.6
-------- --------- --------
Total Assets........................... $5,591.4 $(3,194.2) $2,397.2
======== ========= ========
LIABILITIES AND PARENT COMPANY'S NET
INVESTMENT
CURRENT LIABILITIES
Accounts payable
General Motors and affiliates............ $ 15.0 $ 15.0
Other trade payables..................... 297.0 297.0
Loans payable to General Motors........... 33.2 33.2
Income taxes payable...................... 68.3 68.3
Accrued liabilities
General Motors and affiliates............ 33.3 33.3
Other liabilities........................ 221.0 221.0
-------- --------- --------
Total Current Liabilities.............. 667.8 667.8
-------- --------- --------
Other Liabilities and Deferred Credits..... 55.7 $ 50.0 (e) 105.7
-------- --------- --------
Post retirement benefits other than
pensions.................................. 1,062.3 1,062.3
-------- --------- --------
Parent Company's Net Investment............ 3,805.6 (3,065.9)(d) 561.4
(205.3)(c)
(50.0)(e)
77.0 (b)
Total Liabilities and Parent Company's
Net Investment........................ $5,591.4 $(3,194.2) $2,397.2
======== ========= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of Delco have
been derived from the historical combined financial statements of Delco to give
effect to the Hughes Transactions (i.e., the Hughes Reorganization and not
including the integration with Delphi). The unaudited pro forma condensed
combined balance sheet has been prepared as if the Hughes Transactions had
occurred on September 30, 1997 and the unaudited pro forma condensed combined
statements of income have been prepared as if the Hughes Transactions had
occurred at the beginning of the periods presented.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with Delco's Combined Financial Statements (including notes
thereto) as of and for the year ended December 31, 1996, and as of and for the
nine months ended September 30, 1997, each included in Appendix D to this
document.
The pro forma condensed combined balance sheet is not necessarily indicative
of the financial position of Delco that would have been attained had the Hughes
Transactions been consummated on September 30, 1997. The pro forma condensed
combined statements of income are not necessarily indicative of the results of
operations of Delco that would have been attained had the Hughes Transactions
been consummated at the beginning of the periods presented, nor are they
necessarily indicative of any future operating results.
The following pro forma adjustments were made with respect to the Hughes
Transactions:
(a) To eliminate interest income reflected in the historical financial
statements of Delco relating to notes receivable from Hughes
Electronics which will be eliminated and cash which will be transferred
to Hughes Telecom in connection with the Hughes Transactions.
(b) To reflect income taxes relating to the pro forma adjustments.
(c) To record the transfer of cash of Delco to Hughes Telecom.
(d) To reflect the distribution of notes receivable from Delco to its sole
stockholder.
(e) To record the potential income tax liabilities which will be
transferred from Hughes Electronics to Delco.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
RESULTS OF OPERATIONS
Revenues. Delco revenues for the first nine months of 1997 were $4,252.7
million, a slight decrease from the $4,379.3 million reported during the first
nine months of 1996. Revenues attributed to GM NAO were slightly lower due to
the decline in average electronic content supplied by Delco (primarily due to
price reductions resulting from competitive pricing in connection with GM's
global sourcing initiative) partially offset by a 4% increase in GM NAO vehicle
volume during the first nine months of 1997.
Other Income (Expense)--Included in revenues is other income of $142.5
million for the first nine months of 1997 and $139.2 million for the same
period in 1996. The increase was principally due to the increase in interest
income driven primarily by the increase in notes receivable from Hughes
Electronics during the first nine months of 1997.
Operating Profit. Operating profit for the first nine months of 1997 was
$385.9 million, a 29.9% decrease from the $550.4 million reported during the
comparable period last year. The operating profit margin on the same basis for
1997 was 9.4% compared with 13.0% in the prior year's period. These reductions
were primarily due to price reductions and costs associated with continued
international expansion.
As the principal supplier of automotive electronics to GM NAO, Delco's sales
of automotive electronics is and will continue to be heavily dependent on GM's
production of vehicles in North America, the level of Delco supplied electronic
content per GM vehicle, the price of such electronics and the competitiveness
of Delco's product offerings. In this regard, it is anticipated that
competition through GM's global purchasing process will negatively impact
Delco's sales to GM NAO and result in a decline in the portion of GM NAO
automotive electronics supplied by Delco. Delco's strategy is to aggressively
reduce costs in order to minimize the effect of continuing price reductions and
to manage the loss of GM NAO market share by offering competitive products
which increase electronic functionality through a focus on safety, security,
communications and convenience. Delco will also seek to improve its systems
capability and cost competitiveness both internally and by developing key
design, manufacturing and marketing alliances and other relationships with
mechanical and electrical automotive component suppliers.
The international market for automotive electronic products is also highly
competitive. Delco has refined its strategy for this market to focus on
profitable growth as well as increased market share, and accordingly, will seek
to enhance the cost competitiveness of its international operations.
The competitive environment described above is making it increasingly
difficult to maintain the level of operating profit margins realized at Delco
in recent years as price and volume declines associated with GM's global
sourcing initiatives more than offset Delco's ability to achieve cost
reductions. In response to the increased pressure on margins and to enhance
future competitiveness, Delco management is taking action to reduce the cost
structure of the business. As a result of the factors described above, the
operating margin is expected to be at low double digits for the remainder of
1997, and then show modest improvement in 1998 and 1999.
In connection with Delco's planned integration with Delphi as part of the
Hughes Transactions, Delco is participating with Delphi in a review of the
adequacy of its strategy which focuses on the competitiveness of its
operations, growth opportunities and increasing market share through technology
leadership, quality, cost and responsiveness. Delco and Delphi are continuing
to study the outlook for some of their major product lines and their capacity
to achieve Delphi's goals of increased growth and profitability. The findings
of this study may result in the modifying, selling or closing of certain lines
of business that are not performing as effectively as
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necessary to enable Delphi to meet its strategic plans, while further
expanding and growing product lines which will help to meet corporate
objectives. The study is expected to be completed in late 1997 or early 1998.
Presently, Delco and Delphi cannot estimate the impact the findings of this
study may have on their existing lines of business and results of operations.
See "Recent Developments--General Motors Competitiveness Studies" in Chapter
1.
For information regarding the impact of the integration of Delco and Delphi
on Delco's competitive position and business strategy, see "Special Factors--
Purposes of the Hughes Transactions--Integration of Delco and Delphi" and "--
Background of the Hughes Transactions--Development of the Hughes Transactions
and the Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting"
and "--October 6, 1997 GM Board Meeting" in Chapter 3.
Costs and Expenses. Selling, general and administrative expenses were $169.6
million for the first nine months of 1997 compared to the $198.3 million
reported during the comparable period in 1996. The decrease was attributable
to an overall reduction in domestic spending.
The effective income tax rate was 38.0% for the first nine months of 1997
compared to 37.1% for the same period in 1996.
Earnings. Delco earnings decreased 24.4% to $327.6 million in the first nine
months of 1997 compared with $433.6 million reported in the same period in
1996, principally due to the decrease in operating profit discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $245.3 million at
September 30, 1997, a decrease of $495.7 million from the $741.0 million
reported at December 31, 1996. The decrease was primarily due to the increase
in notes receivable from Hughes Electronics of $889.7 million, net
distributions to the Parent Company of $184.1 million and capital
expenditures, partially offset by cash provided by operating activities of
$656.5 million and proceeds from the disposal of certain property.
Cash flows for the fourth quarter of 1997 and beyond are expected to be
negatively impacted by a change in the credit terms between Delco and GM NAO
for purchases of automotive electronics. Prior to the 1997 third quarter, GM
NAO had generally paid Delco for product shipments immediately upon billing.
The policy governing Delco/GM NAO credit terms was changed such that Delco and
GM NAO are implementing credit terms substantially equivalent to those given
to GM NAO's non-affiliated suppliers. This change in credit terms is subject
to a four-year phase-in period. However, if the spin-off of Hughes Defense is
completed with Delco transferred to Delphi, the credit terms for Delco will
change, effective immediately after such transactions are completed, without
any phase-in period.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio
of current assets to current liabilities) was 6.39 at September 30, 1997 and
5.25 at December 31, 1996. Working capital was $3,599.2 million at September
30, 1997 as compared to $3,123.8 million at December 31, 1996. The increases
were principally due to increased notes receivable from Hughes Electronics of
$889.7 million.
Property and Equipment. Property, net of accumulated depreciation, decreased
$91.2 million to $974.9 million at September 30, 1997, compared to $1,066.1
million at December 31, 1996. Expenditures for property, equipment and special
tools were $101.5 million through September 30, 1997 compared with $163.3
million for the comparable period in 1996. The decrease in capital spending
was due primarily to an overall reduction in domestic spending.
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1996 COMPARED TO 1995
RESULTS OF OPERATIONS
Revenues. Delco revenues decreased 3.2% in 1996 to $5,762.5 million from
$5,952.8 million in 1995. The decline was principally due to price reductions
resulting from competitive pricing in connection with GM's global sourcing
initiative and a 6.4% reduction in GM vehicles produced in the United States
and Canada (excluding joint ventures) primarily related to the United and
Canadian Auto Workers' ("UAW" and "CAW", respectively) strikes offset, in part,
by an increase in Delco-supplied electronic content in these vehicles from $888
per vehicle to $906 per vehicle and an increase in international and non-GM NAO
sales from $841 million in 1995 to $1,010 million in 1996.
Other Income--Included in revenues is other income of $202.4 million for
1996 compared with $195.6 million for 1995. The increase was principally due to
improved results from certain equity investments.
Operating Profit. Operating profit was $658.2 million in 1996 compared to
$888.2 million in 1995. Operating profit margin on the same basis for 1996
declined to 11.8% from 15.4% in 1995 primarily due to the reduced production
volumes, continued price reductions and the costs associated with continued
investment in international expansion.
Costs and Expenses. Selling, general and administrative expenses were $276.5
million in 1996 compared to $260.6 million in 1995. The increase was
principally due to infrastructure put into place to support non-GM NAO
customers in Europe, Asia/Pacific and the Americas. The level of depreciation
and amortization in 1996 was $204.4 million compared to $155.6 million in 1995
primarily due to the increase in special tooling amortization.
The effective income tax rate was 37.9% in 1996 and 1995.
Earnings. Delco's earnings were $534.8 million in 1996 compared to the $672.5
million reported in 1995. The decline was principally due to the decline in
operating profit discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $741.0 million at
December 31, 1996, a decrease of $185.1 million from the $926.1 million
reported at December 31, 1995. The decrease in cash was primarily due to
increases in notes receivable from Hughes Electronics of $437.1 million, net
distributions to Parent Company of $274.8 million and capital expenditures of
$196.5 million, partially offset by cash provided by operating activities of
$705.3 million.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 5.26 at December 31, 1996 and 4.27
at December 31, 1995. Working capital was $3,123.8 million at December 31, 1996
compared to $2,508.3 million at December 31, 1995. The increases were
principally due to increased notes receivable from Hughes Electronics of $437.1
million.
Property and Equipment. Property, net of accumulated depreciation, decreased
$17.3 million to $1,066.1 million in 1996 from $1,083.4 million reported in
1995. Net expenditures for property, equipment and special tools were $196.5
million in 1996 compared with $264.1 million in 1995. 1995 capital spending was
higher due to spending requirements for new technology and product redesign on
powertrain products to meet On Board Diagnostics ("OBD") II and Corporate
Average Fuel Economy ("CAFE") requirements.
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1995 COMPARED TO 1994
RESULTS OF OPERATIONS
Revenues. Delco revenues increased $241.5 million, or 4.2%, in 1995 to
$5,952.8 million from $5,711.3 million in 1994. Increased revenue growth was
primarily attributed to an increase in Delco-supplied electronic content in GM
vehicles produced in North America to $888 in 1995 from $857 in 1994 and an
increase in sales to international and non-GM NAO customers to $841 million in
1995 from $672 million in 1994. GM NAO vehicle production remained relatively
unchanged between 1994 and 1995.
Other Income--Included in revenues is other income of $195.6 million for
1995 compared with $150.6 million for 1994. The increase was principally due to
the increase in interest income driven primarily by the increase in notes
receivable from Hughes Electronics.
Operating Profit. Operating profit was $888.2 million in 1995 compared to
$809.1 million in 1994. Operating profit margin for 1995 increased to 15.4%
from 14.6% in 1994 primarily due to the increase in revenues discussed above
and aggressive cost reduction programs.
Costs and Expenses. Selling, general and administrative expenses were $260.6
million in 1995 and $192.3 million in 1994. The increase was principally due to
infrastructure put into place to support non-GM NAO customers in Europe,
Asia/Pacific and the Americas. The level of depreciation and amortization in
1995 was $155.6 million compared to $145.0 million in 1994.
The effective income tax rate was 37.9% in 1995 and 38.0% in 1994.
Earnings. Delco's earnings were $672.5 million in 1995 compared to $559.8
million reported in 1994 due to increased revenues and aggressive cost
reduction programs. Earnings in 1994 included the unfavorable effect of an
accounting change for post employment benefits. Excluding the accounting
change, Delco earnings in 1994 would have been $595.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $926.1 million at
December 31, 1995, a decrease of $317.1 million from the $1,243.2 million
reported at December 31, 1994. The decrease in cash was primarily due to
increases in notes receivable from Hughes Electronics of $390.8 million,
capital expenditures of $264.1 million, net distributions to Parent Company of
$219.9 million, the acquisition of FUBA Automotive ("FUBA") for $63.2 million
and repayment of loans payable to General Motors of $33.8 million, partially
offset by cash provided by operating activities of $644.3 million.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 4.27 at December 31, 1995 and 3.0 at
December 31, 1994. Working capital was $2,508.3 million at December 31, 1995
compared to $1,885.1 million at December 31, 1994. The increases were primarily
attributed to increased notes receivable from Hughes Electronics of $390.8
million.
Property and Equipment. Property, net of accumulated depreciation, increased
$86.3 million to $1,083.4 million in 1995 from $997.1 million reported in 1994.
Net expenditures for property, equipment and special tools were $264.1 million
in 1995 compared with $165.7 million in 1994. Increased 1995 capital spending
was required for new technology and product redesign on powertrain products to
meet On Board Diagnostics ("OBD") II and Corporate Average Fuel Economy
("CAFE") requirements.
Acquisitions. In September 1995, Delco announced that it had reached an
agreement to acquire FUBA for $63.2 million in cash. FUBA is a leading supplier
of active integrated antenna systems. The acquisition was completed in October
1995.
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BUSINESS OF DELCO
INTRODUCTION
The following description of the business of Delco gives effect to the Hughes
Reorganization but does not generally give effect to the integration of Delco
and Delphi. For additional information, see "Delco Management's Discussion and
Analysis of Financial Condition and Results of Operation" above.
Delco is one of the world's leading suppliers of automotive electronics, with
an estimated 22% share of worldwide automotive electronics sales in 1996. Delco
is currently the principal supplier of automotive electronics to GM North
American Operations ("GM NAO"). Approximately 81% (or $4.3 billion) of Delco's
1996 revenues were attributable to sales to GM NAO, with the remaining 19%
resulting from sales to customers (including GM operations outside of North
America) other than GM NAO. Delco anticipates increased sales to non-GM NAO and
international customers. During 1996, over 50% (based on dollar value) of
Delco's contracts for new business were with customers other than GM NAO.
Deliveries under such contracts are expected to begin in 1998.
Delco's strategy is to maintain its position as a principal supplier of
automotive electronics to GM NAO while continuing to expand its sales to
international and other non-GM NAO customers. Delco believes that consumer
demand for vehicles with enhanced safety, convenience and performance features
will provide opportunities for additional revenues from Delco-supplied
automotive electronics on GM NAO vehicles. Moreover, the integration of Delco
and Delphi would combine advanced electronics capability with components and
systems expertise, and the combined business operations would be expected to
compete aggressively in high-growth markets worldwide by developing new
electronically enhanced vehicle systems with improved functionality, lower cost
and higher quality. The combined Delco/Delphi entity will be better able to
align its product, technical and manufacturing operations to address strategic
objectives for growth and competitiveness. Delco believes that other
opportunities exist as a result of new products based on Delco/Delphi core
technologies. Successful commercialization of these products will depend on,
among other things, consumer acceptance, affordability and the ability to
achieve high volume production of sophisticated products, none of which can be
assured.
As the principal supplier of automotive electronics to GM NAO, Delco's sales
of automotive electronics will continue to be heavily dependent on GM's North
American production, the level of Delco-supplied electronic content per GM
vehicle, the price of such electronics and the competitiveness of Delco's
product offerings. In this regard, it is anticipated that competition through
GM's global purchasing process will negatively impact Delco's sales to GM NAO
and result in a decline in the portion of GM NAO automotive electronics
supplied by Delco. Delco's strategy is to aggressively reduce costs in order to
minimize the effect of continuing price reductions and to manage the loss of GM
NAO market share by offering competitive products which increase electronic
functionality through a focus on safety, security, communications and
convenience.
The international market for automotive electronic products is also highly
competitive. Delco has refined its strategy for this market to focus on
profitable growth as well as increased market share and, accordingly, will seek
to enhance the cost competitiveness of its international operations.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Delco's aggressive cost reduction programs have yielded substantial cost
savings over the last several years. Delco continues to work aggressively to
reduce its costs for automotive electronics in order to maintain its
competitiveness with respect to both GM NAO and other sales. By improving
product design and manufacturing techniques, Delco has been able to and expects
to continue to improve its production methods while reducing its costs of
production. More than half of Delco's automotive electronics products
manufacturing is conducted outside of the United States, resulting in
substantial cost savings as compared to U.S. operations. Other efforts to
reduce costs include purchases of components from unaffiliated suppliers,
synchronous workshops, supplier cost improvement programs and a global
electronics manufacturing strategy.
PRINCIPAL PRODUCTS AND SALES
Delco has three principal product lines: (1) Powertrain, (2) Chassis, Air
Bag, Security and (3) Integrated Body Systems. For GM NAO, product development
and design are organized by product line. For sales other than to GM NAO,
production and sales responsibility is organized by three customer-focused
units: Delco Europe, Delco Asia/Pacific and Delco-Americas.
The following table sets forth revenues of Delco by product line for GM NAO,
and by customer-focused unit for non-GM NAO, for each of the last three years.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
GM NAO (a)
Powertrain............................................... $1,561 $1,554 $1,516
Chassis, Air Bag, Security............................... 680 914 823
Integrated Body Systems.................................. 2,060 2,171 2,160
------ ------ ------
Subtotal................................................ 4,301 4,639 4,499
Other Sales
Delco Europe............................................. 405 366 258
Delco Asia/Pacific....................................... 217 216 168
Delco-Americas and Other................................. 388 259 246
------ ------ ------
Subtotal................................................ 1,010 841 672
------ ------ ------
Subtotal Sales--Automotive............................ 5,311 5,480 5,171
------ ------ ------
Delco Systems Operations (b)............................. 250 277 389
------ ------ ------
Total Sales........................................... 5,561 5,757 5,560
------ ------ ------
Other Income............................................ 202 196 151
------ ------ ------
Total Revenues........................................ $5,763 $5,953 $5,711
====== ====== ======
</TABLE>
- ------------
(a) Includes Delco-supplied content on vehicles which are manufactured in the
United States and Canada by General Motors (excluding affiliates) available
for sale anywhere in the world.
(b) Delco Systems Operations ("DSO") has historically been included in the
Aerospace and Defense Systems segment of Hughes Electronics. However, in
connection with the Hughes Reorganization, DSO is being transferred to
General Motors and thus is included in Delco, not Hughes Defense. DSO is
currently dedicated to the light armored turret vehicle business as well as
advanced classified programs.
Delco's non-GM NAO sales have grown from $672 million in 1994 to $1.01
billion in 1996, with sales to GM International Operations representing
approximately one-third of non-GM NAO sales. Delco and Delphi have established
a close working relationship in Europe and have worked together to obtain
additional automotive electronics business and expect in the future to further
leverage their marketing, engineering, manufacturing and administrative efforts
to achieve consistent customer focus and reduced operating cost.
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AUTOMOTIVE
The principal products of Delco's three product lines for automotive
electronics sales to customers worldwide are as follows:
<TABLE>
<CAPTION>
PRODUCT LINE PRINCIPAL PRODUCTS DESCRIPTION
------------------ ----------------------------- ---------------------------
<C> <C> <S>
Powertrain Systems Engine Management Controllers Microprocessor-based
controllers to optimize
engine performance, fuel
economy and driveability
while reducing emissions
and providing on-board
diagnostics.
Ignition Modules Solid state spark-timing
electronics for ignition
control.
Pressure Sensors Micro-machined pressure
sensors used primarily for
air-to-fuel ratio mix
control.
Control Modules Microprocessor-based
controllers for engines and
transmissions.
Chassis, Air Bag Air Bag Control Modules Control modules and sensors
Controls and and Sensors for driver and passenger-
Security Systems side supplemental
inflatable restraint
systems.
Anti-lock Brake Controllers Electronic systems which
control the brakes to
prevent wheel lock-up.
PASS-Key(R) Anti-theft vehicle security
systems.
FOREWARN(R) Microwave-based object
detection systems.
Integrated Body Audio Systems Full line of audio systems
Systems ranging from AM radios to
integrated compact disc
receivers.
Amplifiers Vehicle acoustic systems,
including speakers.
Instrument Panel Clusters Full line of
instrumentation, from
traditional analog and
digital clusters to
auxiliary displays, such as
head-up displays.
Air Controls Heater, ventilation and air
conditioner controls,
ranging from mechanical (or
manual) to electronic (or
automatic).
Telepath(TM) 100 Satellite-based electronic
navigation system.
</TABLE>
SALES TO GM NAO
Approximately 81% of Delco's 1996 revenues were attributable to sales to GM
NAO. Delco's sales of automotive electronics to GM NAO are heavily dependent
upon the level of GM's North American production and sales of motor vehicles.
Such sales by Delco are also dependent on the level of Delco-supplied
electronic content (based on the number and sophistication of electronic
functions) per vehicle and the price (or cost to GM NAO) of such electronics.
Since 1992, pursuant to its global sourcing initiative, GM NAO has aggressively
pursued price reductions from its suppliers and has provided suppliers
worldwide with the opportunity to bid for business customarily sourced with
Delco. Delco believes that it has been and will continue to be able to compete
effectively for GM NAO business because of the quality of its products, its
ongoing cost reduction efforts and its product and technological innovations.
From 1994 through 1996, Delco won approximately 81% of all globally sourced,
competitive bids for GM NAO automotive electronics business for which Delco
competed (based on the dollar value of all bids submitted by Delco).
Nonetheless, it is anticipated that competition through GM's global purchasing
process will negatively impact Delco's sales to GM NAO and result in a decline
in the portion of GM NAO automotive electronics supplied by Delco.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Delco expects that the level of electronic functions in vehicles will
continue to increase, but that its prices to GM NAO will continue to decrease
as a result of global, market-based pricing pressures and increasing electronic
sophistication at lower prices. As a result of such price decreases and the
decline in the portion of GM NAO automotive electronics supplied by Delco as
described above, Delco expects that its revenues per GM NAO vehicle will
decrease after 1996. Delco is working to mitigate the effect of continuing
price reductions for current products by developing, producing and expanding
sales of enhanced products. Delco believes that by utilizing its core
technologies, opportunities exist for products offering consumers enhanced
safety, convenience and performance. Moreover, Delco believes that it will be
able to mitigate the effect of GM NAO price reductions on operating profit
through its demonstrated ability to reduce costs.
It is a policy of General Motors that a standard of fair dealing govern the
prices, terms and conditions of commercial transactions between Delco and
General Motors.
GM PRODUCTION AND SALES
The following table sets forth certain of GM's production, delivery (sales to
ultimate purchasers, including both retail and fleet customers) and market
share data for North America over the last three years.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
North American Motor Vehicle Production
(in millions of units)*...................................... 4.8 5.2 5.2
North American Motor Vehicle Deliveries
(in millions of units)**..................................... 5.3 5.3 5.6
North American Motor Vehicle Market Share (%)**............... 31.0% 32.3% 32.3%
</TABLE>
- --------
* Includes units which are manufactured in the United States and Canada by
General Motors (excluding affiliates), available for sale anywhere in the
world.
** Includes units which are manufactured by other companies and which are sold
in North America by General Motors and its affiliates.
The automotive industry is historically cyclical and is dependent on general
market conditions, including interest rates. In addition, although not
necessarily leading to a permanent loss of volume, GM's vehicle production is
subject to interruptions from work stoppages, plant and equipment failures and
other conditions and events, many of which are beyond the control of General
Motors.
ELECTRONIC CONTENT OF MOTOR VEHICLES
From 1986 to 1996, Delco revenues per GM NAO vehicle increased each year,
primarily as a result of increases in the number and sophistication of
electronic functions. The increasing level of electronic content of motor
vehicles is reflected in the average Delco electronics dollar sales per vehicle
produced by General Motors (excluding affiliates) in the United States and
Canada (for sale anywhere in the world) from 1994 to 1996, as set forth in the
following table:
<TABLE>
<CAPTION>
AVERAGE DELCO
DOLLAR SALES
PER VEHICLE
PRODUCED BY GM
IN NORTH
AMERICA
--------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Powertrain...................................................... $329 $297 $289
Chassis, Air Bag Controls, Security............................. 143 175 157
Integrated Body Systems......................................... 434 416 411
---- ---- ----
Total.......................................................... $906 $888 $857
==== ==== ====
</TABLE>
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
The Delco-supplied electronic content per GM NAO vehicle varies among vehicle
models and according to the options selected by customers, with more expensive
vehicles tending to have more sophisticated electronic functions. Delco
believes that the functionality of automotive electronics in GM NAO vehicles
will continue to increase, principally as a result of continued, and often
increasingly stringent, regulatory standards for automotive emissions and
consumer demand for increased performance, all of which will require more
sophisticated electronic engine controls. In addition, in the near term, Delco
believes that electronic components such as sensors and controllers will be
increasingly utilized to meet consumer preference for enhanced safety and
security features.
Automotive Emission Standards. Delco believes that the use of sophisticated
engine control computers in the United States will continue to increase,
primarily because of increasingly stringent automotive emissions standards and
more sophisticated diagnostic requirements as defined by the 1990 Clean Air Act
and California Air Resources Board regulations and higher Corporate Average
Fuel Economy ("CAFE") standards. Delco's engine control modules increase fuel
efficiency while helping to lower exhaust emissions.
Safety. Currently, Delco supplies air bag controllers for 100% of GM NAO
vehicles, up from 75% in 1994. Beginning in the 1998 model year, side-impact
air bag controllers will be introduced on various GM vehicles. Delco is also
developing occupant detection sensors which will suppress air bag deployment
based on a passenger's weight and/or position.
Delco also supplies over 90% of GM NAO's passenger car requirements for anti-
lock brake controllers in conjunction with Delphi. Additional features such as
traction control, variable effort steering and YAW control have been integrated
into Delco brake controllers for improved vehicle functioning.
Fuel Efficiency. In conjunction with Delphi, Delco will introduce electro-
hydraulic power steering ("EHPS") in the 1998 model year. EHPS allows for more
effective use of the hydraulic steering system which increases fuel efficiency.
Delco is also developing an improved electric power steering ("EPS") controller
that will eliminate steering hydraulics and lower the total system cost.
Convenience Features. Delco has expanded its penetration into the security
and personalization market through its acquisition of European-based Megamos
and Texton companies. Consumer demand continues to increase for enhanced body
control functions such as lock-out prevention, theater light dimming, vehicle
theft protection and remote keyless entry.
New Products. Delco continues to refine and develop its FOREWARN(R) forward
and rear-looking radar systems. The forward looking system is being pursued as
an adaptive cruise control system. The rear looking radar system continues to
be pursued as a backup aid to warn the driver of possible rear collisions.
These products are expected to be in full production around the year 2000. The
integration of Delco and Delphi is expected to increase synergies with Delphi
units and result in the ability to provide fully integrated, engineered and
assembled interior systems for automotive Original Equipment Manufacturer
("OEM") applications. Successful commercialization of these products will
depend on, among other things, consumer acceptance, affordability and ability
to achieve high volume production of sophisticated products, none of which can
be assured.
INTERNATIONAL AND OTHER SALES
Sales of Delco's automotive electronics to customers other than GM NAO grew
at an 18% compounded annual rate from $382 million in 1990 to $1,010 million in
1996. In 1996, Delco was awarded approximately 61% of all orders (excluding GM
NAO orders) for which it competed worldwide (based on the dollar value of all
bids submitted by Delco). Deliveries under such contracts are expected to begin
in 1998. Delco currently supplies automotive electronics products to several
customers worldwide, including Chrysler, Daewoo, Isuzu, Renault, Toyota, John
Deere, Nissan, BMW, Audi, Ford, Fiat and Mercedes. In 1996, Delco became QS-
9000 certified, attesting to its production and quality capabilities as a
world-class supplier.
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The levels of average electronic content of European-produced and Asian-
produced vehicles are currently substantially below the average level of
electronic content of vehicles sold in North America, indicating that the
worldwide demand for automotive electronics should grow significantly through
the end of the decade. In addition, Delco believes that future growth
opportunities exist outside of the United States as other countries adopt
automotive emission and fuel standards. Delco's customer-focused business units
were established to focus on these growth opportunities as Delco seeks to
capitalize on its cost reduction efforts, product quality and technology,
together with its worldwide manufacturing capabilities and capacities, to
continue to increase international sales (including sales to GM's international
operations and affiliates) and sales to customers other than GM NAO.
The success of Delco's international and non-GM NAO efforts will depend,
among other things, upon the availability of technical, manufacturing and other
resources. Competition in such markets is intense and not necessarily open to
all suppliers on equal terms. See "--Competition" below. Delco continues to
review and enter into, where appropriate, strategic alliances and partnering
arrangements and to make acquisitions to enhance its ability to compete for
international business.
ACQUISITIONS AND ALLIANCES
Historically, Delco's acquisition and alliance activities have been focused
on three objectives: market expansion, product portfolio enhancement to achieve
full systems capability and strengthening of core technologies. Recent
activities include formation of Shanghai Delco Electronics (joint venture
localizing manufacturing in China), acquisition of Fuba Automotive (a leading
antenna business in Europe) and formation of the Flip Chip Technologies joint
venture (which provides innovative integrated circuit packaging technology).
Delco will continue to focus on selective ventures which meet strategic
objectives and which complement the venture needs and strategies of Delphi.
COMPETITION
In April 1992, General Motors launched a major reorganization to streamline
its business practices and downsize its GM NAO operations. These changes were
essential to GM's vision of total customer satisfaction. Central to these
efforts were improved quality, reduced costs, strengthened product focus and
leveraged global sourcing. With regard to global sourcing, GM NAO announced its
intentions to begin filling its procurement needs on a global basis. Pursuant
to this initiative, GM NAO has aggressively pursued price reductions from its
suppliers and has provided suppliers worldwide with the opportunity to bid for
business customarily sourced with Delco. As a result, Delco has reduced its
prices to GM NAO, and Delco expects prices to continue to decline. In 1996,
Delco-supplied electronic content represented approximately 90% of GM NAO
requirements. Delco believes that it is, has been and will continue to be able
to compete effectively for GM business because of the quality of its products,
its on-going cost reduction efforts and its product and technological
innovations. Delco also believes that it derives a competitive advantage from
its business practice of placing Delco engineers at GM facilities to help
integrate Delco electronic products into GM's vehicle designs. Delco believes
that its technological experience from its non-automotive businesses also
provides it with a competitive advantage in developing and implementing new
automotive electronic products. Delco believes that its cost reduction programs
will provide significant ongoing and sustainable cost savings. In light of the
foregoing, Delco expects to be able to continue to compete effectively for GM
NAO business as well as international and North American business other than GM
NAO. However, Delco does expect its share of GM NAO automotive electronics
requirements to decline from its current 90% share to about 80% in the early
2000's principally due to competition through GM's global purchasing process.
The worldwide automotive electronics market includes many strong, global
competitors. In Europe, Delco is challenging incumbent suppliers with dominant
shares and strong relationships with European vehicle manufacturers. These
competitors, like Delco, are innovative, have system capability, are able to
support the European vehicle manufacturers' globalization plans and have
embarked on aggressive cost cutting programs to
182
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
meet the price pressure of vehicle manufacturers. In the Asia/Pacific region,
Delco faces competitors who have strong system capability, offer cost
competitive, high quality products and who have strong relationships with
vehicle manufacturers. In some cases, vehicle manufacturers located in the
Asia/Pacific region have significant equity ownership in Delco's competitors.
In Latin America, Delco's major competitors include suppliers based in both
Europe and in the Asia/Pacific region who have transplanted some operations to
support their customers' entry into, and expansion in, the region.
INTEGRATION OF DELCO AND DELPHI
For information regarding the integration of Delco and Delphi, see "Special
Factors--Purposes of the Hughes Transactions--Integration of Delco and Delphi"
and "--Background of the Hughes Transactions--Development of the Hughes
Transactions and the Raytheon Merger--September 23, 1997 Capital Stock
Committee Meeting" and "--October 6, 1997 GM Board Meeting" in Chapter 3.
183
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM SELECTED COMBINED HISTORICAL AND
PRO FORMA FINANCIAL DATA
The following selected combined historical financial data have been derived
from the financial statements of Hughes Telecom. The data should be read in
conjunction with Hughes Telecom's Combined Financial Statements (including the
notes thereto) included in Appendix E to this document. The income statement
data for the periods ended December 31, 1996, 1995 and 1994 and the balance
sheet data as of December 31, 1996 and 1995 have been derived from the
combined financial statements of Hughes Telecom audited by Deloitte & Touche
LLP, independent public accountants. The income statement data for the periods
ended December 31, 1993 and 1992 and September 30, 1997 and 1996 and the
balance sheet data as of September 30, 1997 and 1996 and December 31, 1994,
1993 and 1992 have been derived from the unaudited combined financial
statements of Hughes Telecom. In the opinion of management, the unaudited
combined financial statements reflect all adjustments (consisting only of
normal recurring items) that are necessary for the fair presentation of
financial position and results of operations for such periods. The Hughes
Telecom unaudited summary pro forma operating results data for the nine months
ended September 30, 1997 and for the year ended December 31, 1996 give effect
to the PanAmSat Merger that was completed on May 16, 1997, the Avicom
Divestiture and the Hughes Transactions (including the recapitalization of GM
Class H Common Stock into New GM Class H Common Stock) as if they had occurred
at the beginning of each respective period. The Hughes Telecom unaudited
summary pro forma balance sheet data as of September 30, 1997 give effect to
the Hughes Transactions as if they had occurred at that date. Operating
results for the nine-month periods ended September 30, 1997 and 1996 are not
necessarily indicative of the results that may be expected for the entire
year. Pro forma data are not necessarily indicative of future financial
position or operating results.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE YEARS
SEPTEMBER 30, ENDED DECEMBER 31,
--------------------------- ----------------------------------------------------------
PRO PRO
FORMA FORMA
1997(A) 1997 1996 1996(A) 1996 1995 1994 1993 1992(B)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............... $3,553.3 $3,433.7 $2,787.5 $4,189.8 $4,008.7 $3,152.8 $2,697.0 $2,195.0 $2,214.8
Other (expense) income,
net.................... (11.3) 470.7 95.0 100.2 75.9 8.2 (9.2) 162.1 38.6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues......... 3,542.0 3,904.4 2,882.5 4,290.0 4,084.6 3,161.0 2,687.8 2,357.1 2,253.4
-------- -------- -------- -------- -------- -------- -------- -------- --------
Cost and expenses....... 3,289.7 3,277.2 2,672.8 4,001.5 3,841.5 3,042.4 2,513.7 2,067.9 2,194.6
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 15.9 15.9 15.9 21.0 21.0 21.0 21.0 21.0 21.0
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 3,305.6 3,293.1 2,688.7 4,022.5 3,862.5 3,063.4 2,534.7 2,088.9 2,215.6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before
income taxes and
minority interests..... 236.4 611.3 193.8 267.5 222.1 97.6 153.1 268.2 37.8
Income taxes............ 98.3 244.5 82.0 149.6 104.8 31.4 55.5 102.7 7.7
Minority interests in
(income) losses of
subsidiaries........... (4.2) 16.8 29.4 (8.0) 52.6 4.6 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before
cumulative effect of
accounting change...... 133.9 383.6 141.2 109.9 169.9 70.8 97.6 165.5 30.1
Income (loss) from
discontinued
operations............. -- 1.2 (6.7) -- (7.4) (64.6) (54.1) (12.6) (2.8)
Cumulative effect of
accounting change...... -- -- -- -- -- -- (2.3) -- (112.8)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income (loss)....... $ 133.9 $ 384.8 $ 134.5 $ 109.9 $ 162.5 $ 6.2 $ 41.2 $ 152.9 $ (85.5)
======== ======== ======== ======== ======== ======== ========
Adjustments to exclude
the effects of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 15.9 21.0
-------- --------
Earnings used for
computation of
available separate
consolidated net income
of Hughes Telecom...... $ 149.8 $ 130.9
======== ========
Earnings per share
attributable to New GM
Class H Common Stock... $ 0.37 $ 0.33
======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $2,912.0 $ 426.5 $ 6.6 $ 6.7 $ 7.6 $ 5.8 $ 10.2 $ 6.4
Current assets.......... 4,854.8 2,331.9 1,390.8 1,497.1 1,175.5 1,154.5 1,126.6 1,343.6
Total assets............ 12,463.6 9,486.2 4,254.9 4,416.4 3,952.6 3,609.3 3,195.5 3,085.9
Current liabilities..... 1,814.4 1,540.8 1,212.8 1,219.6 863.6 881.0 790.2 823.1
Long-term debt.......... 1,072.8 2,797.8 -- -- -- -- 1.3 125.1
Minority interests...... 643.2 643.2 45.1 21.6 40.2 -- -- --
Parent Company's net
investment............. 7,360.1 3,394.0 2,426.1 2,491.6 2,608.9 2,301.0 1,973.3 1,752.3
OTHER DATA:
Depreciation and
amortization........... $ 211.2 $ 157.6 $ 215.6 $ 200.9 $ 160.9 $ 135.7 $ 142.0
Capital expenditures.... $ 551.5 $ 347.8 $ 449.4 $ 442.3 $ 399.0 $ 274.2 $ 186.0
</TABLE>
- -------
(a) Pro forma balance sheet data as of December 31, 1996 and pro forma other
data have not been determined.
(b) Includes the effect of a pre-tax restructuring charge of $155.6 million.
184
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of Hughes
Telecom have been derived from the historical combined financial statements of
Hughes Telecom and consolidated financial statements of PanAmSat to give
effect to the PanAmSat Merger that was completed as of May 16, 1997 and the
Hughes Transactions (including the recapitalization of GM Class H Common Stock
into New GM Class H Common Stock). The pro forma adjustments of the PanAmSat
Merger were performed using the purchase method of accounting. The unaudited
pro forma condensed combined balance sheet has been prepared as if the Hughes
Transactions and the Avicom Divestiture occurred on September 30, 1997. The
unaudited pro forma condensed combined statements of income have been prepared
as if the PanAmSat Merger, the Avicom Divestiture and the Hughes Transactions
occurred on January 1, 1996 and 1997.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with Hughes Telecom's Combined Financial Statements
(including the notes thereto) included in Appendix E to this document and
PanAmSat's Consolidated Financial Statements (including the notes thereto)
contained in pages FIN-1 through FIN-19 of the Proxy Statement on Schedule
14A, filed on April 18, 1997, of PanAmSat, which pages are incorporated into
this document by reference, each as of and for the period ended December 31,
1996, and the unaudited combined financial statements (including the notes
thereto) of Hughes Telecom included in Appendix E to this document and the
unaudited consolidated financial statements (including the notes thereto) of
PanAmSat included in PanAmSat's Form 10-Q/A for the period ended March 31,
1997, which is incorporated into this document by reference.
The pro forma condensed combined balance sheet is not necessarily indicative
of the financial position of Hughes Telecom that would have been attained had
the Hughes Transactions been consummated on June 30, 1997. The pro forma
condensed combined statements of income do not give effect to any synergies
that may be realized as a result of the PanAmSat Merger and are not
necessarily indicative of the results of operations of Hughes Telecom that
would have been attained had the PanAmSat Merger, the Hughes Transactions and
the Avicom Divestiture been consummated on January 1, 1996 and 1997, nor are
they necessarily indicative of any future operating results.
185
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PANAMSAT
MERGER HUGHES
HISTORICAL AND OTHER TRANSACTIONS
HUGHES HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TELECOM PANAMSAT(1) ADJUSTMENTS(2) COMBINED ADJUSTMENTS COMBINED
---------- ----------- -------------- --------- ------------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Product sales.......... $2,064.4 $ (6.4)(a) $2,058.0 $2,058.0
Direct broadcast,
leasing and other
services.............. 1,369.3 $126.0 1,495.3 1,495.3
Other income (expense),
net................... 470.7 232.7 (489.7)(b) (11.3) (11.3)
(225.0)(c)
-------- ------ ------- -------- ----- --------
Total Revenues...... 3,904.4 358.7 (721.1) 3,542.0 -- 3,542.0
-------- ------ ------- -------- ----- --------
COSTS AND EXPENSES
Cost of products sold.. 1,567.8 (3.8)(a) 1,564.0 1,564.0
Broadcast programming
and other costs....... 742.0 742.0 742.0
Selling, general and
administrative
expenses.............. 714.0 28.1 742.1 742.1
Depreciation and
amortization.......... 195.3 24.3 22.0 (d) 241.6 241.6
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft
Company............... 15.9 15.9 15.9
Merger-related
expenses.............. 29.9 (29.9)(e) 0.0 0.0
Interest expense....... 58.1 3.5 32.6 (f) 94.2 (94.2)(k) 0.0
-------- ------ ------- -------- ----- --------
Total Costs and
Expenses........... 3,293.1 85.8 20.9 3,399.8 (94.2) 3,305.6
-------- ------ ------- -------- ----- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES AND
MINORITY INTERESTS..... 611.3 272.9 (742.0) 142.2 94.2 236.4
Income taxes........... 244.5 116.1 (300.0)(g) 60.6 37.7 (l) 98.3
Minority interests in
net losses (income) of
subsidiaries.......... 16.8 (7.6)(h) (4.2) (4.2)
(16.9)(i)
3.5 (j)
Preferred Stock
Dividend.............. 16.9 (16.9)(i) -- --
-------- ------ ------- -------- ----- --------
INCOME FROM CONTINUING
OPERATIONS............. 383.6 139.9 (446.1) 77.4 56.5 133.9
Income from
discontinued
operations............ 1.2 (1.2) (v) -- --
-------- ------ ------- -------- ----- --------
NET INCOME.......... $ 384.8 $139.9 $(447.3) $ 77.4 $56.5 133.9
======== ====== ======= ======== =====
Adjustments to exclude
the effect of GM
purchase accounting
adjustments related to
Hughes Aircraft
Company................ 15.9
--------
Earnings Used For
Computation of
Available Separate
Consolidated Net
Income................. $ 149.8
========
Available Separate
Consolidated Net
Income:
Average number of
shares of New GM
Class H Common Stock
outstanding
(in millions)
(Numerator)........... 100.7
New GM Class H dividend
base
(in millions)
(Denominator)......... 399.9
Available Separate
Consolidated Net
Income................ $ 37.7
========
Earnings Per Share
Attributable to New GM
Class H Common Stock.. $ 0.37
========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
(1)The amounts labeled historical PanAmSat are for the period January 1 through
May 15, 1997.
(2)Other pro forma adjustment includes the effects of the Avicom Divestiture.
186
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PANAMSAT
MERGER HUGHES
AND OTHER TRANSACTIONS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HUGHES TELECOM PANAMSAT ADJUSTMENTS(1) COMBINED ADJUSTMENTS COMBINED
-------------- ---------- -------------- --------- ------------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Product sales.......... $3,009.0 $ (65.8)(a) $2,943.2 $2,943.2
Direct broadcast,
leasing and other
services.............. 999.7 $246.9 1,246.6 1,246.6
Other income, net...... 75.9 24.3 100.2 100.2
-------- ------ ------- -------- ------- --------
Total Revenues....... 4,084.6 271.2 (65.8) 4,290.0 -- 4,290.0
-------- ------ ------- -------- ------- --------
COSTS AND EXPENSES
Cost of products sold.. 2,183.7 (49.0)(a) 2,134.7 2,134.7
Broadcast programming
and other costs....... 631.8 32.7 664.5 664.5
Selling, general and
administrative
expenses.............. 788.5 44.2 832.7 832.7
Depreciation and
amortization.......... 194.6 61.3 58.8 (d) 314.7 314.7
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft
Company............... 21.0 21.0 21.0
Interest expense....... 42.9 24.9 87.7 (f) 155.5 $(100.6)(k) 54.9
-------- ------ ------- -------- ------- --------
Total costs and
expenses............ 3,862.5 163.1 97.5 4,123.1 (100.6) 4,022.5
-------- ------ ------- -------- ------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES AND
MINORITY INTERESTS..... 222.1 108.1 (163.3) 166.9 100.6 267.5
Income taxes............ 104.8 46.4 (41.8)(g) 109.4 40.2 (l) 149.6
Minority interests in
net losses (income) of
subsidiaries........... 52.6 (28.5)(h) (8.0) (8.0)
(41.4)(i)
9.3 (j)
Preferred Stock
Dividend............... 41.4 (41.4)(i) -- --
-------- ------ ------- -------- ------- --------
INCOME FROM CONTINUING
OPERATIONS............. 169.9 20.3 (140.7) 49.5 60.4 109.9
Loss from discontinued
operations............. 7.4 (7.4)(v) -- --
-------- ------ ------- -------- ------- --------
NET INCOME........... $ 162.5 $ 20.3 $(133.3) $ 49.5 $ 60.4 109.9
======== ====== ======= ======== =======
Adjustments to exclude
the effect of GM
purchase accounting
adjustments related to
Hughes Aircraft
Company................ 21.0
--------
Earnings Used For
Computation of
Available Separate
Consolidated Net
Income................. $ 130.9
========
Available Separate
Consolidated Net
Income:
Average number of
shares of New GM Class
H Common Stock
outstanding (in
millions) (Numerator) 98.4
New GM Class H dividend
base (in millions)
(Denominator) 399.9
Available Separate
Consolidated Net
Income $ 32.2
========
Earnings Per Share
Attributable to New GM
Class H Common Stock $ 0.33
========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
(1) Other pro forma adjustment includes the effects of the Avicom Divestiture.
187
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HUGHES
TRANSACTIONS
HISTORICAL AND OTHER PRO
HUGHES FORMA PRO FORMA
TELECOM ADJUSTMENTS(1) COMBINED
---------- -------------- ---------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................ $ 426.5 $ 1,054.5 (m) $ 2,912.0
1,431.0 (n)
Accounts and notes receivable (less
allowances)............................. 462.3 63.3 (o) 525.6
Contracts in process, less advances and
progress payments....................... 512.5 512.5
Inventories.............................. 601.3 601.3
Net assets of discontinued operations.... 35.3 (35.3)(w) --
Deferred subscriber acquisition costs.... 59.9 59.9
Prepaid expenses and other including
deferred income taxes................... 234.1 9.4 (l) 243.5
-------- --------- ---------
Total Current Assets................... 2,331.9 2,522.9 4,854.8
-------- --------- ---------
Satellites, net........................... 2,527.0 2,527.0
-------- --------- ---------
Property, net............................. 805.1 805.1
-------- --------- ---------
Net Investment in Sales-type Leases....... 345.5 345.5
-------- --------- ---------
Intangible Assets, net of amortization.... 2,777.6 2,777.6
-------- --------- ---------
Investments and Other Assets--principally
at cost (less allowances)................ 699.1 274.3 (p) 1,153.6
142.1 (o)
32.9 (q)
5.2 (r)
-------- --------- ---------
Total Assets........................... $9,486.2 $ 2,977.4 $12,463.6
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable......................... $ 411.4 $ 32.6 (o) $ 444.0
Advances on contracts.................... 264.7 264.7
Deferred revenues........................ 171.2 171.2
Accrued liabilities...................... 693.5 87.2 (r) 934.5
8.8 (s)
97.1 (o)
47.9 (w)
-------- --------- ---------
Total Current Liabilities.............. 1,540.8 $ 273.6 1,814.4
-------- --------- ---------
Long-Term Debt............................ 2,797.8 (1,725.0)(n) 1,072.8
-------- --------- ---------
Deferred Gains on Sales and Leasebacks.... 219.7 219.7
-------- --------- ---------
Accrued Operating Leaseback Expense....... 78.7 78.7
-------- --------- ---------
Other Liabilities and Deferred Credits.... 328.7 158.8 (s) 788.8
5.1 (o)
256.2 (t)
40.0 (r)
Deferred Income Taxes..................... 483.3 2.6 (l) 485.9
-------- --------- ---------
Minority Interests........................ 643.2 -- 643.2
-------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock
Parent Company's Net Investment.......... 3,394.0 3,894.3 (u) 7,360.1
71.8 (w)
Additional paid-in capital...............
-------- --------- ---------
Total Stockholders' Equity............. 3,394.0 3,966.1 7,360.1
-------- --------- ---------
Total Liabilities and Stockholders'
Equity................................ $9,486.2 $ 2,977.4 $12,463.6
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
(1) Other pro forma adjustments include the effects of the Avicom Divestiture.
188
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of Hughes
Telecom have been derived from the historical combined financial statements of
Hughes Telecom and consolidated financial statements of PanAmSat to give effect
to the PanAmSat Merger that was completed as of May 16, 1997, the Hughes
Transactions (including the recapitalization of GM Class H Common Stock into
New GM Class H Common Stock) and the Avicom Divestiture. The PanAmSat pro forma
adjustments were performed using the purchase method of accounting. The
unaudited pro forma condensed combined balance sheet has been prepared as if
the Hughes Transactions and the Avicom Divestiture had occurred on September
30, 1997. The unaudited pro forma condensed combined statements of income have
been prepared as if the PanAmSat Merger, the Hughes Transactions and the Avicom
Divestiture had occurred at the beginning of the periods presented. The
historical PanAmSat amounts included in the unaudited pro forma condensed
combined statement of income for the nine month period ending September 30,
1997 are for the period from January 1, 1997 through May 15, 1997, prior to the
date of the PanAmSat Merger.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with Hughes Telecom's Combined Financial Statements
(including notes thereto) as of and for the year ended December 31, 1996 and as
of and for the nine months ended September 30, 1997 included in Appendix E to
this document and PanAmSat's Consolidated Financial Statements (including notes
thereto) contained in pages FIN-1 through FIN-19 of the Proxy Statement on
Schedule 14A, filed on April 18, 1997, of PanAmSat, which pages are
incorporated into this document by reference, and PanAmSat's Unaudited
Consolidated Financial Statements (including the notes thereto) as of and for
the period ended March 31, 1997, included in PanAmSat's Form 10-Q/A, which is
incorporated into this document by reference.
The pro forma condensed combined balance sheet is not necessarily indicative
of the financial position of Hughes Telecom that would have actually been
obtained had the Hughes Transactions been consummated on September 30, 1997.
The pro forma condensed combined statements of income are not necessarily
indicative of the results of operations of Hughes Telecom that would have
actually been obtained had the PanAmSat Merger, the Hughes Transactions and the
Avicom Divestiture been consummated at the beginning of the periods presented,
nor are they necessarily indicative of any future operating results.
The following pro forma adjustments were made with respect to the PanAmSat
Merger:
(a) To eliminate intercompany transactions between PanAmSat and Hughes
Telecom.
(b) To eliminate the non-recurring gain recorded in connection with the
PanAmSat Merger. The PanAmSat Merger was treated for accounting
purposes as a partial sale of Hughes Telecom's Galaxy(R) satellite
services business by Hughes Telecom and resulted in a one-time pre-tax
gain of $489.7 million.
(c) To eliminate the non-recurring gain associated with the sale of certain
options which occurred in connection with the PanAmSat Merger. Prior to
the PanAmSat Merger, PanAmSat held options ("DTH Options") to purchase
equity interests in certain joint ventures formed to provide direct-to-
home services in Latin America and Spain. Since Hughes Electronics also
has investments in entities providing direct-to-home services in Latin
America, Hughes Electronics made it a condition of the PanAmSat Merger
that PanAmSat divest itself of the DTH Options. As a result, PanAmSat
sold the DTH Options and recognized a one-time pre-tax gain of $225.0.
(d) To reflect amortization of the excess of the purchase price of the
71.5% interest in PanAmSat acquired by Hughes Electronics over the fair
value of the net tangible assets acquired using the straight line
method over 40 years.
(e) To eliminate non-recurring expenses related to the PanAmSat Merger.
189
<PAGE>
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
(f) To adjust interest expense as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
To reflect pro forma interest expense related
to the borrowings incurred in connection with
the PanAmSat Merger........................... $37.3 $100.1
To reduce interest expense to reflect the
amortization of the adjustment to fair value
of PanAmSat's indebtedness at the date of the
PanAmSat Merger............................... (4.7) (12.4)
----- ------
Net increase to interest expense............... $32.6 $87.7
===== ======
</TABLE>
(g) To reflect income taxes on the pro forma adjustments relating to the
PanAmSat Merger. Amortization of goodwill resulting from the PanAmSat
Merger is not deductible for tax purposes.
(h) To record the minority interest's share of PanAmSat's net income.
(i) To reclassify the preferred stock dividend of subsidiary to minority
interest.
(j) To reflect amortization of the adjustment to fair value of preferred
stock of subsidiary.
The following pro forma adjustments were made with respect to the Hughes
Transactions:
(k) To eliminate interest expense associated with debt related to the
PanAmSat Merger and debt held by Hughes Electronics which is expected to
be repaid with the proceeds from the Hughes Transactions.
(l) To reflect income taxes relating to the pro forma adjustments relating
to the Hughes Transactions.
(m) To record cash and cash equivalents held by Hughes Electronics
(including the expected proceeds from the Avicom Divestiture), Hughes
Defense and Delco which will be contributed to Hughes Telecom in
connection with the Hughes Transactions.
(n) To record the estimated net cash proceeds relating to the Hughes
Transactions to be contributed to Hughes Telecom. The net cash proceeds
to be paid is subject to adjustment based on the price of Raytheon
Common Stock at the closing of the Hughes Transactions and other
indebtedness of Hughes Defense outstanding at the time of the Hughes
Defense Spin-Off. Based upon the price of Raytheon Common Stock during
the period prior to September 30, 1997, the net cash proceeds are
expected to be comprised of the following components:
<TABLE>
<CAPTION>
(DOLLARS
IN MILLIONS)
------------
<S> <C>
Estimated cash proceeds from the Hughes Transactions......... $ 3,785
Repayment of Hughes Electronics commercial paper............. (629)
-------
Net proceeds contributed to Hughes Telecom................... 3,156
Repayment of PanAmSat Merger-related debt.................... (1,725)
-------
Net cash proceeds............................................ $ 1,431
=======
</TABLE>
The use of the closing price of Raytheon Common Stock on November 7, 1997 of
$51.00 would have resulted in additional cash proceeds to Hughes Telecom of
approximately $200 million.
The net cash proceeds are also subject to adjustment based on the actual net
assets of Hughes Defense at the time of closing. The net assets of Hughes
Defense at September 30, 1997 are not necessarily indicative of the actual
net assets at the closing date.
(o) To record the transfer of other assets and liabilities of Hughes
Electronics related to the joint operations of Hughes Telecom, Hughes
Defense, and Delco which, pursuant to the Master Separation Agreement,
will be contributed to or assumed by Hughes Telecom.
(p) To record prepaid pension costs reflecting the estimated excess of
pension-related assets over pension-related obligations and net deferred
amounts associated with certain pension plans sponsored by Hughes
Electronics attributable to employees of Hughes Telecom. The assets and
liabilities relating to the pension plans have been allocated to Hughes
Telecom based upon the estimated percentage of the projected benefit
obligation related to Hughes Telecom in proportion to the
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projected benefit obligation of Hughes Electronics. Such assets and
liabilities will be assumed by Hughes Telecom pursuant to the Master
Separation Agreement as a result of the Hughes Transactions.
(q) To record Hughes Telecom's 50% equity interest in the Hughes Research
Labs joint venture that will be formed pursuant to the Master
Separation Agreement.
(r) To record estimated assets and accrued liabilities associated with
employee health and welfare benefit plans sponsored by Hughes
Electronics attributable to employees of Hughes Telecom which will be
contributed to and assumed by Hughes Telecom pursuant to the Master
Separation Agreement.
(s) To record estimated accrued liabilities relating to postretirement
benefit plans other than pensions sponsored by Hughes Electronics
attributable to employees of Hughes Telecom which will be assumed by
Hughes Telecom pursuant to the Master Separation Agreement.
(t) To record potential income tax liabilities which will be transferred
from Hughes Electronics to Hughes Telecom.
(u) To record the effect of parent company's net investment related to the
pro forma adjustments referred to in notes (l), (m), (n), (o), (p),
(q), (r), (s) and (t) as follows (in millions of dollars):
<TABLE>
<S> <C>
Deferred taxes relating to the pro forma adjustments........... $ 6.8
Contribution of cash held by Hughes Electronics, Hughes Defense
and Delco..................................................... 899.5
Estimated net cash proceeds from Hughes Transactions after
repayment of certain Hughes Electronics commercial paper debt. 3,156.0
Transfer of certain other assets and liabilities............... 70.6
Contribution of prepaid pension costs.......................... 274.3
Contribution of 50% equity interest in Hughes Research Labs
joint venture................................................. 32.9
Assumption of liabilities relating to other health and welfare
benefit plans................................................. (122.0)
Assumption of liabilities relating to postretirement benefit
plans......................................................... (167.6)
Assumption of liabilities relating to potential income tax
liabilities................................................... (256.2)
--------
$3,894.3
========
</TABLE>
The following pro forma adjustments were made with respect to the Avicom
Divestiture:
(v) To eliminate the loss from discontinued operations.
(w) To eliminate the net assets of discontinued operations and to record
taxes payable related to the Avicom Divestiture.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion excludes purchase accounting adjustments related to
GM's acquisition of Hughes Aircraft, since the amortization of such purchase
accounting adjustments will be excluded from the calculation of earnings
available for the payment of dividends on the New GM Class H Common Stock.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996.
RESULTS OF OPERATIONS
Revenues. Hughes Telecom reported revenues for the first nine months of 1997
of $3,904.4 million, an increase of 35.5% from the $2,882.5 million reported in
the comparable period in 1996. Revenues for 1997 include the $489.7 million
pre-tax gain recognized in the second quarter of 1997 related to the PanAmSat
Merger, and 1996 revenues include the pre-tax gain of $120.3 million related to
the sale of a 2.5% equity interest in DIRECTV(R) to AT&T. Revenues, excluding
both of these gains, for the first nine months of 1997 were $3,414.7 million,
an increase of 23.6% from the $2,762.2 million reported in the first nine
months of 1996. Such increase was primarily related to the continued expansion
of the DIRECTV subscriber base in the United States and Latin America and
increased revenues related to the PanAmSat Merger. Also contributing to the
revenue increase were higher commercial satellite sales within the High Powered
(HP) product line of satellites and on the ICO Global Communications satellite
contract. These revenue increases were partially offset by lower sales of
wireless telecommunications equipment.
Other Income--Included in revenues is other income of $470.7 million for
the first nine months of 1997 and $95.0 million in the same period last year.
The 1997 amount included the $489.7 million pre-tax gain recognized in
connection with the PanAmSat Merger and the 1996 amount included the $120.3
million pre-tax gain from the sale of a 2.5% equity interest in DIRECTV to
AT&T.
Operating Profit. Operating profit for the first nine months of 1997 was
$214.6 million, a $69.8 million increase from the $144.8 million reported in
the same period last year. The operating profit margin on the same basis for
the first nine months of 1997 was 6.3% compared with 5.2% reported in the prior
year's period. The increased operating profit and margin were primarily
attributable to the PanAmSat Merger and improved performance in the satellite
manufacturing segment, partially offset by increased DIRECTV expenses resulting
from the change in amortization period adopted in the first quarter of 1997 for
certain subscriber acquisition costs in the United States, start-up operating
losses from Hughes Telecom's Latin American DIRECTV subsidiary, Galaxy Latin
America, and lower wireless telecommunications equipment sales and margins.
With respect to the worldwide DIRECTV businesses, particularly in the United
States, Hughes Telecom is considering a number of strategic initiatives
designed to expand its market share and enhance its competitive position. These
include new distribution channels, new services, broader programming and
marketing and other promotional strategies designed to address "barriers to
entry" identified by consumers. To the extent that such strategies are
implemented, subscriber acquisition costs are likely to increase and, as a
result, the execution of such strategies is likely to affect the timing and
amount of revenues and the overall profitability of the DIRECTV businesses.
However, Hughes Telecom believes that early capture of market share and the
establishment of market leadership are important to maximization of the long-
term value of the DIRECTV businesses.
Costs and Expenses. Selling, general and administrative expenses for the
first nine months of 1997 were $714.0 million, an increase of $162.3 million
from the $551.7 million reported in the same period last year. The increase was
primarily related to DIRECTV subscriber acquisition costs and start-up costs
for Galaxy Latin America.
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The effective income tax rate was 39.0% for the first nine months of 1997 and
39.1% for the comparable period in 1996.
Earnings. Hughes Telecom earnings from continuing operations increased $242.4
million to $399.5 million in the first nine months of 1997 compared with $157.1
million reported in the same period in 1996. The increase was primarily due to
the $318.3 million after-tax gain recognized in connection with the PanAmSat
Merger partially offset by the first quarter 1996 gain from the sale of 2.5% of
DIRECTV to AT&T.
Backlog. The backlog at September 30, 1997 of $11,027.6 million increased
from the $7,051.2 million reported at September 30, 1996, primarily due to the
PanAmSat Merger in May 1997 and activity related to the ICO mobile satellite
program.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $426.5 million at
September 30, 1997, an increase of $419.8 million from the $6.7 million
reported at December 31, 1996. The increase was primarily due to the positive
net impact on cash of $258.8 million as a result of the PanAmSat Merger and
contributions from the Parent Company of $517.6 million, cash provided by
operating activities of $234.2 million, partially offset by capital
expenditures.
The completion of the PanAmSat Merger in May 1997 had a significant impact on
the liquidity and debt of Hughes Telecom. Existing PanAmSat cash and non-
current marketable securities of $296.9 million and $330.0 million,
respectively, were acquired as a result of the PanAmSat Merger. Total Hughes
Telecom long-term debt increased by the acquisition financing of $1,725.0
million provided by General Motors, as well as the assumption of the existing
PanAmSat debt of $613.4 million. Existing redeemable preferred stock of $395.8
million was also assumed in connection with the PanAmSat Merger; however, such
redeemable preferred stock was exchanged into 12 3/4% Senior Subordinated Notes
on September 30, 1997.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.51 at September 30, 1997 and 1.23
at December 31, 1996. Working capital increased to $791.1 million at September
30, 1997 from $277.5 million at December 31, 1996. These increases were
principally due to the increases in cash described above.
Property and Equipment. Property, net of accumulated depreciation, increased
$114.3 million to $805.1 million at September 30, 1997 from the $690.8 million
reported at December 31, 1996. Satellites, net of accumulated depreciation,
increased $1,470.4 million to $2,527.0 million at September 30, 1997 compared
with $1,056.6 million reported at December 31, 1996. The increase in satellites
was principally due to the satellites acquired in connection with the PanAmSat
Merger as well as capital expenditures. Capital expenditures, including
expenditures for satellites were $551.5 million through September 30, 1997
compared with $347.8 million in the comparable period in 1996.
Long-Term Debt. Long-term debt was $2,797.8 million at September 30, 1997,
primarily consisting of the PanAmSat-related debt described above.
Acquisitions. In May 1997, Hughes Electronics and PanAmSat completed the
merger of their respective satellite service operations into a new publicly
held company. Hughes Electronics contributed its Galaxy(R) satellite services
business in exchange for a 71.5% interest in the new company. Existing PanAmSat
stockholders received a 28.5% interest in the new company and $1.5 billion in
cash. Such cash consideration and other funds required to consummate the merger
were funded by new debt financing totaling $1.725 billion borrowed from General
Motors. It is anticipated that this borrowing will be repaid as part of the
Hughes Transactions.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
For accounting purposes, the PanAmSat Merger was treated by Hughes
Electronics as an acquisition of 71.5% of PanAmSat and accounted for using the
purchase method. Accordingly, the purchase price was allocated to the net
assets acquired, including intangible assets, based on estimated fair values at
date of acquisition. In addition, the PanAmSat Merger was treated as a partial
sale of the Galaxy business by Hughes Electronics and resulted in a one-time
pre-tax gain of $489.7 million ($318.3 million after-tax).
The preferred stock of PanAmSat outstanding at the time of the PanAmSat
Merger was exchanged into 12 3/4% Senior Subordinated Notes on September 30,
1997.
1996 COMPARED TO 1995
RESULTS OF OPERATIONS
Revenues. Hughes Telecom revenues were $4,084.6 million in 1996, a 29.2%
increase from the $3,161.0 million reported in 1995. Included in 1996 revenues
was the $120.3 million pre-tax gain recognized on the sale of a 2.5% equity
interest in DIRECTV(R) to AT&T. Excluding this gain, revenues were $3,964.3
million, a 25.4% increase from 1995. The increase in revenues was primarily due
to the continued expansion of the DIRECTV subscriber base by over one million
subscribers from 1995 to 1996. Further, satellite manufacturing revenues
increased due to higher sales volume of commercial satellite programs,
including Chinasat, ICO, Asiasat, Thor IIA, Brasil B3 and JCSat 4 as well as
government programs such as NASA's TDRS program. Also contributing to the
revenue increase was higher wireless product sales coupled with the
introduction and sales of DSS(R) products. Finally, satellite services had
increased revenues with improved performance in cable, broadcast and direct-to-
home distribution services principally as a result of additional transponder
capacity due to the successful launches of Galaxy III-R and IX.
Other Income--Included in revenues is other income of $75.9 million for
1996 and $8.2 million for 1995. The 1996 amount included the $120.3 million
pre-tax gain recognized from the sale of a 2.5% equity interest in DIRECTV to
AT&T.
Operating Profit. Operating profit for 1996 was $210.1 million, a 22.5%
increase from the $171.5 million reported in 1995. Operating profit margins on
the same basis were 5.2% in 1996 compared to 5.4% in 1995. The operating profit
increase was primarily due to the revenue increases described previously.
Further factors affecting the improved profitability were increased utilization
and capacity on existing satellites and the strong performance of the wireless
product lines. Such improvements were offset in part by increased costs related
to DIRECTV for consumer financing, marketing and operating costs and operating
losses related to the start of service by Hughes Telecom's DIRECTV business in
Latin America.
Costs and Expenses. Selling, general and administrative expenses were $788.5
million in 1996 compared to $488.4 million in 1995. The increase was primarily
related to subscriber acquisition costs related to DIRECTV businesses for both
domestic and international operations. Further, costs increased due to
international expansion activities for satellite services and the wireless
product lines.
The effective income tax rate was 43.1% in 1996 and 26.5% in 1995. The
increase in the effective tax rate was substantially caused by higher losses of
equity method investee and minority interest in partnership in 1996, which were
appropriately not tax affected.
Earnings. Hughes Telecom 1996 earnings from continuing operations were $190.9
million compared with 1995 earnings of $91.8 million. The increase was related
to improved operating performance within satellite manufacturing for government
and commercial programs, improved wireless and satellite network product lines,
the sale of 2.5% equity interest in DIRECTV to AT&T and reduced operating
losses for DIRECTV's domestic subsidiary, offset in part by start-up operating
losses for Galaxy Latin America.
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Backlog. The 1996 year-end backlog of $6,780.5 million decreased from the
$7,057.0 million reported at the end of 1995, primarily due to reduced order
activity on the Milstar and ICO programs, offset in part by increased customer
commitments for Galaxy(R) X.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $6.7 million at
December 31, 1996, a slight decrease from the $7.6 million reported at December
31, 1995. The cash balance was impacted by net distributions to the Parent
Company of $279.8 million and capital expenditures for property and satellites
totaling $449.4 million, offset in part by cash generated by operating
activities of $335.2 million and the proceeds from the sale-leaseback of GIII-R
to GMAC for $252.0 million, the sale of a 2.5% equity interest in DIRECTV to
AT&T for $137.5 million, and the disposal of certain property for $15.3
million.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.23 at December 31, 1996 and 1.36
at December 31, 1995. Working capital decreased $34.4 million to $277.5 million
at December 31, 1996 from the $311.9 million reported at December 31, 1995.
Property and Equipment. Property, net of accumulated depreciation, increased
$139.4 million to $690.8 million in 1996 from the $551.4 million reported in
1995. Satellites decreased $39.4 million to $1,056.6 million in 1996 from the
$1,096.0 million reported in 1995. The decrease in satellites was primarily due
to the sale-leaseback of GIII-R which more than offset the additional
expenditures related to the Galaxy satellite fleet. Capital expenditures,
including expenditures related to satellites increased to $449.4 million in
1996 from $442.3 million in 1995. The increase reflects additions to the Galaxy
satellite fleet, construction of the California Broadcast Center, an uplink
facility that supports Hughes Telecom's DIRECTV business in Latin America,
expenditures to upgrade satellite manufacturing capabilities, costs related to
DIRECTV's system enhancement projects, and the land acquisition for the Los
Angeles Broadcast Center.
Divestitures. In March 1996, Hughes Electronics sold a 2.5% equity interest
in DIRECTV to AT&T for $137.5 million, with options to increase their ownership
interest under certain conditions. The sale resulted in a $120.3 million pre-
tax gain, which is included in other income.
1995 COMPARED TO 1994
RESULTS OF OPERATIONS
Revenues. Hughes Telecom revenues were $3,161.0 million in 1995, a 17.6%
increase from 1994 revenues of $2,687.8 million. The increase resulted from
higher cellular communications equipment and private business network sales,
additional Galaxy(R) satellite transponder sales, increased satellite
construction sales, and the commencement of service by DIRECTV(R). DIRECTV
increased its subscriber base by nearly one million from 1994 to 1995. Such
revenue increases were offset in part by a decrease in revenues from Claircom
Communications within Hughes Network Systems.
Other Income/(Expense)--Included in revenues is other income of $8.2
million in 1995 and other expense of $9.2 million in 1994. The 1994 amount
included the pre-tax charge of $35.0 million for the estimated loss on
disposition of a non-strategic business unit.
Operating Profit. Operating profit for 1995 was $171.5 million, a 27.1%
decrease from the $235.3 million reported in 1994. Operating profit margins on
the same basis were 5.4% in 1995 and 8.7% in 1994. The overall declines were
primarily a result of increased operating expenses associated with the
continued expansion of DIRECTV(R) and increased development costs on a
geostationary satellite mobile telephony product line. Also contributing to the
decline in operating profit were the reduced 1994 costs associated with the
replacement of a Galaxy satellite, that was destroyed by a launch vehicle
failure in August 1992, and 1994 earnings recognized by DIRECTV related to a
contract with the National Rural Telecommunications Cooperative.
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Costs and Expenses. Selling, general and administrative expenses were $488.4
million in 1995 compared to $358.8 million in 1994. The increase was
principally due to the continued expansion of DIRECTV and the international
expansion effort at Hughes Network Systems, offset in part, by the divestiture
of Hughes LAN Systems ("HLS") in 1995.
The effective income tax rate was 26.5% in 1995 and 31.9% in 1994. The
variance in the rate is primarily due to the effect of the foreign sales
corporations ("FSC") tax benefits and the investment tax credits as a
percentage of the operating profits of the two years.
Earnings. Hughes Telecom 1995 earnings from continuing operations were $91.8
million compared with 1994 earnings of $118.6 million. The decline was
primarily related to the lower operating profits previously discussed.
Backlog. The 1995 year-end backlog of $7,057.0 million increased from the
$4,212.4 million reported at the end of 1994, primarily due to orders on the
ICO and Thor IIA satellite programs, increased customer commitments for Galaxy
III-R and Galaxy IX, and increased wireless and broadcast product orders.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $7.6 million at
December 31, 1995, a slight increase from the $5.8 million reported at December
31, 1994. The cash balance was impacted by contributions by the Parent Company
of $301.7 million, cash provided by operating activities of $97.5 million and
proceeds from the divestiture of HLS of $17.5 million, offset in part by
capital expenditures.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) of 1.36 at December 31, 1995 remained
comparable to the 1.31 reported at December 31, 1994. Working capital was
$311.9 million at December 31, 1995 compared to $273.5 million at December 31,
1994.
Property and Equipment. Property, net of accumulated depreciation, increased
$52.9 million to $551.4 million in 1995 from the $498.5 million reported in
1994. Satellites, net of accumulated depreciation, increased $151.6 million to
$1,096.0 million in 1995 compared with the $944.4 million reported in 1994.
Capital expenditures, including expenditures for satellites, were $442.3
million for 1995 compared with $399.0 million in 1994. The increase in capital
expenditures was primarily due to increased expenditures related to the Galaxy
Satellite fleet and upgrading satellite manufacturing capabilities, offset in
part by declines from 1994 costs associated with the completion of the Castle
Rock Broadcast Center to support DIRECTV.
Divestitures. During 1995, Hughes Electronics divested Hughes LAN Systems
resulting in aggregate proceeds of approximately $38.8 million and a net loss
of $9.0 million, for which a pre-tax charge of $35.0 million was taken in 1994.
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BUSINESS OF HUGHES TELECOM
INTRODUCTION
The following description of the business of Hughes Telecom gives effect to
the Hughes Reorganization. Following the consummation of the Hughes
Transactions, this business will be conducted by New Hughes Electronics.
Hughes Telecom is a leading worldwide provider of satellite-based video, data
and telephony services and manufacturer of communications satellites and
wireless and other telecommunications equipment. Hughes Telecom has the world's
largest non-governmental fleet of geostationary communications satellites and
is the world's leading supplier of satellite-based private business networks.
In addition to providing a broad range of satellite-related services, Hughes
Telecom is a leader in the U.S. direct broadcast satellite market with its
programming distribution service known as DIRECTV(R), which was introduced in
1994 and was the first high-powered, all digital, Direct-to-Home ("DTH")
television distribution service in North America. Hughes Telecom believes it is
a leading manufacturer of commercial communications satellites and satellite-
based electronic equipment for the U.S. government. Hughes Telecom is a
vertically integrated supplier of satellites and satellite-based communications
systems and services. It also provides communications equipment and services in
the mobile communications and packet switching markets. Its equipment and
services are applied in, among other things, data, video and audio
transmission, cable and network television distribution, private business
networks, digital cellular communications and DTH satellite broadcast
distribution of television programming.
Hughes Telecom conducts its operations in four principal segments: Satellite
Manufacturing, Network Systems, Direct-To-Home Broadcast and Satellite
Services. Certain other operations are included in Intercompany Eliminations
and Other. The following table sets forth revenues of Hughes Telecom for each
of the last three years by segment.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Satellite Manufacturing........................... $2,050.2 $1,716.8 $1,462.4
Network Systems................................... 1,067.4 909.2 813.6
Direct-to-Home Broadcast.......................... 744.4 241.0 108.3
Satellite Services................................ 483.4 394.0 331.5
Intercompany Eliminations and Other............... (260.8) (100.0) (28.0)
-------- -------- --------
Total............................................. $4,084.6 $3,161.0 $2,687.8
======== ======== ========
</TABLE>
Hughes Telecom also owns and operates Hughes Avicom, its in-flight
entertainment subsidiary. On November 3, 1997, Hughes Telecom entered into an
agreement to sell Hughes Avicom to Rockwell Collins, Inc. The sale is expected
to close in the fourth quarter of 1997, pending regulatory approval. As a
result of the planned divestiture, Hughes Avicom has been treated as a
discontinued operation for financial statement purposes.
SATELLITE MANUFACTURING
Through Hughes Space and Communications Company ("HSC"), Hughes Telecom is
the world leader in the manufacture of geostationary commercial communications
satellites, having built approximately 40% of the communications satellites now
in commercial service worldwide. Hughes Telecom believes that HSC is a leading
manufacturer of spacecraft and spacecraft-based electronic equipment for the
U.S. government. In addition to commercial applications, HSC's satellites and
satellite payloads are used for a variety of defense, NASA and other government
space missions.
Since its construction of the world's first geosynchronous communications
satellite in 1963, HSC has been recognized worldwide as a leader in the design
and manufacture of communications satellites. The following table outlines
certain publicly announced information with respect to commercial (non-defense)
communications satellites during the period from 1994 to 1996. Through
September 30, 1997, five additional HSC-built satellites were placed in
service.
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<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Commercial Communications Satellite Launches
HSC-Built....................................................... 10 8 10
Total Industry.................................................. 26 19 18
Commercial Communications Satellites in Service
HSC-Built....................................................... 64 61 57
Total Industry.................................................. 165 145 134
</TABLE>
As of September 30, 1997, HSC has publicly announced outstanding orders to
construct 40 communications satellites for companies (including subsidiaries
and affiliates of Hughes Electronics) and government agencies in nine
countries, including orders for 30 of its advanced HS 601 satellites (of which
ten are commercial orders for its higher-power models), representing over $4.4
billion in backlog. As of September 30, 1997, five HSC-built satellites are
scheduled for launch in the remainder of 1997. Launch schedules are subject to
a number of factors, including construction delays, weather, availability of
launch vehicles, launch vehicle problems and governmental and political
pressures, many of which are beyond the control of HSC. Launch difficulties and
delays can, in certain circumstances, result in increased costs to HSC.
Hughes Telecom believes that HSC's leadership position in the competitive
satellite manufacturing industry reflects the high quality and reliability of
its satellites, which results from HSC's technological superiority in satellite
design, production and operation. One measure of the reliability of HSC's
satellites is the duration of their operational service. Since the launch of
HSC's first satellite in 1963, HSC's satellites have accumulated over 850 years
of in-orbit experience, with channel availability of 99.5% on HS 376, HS 601
and other current generation commercial satellites. Approximately 95% of HSC's
satellites have remained in service past their originally scheduled retirement
dates. The quality of HSC's satellites is also evidenced by the number of
repeat customers. Since 1965, approximately one-half of all HSC's satellite
sales have been made to repeat customers.
HSC's technological capabilities have led to enhancements in the quality of
its satellites, improvements in cost effectiveness through higher power and
compression and expansion of its satellite product line, thereby strengthening
HSC's leadership position and expanding the market for satellites as a whole.
For example, HSC has developed a family of structures, electronics, propulsion
and power systems (referred to as "buses"), which can be replicated at
relatively low cost in a variety of commercial and defense configurations. In
addition, HSC has applied signal compression and has developed other methods to
enhance the efficiency of transponders. The newest product in this family is
the HS 702 bus, which offers substantially higher power levels than those
previously achieved. Advancements in digital electronics, high power
amplifiers, antenna implementations and propulsion systems offer enhanced
performance capabilities of HSC-built satellites at a relatively higher power
than other satellites. These advancements are expected to provide a competitive
advantage for HSC as a result of enhanced performance capabilities.
In order to enhance its competitive position in both the government and
commercial satellite manufacturing markets, HSC continues to work to lower its
costs and improve productivity while maintaining its quality standards. Since
1992, HSC has improved its satellite manufacturing productivity by
approximately 47% (as measured by satellite sales dollars per employee) and
reduced cycle time from order to delivery for satellite production by
approximately 30%. In addition, HSC has secured commitments for 35 launch
vehicles over the next several years, which will assure HSC's access to space
at competitive costs.
HSC is currently building twelve communications satellites for London-based
ICO Global Communications, providing revenues to HSC of over $2.0 billion. The
satellites will be used in a global satellite-based mobile communications
system designed primarily to provide services to dual-mode (space/terrestrial)
cellular phones. The system will offer digital voice, data and facsimile
services, as well as a range of messaging services worldwide. This will be the
first commercial program to utilize a payload with a
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complex, on-board digital processor and phased array antenna. It also will be
the first spacecraft to be built by HSC for an intermediate earth orbit.
In September 1997, HSC announced a contract with Thuraya Satellite
Telecommunications Company ("Thuraya"), to provide a satellite-based mobile
phone system to serve the Middle East, North Africa, Eastern Europe (including
Turkey), Central Asia and the Indian subcontinent. This award will be the
largest satellite communications project in the region, worth approximately $1
billion to Hughes Electronics, and includes the manufacture of two high-power
satellites, launch services for the first satellites, insurance, ground
facilities and between 112,000 and 235,000 mobile telephones.
NETWORK SYSTEMS
Through Hughes Network Systems, Hughes Telecom provides a broad range of
telecommunications products and services, including satellite and ground-based
communications equipment and services. With an estimated worldwide market share
in excess of 60%, Hughes Network Systems is the world's leading supplier of
satellite-based private business networks, which utilize its very small
aperture terminals ("VSATs") and are individually designed, owner controlled,
interactive, highly flexible communications systems with the capacity to link
thousands of locations for data exchange, voice communications and video
conferencing. Hughes Network Systems also provides shared-hub systems that
allow users with more modest communications needs to share usage of Hughes
Network Systems' satellite ground stations and networks. Hughes Network Systems
is also a leader in wireless telephone networks and digital cellular mobile
systems and believes significant opportunities exist in utilizing digital
cellular technologies to provide fixed wireless telecommunications networks for
local and international telecommunications in areas with deficient
communications infrastructures (particularly developing nations) and to provide
mobile communications systems and services. Hughes Network Systems is also the
leader in providing satellite-based access to the Internet through its
DirecPC(TM) service.
As the leading supplier of VSATs, Hughes Network Systems has delivered or
received orders for more than 170,000 VSATs for use in the private networks of
companies, government agencies, universities and research institutions. Among
these are the more than 9,000 installed in the GM Pulsat network, which is the
world's largest private business network. Since 1987, Hughes Network Systems
has sold private business networks to a variety of customers worldwide,
including Chrysler, Toyota, Chevron, Wal-Mart, Toys "R" Us, Jusco (Japan),
China Ministry of Posts and Telecommunications and France Telecom. Sales to
international customers are expected to increase, particularly as government
regulation of private ownership of such networks decreases. As of September 30,
1997, Hughes Network Systems had sold private networks for use in over 55
countries in North America, Europe, Asia, Latin America and Africa.
Hughes Network Systems has a long history of products for terrestrial data
communications, beginning with the X.25 packet switches for Telenet in the mid-
1970's. Hughes Network Systems recently announced a new family of networking
products called the Radiant(TM) family. Radiant products are able to address a
large range of customer's wide area networking requirements.
Hughes Network Systems believes that it has developed a unique and flexible
system that uses common hardware and software modules for multiple wireless
telecommunications applications, including analog and digital mobile cellular,
mobile data, fixed wireless telephony and Personal Communication Services
("PCS"). The advanced GMH 2000(TM) cellular system supports and is compatible
with the U.S. Telecommunications Industry Association ("TIA") analog, and Time
Division Multiple Access ("TDMA") and Code Division Multiple Access ("CDMA")
digital cellular standards, the Cellular Digital Packet Data ("CDPD") mobile
data standard, the BellCore "PACS" system proposed as a PCS standard and Hughes
Network Systems' proprietary enhancement to TDMA, Extended Time Division
Multiple Access ("E-TDMA(R)") standard. E-TDMA offers significantly increased
capacity as compared to conventional analog switching technology. Hughes
Network Systems has installed major telephone infrastructures in Jakarta,
Indonesia; Prague, Czech Republic; Blantyre, Malawi; Vladivostok, Russia;
Chengdu, China; Ho Chi Minh City and Hanoi, Vietnam; and
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Campos, Brazil. The Hughes Network Systems program in Tatarstan, a Russian
republic, for a high capacity fixed wireless telephone system has been in
operation since January 1995. Hughes Network Systems has a contract with
BellSouth Cellular Corporation under which it installed and continues to expand
its GMH 2000(TM) dual analog/digital cellular networks for voice and data
transmission in more than 50 markets in the southeastern United States. GTE
Mobilnet installed a Hughes Network Systems network with CDPD technology in
many of its markets in 1995.
Hughes Network Systems is discussing with several other countries and cities
the installation of similar systems to provide and upgrade basic telephone
service. For example, on September 30, 1997, the government of India issued to
Hughes Ispat Limited, a limited liability company organized under the laws of
India in which Hughes Telecom has an ownership interest, a license to provide
basic telecommunications services within the Indian state of Maharashtra. A
letter of intent has also been signed for Hughes Ispat Limited to provide
similar services to the Indian state of Karnataka. In addition, Hughes Network
Systems will be the primary wireless equipment provider in connection with both
of these services.
Hughes Network Systems believes that its technologies and other capabilities
position it to become a leading provider of satellite-based mobile
communications equipment and services. Recent awards, including those from
Thuraya and ICO, to provide satellite-based ground telecommunications
networking equipment have established Hughes Network Systems' credentials in
this sector. In addition, HNS is under contract to Thuraya to build between
112,000 and 235,000 hand held telephones that can operate in dual mode:
cellular and satellite.
In 1996, Hughes Network Systems began providing subscriber equipment for
DIRECTV(R) services. In addition, Hughes Network Systems has developed
DirecPC(TM), a satellite-based information delivery service that uses a small
antenna and high-speed digital transmission to make software, documents, desk-
top video, games, news and other information accessible through personal
computers. For example, through DirecPC's Turbo Internet(TM) service, a
personal computer user can download data and video at speeds up to 400 kilobits
per second. In 1996, Hughes Network Systems initiated commercial DirecPC
service in the United States and licensed two operators in Japan and the Hughes
Network Systems Olivetti joint venture in Europe for DirecPC operation.
DIRECT-TO-HOME BROADCAST
Hughes Telecom has consolidated its North American and international DIRECTV
efforts into one organization: DIRECTV Global. The goal of the reorganization
is to capitalize on Hughes Telecom's experience in North America as DIRECTV
expands into the international arena. The reorganization also provides
synergies in programming and technical support provided to these new markets.
UNITED STATES
Through DIRECTV Enterprises, Inc. ("DIRECTV U.S."), Hughes Telecom has
developed and operates the first high-powered, all digital DTH television
distribution service in North America, and is the leader in the direct
broadcast satellite market in the United States with its programming
distribution service known as DIRECTV. Introduced in June 1994, DIRECTV service
is broadcast from three Hughes HS 601 satellites directly to 18-inch receiving
antennae and decoding boxes located in households in the 48 contiguous states
in the United States. DIRECTV U.S. uses 11 of the 16 transponders on the first
satellite and all transponders on the second and third satellites for DIRECTV
services. The remaining five transponders on the first satellite have been sold
to United States Satellite Broadcasting, Inc. ("USSB") for use in its own
programming service. Programming is received and broadcast from DIRECTV's
55,000 square foot broadcast facility in Castle Rock, Colorado. The receiving
equipment for DTH television services, DSS(TM), is manufactured by a number of
name brand consumer electronics companies, including Thomson Consumer
Electronics under the RCA(R), Proscan and GE brand names, Sony, Panasonic,
Daewoo, Hitachi, Phillips, Hughes Network Systems, Toshiba and Uniden. DSS
equipment prices have fallen steadily from the initial $699-$899 range in June
1994 to
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approximately $199-$399 today. The technology for the DIRECTV(R) service is
based, in part, on Hughes Telecom's satellite and satellite-based services
experience and in part, on the expertise of the consumer electronics
manufacturers which produce DSS equipment. DIRECTV U.S. has outsourced many of
the significant facets of marketing directly to consumers and operating the
related infrastructure and support services to vendors experienced in the
respective fields.
Hughes Telecom believes that DIRECTV U.S. can compete effectively with cable
and other DTH providers through a combination of its high quality video, audio
and customer service, broad range of programming and extensive distribution.
Both the DIRECTV programming service and DSS equipment are currently
distributed through consumer electronics stores such as Circuit City, Radio
Shack, Best Buy and Sears; and satellite television dealers. In addition,
pursuant to an arrangement with the National Rural Telecommunications
Cooperative ("NRTC"), the NRTC offers DIRECTV services to member cooperatives
located primarily in rural areas of the continental United States.
The DIRECTV entertainment services currently offered to subscribers include
over 175 television channels (including The Disney Channel, ESPN and CNN); an
assortment of pay per view events such as movies, boxing, wrestling, musical
concerts and other similar programs; 31 audio channels of commercial-free, CD-
quality music; professional sports programming consisting of out-of-market
games from the NFL, NBA, NHL, MLB and collegiate football sports programming;
and other entertainment services such as The Golf Channel, STARZ! and Playboy
TV. DIRECTV U.S. believes that its wide diversity of programming and its
variety of programming packages available to consumers (especially in the areas
of sports and movies) will allow DIRECTV to compete effectively in the market
for television entertainment. Future program offerings may include additional
basic, niche or specialized programming. DIRECTV U.S. also sells programming
packages to restaurants, bars, office buildings, hotels and other commercial
establishments. DIRECTV U.S. anticipates offering the DIRECTV video and audio
services as well as enhanced multimedia and data services on personal computers
in early 1998.
Primestar, USSB and Echostar are the only other direct broadcast service
companies currently in operation in the United States. ASkyB and Primestar
announced their intention to merge in 1997 to form a new company. At this time,
the transaction is still pending. In addition, on May 27, 1997, Alphastar filed
a voluntary Chapter 11 petition under Title 11 of the United States Code and on
August 8, 1997 ceased broadcast operations. DIRECTV service also competes with
cable television, other broadcast television and other entertainment services,
including video rentals and telephone services.
As of September 30, 1997, there were approximately 2.9 million subscribers in
the United States for DIRECTV programming services, including approximately
650,000 NRTC subscribers. Excluding NRTC subscribers (and revenues), average
revenue per U.S. subscriber is currently over $40 per month, and net subscriber
churn is currently approximately 1% per month. Recently, the demographics of
the DIRECTV U.S. subscriber base has changed, with increasingly more
subscribers coming from urban and suburban homes passed by cable.
INTERNATIONAL
Hughes Telecom's business strategy also includes application of its U.S.
telecommunications industry experience and technology to international markets.
Consistent with this strategy, Hughes Telecom has entered into a partnership,
known as Galaxy Latin America, with three prominent Latin American media
companies to introduce satellite-based direct broadcast entertainment into
Latin America through a service using the DIRECTV(R) brand name. Galaxy Latin
America was the first DTH provider in Latin America and is currently the market
leader. Hughes Telecom estimates that the Latin American market represents the
third largest television market in the world, with over 90 million television
households, although the number of households which are potential customers for
DIRECTV service is estimated to be substantially less. In this regard, Hughes
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Telecom Latin America believes that approximately one-half of television
households in Latin America earn an income sufficient to afford pay TV
services, but only a small fraction currently subscribe to such services.
Hughes Telecom maintains a 60% ownership share in the Galaxy Latin America
partnership, which also includes Cisneros Group of Venezuela (20%), Multivision
of Mexico (10%) and TV Abril of Brazil (10%).
Galaxy Latin America commenced operations in July 1996 using a Hughes Telecom
HS 601 satellite. Galaxy Latin America currently utilizes four broadcast
centers, in Long Beach, California, Mexico City, San Paulo and Caracas, to
uplink diverse programming throughout Latin America and plans to add one
additional broadcast center in Buenos Aires, which is expected to become
operational in late 1997 or early 1998. Local operating companies ("LOCs") in
each country provide marketing, sales, distribution, customer service and other
infrastructure services. Hughes Telecom either has purchased or plans to
purchase a 10% to 20% interest in each of the LOCs operating in the larger
Latin American markets, such as Brazil, Mexico, Venezuela, Colombia and
Argentina. Hughes Telecom believes that an equity stake in these firms will
help ensure a coordinated strategy throughout Latin America. DIRECTV service in
Latin America currently includes approximately 70 channels of entertainment for
customers in each of Mexico, Brazil, Venezuela, Ecuador, Panama, Costa Rica,
Trinidad/Tobago, Guatemala, Chile and, most recently, Colombia. Later in 1997
or in early 1998, Hughes Telecom expects Galaxy Latin America to introduce
DIRECTV service in Argentina and, by the end of 1998, expects to offer services
to approximately 100% of the Latin American market. As of September 30, 1997,
there were approximately 235,000 subscribers in Latin America. Galaxy Latin
America's average revenue per subscriber is currently over $40 per month.
Galaxy Latin America's business strategy includes maintaining its market
leadership through program differentiation, high quality video, audio and
customer service, advanced technological capabilities and increased channel
capacity. Galaxy Latin America believes that its early entry into the Latin
American direct broadcast market, coupled with its existing DIRECTV technology,
provides it with a competitive advantage in this market.
In October 1996, Hughes Telecom announced an agreement to form DIRECTV JAPAN,
Inc. ("DTVJ"), a partnership of leading Japanese and American
telecommunications companies. The DTVJ partners and their equity ownership in
the company are as follows: Hughes Telecom (31.8%); Culture Convenience Club
Co., Ltd. ( 31.8%); Mitsubishi Corporation and certain of its affiliates
(13.7%); Matsushita Electric Industrial Co., Ltd. (9.1%); Tokuma Corporation
(9.1%); and Dai Nippon Printing Co., Ltd. (4.5%). Hughes Telecom estimates that
there are more than 40 million television households in Japan, with very low
cable penetration. Hughes Telecom believes that DTVJ's strong in-country
partners, DTH experience in the United States and Latin American markets, its
higher-quality video, audio, data and interactive services and its programming
line-up containing a number of unique local Japanese programs and major U.S.
programming channels provide it with a competitive advantage in this market.
Hughes Telecom currently expects DTVJ to commence commercial operations in
early 1998, with an offering of over 90 channels of advanced, digital, DTH
entertainment services throughout Japan.
GENERAL
With respect to the worldwide DIRECTV businesses, particularly in the United
States, Hughes Telecom is considering a number of strategic initiatives
designed to expand its market share and enhance its competitive position. These
include new distribution channels, new services, broader programming and
marketing and other promotional strategies designed to address "barriers to
entry" identified by consumers. To the extent that such strategies are
implemented, subscriber acquisition costs are likely to increase and, as a
result, the execution of such strategies is likely to affect the timing and
amount of revenues and the overall profitability of the DIRECTV businesses.
However, Hughes Telecom believes that early capture of market share and the
establishment of market leadership are important to maximization of the long-
term value of the DIRECTV businesses.
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There can be no assurance that any level of DIRECTV(R) subscribers or
profitability to Hughes Telecom in the United States, Latin America, Japan or
other markets will be achieved or, if and when achieved, maintained due to the
factors described in this section and other factors outside the control of
Hughes Telecom and its partners (including economic conditions and political
volatility in various foreign countries and currency and exchange rate risks).
To the extent that the factors described above affect the levels of subscribers
which are achieved or maintained, the timing and amount of revenues and
profitability to Hughes Telecom from its participation in providing DIRECTV
services in the United States, Latin America, Japan and other markets may be
adversely affected.
The DIRECTV U.S., Galaxy Latin America and DTVJ Japan systems, if and when
operational, will compete with other technologies and systems. See "--
Competition" below. Delays in the successful production or launch of the
related satellites could materially delay the commencement or expansion of such
services, which could materially affect market acceptance of such services and
the financial results to Hughes Telecom. Launch schedules are subject to a
number of factors, including construction delays, weather, availability of
launch vehicles, launch vehicle problems and governmental and political
pressures, many of which are beyond the control of Hughes Telecom. In addition,
there can be no assurance that Hughes Telecom will receive the approvals and
licenses from the FCC and other U.S. and foreign governmental agencies that
will be required to launch and operate the satellites for direct broadcast.
SATELLITE SERVICES
On May 16, 1997, Hughes Telecom and PanAmSat completed the PanAmSat Merger,
resulting in the merger of their respective satellite services operations into
a new publicly held company, which assumed the name "PanAmSat Corporation". As
part of this series of transactions, Hughes Telecom contributed its Galaxy(R)
satellite services business for a 71.5% interest in PanAmSat. In these
transactions, PanAmSat stockholders received $1.5 billion in cash and a 28.5%
interest in PanAmSat after the PanAmSat Merger in exchange for their existing
holdings. PanAmSat borrowed approximately $1.725 billion to finance the
PanAmSat stock purchase and facilitate the sale of certain DTH television
rights to a stockholder of PanAmSat.
The PanAmSat Merger brings together the leading provider of commercial
satellite services in the U.S. domestic market with the leading commercial
provider in the international market. PanAmSat operates a global network of 16
satellites supported by seven teleport and operations facilities in the United
States and more than 400 sales, marketing and engineering employees on five
continents. PanAmSat believes that these resources enable the company to serve
as a unique, one-stop provider of global satellite services.
PanAmSat's global satellite network is used to provide video distribution and
telecommunications services. PanAmSat currently operates the leading satellites
for cable and broadcast television distribution in the United States, Latin
America, the Indian subcontinent and the Asia-Pacific region; and satellite
platforms for direct-to-home television services in Latin America, South
Africa, the Middle East and India. In addition, the company offers live
transmission services for news, sports and special events coverage worldwide
and satellite transmissions capacity and related services for private business
networks and international Internet access. PanAmSat also provides satellite
tracking, telemetry and control services for its own satellite fleet as well as
for satellites owned by others.
PanAmSat primarily provides satellite services through long-term operating
lease contracts to its customers for the use of full or partial transponder
capacity. The company also offers services to its customers through sales and
sales-type lease contracts. PanAmSat currently provides service to hundreds of
video distribution and telecommunications customers worldwide and, as of
September 30, 1997, had long-term contracts for satellite services representing
future payments of approximately $7.1 billion.
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The following table sets forth on a pro forma basis the number of
transponders on the in-orbit satellites in the PanAmSat network as of September
30, 1997 and December 31, 1996, 1995 and 1994 and the percentage of such
transponders committed, in the aggregate, for use by PanAmSat customers during
the current year (as of September 30, 1997) and during each of 1996, 1995 and
1994.
<TABLE>
<CAPTION>
1997* 1996 1995 1994
----- ---- ---- ----
<S> <C> <C> <C> <C>
PanAmSat Network
Satellites......................................... 16 14 11 11
Transponders Available............................. 495 411 307 291
Transponders Committed............................. 85% 85% 91% 72%
</TABLE>
- ------
*As of September 30, 1997.
PanAmSat's business strategy is to capture more of the value-added benefits
of the satellite-based services market by offering one-stop satellite shopping
through its global reach and by capitalizing on its technological capabilities,
its early market entry, the desirable orbital locations of its satellite fleet
and its management expertise in satellite operations. In addition, PanAmSat is
the leader in the development and marketing of cable neighborhoods and a
broadcast neighborhood. These innovations, which concentrate a broad range of
quality cable programming or broadcast programming on certain satellites, have
made such satellites particularly attractive to cable programmers and broadcast
programmers desiring to distribute widely their programming to cable system
operators or television stations.
To meet the expected demand for additional satellite capacity, PanAmSat has
five additional satellites scheduled for launch by the end of 1998. These
additional launches would increase the number of PanAmSat satellite
transponders between 1996 and 1998 by approximately 74%. There can be no
assurance, however, that the schedule for PanAmSat's future satellite launches
will be met. Delays in the production or successful launch of these satellites
could materially affect the ability of PanAmSat to deliver services and benefit
from the opportunities it is currently pursuing. Launch schedules are subject
to a number of factors, including construction delays, weather, availability of
launch vehicles, launch vehicle problems and governmental and political
pressures, many of which are beyond the control of PanAmSat.
HUGHES AVICOM
On November 3, 1997, Hughes Telecom entered into an agreement to sell
substantially all of the assets and liabilities of the Hughes Avicom business
to Rockwell Collins, Inc. (the "Avicom Divestiture"). The Avicom Divestiture is
expected to close in the fourth quarter of 1997, pending regulatory approval.
As a result of the planned divestiture, Hughes Avicom has been treated as a
discontinued operation for financial statement purposes. The Avicom Divestiture
will allow Hughes Telecom to better focus on its core space and
telecommunications businesses.
Hughes Avicom is a supplier of cabin management, interactive passenger
communications and entertainment systems and related services for the
commercial airline market. In response to the growth of the in-flight
entertainment industry, Hughes Avicom has developed a complete cabin
communications and entertainment system that integrates its audio distribution
technology, large system processing capability and liquid crystal display
technology to be fully interactive and allow passengers, through individual
screens at their seats, to watch and listen to individually selected
entertainment programs, request meals and beverages and order duty free and
other merchandise. The interactive feature of this system is currently
operating on a number of major commercial carriers; a video-on-demand feature
is expected to be available in 1998. Hughes Avicom faces stiff competition from
an array of international firms, including Matsushita, Sony and BE Aerospace.
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CORPORATE AND OTHER
Hughes Telecom operates and owns equity interests in other businesses in
addition to those described above. These businesses will be reported as part of
"Other" in New Hughes Electronics' consolidated financial statements and the
revenues of these businesses are not, in the aggregate, material to Hughes
Telecom.
For example, Hughes Telecom is the largest stockholder of American Mobile
Satellite Corporation ("AMSC"), with a current equity interest of approximately
27% (plus an option to acquire, under certain circumstances, an additional 10%
interest on a fully diluted basis). AMSC's common stock is publicly traded and
other stockholders include Singapore Telecommunications Ltd. and AT&T Wireless
Services. AMSC provides a full range of satellite-based mobile telephone,
facsimile and data services in the United States, including Alaska, Hawaii,
Puerto Rico, the Virgin Islands and hundreds of miles of U.S. coastal waters.
STRATEGY AND GROWTH
Hughes Telecom's mission is to leverage its satellite and wireless
competencies to become a premier communications company. Hughes Telecom's
strategy includes using its vertical integration and market leadership to gain
a competitive advantage in the fast growing international communications
marketplace. Hughes Telecom's roots lie in its satellite design and
manufacturing expertise and it is this technological know how which has given
Hughes Telecom its early competitive advantage. Hughes Telecom now intends to
capture more of the value-added benefits of the satellite-based services market
by capitalizing on its technological capabilities, the size and desirable
orbital locations of its satellite fleet and its management expertise in
satellite, communications and telecommunications operations. Hughes Telecom's
strategy also includes building on its technology and experience to develop new
applications for its products and services for governments, businesses and
consumers and expanding international sales for all its businesses. Hughes
Telecom believes significant opportunities exist in (1) DTH satellite-based
television programming distribution outside North America based on Hughes
Telecom's experience with its DIRECTV service, especially in areas lacking
established alternative distribution infrastructures (such as developing
nations); (2) owning and operating an expanding satellite fleet to provide
global communications services;(3) fixed wireless telecommunications networks
for local and international telecommunications in areas with deficient
communications infrastructures (such as developing nations); (4) mobile
wireless communications systems and services based on Hughes Telecom's digital
satellite and cellular communications technologies; and (5) satellite-based
communications directly to personal computers. In addition, Hughes Telecom
seeks to maintain its strong position in satellite manufacturing and
telecommunications equipment through more efficient production processes.
In addition, Hughes Telecom seeks to expand into related markets where it
believes that its existing technologies will provide it with a sustainable
competitive advantage. For example, Hughes Telecom is actively involved in
pursuing Spaceway(TM), a high speed, bandwidth-on-demand satellite service.
Most of the space-based hardware (including the satellites, the transponders
and other electronic components comprising the satellite payloads) and most of
the ground-based control equipment will be designed or manufactured by Hughes
Telecom.
The global telecommunications industry is highly competitive and undergoing
rapid technological and structural change. The ability of Hughes Telecom to
realize its strategic goals is accordingly subject to numerous uncertainties.
However, based on the current business plan for Hughes Telecom and Hughes
Electronics management's current assessment of industry conditions, Hughes
Electronics management currently anticipates that the revenues and earnings of
Hughes Telecom should each be able to grow at a compound rate of at least 20%
per year through 2001. In general, Hughes Telecom's systems businesses
(principally the satellite manufacturing and network systems segments) are
expected to have more moderate growth in revenues and earnings, with greater
growth coming in the services businesses (principally the direct-to-home
broadcast and satellite services segments).
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ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES
Due to the rapid growth in the telecommunications and space industry,
particularly internationally, and increasing competitive pressures, Hughes
Telecom reviews its competitive position on an ongoing basis and considers from
time to time various acquisitions, strategic alliances and divestitures in
order to continue to compete effectively, grow its business and allocate its
resources efficiently. It is becoming increasingly important for Hughes Telecom
to form strategic partnerships with other firms. These alliances bring together
the necessary expertise, such as distribution, market knowledge and technology,
to address competitive pressures and meet new market demands. Hughes Telecom
has done this in its international DIRECTV businesses as well as its Network
Systems businesses. See "--Direct-To-Home Broadcast" and "Network Systems"
above. Hughes Telecom also seeks acquisitions which will improve its position
in these high growth and increasingly competitive markets. The PanAmSat Merger,
completed as of May 16, 1997, merging Hughes Galaxy and PanAmSat satellite
operations businesses to form the world's premier public provider of satellite
services is the most recent example of this. See "--Satellite Services" above.
Hughes Telecom continues to evaluate acquisitions, alliances and divestitures,
and from time to time engages in discussions regarding possible transactions,
which it believes will improve Hughes Telecom's competitive position and
financial results. See "--Hughes Avicom" above.
REGULATION
Various aspects of Hughes Telecom's businesses are subject to federal and
state regulation, noncompliance with which, depending upon the nature of the
noncompliance, may result in the suspension or revocation of any license or
registration at issue, the termination or loss of any contract at issue or the
imposition of contractual damages, civil fines or criminal penalties. Hughes
Telecom has experienced no material difficulties in complying with the various
laws and regulations affecting its business.
U.S. GOVERNMENT CONTRACTS
Hughes Telecom acts as a prime contractor or major subcontractor with respect
to U.S. government programs. Principally, this business is performed in the
satellite manufacturing segment of Hughes Telecom. Sales to the U.S. government
may be affected by changes in acquisition policies, budget considerations,
changing concepts of national defense, civilian space needs, spending
priorities and other factors that are outside the control of Hughes Telecom.
Government spacecraft acquisition programs generally follow a life cycle that
begins with the research and development phase, followed by an engineering
development phase which includes the first spacecraft, and finally progressing
into a production stage for the remaining spacecraft and may continue with
refinements and improvements for several years. Large programs with significant
start-up costs, which are usually incurred in the research and development
phase, do not become profitable until the engineering development phase. The
U.S. government typically uses multiple sources during the research and
development phase to intensify competition and down-selects to one source to
perform the later phases of the program. Therefore, Hughes Telecom may not be
selected for engineering development and production stages even when
considerable resources have been expended in the research and development phase
of a program.
Hughes Telecom's U.S. government business is performed under two general
types of contracts, fixed-price and cost reimbursement. Under fixed-price
contracts, Hughes Telecom realizes all the benefit or detriment caused by
decreased or increased costs of performing the contract. Cost reimbursement
contracts provide for reimbursement of costs, to the extent such costs are
reasonable, allocable to the contract and allowable under applicable
regulations, plus payment of a fee. Approximately 26% of Hughes Telecom's total
sales to the U.S. government in 1996 were pursuant to fixed-price contracts,
and approximately 74% were pursuant to cost reimbursement contracts. Total
Hughes Telecom net sales to the U.S. government in 1996 were approximately $0.9
billion.
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Hughes Telecom's fixed-price government contracts contain contract financing
provisions under which Hughes Telecom may receive payments in advance of
delivery in amounts ranging from over 75% to 100% of cumulative total costs
incurred, with the remainder, including profit, billed upon delivery and
acceptance or upon the completion of performance milestones. Under cost
reimbursement contracts, Hughes Telecom is periodically reimbursed for
allowable costs and paid a portion of the fee component based on progress
and/or performance. Under either type of contract, certain costs, including
certain financing, research and development and marketing expenses, are not
reimbursable under currently applicable regulations. Also, under either type of
contract, all or a portion of the profit or fee is typically subject to pay-
back due to degraded or failed performance in-orbit.
Most of Hughes Telecom's contracts with the U.S. government which are the
basis of Hughes Telecom's backlog are incrementally funded and therefore are
subject to appropriations decisions subsequent to award. Once awarded,
contracts may be contested by other bidders. In addition, Hughes Telecom's
contracts with the U.S. government are subject to termination by the U.S.
government either for its convenience or for default by Hughes Telecom. The
costs recovered for terminations for convenience may not fully reimburse Hughes
Telecom, and the profit or fee received by Hughes Telecom may be lower than
that which it had expected for the portion of the contract performed. In cases
of termination for default, normal contract remedies generally apply. In
addition, the U.S. government has broad discretion to suspend or debar
contractors from engaging in new government business, including discretion as
to the period of suspension or debarment. A contractor may be debarred based on
a conviction or civil judgment involving certain offenses, including fraud in
connection with obtaining or performing a public contract (or subcontract
thereunder), and may be suspended, if indicted for such an offense or if there
is other adequate evidence that such an offense has been committed. Like other
government contractors, Hughes Telecom is subject to civil and criminal audits
and investigations of its contracting activity. This liability includes
potential contract cost reductions due to defective pricing claims.
COMPETITION
Hughes Telecom has certain competitive advantages in its telecommunications
and space business. In the construction of satellites, Hughes Telecom's family
of satellite bus designs gives it the flexibility to respond to varying
customer requirements, and its relatively lighter weight satellites are less
expensive to launch than heavier competing models. The new HS 702 spacecraft
keeps Hughes Telecom on the cutting edge of satellite technology as it boasts
up to double the transponder capacity and power of other satellites currently
available in the marketplace. Hughes Telecom faces competition from companies
such as TRW, Loral Space and Communications Ltd. and Lockheed Martin in the
satellite construction segment. In the sale and leasing of satellite
transponders, Hughes Telecom enjoys advantages from its economies of scale and
the location of many
of its orbital positions, many of which are the most desirable in North
America. Hughes Telecom believes that the merger of Hughes Telecom's satellite
fleet with PanAmSat's fleet strengthens this competitive position. Loral Space
& Communications Ltd.'s recent purchase of AT&T Skynet, as well as Intelsat's
and Inmarsat's current spacecraft fleets keep this an exceptionally competitive
market. Hughes Telecom also believes that its experience acquired through the
development and operation in North America of the DIRECTV(R) service, and its
early entry into the Latin American satellite-based direct broadcast market,
will provide it with competitive advantages in such markets and in its efforts
to expand direct broadcast services to other markets, such as Japan. The
various DIRECTV services face stiff competition from local cable operations as
well as other DTH satellite systems such as Primestar, Echostar and the various
"Sky" services (ASkyB; BSkyB; and JSkyB). The Network Systems business of
Hughes Telecom faces global competition from firms such as Lucent Technologies
Inc., Telefonaktiebolaget LM Ericsson, AT&T Corporation, as well as other large
telecommunications companies and the various regional Bell operating companies.
Notwithstanding the competitive advantages described above, Hughes Telecom
participates in markets that involve a high level of competition by other
companies that have similar or better financial, technological and personnel
resources as Hughes Telecom. Hughes Telecom's telecommunications businesses
compete with other
207
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
communications technologies and systems, such as, with respect to
telecommunications systems for fixed and mobile applications, fiber optics
networks, cable systems, wire telephony and radio-based systems and other
satellite-based systems. In addition to existing and other planned operations
of DTH broadcasting services Hughes Telecom's direct broadcasting service
competes and will compete in present and future telecommunications markets with
telephone companies, cable television, other broadcast television and other
entertainment services, including video rentals. No assurance can be given as
to the effect that any such competition may have on the financial condition or
results of operations of Hughes Telecom.
RESEARCH AND INTELLECTUAL PROPERTY
The ability to continue to generate technological innovations is critical to
ensure Hughes Telecom's long-term success and competitiveness of the Hughes
Telecom business. See "Risk Factors Relating to the Business of New Hughes
Electronics--New Hughes Electronics' Ability to Maintain Leading Technological
Capabilities" in Chapter 2. The continued development of new technologies may
provide new and improved products which will continue to fuel business
opportunities and product improvements which, among other things, will enable
the extension of profitable production programs. Research and development is
carried on in each of Hughes Telecom's business units in connection with
ongoing product improvement efforts. Hughes Research Labs located in Malibu,
California, which will be 50% owned by Hughes Telecom after the Hughes
Reorganization, conducts long-range applied research in the specialized fields
of physics, chemistry, electronics and information sciences. See "Separation
and Transition Arrangements--Summary of Other Agreements Contemplated by the
Master Separation Agreement--Intellectual Property" and "--Hughes Research
Labs" in Chapter 3.
Hughes Telecom utilizes a large number of patents and trademarks which are
held by Hughes Electronics or its other affiliates, including Hughes Defense.
As part of the Hughes Transactions, Hughes Defense and Hughes Electronics and
its affiliates will implement certain cross-licenses to enable them to continue
to operate their respective businesses after the Hughes Transactions. See
"Separation and Transition Agreements--Summary of Other Agreements Contemplated
by the Master Separation Agreement--Intellectual Property" in Chapter 3. Hughes
Telecom believes that, in the aggregate, the rights existing under such
patents, trademarks and licenses are important. Hughes Telecom believes that
its competitive position is primarily dependent on research, engineering and
production capabilities. Hughes Telecom actively pursues patent and trademark
protections of its technological and engineering innovations, and actively
pursues enforcement of its intellectual property rights.
EMPLOYEES
As of September 30, 1997, Hughes Telecom employed approximately 15,500
persons (excluding Hughes Research Labs).
REAL PROPERTY
As of September 30, 1997, Hughes Telecom had approximately 165 locations
operating in 22 states and 55 cities in the United States and approximately 30
additional locations in 22 cities in approximately 17 countries outside the
United States. At such date, approximately 3.2 million square feet of space was
owned by Hughes Telecom and an additional 3.3 million square feet of space was
leased.
Leased properties consist primarily of office and warehouse facilities. Lease
terms on standard leases are generally five years or less. Upon the expiration
of its leases, Hughes Telecom does not anticipate any difficulty in obtaining
renewals or alternative space.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Hughes Telecom management believes that its facilities are suitable and
adequate for its business; however, Hughes Telecom periodically reviews its
space requirements to consolidate and dispose of or sublet facilities which are
no longer required in connection with its business and to acquire new space to
meet the needs of its business.
LEGAL PROCEEDINGS
From time to time Hughes Telecom is involved in various litigation matters
arising in the ordinary course of its business. Hughes Telecom management does
not believe that disposition of any current matter will have a material adverse
effect on Hughes Telecom's combined financial position or results of
operations.
THE "WILLIAMS PATENT"
Hughes Electronics has maintained a suit against the U.S. government since
September 1973 regarding the U.S. government's infringement and use of a Hughes
Electronics patent (the "Williams Patent") covering "Velocity Control and
Orientation of a Spin Stabilized Body," principally satellites. On June 17,
1994, the U.S. Court of Claims awarded Hughes Electronics damages of $114
million. Because Hughes Electronics believed that the record supported a higher
royalty rate, it appealed that decision. The U.S. government, contending that
the award was too high, also appealed. On June 19, 1996, the Court of Appeals
for the Federal Circuit affirmed the decision of the Court of Claims which
awarded Hughes Electronics $114 million in damages, together with interest. The
U.S. government petitioned the Court of Appeals for the Federal Circuit for a
rehearing. That petition was denied in October 1996. The U.S. government then
filed a petition with the U.S. Supreme Court seeking review. On April 21, 1997
the U.S. Supreme Court, citing a recent decision it had rendered in a separate
patent matter, remanded Hughes Electronics' suit over the Williams Patent back
to the Court of Appeals along with patent cases involving other parties then
pending before the U.S. Supreme Court, in order to have the Court of Appeals
determine whether the results of prior proceedings in those cases are
consistent with the U.S. Supreme Court's recent decision in such other matter.
The previous liability decision of the Court of Claims in the Williams Patent
matter, and its $114 million damage award to Hughes Electronics, currently
remain in effect pending reconsideration by the Court of Appeals. Hughes
Electronics is unable to estimate the duration of this reconsideration process.
While no amount has been recorded in the financial statements of Hughes
Electronics to reflect the $114 million award or the interest accumulating
thereon, a resolution of this matter could result in a gain that would be
material to the earnings of General Motors attributable to New GM Class H
Common Stock.
LANE AND VILLALPANDO LITIGATION
In October 1994, a California jury awarded a total of $89.5 million in
damages against Hughes Telecom, including punitive damages of $40 million to
each of two former Hughes Telecom employees, Lane (race
discrimination/retaliation) and Villalpando (retaliation), based on claims of
mistreatment and denials of promotions. The trial court granted Hughes
Telecom's motion to set aside the verdicts because of insufficient evidence. On
January 6, 1997, the Court of Appeal reversed the trial court's decision to set
aside the verdicts, reinstated the jury verdicts, but reduced the two $40
million punitive damage awards to $5 million and $2.83 million, resulting in an
aggregate judgment of $17.33 million. Hughes Telecom filed a petition for
review by the California Supreme Court, which was supported by various amicus
briefs. On March 19, 1997, the California Supreme Court granted Hughes
Telecom's request for review of the $17.33 million judgment, and ordered the
Court of Appeal to vacate its decision and reconsider the case. On March 27,
1997, the Court of Appeal issued such an order and requested supplemental
briefs. On July 28, 1997, the Court of Appeal reissued essentially the same
opinion and award. Hughes Telecom's petition for reconsideration was denied.
Hughes Telecom has petitioned the California Supreme Court for review. Because
review by the California Supreme Court is in the discretion of that court, no
assurance can be given that the case will be accepted for review, or that if
accepted, the California Supreme Court's decision will be favorable to Hughes
Telecom.
209
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
GOVERNMENT REGULATIONS
Hughes Telecom and its subsidiaries are subject to potential liability under
government regulations and various claims and legal actions which are pending
or may be asserted against them. Some of the pending actions purport to be
class actions. The aggregate ultimate liability of Hughes Telecom and its
subsidiaries under these government regulations, and under these claims and
actions, was not determinable as of the date of this document. After discussion
with counsel, it is the opinion of Hughes Telecom management that such
liability is not expected to have a material adverse effect on the Hughes
Telecom's consolidated operations or financial position.
210
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DIRECTORS AND EXECUTIVE OFFICERS OF NEW HUGHES ELECTRONICS
After the Hughes Transactions, it is expected that all nine of the current
members of the Hughes Electronics Board will initially serve as directors of
New Hughes Electronics, including three directors who are also independent
directors of General Motors (one of whom is also a member of the Capital Stock
Committee of the GM Board), three directors who are executive officers of
General Motors and three directors who will be executive officers of Hughes
Telecom. For information regarding recent changes to the Hughes Electronics
senior management team, see "Recent Developments--New Leadership Team at Hughes
Electronics" in Chapter 1.
Set forth below are the names, ages and positions with New Hughes Electronics
upon the consummation of the Hughes Transactions of the persons expected to be
directors and executive officers of New Hughes Electronics immediately after
such consummation.
DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <S> <C>
Michael T. Smith 54 Chairman of the Board
Steven D. Dorfman 62 Director
Charles T. Fisher, III 67 Director
J. Michael Losh 51 Director
Charles H. Noski 45 Director
Harry J. Pearce 55 Director
Eckhard Pfeiffer 56 Director
John F. Smith, Jr. 59 Director
Thomas H. Wyman 67 Director
EXECUTIVE OFFICERS
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <S> <C>
Michael T. Smith 54 Chief Executive Officer
Charles H. Noski 45 President
Steven D. Dorfman 62 Vice Chairman
Roxanne S. Austin 36 Senior Vice President and
Chief Financial Officer
Gareth C. C. Chang 54 Senior Vice President
Jack A. Shaw 58 Senior Vice President
Marcy Tiffany 48 Vice President and
General Counsel
Ted G. Westerman 61 Senior Vice President
Set forth below are the persons expected to have primary responsibility for
the business segments of New Hughes Electronics after the consummation of the
Hughes Transactions.
<CAPTION>
NAME AGE BUSINESS SEGMENT
---- --- ----------------
<C> <S> <C>
Steven D. Dorfman 62 Satellite Manufacturing
Jack A. Shaw 58 Network Systems
Eddy W. Hartenstein 46 Direct-To-Home Broadcast
Frederick C. Landman 49 Satellite Services
</TABLE>
211
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
RAYTHEON SELECTED COMBINED HISTORICAL
AND PRO FORMA FINANCIAL DATA
The following Raytheon selected combined historical financial data have been
derived from the financial statements of Raytheon. The unaudited pro forma
combined condensed financial statements of New Raytheon have been derived from
the historical consolidated financial statements of Raytheon and the
historical combined financial statements of Texas Instruments Defense and
Hughes Defense, and give effect to the Raytheon Merger and the Texas
Instruments Defense Acquisition using the purchase method of accounting as
well as consistent application of Raytheon accounting practices. The data
should be read in conjunction with Raytheon's Consolidated Financial
Statements (including the notes thereto) which are incorporated into this
document by reference. The consolidated historical financial data as of and
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 have been
derived from the consolidated financial statements of Raytheon audited by
Coopers & Lybrand L.L.P., independent public accountants. The Raytheon
consolidated historical financial data as of and for the nine-month periods
ended September 28, 1997 and September 29, 1996 have been derived from the
unaudited financial statements of Raytheon for such periods included in the
Raytheon Solicitation Statement, which are incorporated into this document by
reference. In the opinion of Raytheon management, the unaudited consolidated
historical financial statements reflect all adjustments (consisting of only
normal recurring items) that are necessary for fair presentation of financial
position and results of operations for such periods. The Raytheon unaudited
summary pro forma operating results for the nine months ended September 28,
1997 and for the year ended December 31, 1996 give effect to the Hughes
Transactions, the Raytheon Merger and the Texas Instruments Defense
Acquisition as if they had occurred at the beginning of each respective
period. The Raytheon unaudited summary pro forma balance sheet data as of
September 28, 1997 give effect to the Hughes Transactions and the Raytheon
Merger as if they had occurred at that date. Operating results for the nine-
month periods ended September 28, 1997 and September 29, 1996 are not
necessarily indicative of the results that may be expected for the entire
year. Pro forma data are not necessarily indicative of future financial
position or operating results.
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED FOR THE YEARS ENDED
----------------------------- --------------------------------------------------------------------
PRO FORMA
SEPT. 28, SEPT. 28, SEPT. 29, PRO FORMA
1997(D) 1997 1996 1996(D) 1996(A) 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- --------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net Sales............... $15,650 $ 9,669.2 $ 8,946.7 $20,514 $12,330.5 $11,804.2 $10,097.7 $9,334.1 $9,121.7
Costs and Expenses...... 14,521 8,754.7 8,124.9(a) 19,114(a) 11,247.0(a) 10,612.5(b) 9,197.8(c) 8,286.8 8,165.7
Income before Taxes..... 1,129 914.5 821.8(a) 1,400(a) 1,083.5(a) 1,191.7(b) 899.9(c) 1,047.3 956.0
Income Taxes............ 432 310.4 238.0 499 322.3 399.2 303.0 354.3 320.9
Net Income.............. 697 604.1 583.8(a) 901(a) 761.2(a) 792.5(b) 596.9(c) 693.0 635.1
Earnings per common
share.................. 2.06 2.56 2.45(a) 2.65(a) 3.21(a) 3.25(b) 2.26(c) 2.56 2.36
Dividend declared per
common share........... 0.60 0.60 0.80 0.75 0.738 0.70 0.663
BALANCE SHEET DATA:
Cash and marketable
securities............. $ 268 $ 267.7 $ 161.4 $ 138.8 $ 210.3 $ 202.2 $ 190.2 $ 88.8
Current assets.......... 9,338 6,554.0 6,278.3 5,603.9 5,275.2 4,985.5 4,609.2 3,775.8
Total assets............ 28,059 15,256.2 11,785.7 11,126.1 9,840.9 7,395.4 7,257.7 6,015.1
Current Liabilities..... 9,734 5,345.1 5,494.4 4,691.8 3,690.4 3,283.1 2,800.3 2,136.8
Long-term debt.......... 6,548 4,386.4 1,493.2 1,500.5 1,487.7 24.5 24.4 25.3
Stockholders' Equity.... 10,080 5,015.1 4,448.4 4,598.0 4,292.0 3,928.2 4,297.9 3,843.2
OTHER DATA:
Depreciation and
amortization........... $ 325.3 $ 271.3 $ 368.9 $ 371.4 $ 304.2 $ 296.4 $ 302.1
Capital Expenditures.... $ 305.4 $ 287.6 $ 406.0 $ 328.6 $ 267.4 $ 256.1 $ 307.7
</TABLE>
- ----------
(a) Includes special charge of $34.0 million pre-tax, $22.1 million after-tax,
or $.09 per share.
(b) Includes one-time gain of $8.0 million pre-tax, $5.2 million after-tax, or
$.02 per share.
(c) Includes restructuring charge of $249.8 million pre-tax, $162.3 million
after-tax, or $.61 per share.
(d) Pro forma balance sheet as of December 31, 1996 and pro forma other data
have not been determined.
212
<PAGE>
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
OVERVIEW OF RAYTHEON BUSINESS
For additional information regarding the business of Raytheon, see Raytheon
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Raytheon 1996 Form 10-K, which is incorporated into
this document by reference.
GENERAL
Raytheon is an international high technology company which operates in the
following principal businesses: defense and commercial electronics, engineering
and construction and aircraft. Historically, Raytheon's principal business has
been the design, manufacture and servicing of advanced electronic devices,
equipment and systems for government and commercial use. Raytheon is a major
defense contractor in the United States and internationally.
ELECTRONICS
DEFENSE ELECTRONICS
Raytheon's defense electronics business consists of Raytheon Electronics
Systems and Raytheon
E-Systems. Raytheon Electronic Systems is a major provider of ground-based air
defense systems, air intercept missiles, ground-based and shipboard radars,
military communications systems and naval combat control, sonar and minehunting
systems. Raytheon E-Systems is a leader in defense systems integration and
provides reconnaissance and surveillance, command, control, communications and
intelligence systems, mass data collection, interpretation and dissemination,
specialized aircraft modification services and shipboard and airborne
countermeasures systems to a wide variety of customers worldwide. In addition
to defense electronics systems, Raytheon has been successful in the conversion
of certain defense electronics technologies to commercial applications such as
air traffic control, environmental monitoring and communications.
On July 11, 1997, Raytheon consummated the acquisition of Texas Instruments
Defense. Since that date, Texas Instruments Defense has been conducted through
Raytheon TI Systems, a wholly owned subsidiary of Raytheon ("RTIS"). RTIS is a
premier supplier of advanced defense systems, including tactical missiles,
precision-guided weapons, radar, night vision systems and electronic warfare
systems.
COMMERCIAL ELECTRONICS
Raytheon's commercial electronics business consists of Raytheon Marine
Company, Raytheon Microelectronics, Raytheon Semiconductor, Seiscor
Technologies, Inc. and Switchcraft, Inc. These entities produce, among other
things, marine radars and other marine electronics, transmit/receive modules
for satellite communications projects, silicon semiconductor components,
telephone transmission, switching and connection equipment and other electronic
components for a wide range of applications.
ENGINEERING AND CONSTRUCTION
Raytheon Engineers & Constructors ("RE&C") is one of the largest engineering,
construction and operation and maintenance firms in the world, supporting
customers in thirteen industries. RE&C is engaged in the design, construction
and maintenance of facilities and plants operated by a range of customers,
including independent power producers, utilities, petroleum companies, pulp and
paper companies, industrial concerns and governments. Raytheon Service Company,
a unit of RE&C, provides operations, maintenance and technical services for
many U.S. defense systems and agencies. Another unit of RE&C designs and
manufactures a wide range of equipment used for infrastructure building and
repair, including aggregate producing equipment, asphalt paving equipment,
mixing plants and soil remediation systems.
213
<PAGE>
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
AIRCRAFT
Raytheon's Aircraft segment offers one of the broadest product lines in the
general aviation market. Raytheon Aircraft manufactures, markets and supports
piston-powered aircraft, jet props and light and medium jets for the world's
commercial, regional airline and military aircraft markets. Raytheon Aircraft
is the prime contractor for the U.S. Air Force/U.S. Navy Joint Primary Aircraft
Training System ("JPATS").
APPLIANCES
On September 10, 1997, Raytheon consummated the sale of its home appliance,
heating and air conditioning and commercial cooking businesses to Goodman
Manufacturing Company, L.P. for an aggregate amount of $550 million in cash.
Raytheon believes that the 1996 sales, operating income, net income and total
assets of the businesses sold were not material and does not expect the sale to
have a significant effect on results of operations. In the appliances segment,
Raytheon is retaining its commercial laundry and electronic controls
businesses, but is continuing its strategic review of these remaining
businesses.
See "Recent Developments--Raytheon--Sale of Portions of the Appliances
Business" in Chapter 1.
214
<PAGE>
CHAPTER 5: NEW RAYTHEON
CHAPTER 5
NEW RAYTHEON
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEW RAYTHEON UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS....................................................... 217
NEW RAYTHEON NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS............................................. 221
OVERVIEW OF NEW RAYTHEON BUSINESS................................. 224
NEW RAYTHEON MANAGEMENT........................................... 226
Directors and Executive Officers................................. 226
Director and Executive Compensation.............................. 229
Stock Ownership of Directors, Executive Officers and Certain
Beneficial Owners............................................... 230
Change in Control Employment Agreements.......................... 230
NEW DEBT OF HUGHES DEFENSE TO BE ASSUMED BY NEW RAYTHEON.......... 231
</TABLE>
215
<PAGE>
CHAPTER 5: NEW RAYTHEON
[THIS PAGE INTENTIONALLY LEFT BLANK]
216
<PAGE>
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed financial statements of New
Raytheon have been derived from the historical consolidated financial
statements of Raytheon and the historical combined financial statements of
Texas Instruments Defense and Hughes Defense, and give effect to the Hughes
Transactions, the Raytheon Merger and the Texas Instruments Defense Acquisition
using the purchase method of accounting as well as consistent application of
Raytheon accounting practices. The unaudited pro forma combined condensed
statements of income for the nine months ended September 28, 1997 and for the
year ended December 31, 1996 have been prepared as if the Hughes Transactions,
the Raytheon Merger and the Texas Instruments Defense Acquisition had occurred
at the beginning of each respective period. The unaudited pro forma combined
condensed balance sheet has been prepared as if the Hughes Transactions and the
Raytheon Merger occurred on September 28, 1997. The purchase price has been
allocated to the assets and liabilities based upon preliminary estimates of
their respective fair values and the pro forma adjustments do not give effect
to any synergies.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with Raytheon's Consolidated Financial Statements
(including notes thereto) included in Appendix C of the Raytheon Solicitation
Statement and with the historical financial statements of the Defense Business
of Texas Instruments (including notes thereto) included in Appendix E of the
Raytheon Solicitation Statement, which are incorporated into this document by
reference, and with the historical financial statements of Hughes Defense
(including notes thereto) included in Appendix C to this document.
The pro forma combined condensed balance sheet is not necessarily indicative
of the financial position of Raytheon that would have been attained had the
Hughes Transactions and the Raytheon Merger been consummated on September 28,
1997. The pro forma combined condensed statements of income are not necessarily
indicative of the results of operations of New Raytheon that would have been
attained had the Hughes Transactions, the Raytheon Merger and the Texas
Instruments Defense Acquisition been consummated on January 1, 1996 and 1997,
nor are they necessarily indicative of future operating results.
217
<PAGE>
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HUGHES
HISTORICAL HISTORICAL PRO FORMA PRO FORMA HUGHES DEFENSE PRO FORMA PRO FORMA
RAYTHEON TI DEFENSE ADJUSTMENTS COMBINED DEFENSE RECLASSES ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $9,669 $824 $10,493 $5,157 $15,650
------ ---- ----- ------- ------ ----- ----- -------
Cost of sales........... 7,426 638 $ (4)(2a) 8,079 4,245 $ 27 $ (18)(3c) 12,380
(6)(2b) (72)(3d)
35 (2e) 140 (3g)
(10)(2c) (21)(3e)
Amortization of push-
down goodwill.......... 76 (76)(3c) --
Administration and
selling expenses....... 812 55 867 274 (15) 1,126
Depreciation and
amortization........... 116 (116) --
Research and development
expenses............... 290 44 334 127 461
------ ---- ----- ------- ------ ----- ----- -------
Operating income....... 1,141 87 (15) 1,213 446 (23) 47 1,683
Interest expense........ 263 263 72 (72)(3i) 263
Interest income......... (24) (24) (24)
Acquisition interest
expense................ 110 (2d) 110 225 (3f) 335
Other (Income)/expense.. (12) 2 (10) (10) (20)
------ ---- ----- ------- ------ ----- ----- -------
Income before tax...... 914 85 (125) 874 384 (23) (106) 1,129
Federal and foreign
income taxes........... 310 32 (44)(2f) 298 177 (23) (20)(3h) 432
------ ---- ----- ------- ------ ----- ----- -------
Net income............. $ 604 $ 53 $ (81) $ 576 $ 207 -- $ (86) $ 697
====== ==== ===== ======= ====== ===== ===== =======
Earnings per common
shares
Outstanding shares..... $ 2.56 $ 2.44 $ 2.06
Fully diluted.......... $ 2.51 $ 2.39 $ 2.03
Average common shares
Outstanding............ 236 236 103 339
Fully diluted.......... 241 241 103 344
</TABLE>
The accompanying notes are an integral part of the
Unaudited Pro Forma Combined Condensed Financial Statements.
218
<PAGE>
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HUGHES
HISTORICAL HISTORICAL PRO FORMA PRO FORMA HUGHES DEFENSE PRO FORMA PRO FORMA
RAYTHEON TI DEFENSE ADJUSTMENTS COMBINED DEFENSE RECLASSES ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $12,331 $1,800 $14,131 $6,383 $20,514
------- ------ ----- ------- ------ ----- ----- -------
Cost of sales........... 9,755 1,415 $ (6)(2a) 11,169 5,211 $ 5 $ (18)(3c) 16,430
(12)(2b) (95)(3d)
69 (2e) 187 (3g)
(52)(2c) (29)(3e)
Amortization of push-
down goodwill.......... 101 (101)(3c) --
Administration and
selling expenses....... 1,021 129 1,150 322 (21) 1,451
Depreciation and
amortization........... 146 (146) --
Research and development
expenses............... 323 78 401 192 593
Special charges......... 34 34 34
------- ------ ----- ------- ------ ----- ----- -------
Operating income....... 1,198 178 1 1,377 603 (30) 56 2,006
Interest expense........ 256 256 92 (92)(3i) 256
Interest income......... (102) (102) (102)
Acquisition interest
expense................ 198 (2d) 198 300 (3f) 498
Other (Income)/expense.. (40) 3 (37) (9) (46)
------- ------ ----- ------- ------ ----- ----- -------
Income before tax...... 1,084 175 (197) 1,062 520 (30) (152) 1,400
Federal and foreign
income taxes........... 322 66 (69)(2f) 319 239 (30) (29)(3h) 499
------- ------ ----- ------- ------ ----- ----- -------
Net income............. $ 762 $ 109 $(128) $ 743 $ 281 -- $(123) $ 901
======= ====== ===== ======= ====== ===== ===== =======
Earnings per common
share
Outstanding shares..... $ 3.21 $ 3.14 $ 2.65
Fully diluted.......... $ 3.16 $ 3.08 $ 2.62
Average common shares
Outstanding............ 237 237 103 340
Fully Diluted.......... 241 241 103 344
</TABLE>
The accompanying notes are an integral part of the
Unaudited Pro Forma Combined Condensed Financial Statements.
219
<PAGE>
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 28, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL RECLASSI- PRO FORMA HUGHES PRO FORMA PRO FORMA
RAYTHEON FICATIONS COMBINED DEFENSE ADJUSTMENTS COMBINED
---------- --------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and marketable
securities............ $ 268 $ 268 $ 73 $ (73)(3b) $ 268
Accounts receivable.... 954 $(207)(2g) 747 687 1,434
Contracts in process... 3,148 395 (2g) 3,543 1,579 (190)(3b) 4,932
Inventories............ 1,653 (188)(2g) 1,465 445 1,910
Other.................. 531 531 263 794
------- ----- ------- ------ ------- -------
Total current assets.... 6,554 6,554 3,047 (263) 9,338
Property, plant and
equipment, net........ 2,047 2,047 1,095 8 (3b) 3,150
Cost in excess of net
assets acquired....... 5,954 5,954 2,892 (2,892)(3b) 13,464
7,510 (3b)
Pension asset.......... 1,075 (3b) 1,075
Other assets........... 701 701 128 203 (3b) 1,032
------- ------- ------ ------- -------
Total assets............ $15,256 $15,256 $7,162 $ 5,641 $28,059
======= ======= ====== ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and
current portion of
long-term debt........ $ 2,175 $ 2,175 $ 119 $ 2,310 (3a) $ 4,604
Advance payments....... 389 389 310 699
Accounts payable....... 1,265 1,265 327 1,592
Other.................. 1,516 1,516 780 543 (3b) 2,839
------- ------- ------ ------- -------
Total current
liabilities............ 5,345 5,345 1,536 2,853 9,734
Long-term debt and
capitalized leases.... 4,386 4,386 32 2,130 (3a) 6,548
Other.................. 510 510 328 859 (3b) 1,697
Stockholders' equity:
Common stock at par.... 236 236 103 (3a) 339
Additional paid-in-
capital............... 313 313 4,962 (3a) 5,275
Retained earnings...... 4,466 4,466 5,266 (5,266)(3b) 4,466
------- ------- ------ ------- -------
Total stockholders'
equity................. 5,015 5,015 5,266 (201) 10,080
Total liabilities and
stockholders' equity... $15,256 $15,256 $7,162 $ 5,641 $28,059
======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the Unaudited Pro Forma Combined
Condensed Financial Statements.
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CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying pro forma combined condensed statements of income present
the historical results of operations of Raytheon, Texas Instruments Defense and
Hughes Defense for the year ended December 31, 1996 and for the nine months
ended September 28, 1997, with pro forma adjustments as if the Texas Instrument
Defense Acquisition and the Raytheon Merger had taken place on January 1, 1996.
The historical results of operations of Raytheon for the nine months ended
September 28, 1997 include the financial results for Raytheon TI Systems from
July 11, 1997. The historical results of operations of Texas Instruments
Defense include financial results for the six-month period ending June 29,
1997. The Texas Instruments Defense financial results for the period from June
30, 1997 to July 10, 1997 were not material. The pro forma combined condensed
balance sheet presents the historical balance sheets of Raytheon and Hughes
Defense as of September 28, 1997, with pro forma adjustments as if the Raytheon
Merger had been consummated as of September 28, 1997, in a transaction
accounted for as a purchase for financial accounting purposes in accordance
with generally accepted accounting principles.
Certain reclassifications have been made to the historical financial
statements of Raytheon, Texas Instruments Defense and Hughes Defense to conform
to the pro forma combined condensed financial statement presentation on a
consistent basis.
2. Pro Forma Adjustments--Texas Instruments Defense
The following adjustments give pro forma effect to the Texas Instruments
Defense Acquisition (in millions):
(a) Adjustment to eliminate the amortization of intangible assets of Texas
Instruments Defense which would not have been incurred if the Texas
Instruments Defense Acquisition had occurred on January 1, 1996.
(b) Adjustment to reflect the effect on 1996 and 1997 results relating to a
net reduction of accumulated contract costs as an allowance for
Raytheon's normal profit on its efforts to complete such contracts, and
other contract valuation adjustments.
(c) Elimination of $32 of non-recurring employee related costs and $20 of
non-recurring corporate allocations from the parent of Texas Instruments
Defense as a result of the Texas Instruments Defense Acquisition for the
year ended December 31, 1996 and $10 of non-recurring corporate
allocations for the nine months ending September 28, 1997.
(d) Adjustments which represent additional estimated interest expense
resulting from the use of borrowings to finance the Texas Instruments
Defense Acquisition and incremental interest on Raytheon's pre-Texas
Instruments Defense Acquisition variable rate borrowings to reflect the
change in credit rating as a result of the Texas Instruments Defense
Acquisition.
(e) The amortization of excess of costs over acquired net assets over an
estimated life of 40 years. Such amortization expense is subject to
possible adjustment resulting from the completion of the valuation
analyses. Raytheon expects that any subsequent adjustment would not
materially affect the combined pro forma results.
(f) The estimated tax effect on the applicable pro forma adjustments.
(g) Reclassifications made to conform the Texas Instruments Defense
historical financial statements to the unaudited pro forma combined
condensed financial statement presentation.
221
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CHAPTER 5: NEW RAYTHEON
3. Pro Forma Adjustments--Hughes Defense
The following adjustments give pro forma effect to the Raytheon Merger (in
millions):
(a) To record the exchange consideration at closing:
<TABLE>
<S> <C>
Consideration ($9,500 less acquired debt of $120)................... $9,380
======
</TABLE>
(Assumed financing is based on the following assumptions:
Equity--102,634 thousand shares at assumed market value of $49.35
totals $5,065. $49.35 represents the mid-point of the market price
collar mechanism. The use of other market price assumptions within the
range would not have a significant effect on pro forma results.
Debt--$4,435 less $120 of debt assumed plus acquisition costs of $125
totals $4,440 to be financed with a combination of variable rate
short-term borrowings of $2,310 and fixed rate medium- and long-term
borrowings of $2,130 at an average interest rate of 6.37%)
(b) To adjust the assets and liabilities to their estimated fair values:
<TABLE>
<S> <C>
Net assets of Hughes Defense at September 28, 1997............... $ 5,266
Additional assets to be recorded in the Raytheon Merger.......... 45
Additional liabilities to be recorded in the Raytheon Merger..... (94)
Cash not included in the Raytheon Merger......................... (73)
Contracts in process valuation adjustments....................... (190)
Accrual for future lease cost in excess of fair market value..... (264)
Provision for the estimated exit costs of integrating acquired
operations...................................................... (495)
To include pension assets and reflect fair market value less the
projected benefit obligation.................................... 892
To include the liability for post-retirement benefits other than
pensions........................................................ (366)
Deferred tax benefits............................................ 166
Costs in excess of net assets of Hughes Defense.................. 7,510
Raytheon Merger costs............................................ (125)
Elimination of Hughes Defense goodwill........................... (2,892)
-------
$ 9,380
=======
</TABLE>
(c) Adjustment to eliminate the amortization of intangible assets of Hughes
Defense which would not have been incurred if the Raytheon Merger had
occurred on January 1, 1996.
(d) Adjustment to reflect the effect on 1996 and 1997 results relating to a
net reduction of accumulated contract costs as an allowance for
Raytheon's normal profit on its efforts to complete such contracts.
(e) Elimination of $29 of non-recurring corporate allocation from the parent
of Hughes Defense as a result of the Raytheon Merger for the year ended
December 31, 1996 and $21 for the nine months ended September 28, 1997.
(f) Adjustments which represent additional estimated interest expense
resulting from the use of borrowings to finance the Raytheon Merger and
incremental interest on Raytheon's pre-Raytheon Merger variable rate
borrowings to reflect the change in credit rating as a result of the
Raytheon Merger.
(g) The amortization of excess of costs over acquired net assets over an
estimated life of 40 years. Such amortization expense is subject to
possible adjustment resulting from the completion of the valuation
analyses. Raytheon expects that any subsequent adjustment would not
materially affect the combined pro forma results.
222
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CHAPTER 5: NEW RAYTHEON
(h) The estimated tax effect on the applicable pro forma adjustments.
(i) Elimination of Hughes Defense interest expense.
(j) The consideration to be paid is subject to adjustment based on the
actual net assets at the time of the closing and the amount of debt and
equity to be issued is subject to adjustment based on the price of
Raytheon Common Stock at the closing of the Raytheon Merger.
4. Other
On September 10, 1997, Raytheon consummated the sale of its home appliance
heating and air conditioning and commercial cooking businesses to Goodman
Manufacturing Company, L.P. for an aggregate amount of $550 million in cash,
subject to certain changes in the net working capital of such businesses
between December 31, 1996 and the closing date of the transaction. Raytheon
believes that the 1996 sales, operating income, net income and total assets of
the businesses sold were not material and does not expect the sale to have a
significant impact on results of operations. Accordingly, the sale of these
businesses was not included in the pro forma financial statements.
The U.S. Department of Justice and Raytheon entered into an agreement
regarding the Texas Instruments Defense Acquisition on July 2, 1997, pursuant
to which Raytheon agreed to divest the Gallium Arsenide foundry and the TI
Monolithic Microwave Integrated Circuit business of the R/F Microwave business
unit after closing the transaction. The business, which accounted for less than
$40 million in 1996 revenues, was not material and as such the sale of this
business has not been included in the pro forma financial statements.
On October 16, 1997, the U.S. Department of Justice filed with the U.S.
District Court for the District of Columbia an agreement among the U.S.
Department of Justice, Raytheon, General Motors and Hughes Defense regarding
the Raytheon Merger. The agreement, when entered as a final judgment pursuant
to court order, will require Raytheon to divest portions of Hughes' Electro
Optics business and portions of Raytheon's TI Systems' Focal Plane Array
business. These two businesses, which together accounted for less than $55
million in 1996 revenues, were not material and, as such, the sale of these
businesses has not been included in the pro forma financial statements.
223
<PAGE>
CHAPTER 5: NEW RAYTHEON
OVERVIEW OF NEW RAYTHEON BUSINESS
In early January 1997, Raytheon entered into agreements to acquire Texas
Instruments Defense (now Raytheon TI Systems) and to merge with Hughes Defense,
thereby creating a unique technology company and a world leader in what it
considers to be the most appealing segment of the defense business--defense
electronics. Representing the best-of-the-best of the three companies in terms
of people, processes and technologies, Raytheon believes this dynamic new
combination will enhance Raytheon's global competitiveness by fully integrating
operations for greater efficiency and effectiveness.
Having completed the Texas Instruments Defense Acquisition on July 11, 1997,
Raytheon expects the strategic combination of Raytheon and Hughes Defense to
offer an even broader range of products and services, greater returns to New
Raytheon stockholders, and a more secure and promising future for its people.
Certain of the benefits of the Raytheon, Hughes Defense and Raytheon TI Systems
combination include:
. critical mass of programs, skills and investment to compete effectively on
cost and performance in an industry Raytheon knows well against top-tier
defense companies such as Lockheed Martin and the newly created
Boeing/McDonnell Douglas. This same critical mass also provides the
technological discriminators and capability to support fully those same
primes in areas where teaming is more appropriate;
. a position of strength in core market areas such as air- and ground-based
radar systems, air defense systems, air traffic control systems, airborne
and space surveillance systems, communication equipment, information
systems, missiles, night vision systems, surface and undersea naval
systems, simulation, technical services and training;
. integration and consolidation of the substantial research and development
capabilities of the combined companies, long renowned for their innovative
research and development; and
. annual cost savings and a stronger cash flow through the creation of
"centers of excellence" for design and manufacturing and consolidation of
operations.
Shortly after the Texas Instruments Defense Acquisition and the Raytheon
Merger were announced in January 1997, planning for the new company began with
the formation of the Management Transition Committee. Cross-company teams were
established in areas such as engineering, facilities, finance, human resources,
material procurement, quality and others. Throughout the process, the emphasis
has been on achieving efficiencies and refining business operations rapidly
while expanding global market presence. In order to accomplish this, the teams
have formulated a strategy to integrate and consolidate New Raytheon's
businesses, serve its customers and extend its defense technologies and
capabilities into related commercial areas. This strategy is currently being
used to guide the integration of the operations of Texas Instruments Defense
into Raytheon. Raytheon believes that the end result will be a world-class
defense electronics and systems integration company with strong operational
management.
The defense operations of New Raytheon will be organized along major product
lines, emphasizing weapons systems, sensor systems, information systems,
communications systems, training and technical services. Although the defense
operations of New Raytheon will be primarily focused on its core capabilities
in defense electronics, it will continue to pursue and expand business
opportunities in related and growing non-defense areas such as air traffic
control, information technology, technical services, telecommunications,
training and transportation systems. Furthermore, New Raytheon will be a multi-
industry, global enterprise with established commercial businesses in aircraft,
engineering and construction and commercial electronics.
After the Raytheon Merger is completed, the business of New Raytheon will
consist of:
. the combined operations of the Raytheon defense business, Hughes Defense
and Texas Instruments Defense;
. the commercial electronics business (See "Overview of Raytheon Business--
Electronics--Commercial Electronics" in Chapter 4);
224
<PAGE>
CHAPTER 5: NEW RAYTHEON
. the engineering and construction business (See "Overview of Raytheon
Business--Engineering and Construction" in Chapter 4);
. the aircraft business (See "Overview of Raytheon Business--Aircraft" in
Chapter 4); and
. the commercial laundry and electronic controls business (See "Overview of
Raytheon Business--Appliances" in Chapter 4).
For additional information regarding the business of Raytheon, see Raytheon
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Raytheon 1996 Form 10-K, which is incorporated into
this document by reference. See "Where You Can Find More Information" in
Chapter 7.
225
<PAGE>
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
The Hughes Defense Board currently has three members. The Raytheon Merger
Agreement provides that, effective as of the Raytheon Merger Effective Time,
the New Raytheon Board will be constituted as set forth below. A majority of
such persons will not be employees of New Raytheon.
<TABLE>
<CAPTION>
NAME AGE
------------------------------------- ---
<S> <C>
Ferdinand Colloredo-Mansfeld......... 57
Steven D. Dorfman.................... 62
Theodore L. Eliot, Jr................ 69
Thomas E. Everhart................... 65
John R. Galvin....................... 68
Barbara B. Hauptfuhrer............... 69
Richard D. Hill...................... 78
L. Dennis Kozlowski.................. 51
James N. Land, Jr.................... 68
A. Lowell Lawson..................... 59
Charles H. Noski..................... 45
Thomas L. Phillips................... 73
Dennis J. Picard..................... 65
Warren B. Rudman..................... 67
Alfred M. Zeien...................... 67
</TABLE>
The New Raytheon Board will be divided into three classes serving staggered
terms. Directors in each class will be elected to serve for three-year terms
and until their successors are elected and qualified. Each year, the directors
of one class will stand for election as their terms of office expire.
Set forth below is a description of the backgrounds of the persons expected
to be directors of New Raytheon.
Ferdinand Colloredo-Mansfeld. Current director of Raytheon. Chairman and
Chief Executive Officer, Cabot Partners, since October 1990. Prior thereto,
Chairman and Chief Executive Officer, Cabot, Cabot & Forbes Realty Advisers,
Inc. (predecessor of Cabot Partners) and Chairman, Chief Executive Officer and
President of Cabot, Cabot and Forbes from 1986. Principal Business: Real Estate
Investment and Management. Director: Shawmut National Corporation; Data General
Corporation; Chairman, Massachusetts General Hospital.
Steven D. Dorfman. Vice Chairman and director of Hughes Electronics; Chairman
of the Hughes Telecommunications and Space Company. Prior thereto, President
and Chief Executive Officer of Hughes Space and Communications Company.
Director: American Mobile Satellite Corporation; Galaxy Latin America and
PanAmSat Corporation.
Theodore L. Eliot, Jr. Current director of Raytheon. Dean Emeritus of the
Fletcher School of Law and Diplomacy, Tufts University; former U.S. Ambassador.
Director: Neurobiological Technologies, Inc. and Fiberstars, Inc.
Thomas E. Everhart. President and Professor of Electrical Engineering and
Applied Physics, California Institute of Technology, Pasadena. Prior thereto,
Chancellor of University of Illinois, Urbana-Champaign. Director: General
Motors Corporation; Hewlett-Packard Corporation; Saint-Gobain Corporation;
Reveo, Inc.; Corporation for National Research Initiatives; Community
Television of Southern California (KCET).
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CHAPTER 5: NEW RAYTHEON
John R. Galvin. Current director of Raytheon. Dean of the Fletcher School of
Law and Diplomacy, Tufts University. General Galvin retired from the U.S. Army
in 1992 after a 38-year career which included positions as NATO Supreme Allied
Commander Europe and Commander-in-Chief, U.S. European Command. From 1992 to
1994, General Galvin served as the Olin Distinguished Professor of National
Security at the U.S. Military Academy at West Point. In 1994 and 1995 he was a
visiting professor at the Mershon Center, The Ohio State University. Director:
USLife Corporation and Director or Trustee, the Seligman Group of Investment
Companies. Trustee: Institute for Defense Analyses.
Barbara B. Hauptfuhrer. Current director of Raytheon. Principal Business:
Corporate Director. Director: The Vanguard Group of Investment Companies and
each of the mutual funds in the Vanguard Group; The Great Atlantic and Pacific
Tea Co., Inc.; Knight-Ridder, Inc.; Massachusetts Mutual Life Insurance
Company; Ikon Business Solutions, Inc.; Trustee Emerita, Wellesley College.
Richard D. Hill. Current director of Raytheon. Retired Chairman, Bank of
Boston Corporation and The First National Bank of Boston. Principal Business:
Corporate Director.
L. Dennis Kozlowski. Current director of Raytheon. Chairman of the Board and
Chief Executive Officer of Tyco International Ltd. since 1992. Prior thereto
Mr. Kozlowski served as President of Tyco from 1989. Principal business: Fire
Protection Systems. Director: Tyco International Ltd.; Dynatech Corporation;
Thiokol Corporation and Applied Power, Inc.
James N. Land, Jr. Current director of Raytheon. Principal Business:
Corporate Financial Advisor. Director: E.W. Blanch Holdings, Inc.
A. Lowell Lawson. Current director of Raytheon. Executive Vice President of
Raytheon since April 1995 and Chairman of the Board and Chief Executive Officer
of E-Systems, Inc. since January 1994. Prior thereto Mr. Lawson served as
President of E-Systems from April 1989 and Executive Vice President of E-
Systems from April 1987.
Charles H. Noski. President and director of Hughes Electronics, since October
20, 1997. Prior thereto, Executive Vice President and Chief Financial Officer,
United Technologies Corporation (August 1997 to October 17, 1997). Prior
thereto, Vice Chairman and Chief Financial Officer, Hughes Electronics (1996 to
1997) and Senior Vice President and Chief Financial Officer, Hughes Electronics
(1992 to 1996). Director: PanAmSat Corporation.
Thomas L. Phillips. Current director of Raytheon. Retired Chairman of the
Board and Chief Executive Officer, Raytheon Company. Director: John Hancock
Mutual Life Insurance Company; Knight-Ridder, Inc.; Digital Equipment
Corporation; Systems Research and Applications. Trustee: State Street Research
Funds; MetLife-State Street Funds.
Dennis J. Picard. Chairman of the Board and Chief Executive Officer of
Raytheon since March 1, 1991. Prior thereto, President from 1989 and Senior
Vice President, General Manager of the Missile Systems Division of Raytheon
from 1983. Director: State Street Boston Corporation.
Warren B. Rudman. Current director of Raytheon. Partner, law firm of Paul,
Weiss, Rifkind, Wharton and Garrison since January 1992. Principal Business:
Law. Prior thereto, United States Senator from 1980 through January 1992.
Director: Chubb Corporation; Collins & Aikman Corporation; Prime Succession,
Inc.; several mutual funds managed by Dreyfus Corporation.
Alfred M. Zeien. Current director of Raytheon. Chairman of the Board and
Chief Executive Officer of The Gillette Company since 1991. Prior thereto,
President of Gillette from 1991 and as Vice Chairman, Gillette
International/Diversified Operations from 1988. Principal Business: Consumer
Goods and Services. Director: Bank of Boston; The Gillette Company; Polaroid
Corporation; Massachusetts Mutual Life Insurance Company.
227
<PAGE>
CHAPTER 5: NEW RAYTHEON
COMMITTEES
Pursuant to the Raytheon Merger Agreement, from and after the Raytheon Merger
Effective Time, the following three new committees will be created: (1) the
Board Transition Committee; (2) the Management Transition Committee; and (3)
the Defense Business Executive Council. Set forth below is a brief description
of the duties and composition of these new committees as well as the
composition of the Audit Committee and the Nominating Committee of New
Raytheon.
Board Transition Committee. The Board Transition Committee will be
responsible for resolving issues relating to the integration of the businesses,
facilities, functions and employees of Hughes Defense, Raytheon and Texas
Instruments Defense at the New Raytheon Board level. The Board Transition
Committee will be comprised of two directors affiliated with Raytheon and two
directors affiliated with Hughes Defense (Messrs. Dorfman and Noski) and will
be chaired by Mr. Noski.
Other Board Committees. As of the Raytheon Merger Effective Time, the Audit
Committee will be comprised of three directors affiliated with Raytheon and one
director affiliated with Hughes Defense (Mr. Dorfman) and the Nominating
Committee will be comprised of five directors affiliated with Raytheon and one
director affiliated with General Motors (Mr. Everhart).
Management Committees. The Management Transition Committee, which will be
comprised of three management personnel affiliated with Raytheon and three
management personnel affiliated with Hughes Defense, will be responsible for
supervising and implementing the integration of the businesses, facilities,
functions and employees of Hughes Defense, Raytheon and Texas Instruments
Defense. The Defense Business Executive Council, which will be comprised of
four management personnel affiliated with Raytheon and four management
personnel affiliated with Hughes Defense, will supervise and manage the
combined defense businesses of Hughes Defense, Raytheon and Texas Instruments
Defense on an ongoing basis and will serve as a vehicle for planning,
communication and decision making on issues involving such combined businesses.
The New Raytheon Board may, from time to time, establish other committees to
facilitate the management of New Raytheon or for other purposes it may deem
appropriate.
228
<PAGE>
CHAPTER 5: NEW RAYTHEON
OFFICERS
The Raytheon Merger Agreement provides that the officers of Raytheon
immediately prior to the Raytheon Merger Effective Time will be the officers of
New Raytheon immediately following the Raytheon Merger Effective Time.
Accordingly, effective as of the Raytheon Merger Effective Time, the executive
officers of New Raytheon are expected to be as set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---------------------- --- -------------------------------------------------
<C> <C> <S>
Gail P. Anderson...... 55 Vice President--Human Resources
Shay D. Assad......... 47 Vice President--Contracts
Senior Vice President Engineering and Business
Renso L. Caporali..... 64 Development
Vice President and Group Executive--Commercial
Philip W. Cheney...... 61 Electronics
Kenneth H. Colburn.... 46 Vice President--Project and International Finance
Peter R. D'Angelo..... 59 Executive Vice President--Chief Financial Officer
Herbert Deitcher...... 64 Senior Vice President--Treasurer
David S. Dwelley...... 58 Vice President--Strategic Business Development
Vice President--Corporate Controller and Investor
Michele C. Heid....... 43 Relations
Executive Vice President--Law, Corporate
Christoph L. Hoffmann. 53 Administration, and Secretary
Thomas D. Hyde........ 48 Vice President and General Counsel
A. Lowell Lawson...... 59 Executive Vice President and Chairman and Chief
Executive Officer of Raytheon E-Systems, Inc.
Vice President--Corporate Affairs and
Robert S. McWade...... 41 Communications
Executive Vice President and Chairman and Chief
Executive Officer of Raytheon Engineers &
Charles Q. Miller..... 52 Constructors International, Inc.
Dennis J. Picard...... 65 Chairman and Chief Executive Officer
Robert A. Skelly...... 55 Vice President--Assistant to the Executive Office
William H. Swanson.... 49 Executive Vice President and General Manager--
Raytheon Electronic Systems Division
Arthur E. Wegner...... 60 Executive Vice President and Chairman and Chief
Executive Officer of Raytheon Aircraft Company
</TABLE>
Executive officers serve at the discretion of the New Raytheon Board.
For a brief description of the backgrounds of the persons expected to be
executive officers of New Raytheon upon the consummation of the Hughes
Transactions and the Raytheon Merger, please refer to the Raytheon 1996 Form
10-K, which is incorporated into this document by reference. See "Where You Can
Find More Information" in Chapter 7.
DIRECTOR AND EXECUTIVE COMPENSATION
The directors and executive officers of New Raytheon will receive no
compensation from New Raytheon prior to the Raytheon Merger Effective Time.
Certain of the directors and executive officers of New Raytheon are presently
directors and/or executive officers of Raytheon and are entitled to
compensation and/or certain other employment benefits from Raytheon prior to
the Raytheon Merger Effective Time.
The New Raytheon Board will rely on its Compensation Committee, which will be
composed of non-employee directors, to recommend the form and amount of
compensation to be paid to New Raytheon's executive officers. Raytheon's
current retirement, incentive and stock purchase plans for its directors and
executive officers generally will apply to New Raytheon's directors and
executive officers. These plans are and will continue to be subject to change
from time to time. In addition, in connection with the Raytheon Merger, the
following plans, each of which provides for the issuance of "incentive stock
options" as defined in Section 422(b) of the Code, will be assumed by New
Raytheon and will continue in full force and effect as plans of New Raytheon
following the Raytheon Merger: the Raytheon Company 1991 Stock Plan and the
Raytheon Company 1995 Stock Option Plan.
For information regarding compensation paid to directors and executive
officers of Raytheon in 1996 and the above-mentioned plans, as well as
compensation committee interlocks and insider participation, please refer to
the Raytheon 1996 Form 10-K, which is incorporated into this document by
reference. See "Where You Can Find More Information" in Chapter 7.
229
<PAGE>
CHAPTER 5: NEW RAYTHEON
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN BENEFICIAL OWNERS
No director or executive officer is expected to own more than one percent of
the outstanding shares of New Raytheon Capital Stock after giving effect to the
Raytheon Merger. The directors and executive officers of New Raytheon as a
group are expected to beneficially own less than five percent of the
outstanding shares of New Raytheon Capital Stock after giving effect to the
Raytheon Merger. No person is expected to beneficially own more than ten
percent of the outstanding shares of New Raytheon after giving effect to the
Raytheon Merger (based upon publicly available information).
CHANGE IN CONTROL EMPLOYMENT AGREEMENTS
In connection with the Hughes Transactions, Hughes Defense entered into
change in control agreements and retention agreements with 17 of its senior
executives and has entered into retention agreements with 86 of its key
employees (in addition to the senior executives). New Raytheon will assume
Hughes Defense's obligations under these agreements after the Raytheon Merger
Effective Time.
The change in control agreements are effective for three years following the
GM Spin-Off Merger Effective Time. In the event of an involuntary termination
or constructive termination of employment following a "change in control" (as
defined in the agreements), the agreements provide for cash payments, medical
and life insurance, an increase in pension benefits (for six of the senior
executives), outplacement services, legal fees (if necessary to resolve any
dispute thereunder) and gross up payments if excise taxes are assessed. The
aggregate liability for the benefits provided in all of the change in control
agreements will not exceed $11 million (exclusive of gross up payments, if
any). The retention agreements provide for cash payments, and gross up payments
if excise taxes are assessed, to employees covered by such agreements if still
employed by New Raytheon at the end of the second and third years (in the case
of senior executives) and at the end of the first and second years (in the case
of other key employees) after the GM Spin-Off Merger Effective Time. A pro-rata
portion of such cash payments will be paid if there is an involuntary
termination prior to the benefit payment dates. The aggregate liability for
cash payments under all of the retention agreements will not exceed $60 million
(exclusive of gross up payments, if any). Up to $25 million will be paid if
there is a termination or constructive termination of employment following a
change in control. The Raytheon Merger is a "change in control" for purposes of
the agreements.
Raytheon has entered into change in control severance agreements with 25
senior executives. These agreements provide the executive with severance pay
and the continuation of certain benefits upon an involuntary or constructive
termination of the executive's employment within two years following the
occurrence of a "change in control" (as defined in the agreements).
Specifically, the agreements will provide a cash payment, continuation of
fringe benefits pursuant to all of Raytheon's welfare, benefit and retirement
plans, an increase in pension benefit, outplacement services, legal fees if
necessary to resolve any dispute thereunder and gross up payments if an excise
tax is assessed. The aggregate liability for cash payments, exclusive of
amounts relating to fringe benefits and gross up payments, if any, under all of
the severance agreements will not exceed $48 million.
230
<PAGE>
CHAPTER 5: NEW RAYTHEON
NEW DEBT OF HUGHES DEFENSE TO BE ASSUMED BY NEW RAYTHEON
In preparation for the consummation of the Hughes Transactions, Hughes
Defense and the subsidiary of Hughes Defense which principally operates the
defense electronics business entered into two unsecured credit agreements with
a syndicate of lenders to provide for the new debt to be incurred by Hughes
Defense under the terms of the Raytheon Merger Agreement. The following is a
summary of the material terms of these agreements and does not purport to be
complete and is qualified in its entirety by reference to the agreements, each
of which has been filed as an exhibit to the Hughes Defense Registration
Statement of which this document is a part. As noted elsewhere in this
document, the obligation to repay this indebtedness will remain with New
Raytheon after the Raytheon Merger. These agreements consist of a $3.0 billion
revolving credit facility with a five-year maturity date and a $2.0 billion
revolving credit facility with a maturity date of May 29, 1998. With respect to
each of its loans obtained under the credit facilities, Hughes Defense has the
option thereunder, in accordance with specified procedures, to seek competitive
bids from among the syndicate of lenders party to the credit facilities to
establish the interest rate applicable to such loans. If Hughes Defense elects
not to seek such competitive bids, interest on each loan will be based on, at
the option of Hughes Defense, the London interbank market rate for U.S. dollar
deposits ("LIBOR") or an adjusted base rate of the administrative agent tied to
its prime rate, CD rate or federal funds rate. Prior to the Raytheon Merger,
the LIBOR rate will vary based on the ratio of Hughes Defense's total debt to
total capitalization and, upon consummation of the Raytheon Merger, the rate
will vary based upon credit ratings imposed on certain of New Raytheon's debt.
The funds accessible to Hughes Defense pursuant to these revolving credit
facilities will be available after the following principal conditions have been
satisfied: (1) all requisite government authorities have approved or consented
to the Raytheon Merger; (2) GM's common stockholders have consented to the
Hughes Transactions; (3) Raytheon's common stockholders have consented to the
Raytheon Merger; and (4) the subsidiary of Hughes Defense which principally
operates the defense electronics business has merged with and into Hughes
Defense in preparation for the Hughes Defense Spin-Off (as part of the Hughes
Reorganization). In addition, as a condition to funding under these facilities,
there can be no actual or threatened litigation or administrative proceedings
that, in the judgment of the lenders, might prohibit or impose burdensome
conditions on the Raytheon Merger or the financings. It is a condition to GM's
obligation to consummate the Hughes Transactions that the proceeds of the new
debt permitted to be incurred by Hughes Defense be made available to Hughes
Telecom and, if applicable, General Motors.
The credit agreements which document these facilities contain covenants
typical of such agreements involving an investment grade borrower, including
providing the lenders with certain periodic financial statements of Hughes
Defense and restricting liens, sale and leaseback transactions and
subsidiaries' debt. In addition, the agreements contain a single financial
covenant that specifies a maximum debt to total capitalization ratio of 60% at
the time of the Raytheon Merger and specified ratios after consummation of the
Raytheon Merger. Absent an unanticipated material adverse change in Hughes
Defense's business, the financial and other covenants will not restrict Hughes
Defense's ability to use these facilities for the purposes described in this
document.
231
<PAGE>
CHAPTER 5: NEW RAYTHEON
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232
<PAGE>
CHAPTER 6: CAPITAL STOCK
CHAPTER 6
CAPITAL STOCK
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPARISON OF GM CLASS H COMMON STOCK, NEW GM CLASS H COMMON
STOCK AND CLASS A COMMON STOCK................................. 235
Introduction................................................... 235
Comparison..................................................... 236
CONSIDERATIONS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL
STRUCTURE...................................................... 245
Overview....................................................... 245
Board of Directors............................................. 246
New GM Board Policy Statement.................................. 246
GM CLASS H COMMON STOCK......................................... 249
Introduction................................................... 249
Price Range and Dividends Paid................................. 249
GM Certificate of Incorporation Provisions Regarding Dividends. 250
Dividend Policy................................................ 250
Voting Rights.................................................. 251
Liquidation Rights............................................. 251
Recapitalization............................................... 252
Subdivision or Combination..................................... 252
NEW GM CLASS H COMMON STOCK..................................... 253
Introduction................................................... 253
GM Certificate of Incorporation Provisions Regarding Dividends. 253
Dividend Policy................................................ 255
Voting Rights.................................................. 256
Liquidation Rights............................................. 256
Recapitalization and Certain Other Transactions................ 256
Subdivision or Combination..................................... 257
Stock Exchange Listing......................................... 257
Transfer Agent and Registrar................................... 257
NEW RAYTHEON CAPITAL STOCK...................................... 258
Introduction................................................... 258
Common Stock................................................... 258
Preferred Stock................................................ 260
New Raytheon Rights Agreement.................................. 260
Limitation on New Raytheon Directors' Liability................ 263
Section 203 of the Delaware General Corporation Law............ 264
Limitations on Changes in Control.............................. 264
Stock Exchange Listing......................................... 266
Transfer Agent and Registrar................................... 266
</TABLE>
233
<PAGE>
CHAPTER 6: CAPITAL STOCK
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234
<PAGE>
CHAPTER 6: CAPITAL STOCK
COMPARISON OF GM CLASS H COMMON STOCK, NEW GM CLASS H
COMMON STOCK AND CLASS A COMMON STOCK
INTRODUCTION
OVERVIEW OF GM COMMON STOCK
General Motors currently has two classes of common stock: GM $1 2/3 Common
Stock and GM Class H Common Stock. Upon the consummation of the Hughes
Transactions, General Motors will continue to have two classes of common stock:
GM $1 2/3 Common Stock and New GM Class H Common Stock. See "Description of the
Hughes Transactions" in Chapter 3. For considerations relating to GM's dual-
class common stock capital structure, including a policy statement adopted by
the GM Board in connection with the establishment of the terms of the New GM
Class H Common Stock, see "Considerations Relating to GM's Dual-Class Common
Stock Capital Structure" below.
GM CLASS H COMMON STOCK AND NEW GM CLASS H COMMON STOCK
Under the GM Certificate of Incorporation, the financial performance of
Hughes Electronics currently determines the earnings pool out of which
dividends may be paid on GM Class H Common Stock. Accordingly, GM Class H
Common Stock is sometimes described as a "tracking stock" of General Motors
with respect to Hughes Electronics. The portion of earnings of Hughes
Electronics not included in the earnings pool for GM Class H Common Stock is
available for the payment of dividends on GM $1 2/3 Common Stock. New GM Class
H Common Stock, into which the GM Class H Common Stock will be recapitalized
and converted in the GM Spin-Off Merger, will also be a "tracking stock" of
General Motors, tracking the financial performance of New Hughes Electronics.
Accordingly, the portion of earnings of New Hughes Electronics not included in
the earnings pool for New GM Class H Common Stock will be available for the
payment of dividends on GM $1 2/3 Common Stock.
GM Class H Common Stockholders are stockholders of General Motors (not Hughes
Electronics) and, as a result, have voting, liquidation and other rights with
respect to General Motors (not Hughes Electronics), as described below. Upon
the consummation of the Hughes Transactions, New GM Class H Common Stockholders
will continue to be stockholders of General Motors (not New Hughes Electronics)
and, as a result, will continue to have voting, liquidation and other rights
with respect to General Motors (not New Hughes Electronics), as described
below.
GM $1 2/3 COMMON STOCK
GM $1 2/3 Common Stock will remain outstanding following the Hughes
Transactions, with no changes in its terms. However, the terms of the New GM
Class H Common Stock include a formula for determining the per share
liquidation and voting rights of the New GM Class H Common Stock based on the
relative prices of the two classes of GM common stock in a specified period
prior to the consummation of the Hughes Transactions. Based on current market
prices, we expect the per share liquidation and voting rights of the New GM
Class H Common Stock to equal 0.50, the same as for the GM Class H Common
Stock. To the extent, however, that the formula results in per share
liquidation and voting rights for the New GM Class H Common Stock in excess of
0.50, the effect will be to reduce the percentage of the aggregate liquidation
and voting rights in General Motors attributable to the GM $1 2/3 Common
Stockholders, even though the stated per share liquidation and voting rights of
the GM $1 2/3 Common Stock will remain unchanged at 1.0. In addition, as a
result of the Hughes Transactions, 100% of the earnings of Delco will be
available for the payment of dividends on GM $1 2/3 Common Stock after the
completion of the Hughes Transactions.
NEW RAYTHEON COMMON STOCK
After the completion of the Hughes Transactions and the Raytheon Merger, New
Raytheon will have two classes of common stock: Class A Common Stock and Class
B Common Stock. Class A Common Stock will
235
<PAGE>
be distributed to GM's common stockholders in the Hughes Defense Spin-Off.
Class B Common Stock will be issued upon conversion of outstanding Raytheon
Common Stock on a share-for-share basis in the Raytheon Merger. Neither Class A
Common Stock nor Class B Common Stock will be a "tracking stock." As
stockholders of New Raytheon, the rights of Class A Common Stockholders will be
governed by the New Raytheon Certificate of Incorporation and the New Raytheon
By-Laws, which differ in certain material respects from the GM Certificate of
Incorporation and the GM By-Laws as summarized below.
Holders of both classes of New Raytheon Common Stock will have identical
rights, except that Class A Common Stockholders will be entitled, in the
aggregate, to 80.1% and Class B Common Stockholders will be entitled, in the
aggregate, to 19.9% of the total voting power of New Raytheon in the election
and removal of directors. With respect to all stockholder matters other than
the election and removal of directors, separate class approvals of the Class A
Common Stockholders and Class B Common Stockholders will be required. As
described below, the Class A Common Stockholders (and the Class B Common
Stockholders) will have voting, liquidation and other rights with respect to
New Raytheon.
COMPARISON
The following chart compares the terms of the GM Class H Common Stock, the
New GM Class H Common Stock and the Class A Common Stock (and, in the case of
the New GM Class H Common Stock and the Class A Common Stock, gives effect to
the consummation of the Hughes Transactions and the Raytheon Merger). More
detailed descriptions of the terms, as well as the applicable provisions of
Delaware law and the certificates of incorporation and the by-laws of both
General Motors and New Raytheon, follow this comparison table. THE COMPARISON
CHART BELOW, AS WELL AS THE DESCRIPTIONS WHICH FOLLOW, ARE SUMMARIES AND DO NOT
PURPORT TO BE COMPLETE.
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
ISSUER General General New Raytheon,
Motors, a Motors, a a Delaware
Delaware Delaware corporation,
corporation, corporation, will be the
is the issuer will be the issuer of
of GM Class H issuer of New Class A Common
Common Stock. GM Class H Stock.
Common Stock.
PRINCIPAL The defense The business Not
TRACKED electronics, of Hughes applicable.
BUSINESS(ES) automotive Telecom (which
electronics will be
and renamed
telecommunications "Hughes
and space Electronics
businesses of Corporation").
Hughes
Electronics.
DIVIDENDS Under the GM Under the GM Subject to the
Certificate of Certificate of rights of the
Incorporation, Incorporation, holders of New
dividends on as proposed to Raytheon
GM Class H be amended in Preferred
Common Stock the GM Spin- Stock (if any)
may be Off Merger, and applicable
declared by the GM Board law, under the
the GM Board will be able New Raytheon
and paid out to declare and Certificate of
of the assets pay dividends Incorporation
of General on New GM the Class A
Motors only to Class H Common Common
the extent of Stock out of Stockholders
the sum of (1) the assets of and the Class
the paid-in General Motors B Common
surplus of legally Stockholders
General Motors available for will be
attributable the payment of entitled to
to the GM dividends receive the
Class H Common reduced by the same amount
Stock plus (2) sum of (1) the per share of
an allocated amount any cash
portion of the initially dividend. The
earnings of attributed by dividend
Hughes the GM Board policy with
Electronics, to the GM respect to
Class A
</TABLE>
CHAPTER 6: CAPITAL STOCK
236
<PAGE>
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
DIVIDENDS which is $1 2/3 Common Common Stock
(CONT.) referred to in Stock plus the and Class B
this document paid-in Common Stock
as the surplus will be
"Available attributed to determined by
Separate shares of GM the New
Consolidated $1 2/3 Common Raytheon
Net Income of Stock issued Board. It is
Hughes after the currently
Electronics" closing of the expected that
and in the GM Hughes New Raytheon's
Certificate of Transactions, dividend
Incorporation plus (2) all policy with
as the of the respect to the
"Available earnings of Class A Common
Separate General Motors Stock after
Consolidated after the the Raytheon
Net Income of closing of the Merger will
Hughes." Hughes not differ
Transactions from
The current other than the Raytheon's
dividend earnings current
policy of the attributed to dividend
GM Board is to the New GM policy with
pay quarterly Class H Common respect to
dividends on Stock in Raytheon
GM Class H accordance Common Stock,
Common Stock, with the GM which is to
when, as and Certificate of pay a
if declared by Incorporation, quarterly
the GM Board, plus or minus dividend of
at an annual (3) the amount $0.20 per
rate equal to of any share. See
approximately adjustment "New Raytheon
35% of the that may be Capital
Available made by the GM Stock--Common
Separate Con- Board as Stock" below.
solidated Net described
Income of elsewhere in
Hughes Elec- this document.
tronics for The earnings
the prior attributed to
year. Notwith- the New GM
standing the Class H Common
current divi- Stock are
dend policy of referred to in
the GM Board, this document
the quarterly as the
dividend paid "Available
on GM Class H Separate
Common Stock Consolidated
of $0.25 per Net Income of
share during New Hughes
1997 was based Electronics"
on an annual and in the GM
rate higher Certificate of
than 35% of Incorporation,
the Available as proposed to
Separate be amended in
Consolidated the GM Spin-
Net Income of Off Merger, as
Hughes Elec- the "Available
tronics for Separate
the preceding Consolidated
year. Net Income of
Hughes." See
"New GM Class
H Common
Stock--GM
Certificate of
Incorporation
Provisions
Regarding
Dividends"
below.
General Motors
does not
currently
anticipate
paying any
cash dividends
initially on
the New GM
Class H Common
Stock
following the
Hughes
Transactions.
See "New GM
Class H
</TABLE>
CHAPTER 6: CAPITAL STOCK
237
<PAGE>
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
DIVIDENDS Common Stock--
(CONT.) Dividend
Policy" below.
With respect
to the
relationship
between
dividends (if
any) paid by
New Hughes
Electronics to
General Motors
and dividends
(if any) paid
by General
Motors to its
common
stockholders,
see the policy
statement of
the GM Board
adopted in
connection
with the
establishment
of the terms
of the New GM
Class H Common
Stock set
forth below
under
"Considerations
Relating to
GM's Dual-
Class Common
Stock Capital
Structure."
VOTING RIGHTS GM Class H New GM Class H With respect
Common Common to the
Stockholders Stockholders election and
are entitled will be removal of
to cast one- entitled to a directors,
half of a vote fixed number Class A Common
per share on of votes per Stockholders
all matters share will be
submitted to determined as entitled to
GM's common described such number of
stockholders below on all votes for each
for a vote matters share of Class
and, with submitted to A Common Stock
specified GM's common as shall be
exceptions, stockholders necessary to
vote together for a vote entitle the
as a single and, with holders of all
class with the specified shares of
GM $1 2/3 exceptions, Class A Common
Common will vote Stock to vote,
Stockholders together as a in the
on all matters single class aggregate,
(including the with the GM $1 80.1% of the
election and 2/3 Common total voting
removal of Stockholders power of all
directors), on all matters holders of New
based on their (including the Raytheon
respective election and Common Stock.
voting rights removal of With respect
as set forth directors), to all other
in the GM based on their matters
Certificate of respective submitted to a
Incorporation. voting rights vote of New
The number of as set forth Raytheon's
votes per in the GM common
share is Certificate of stockholders,
subject to Incorporation the Class A
certain anti- (as proposed Common
dilution to be amended Stockholders
adjustments in the GM and the Class
for stock Spin-Off B Common
subdivisions Merger). The Stockholders
and number of will each be
combinations votes to which entitled to a
and certain each share of single vote
other events, New GM Class H per share and
as set forth Common Stock the approval
in the GM will be of any such
Certificate of entitled will matter will
Incorporation. be the greater require the
of (1) one- approval of
half or (2) a both classes
of New
</TABLE>
CHAPTER 6: CAPITAL STOCK
238
<PAGE>
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
VOTING RIGHTS number Raytheon
(CONT.) (rounded to Common Stock,
the nearest each voting as
one-tenth) a separate
which reflects class. Except
the relative as may be
market value provided in
of New GM connection
Class with any class
H Common Stock or series of
compared to New Raytheon
the market Preferred
value of GM $1 Stock issued
2/3 Common from time to
Stock, based time or as may
on the average be required by
trading prices law, New
of such stocks Raytheon
during a Common Stock
specified will be the
period only New
following the Raytheon
consummation Capital Stock
of the Hughes entitled to
Transactions. vote in the
Based on election and
current market removal of
prices, we directors and
expect this other matters
number to be presented to
0.50 per the
share. The stockholders
number of of New
votes per Raytheon from
share will be time to time.
subject to
certain anti- Class A Common
dilution Stockholders
adjustments will have the
for stock right to vote
subdivisions directly on
and matters
combinations relating to
and certain New Raytheon,
other events, while GM Class
as set forth H Common
in the GM Stockholders
Certificate of vote directly
Incorporation on matters
(as proposed relating to
to be amended General
in the GM Motors.
Spin-Off
Merger).
LIQUIDATION The GM The GM The New
RIGHTS Certificate of Certificate of Raytheon
Incorporation Incorporation, Certificate of
provides that as proposed to Incorporation
upon the be amended in provides that
liquidation, the GM Spin- upon the
dissolution or Off Merger, liquidation,
winding up of provides that dissolution or
General upon the winding up of
Motors, after liquidation, New Raytheon,
the holders of dissolution or whether
GM Preferred winding up of voluntary or
Stock (if any) the business involuntary,
and GM of General Class A Common
Preference Motors, after Stockholders
Stock receive the holders of and Class B
the full GM Preferred Common
preferential Stock (if any) Stockholders
amounts to and GM will be
which they are Preference entitled to
entitled, GM Stock receive receive the
$1 2/3 Common the full assets of New
Stockholders preferential Raytheon
and GM Class H amounts to available for
Common which they are distribution
Stockholders entitled, GM to its
will receive $1 2/3 Common stockholders
the remaining Stockholders in proportion
assets of and New GM to the number
General Motors Class H Common of shares held
on a per share Stockholders by such
basis in will receive holders,
proportion to the remaining provided that
their assets of the full
respective per General Motors amounts
share on a per share necessary to
liquidation basis in satisfy any
units, which proportion to creditors and
are their preferential
approximately respective per or
</TABLE>
CHAPTER 6: CAPITAL STOCK
239
<PAGE>
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
LIQUIDATION one per share share participating
RIGHTS of GM $1 2/3 liquidation amounts owing
(CONT.) Common Stock units. GM $1 to the holders
and one-half 2/3 Common of New
per share of Stock is Raytheon
GM Class H entitled to Preferred
Common Stock. one Stock (if any)
The number of liquidation have been paid
liquidation unit per or set aside
units per share. New GM for payment
share is Class H Common previously.
subject to Stock will be
adjustment as entitled to a The
described number of liquidation
below with liquidation rights of
respect to units equal to Class A Common
voting rights the number of Stockholders
under "GM votes to which will relate to
Class H Common each such New Raytheon,
Stock--Voting share is while the
Rights." entitled, liquidation
determined as rights of GM
GM Class H described Class H Common
Common below under Stockholders
Stockholders "New GM Class relate to
have no direct H Common General
rights in the Stock--Voting Motors.
equity or Rights,"
assets of subject to
Hughes adjustment as
Electronics, described
but rather above with
have rights in respect to
the equity and such voting
assets of rights.
General Motors
(which New GM Class H
includes 100% Common
of the stock Stockholders
of Hughes will have no
Electronics). direct rights
in the equity
or assets of
New Hughes
Electronics,
but rather
will have
rights in the
equity and
assets of
General Motors
(which will
include 100%
of the stock
of New Hughes
Electronics).
RECAPITALIZATION, Under the GM Under the GM Class A Common
REPURCHASE Certificate of Certificate of Stockholders
RIGHTS AND Incorporation, Incorporation, will have no
CERTAIN all as proposed to comparable
DISPOSITIONS outstanding be amended in right to that
AND OTHER shares of GM the GM Spin- which they
TRANSACTIONS Class H Common Off Merger, possess as GM
Stock may be all Class H Common
recapitalized outstanding Stockholders
as shares of New with respect
shares of GM GM Class H to the
$1 2/3 Common Common Stock potential
Stock (1) at may be recapitalization
any time in recapitalized of their GM
the sole as shares of Class H Common
discretion of GM $1 2/3 Stock into GM
the GM Board Common Stock $1 2/3 Common
(provided that (1) at any Stock at a
certain time after 120% exchange
requirements December 31, ratio, as
are met) or 2002 in the currently
(2) sole provided for
automatically, discretion of under certain
if at any time the GM Board, circumstances
General Motors or (2) in the GM
disposes of automatically, Certificate of
substantially if at any time Incorporation.
all of the General Class A Common
business of Motors, in one Stockholders
Hughes transaction or may, however,
Aircraft (or a series of have the
its related potential to
successors) or transactions, realize
substantially disposes of
all of the substantially
other business all of the
of Hughes business of
Electronics to New Hughes
a Electronics
(or its
</TABLE>
CHAPTER 6: CAPITAL STOCK
240
<PAGE>
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
RECAPITALIZATION, person, entity successors) to premiums over
REPURCHASE or group of a person, prevailing
RIGHTS AND which General entity or market prices
CERTAIN Motors is not group of which for Class A
DISPOSITIONS a majority General Motors Common Stock
AND OTHER owner. In the is not a in connection
TRANSACTIONS event of such majority with certain
(CONT.) recapitalization,owner. For corporate
each GM Class purposes of transactions,
H Common this including
Stockholder recapitalization tender offers
would receive provision of for New
shares of GM the GM Raytheon
$1 2/3 Common Certificate of Common Stock
Stock having a Incorporation, and change in
market value, "substantially control
as of a all of the transactions
specified date business" of involving New
provided for New Hughes Raytheon,
in the GM Electronics although there
Certificate of will mean at can be no
Incorporation, least 80% of assurance in
equal to 120% the business this regard.
of the market of New Hughes See "New
value of such Electronics, Raytheon
holder's GM based on the Capital
Class H Common fair market Stock--
Stock on such value of the Limitations on
date. assets, both Changes in
tangible and Control"
As a result of intangible, of below. Such
the GM Spin- New Hughes premiums, if
Off Merger, Electronics as any, will not
the GM of the time of be limited by
Certificate of the proposed any formula in
Incorporation transaction. the New
will be In the event Raytheon
amended so of any such Certificate of
that the recapitalization, Incorporation
Hughes each New GM comparable to
Transactions Class H Common that relating
will not Stockholder to the
result in a would receive recapitalization
recapitalization shares of GM of GM Class H
of GM Class H $1 2/3 Common Common Stock
Common Stock Stock having a or New GM
into GM $1 2/3 market value, Class H Common
Common Stock as of a Stock as
at a 120% specified date described
exchange provided for above.
ratio, as in the GM
described Certificate of New Raytheon
above. Incorporation may not
(as proposed directly or
to be amended indirectly
in the GM redeem,
Spin-Off purchase,
Merger), equal repurchase or
to 120% of the otherwise
market value acquire for
of such consideration
holder's New any shares of
GM Class H New Raytheon
Common Stock Common Stock
on such date. unless such
No automatic action is (1)
recapitalization effected
will occur ratably in
upon a accordance
disposition in with the
connection number of
with the outstanding
dissolution, shares of
liquidation Class A Common
and winding up Stock and
of General Class B Common
Motors and the Stock, (2) for
distribution consideration
of the net of the same
assets of type and
General Motors amount as to
to GM's common shares of each
stockholders. class and (3)
not in any
With respect other way
to certain prejudicial to
transfers of the rights of
assets by New the holders of
one class of
New Raytheon
Common Stock
in favor of
the other
</TABLE>
CHAPTER 6: CAPITAL STOCK
241
<PAGE>
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
RECAPITALIZATION, Hughes class of New
REPURCHASE Electronics to Raytheon
RIGHTS AND General Motors Common Stock.
CERTAIN or the common
DISPOSITIONS stockholders In the event
AND OTHER of General of any
TRANSACTIONS Motors, see corporate
(CONT.) the policy merger,
statement of consolidation,
the GM Board purchase or
adopted in acquisition of
connection property or
with the stock, or
establishment other
of the terms reorganization
of the New GM in which any
Class H Common consideration
Stock set is to be
forth below received by
under the Class A
"Considerations Common
Relating to Stockholders
GM's Dual- or the Class B
Class Common Common
Stock Capital Stockholders,
Structure." the holders of
each class
will receive
the same type
and amount of
consideration
on a per share
basis.
CERTAIN Not Not The New
LIMITATIONS applicable. applicable. Raytheon
ON CHANGES Certificate of
IN CONTROL Incorporation
and the New
Raytheon By-
Laws contain
certain
provisions,
such as a
classified
board of
directors, a
provision
prohibiting
stockholder
action by
written
consent, a
provision
prohibiting
stockholders
from calling
special
meetings and a
provision
authorizing
the New
Raytheon Board
to consider
factors other
than
stockholders'
short-term
interests in
evaluating an
offer
involving a
change in
control, which
are not
present in the
GM Certificate
of
Incorporation
or the GM By-
Laws and which
could have the
effect of
delaying,
deferring or
preventing a
change in
control of New
Raytheon or
the removal of
existing
management, of
deterring
potential
acquirors from
making an
offer to
stockholders
of New
</TABLE>
CHAPTER 6: CAPITAL STOCK
242
<PAGE>
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
CERTAIN Raytheon and
LIMITATIONS of limiting
ON CHANGES IN any
CONTROL opportunity to
(CONT.) realize
premiums over
prevailing
market prices
for New
Raytheon
Common Stock
in connection
therewith.
The New
Raytheon
Rights
Agreement,
which also has
no equivalent
at General
Motors, will
provide for
preferred
stock purchase
rights that
could have the
same effect.
New Raytheon,
like General
Motors, will
be subject to
Section 203 of
the Delaware
General
Corporation
Law.
In order to
preserve the
tax-free
status of the
Hughes Defense
Spin-Off, the
Hughes Telecom
Spin-Off and
the Raytheon
Merger, New
Raytheon will
be subject to
certain
covenants
under the
Spin-Off
Separation
Agreement
which will act
to prohibit
New Raytheon
from entering
into or
permitting (to
the extent
that New
Raytheon has
the right to
prohibit)
certain
transactions
and taking
certain
actions with
respect to the
New
Raytheon
Certificate of
Incorporation
or the New
Raytheon By-
Laws. Such
prohibitions,
to which
General Motors
is not
subject, could
have the
effect of
delaying,
deferring or
preventing a
change in
control of New
Raytheon and
of limiting
the
opportunity to
realize
</TABLE>
CHAPTER 6: CAPITAL STOCK
243
<PAGE>
<TABLE>
<CAPTION>
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
<S> <C> <C> <C>
CERTAIN premiums over
LIMITATIONS prevailing
ON CHANGES IN market prices
CONTROL for New
(CONT.) Raytheon
Common Stock
in connection
therewith
during the
period of
their
applicability.
For additional
information
regarding
these
prohibitions,
see
"Separation
and Transition
Arrangements--
Summary of
Spin-Off
Separation
Agreement--
Preservation
of Tax-Free
Status of the
Hughes
Transactions
and the
Raytheon
Merger" in
Chapter 3.
NUMBER OF 102,459,163 102,459,163 102,630,503
SHARES
OUTSTANDING
IMMEDIATELY
AFTER THE
HUGHES
TRANSACTIONS
(BASED ON THE
NUMBER OF
SHARES OF GM
CLASS H
COMMON STOCK
OUTSTANDING
AS OF
SEPTEMBER 30,
1997)
STOCK GM Class H Application Application
EXCHANGE Common Stock has been made will be made
LISTING is listed on to list New GM to list Class
the NYSE under Class H Common A Common Stock
the symbol Stock on the on the NYSE.
"GMH." NYSE and such It is expected
application that Class A
has been Common Stock
granted will be listed
subject to on the NYSE
notice of under the
issuance. It symbol "RTNA."
is
expected that
New GM Class H
Common Stock
will be listed
on the NYSE
under the
symbol "GMH."
FORM OF STOCK Certificated. Uncertificated Uncertificated
OWNERSHIP (unless (unless
otherwise otherwise
requested). requested).
</TABLE>
CHAPTER 6: CAPITAL STOCK
244
<PAGE>
CONSIDERATIONS RELATING TO GM'S DUAL-CLASS
COMMON STOCK CAPITAL STRUCTURE
OVERVIEW
General Motors currently has a dual-class common stock capital structure with
two classes of common stock outstanding: GM $1 2/3 Common Stock and GM Class H
Common Stock. After the completion of the Hughes Transactions, General Motors
will continue to have a dual-class common stock capital structure with two
classes of common stock outstanding: GM $1 2/3 Common Stock and New GM Class H
Common Stock. The following discussion addresses certain considerations
relating to GM's dual-class common stock capital structure.
The GM Certificate of Incorporation, both in its current form and as proposed
to be amended in the GM Spin-Off Merger, restricts the power of the GM Board to
declare and pay dividends on either class of common stock to certain defined
amounts which are attributable to each separate class of common stock and
subject to the amount legally available for the payment of dividends by General
Motors. For dividend purposes, this restriction serves to preserve the interest
in retained earnings of holders of each class of GM common stock in relation to
the interests therein of holders of the other class. However, this restriction
does not result in a physical segregation of the assets of General Motors on
the one hand and Hughes Electronics (before the Hughes Transactions) or New
Hughes Electronics (after the Hughes Transactions) on the other, nor does it
result in the establishment of separate accounts or dividend or liquidation
preferences with respect to such assets for the benefit of the holders of
either of the separate classes of GM common stock. GM Class H Common
Stockholders have no direct rights in the equity or assets of Hughes
Electronics but rather, together with GM $1 2/3 Common Stockholders, have
certain liquidation rights in the equity and assets of General Motors (which
include 100% of the stock of Hughes Electronics). Similarly, New GM Class H
Common Stockholders will have no direct rights in the equity or assets of New
Hughes Electronics but rather, together with GM $1 2/3 Common Stockholders,
will have certain liquidation rights in the equity and assets of General Motors
(which include 100% of the stock of New Hughes Electronics) after the Hughes
Transactions.
The existence of two classes of common stock with separate dividend rights as
provided for in the GM Certificate of Incorporation, both in its current form
and as proposed to be amended in the GM Spin-Off Merger, can give rise to
potential divergences among the interests of the holders of the two classes of
GM common stock with respect to various intercompany transactions and other
matters. Because General Motors is incorporated under the Delaware General
Corporation Law (and will continue to be so after the Hughes Transactions), the
laws of Delaware govern, and will continue to govern, the duties of the GM
Board with respect to such divergences. Under Delaware law, the GM Board owes
an equal fiduciary duty to all holders of GM common stock and must act with due
care and on an informed basis in the best interests of General Motors and all
such common stockholders, regardless of class. In this regard, the GM Board, in
the discharge of its fiduciary duties, principally through its Capital Stock
Committee (which is and will continue to be comprised entirely of independent
directors of General Motors), oversees the policies, programs and practices of
General Motors which may impact the potentially divergent interests of the two
classes of GM common stock (and will continue to do so after the Hughes
Transactions).
The GM By-Laws, in defining the role of the Capital Stock Committee,
currently provide that such committee shall oversee those matters in which the
two classes of stockholders may have divergent interests, particularly as they
relate to: (1) the business and financial relationships between General Motors
or any of its units and Hughes Electronics; (2) dividends in respect of,
disclosures to stockholders and the public concerning, and transactions by
General Motors or any of its subsidiaries in, shares of GM Class H Common
Stock; and (3) any matters arising in connection therewith, all to the extent
the Capital Stock Committee may deem appropriate, and to recommend such changes
in such policies, programs and practices as the Capital Stock Committee may
deem appropriate. In performing this function, the Capital Stock Committee's
role is not to make decisions concerning matters referred to its attention, but
rather to oversee the process by which decisions concerning such matters are
made. The Capital Stock Committee does this with a view towards,
CHAPTER 6: CAPITAL STOCK
245
<PAGE>
among other things, assuring a process of fair dealing between General Motors
and Hughes Electronics as well as fair consideration of the interests of all of
GM's common stockholders in the resolution of such matters.
After the Hughes Transactions, the Capital Stock Committee will continue to
have the same oversight role with respect to the relationship between General
Motors and New Hughes Electronics, dividend policies and practices of General
Motors and such other matters as have the potential to have differing effects
on holders of both classes of GM common stock as it currently does with respect
to General Motors and Hughes Electronics.
BOARD OF DIRECTORS
The Hughes Electronics Board currently has nine members. Three directors are
independent directors of General Motors (one of whom is also a member of the
Capital Stock Committee of the GM Board), three directors are executive
officers of General Motors and three directors are executive officers of Hughes
Electronics. Those directors of Hughes Electronics who are also executive
officers of General Motors devote a substantial amount of their time to the
business and affairs of General Motors and its other subsidiaries or to the
oversight thereof.
We expect that the persons currently serving as directors of Hughes
Electronics will become directors of New Hughes Electronics. We are continuing
to review the composition of the New Hughes Electronics board of directors and
may make changes to the composition of the board following the completion of
the Hughes Transactions. For additional information regarding the New Hughes
Electronics board, see "Business of Hughes Telecom--Directors and Executive
Officers of New Hughes Electronics" in Chapter 4.
NEW GM BOARD POLICY STATEMENT
In connection with its determination of the terms of the New GM Class H
Common Stock, the GM Board reviewed its policies and practices with respect to
GM's dual-class common stock capital structure and adopted, subject to the
consummation of the Hughes Transactions, the following policy statement:
GENERAL MOTORS CORPORATION
BOARD OF DIRECTORS
GM BOARD POLICY STATEMENT REGARDING CERTAIN CAPITAL STOCK MATTERS
(A) GENERAL POLICY. It is the policy of the Board of Directors of General
Motors Corporation (the "GM Board"):
(1) that all material matters as to which the holders of the two classes
of GM common stock may have potentially divergent interests shall be
resolved in a manner which the GM Board determines to be in the best
interests of General Motors Corporation and all of its common stockholders
after giving fair consideration to the potentially divergent interests and
all other relevant interests of the holders of the separate classes of GM
common stock; and
(2) that a process of fair dealing shall govern the relationship between
GM and HEC and the means by which the terms of any material transaction
between them shall be determined.
(B) ADDITIONAL MATTERS. In relation to the foregoing policy, it is the
further policy of the GM Board that:
(1) QUARTERLY DIVIDENDS.
(a) In contemplation of the GM Board's duty periodically to consider an
appropriate dividend policy and practice in relation to Class H Common
Stock and its expectation that the Board of Directors of HEC (the "HEC
Board") shall, at least annually, consider and determine a quarterly
dividend policy with respect to the common stock of HEC (100% of which is
held by GM), the GM Board shall, at least annually, determine a quarterly
dividend policy with respect to the Class H Common Stock.
CHAPTER 6: CAPITAL STOCK
246
<PAGE>
CHAPTER 6: CAPITAL STOCK
(b) The quarterly dividend policy of the GM Board with respect to the
Class H Common Stock shall be to declare and pay quarterly dividends on
the Class H Common Stock in an amount equal to the product of (i) the
aggregate amount of each quarterly dividend received by GM as a
stockholder of HEC, if any, multiplied by (ii) the fraction used to
determine the Available Separate Consolidated Net Income of Hughes (as
such term is used in GM's Restated Certificate of Incorporation, as
amended) at the time such dividend was declared by HEC.
(c) GM's payment of a quarterly dividend on the Class H Common Stock
shall be made as soon as practicable after receipt of the corresponding
dividend payment from HEC.
(2) PRINCIPLES GOVERNING DIVIDENDS AND DISTRIBUTIONS OTHER THAN QUARTERLY
DIVIDENDS.
(a) Except as provided in paragraph (B)(2)(b) below, in the event that
HEC directly or indirectly makes any transfer of material assets to GM or
to GM's stockholders:
(i) TRANSFERS OF HEC ASSETS TO GM. If such transfer of assets by HEC
is to GM, the GM Board shall as soon thereafter as practicable declare
and pay a dividend or make other provision with respect to a
distribution on the Class H Common Stock so that there shall be
distributed to the holders of Class H Common Stock a portion of such
assets transferred to GM that is not less than the fraction used to
determine the Available Separate Consolidated Net Income of Hughes at
the time of such transfer to GM; provided that, if the GM Board
determines that it is not reasonably practicable or not in the best
interests of the holders of Class H Common Stock for GM to distribute
any such assets to the holders of Class H Common Stock, GM shall
distribute to such holders cash or other noncash assets having an
equivalent fair value; and
(ii) TRANSFERS OF HEC ASSETS TO GM'S STOCKHOLDERS. If such transfer
of assets by HEC is to GM's stockholders, the portion of such assets
transferred to the holders of Class H Common Stock shall be not less
than the fraction used to determine the Available Separate
Consolidated Net Income of Hughes at the time of such transfer.
(b) EXCEPTIONS TO FOREGOING PRINCIPLES. The provisions of paragraph
(B)(2)(a) above shall not apply to any of the following asset transfers:
(i) any transfer that results in the recapitalization of Class H
Common Stock into $1 2/3 Par Value Common Stock pursuant to the
provisions of paragraph (c) of Division I of Article Fourth of GM's
Restated Certificate of Incorporation, as amended;
(ii) any transfer that is made pursuant to the quarterly dividend
policy described in paragraph (B)(1) above;
(iii) any transfer that is made in the ordinary course of HEC's
business;
(iv) any transfer for which HEC shall have received fair
compensation as determined pursuant to this policy as described in
paragraph (A) above, provided that, where required by paragraph (B)(3)
below, stockholder consent to such transfer shall have been received;
and
(v) any transfer which shall have received the consent of the
holders of a majority of the outstanding shares of Class H Common
Stock, voting as a separate class, and $1 2/3 Par Value Common Stock,
voting as a separate class.
(3) SEPARATE CLASS VOTES OF GM'S STOCKHOLDERS AS A CONDITION TO GM'S
ACQUISITION OF A SIGNIFICANT PORTION OF HEC ASSETS. GM shall not acquire in
one transaction or a series of related transactions a significant portion of
the business of HEC for compensation without receiving the consent of the
holders of a majority of the outstanding shares of Class H Common Stock,
voting as a separate class, and $1 2/3 Par Value Common Stock, voting as a
separate class. For purposes of this paragraph, "significant portion of the
business of HEC" shall mean more than 33% of the business of HEC, based on
the fair market value of the assets, both tangible and intangible, of HEC as
of the time that the proposed transaction is approved by the GM Board.
247
<PAGE>
CHAPTER 6: CAPITAL STOCK
(4) BASIS FOR COMMERCIAL TRANSACTIONS BETWEEN GM AND HEC. GM and HEC shall
operate on the principle that all material commercial transactions between
them shall be based on commercially reasonable terms.
(C) MEANING OF "GM" AND "HEC" WITHIN THIS POLICY. For purposes of this
policy, "GM" shall mean General Motors Corporation and its affiliates (other
than HEC), and "HEC" shall mean Hughes Electronics Corporation, including any
person controlled by Hughes Electronics Corporation.
(D) ROLE OF CAPITAL STOCK COMMITTEE RELATING TO THIS POLICY. The Capital
Stock Committee of the GM Board shall oversee the implementation of, and shall
have authority to interpret, this policy.
(E) DELEGATION. In administering this policy, the GM Board may, at its
option, delegate its authority, including to the Capital Stock Committee, and
may delegate to members of management the authority to implement any matter
pursuant to this policy.
(F) FIDUCIARY OBLIGATIONS. In making any and all determinations in connection
with this policy, either directly or by appropriate delegation of authority,
the GM Board shall act in its fiduciary capacity and pursuant to legal guidance
concerning its obligations under applicable law.
(G) GM BOARD MAY MAKE FUTURE PROPOSALS TO STOCKHOLDERS FOR RECAPITALIZATION
TRANSACTIONS WHICH WOULD BE ON TERMS DIFFERENT FROM THOSE IN GM'S CURRENT
RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED. Consistent with the terms of
both GM's Restated Certificate of Incorporation, as amended, and Delaware
General Corporation Law, the GM Board may, in the future, propose
recapitalization transactions to GM stockholders on terms different from those
provided for under GM's Restated Certificate of Incorporation, as amended.
(Such alternative proposals were utilized by GM's Board of Directors in
connection with the split-off of Electronic Data Systems Corporation in 1996
and the spin-off of the defense electronics business of HEC in 1997.)
(H) INTERPRETATION, AMENDMENTS AND MODIFICATIONS OF THIS POLICY. This policy
may at any time and from time to time be modified, rescinded and interpreted by
the GM Board, and the GM Board may adopt additional or other policies or make
exceptions with respect to the application of this policy in connection with
particular facts and circumstances, all as the GM Board may determine,
consistent with its fiduciary duties to General Motors Corporation and all of
its common stockholders, to be in the best interests of General Motors
Corporation and all of its common stockholders, and any such action may be
taken with or without the approval of the stockholders of General Motors
Corporation.
* * * * *
As set forth therein, this policy statement may be modified or rescinded at
any time and from time to time by the GM Board and the GM Board may propose to
GM stockholders alternative recapitalization proposals. The GM Board has no
present intention to modify or rescind this policy statement or to propose a
recapitalization of the New GM Class H Common Stock. See "Risk Factors Relating
to GM's Dual-Class Common Stock Capital Structure--GM Board Policies and
Practices Are Subject to Change" in Chapter 2.
Notwithstanding this policy statement or the provisions concerning
recapitalization of the New GM Class H Common Stock into GM $1 2/3 Common Stock
at a 120% exchange ratio as provided under certain circumstances in the GM
Certificate of Incorporation, as proposed to be amended in the GM Spin-Off
Merger, the GM Board may propose to GM's common stockholders for their approval
one or more transactions on terms different from those provided for by such
provisions or by this policy statement. See "Risk Factors Relating to GM's
Dual-Class Common Stock Capital Structure--Potentially Diverging Interests of
GM's Common Stockholders; Fiduciary Duties of the GM Board" in Chapter 2.
248
<PAGE>
CHAPTER 6: CAPITAL STOCK
GM CLASS H COMMON STOCK
INTRODUCTION
GM Class H Common Stock is one of two classes of GM common stock. The other
class of GM common stock is GM $1 2/3 Common Stock. On the Record Date, there
were approximately 103 million shares of GM Class H Common Stock, held by
approximately 233,240 record holders, issued and outstanding.
GM Class H Common Stockholders have no direct rights in the equity or assets
of Hughes Electronics or Hughes Defense, but rather have rights in the equity
and assets of General Motors (which includes 100% of the stock of Hughes
Electronics). GM Class H Common Stock is designed to provide holders with
financial returns based on the performance of Hughes Electronics. The intent of
this design objective is achieved through (1) allocations under the GM
Certificate of Incorporation of the earnings of General Motors attributable to
Hughes Electronics between amounts available for the payment of dividends on GM
Class H Common Stock and amounts available for the payment of dividends on the
GM $1 2/3 Common Stock and (2) the announced current dividend policies and
practices of the GM Board with respect to the GM Class H Common Stock, all as
more fully described below. The GM Board is free at any time to change dividend
policies and practices with respect to GM Class H Common Stock or the GM $1 2/3
Common Stock.
PRICE RANGE AND DIVIDENDS PAID
The GM Class H Common Stock is listed and traded on the NYSE under the symbol
"GMH." The table below shows the range of reported per share sale prices on the
NYSE Composite Tape for the GM Class H Common Stock for the periods indicated,
and the dividends paid per share on the GM Class H Common Stock in such
periods. The last reported sale price of the GM Class H Common Stock on the
NYSE on November 7, 1997 was $62 15/16 per share.
<TABLE>
<CAPTION>
DIVIDENDS
CALENDAR YEAR HIGH LOW PAID
------------- ------ ------ ---------
<S> <C> <C> <C>
1995
First Quarter.................................. $41.75 $33.25 $0.23
Second Quarter................................. 41.63 37.75 0.23
Third Quarter.................................. 42.75 39.13 0.23
Fourth Quarter................................. 50.00 39.50 0.23
1996
First Quarter.................................. 63.38 45.00 0.24
Second Quarter................................. 68.25 57.50 0.24
Third Quarter.................................. 61.38 53.13 0.24
Fourth Quarter................................. 59.25 49.50 0.24
1997
First Quarter.................................. 64.88 54.25 0.25
Second Quarter................................. 60.25 49.00 0.25
Third Quarter.................................. 67.50 56.13 0.25
Fourth Quarter (through November 7, 1997)...... 68.75 62.19 --
</TABLE>
On January 15, 1997, the day prior to the day on which General Motors
announced that it intended to pursue the Hughes Transactions, the closing price
of the GM Class H Common Stock, as reported on the NYSE Composite Tape, was $62
5/8, and the aggregate market value of the outstanding GM Class H Common Stock
was approximately $6.3 billion. On such date, the closing price of the GM $1
2/3 Common Stock, as reported on the NYSE Composite Tape, was $60 1/8 and the
aggregate market value of the outstanding GM $1 2/3 Common Stock was
approximately $45.4 billion.
On October 6, 1997, the day on which General Motors announced that the GM
Board had approved the final terms of the Hughes Transactions, including the
Distribution Ratio, the closing price of the GM Class H
249
<PAGE>
CHAPTER 6: CAPITAL STOCK
Common Stock, as reported on the NYSE Composite Tape prior to such
announcement, was $67.00, and the aggregate market value of the outstanding GM
Class H Common Stock was approximately $6.9 billion. On such date, the closing
price of the GM $1 2/3 Common Stock, as reported on the NYSE Composite Tape
prior to such announcement, was $68.50 and the aggregate market value of the
outstanding GM $1 2/3 Common Stock was approximately $48.4 billion.
GM CERTIFICATE OF INCORPORATION PROVISIONS REGARDING DIVIDENDS
Subject to the rights of the holders of GM Preferred Stock (if any) and GM
Preference Stock, under the GM Certificate of Incorporation, dividends on GM
Class H Common Stock may be declared and paid out of the assets of General
Motors only to the extent of the sum of (1) the paid-in surplus of General
Motors attributable to the GM Class H Common Stock plus (2) an allocated
portion of the earnings of Hughes Electronics after December 31, 1985, the date
that General Motors acquired Hughes Aircraft, which is referred to as the
Available Separate Consolidated Net Income of Hughes Electronics (determined as
described below).
The Available Separate Consolidated Net Income of Hughes Electronics for any
quarterly period represents the separate consolidated net income of Hughes
Electronics for such period, excluding the effects of GM purchase accounting
adjustments arising at the time of GM's acquisition of Hughes Aircraft,
calculated for such period and multiplied by a fraction, the numerator of which
is a number equal to the weighted average number of shares of GM Class H Common
Stock outstanding during the quarter (approximately 102 million during the
third quarter of 1997) and the denominator of which was approximately 400
million for the third quarter of 1997, provided that such fraction shall never
be greater than one. The GM Certificate of Incorporation permits the
denominator to be adjusted from time to time as deemed appropriate by the GM
Board (1) to reflect subdivisions and combinations of GM Class H Common Stock
and stock dividends payable in shares of GM Class H Common Stock to GM Class H
Common Stockholders, (2) to reflect the fair market value of contributions of
cash or property by General Motors or its subsidiaries to Hughes Electronics or
its subsidiaries and to reflect such contributions or contributions of GM
capital stock by General Motors to, or for the benefit of, employees of Hughes
Electronics or its subsidiaries in connection with employee benefit plans or
arrangements and (3) to reflect payments by Hughes Electronics to General
Motors of amounts applied to the repurchase by General Motors of shares of GM
Class H Common Stock and purchases by Hughes Electronics of shares of GM Class
H Common Stock. The GM Board has determined the denominator will be
automatically adjusted at the end of each quarter to reflect on a weighted-
average basis the number of shares of GM Class H Common Stock acquired or sold
by Hughes Electronics during such quarter. For all purposes, determination of
the Available Separate Consolidated Net Income of Hughes Electronics is in the
discretion of the GM Board, subject to the provisions described above of the GM
Certificate of Incorporation.
As described above, under the GM Certificate of Incorporation, the
amortization of intangible assets arising from the purchase accounting
adjustments related to GM's acquisition of Hughes Aircraft is charged against
earnings attributable to GM $1 2/3 Common Stock and not against earnings
attributable to GM Class H Common Stock. For additional information regarding
these purchase accounting adjustments, see the Hughes Electronics financial
information set forth in Exhibit 99 to the GM 1996 Form 10-K, which is
incorporated into this document by reference. See "Where You Can Find More
Information" in Chapter 7.
For purposes of determining the approximate earnings per share attributable
to GM Class H Common Stock for financial reporting purposes, an investor may
divide the quarterly earnings allocated to GM Class H Common Stock (the
Available Separate Consolidated Net Income of Hughes Electronics) by the
weighted average number of shares of GM Class H Common Stock outstanding during
such quarter, which is the numerator of the fraction described above. You can
obtain approximately the same mathematical result by dividing the quarterly
earnings used for computation of the Available Separate Consolidated Net Income
of Hughes Electronics (i.e., net income) by the denominator of the fraction
described above.
DIVIDEND POLICY
The declaration of any dividend on either class of GM common stock is a
matter to be acted upon by the GM Board upon the recommendation of GM
management. Dividend policy with respect to GM Class H
250
<PAGE>
CHAPTER 6: CAPITAL STOCK
Common Stock is, and with respect to New GM Class H Common Stock will be, one
of the matters reviewed by the Capital Stock Committee of the GM Board. See
"Considerations Relating to GM's Dual-Class Common Stock Capital Structure"
above. The current dividend policy of the GM Board is to pay quarterly
dividends on GM Class H Common Stock, when, as and if declared by the GM Board,
at an annual rate equal to approximately 35% of the Available Separate
Consolidated Net Income of Hughes Electronics for the prior year.
Notwithstanding this dividend policy, the GM Board has decided that a quarterly
dividend of $0.25 per share shall be paid on GM Class H Common Stock during
1997, an annual rate somewhat higher than 35% of the Available Separate
Consolidated Net Income of Hughes Electronics for the preceding year.
Under Delaware law and the GM Certificate of Incorporation, the GM Board is
not required to declare dividends on any class of GM common stock. If and to
the extent the GM Board chooses to declare dividends on either or both of the
classes of its common stock, neither Delaware law nor the GM Certificate of
Incorporation requires that there be any proportionate or other fixed
relationship between the amount of dividends declared with respect to such
different classes of common stock. The GM Board reserves the right to
reconsider from time to time its policies and practices regarding dividends on
GM common stock and to increase or decrease the dividends paid on GM common
stock on the basis of GM's consolidated financial position, including
liquidity, and other factors, including, with regard to GM Class H Common
Stock, the earnings and consolidated financial position of Hughes Electronics.
There is no fixed relationship, on a per share or aggregate basis, between the
cash dividends that may be paid by General Motors to GM Class H Common
Stockholders and cash dividends or other amounts that may be paid by Hughes
Electronics to General Motors. However, it has been the practice of the Hughes
Electronics Board to pay quarterly cash dividends to General Motors in an
aggregate amount equal to the quarterly dividend per share paid by General
Motors on GM Class H Common Stock multiplied by the denominator of the fraction
used to determine the Available Separate Consolidated Net Income of Hughes
Electronics. In addition, under the current dividend policies and practices of
the GM Board, dividends on GM Class H Common Stock are not materially affected
by developments involving the performance (operations, liquidity or financial
condition) of General Motors (excluding Hughes Electronics).
VOTING RIGHTS
Under the GM Certificate of Incorporation and subject to adjustment as
described below under "--Subdivision or Combination," GM Class H Common
Stockholders are entitled to cast one-half of a vote per share on all matters
submitted to GM's common stockholders for a vote (including the election and
removal of directors), while GM $1 2/3 Common Stockholders may cast one vote
per share. Holders of both classes of GM common stock vote together as a single
class on all matters, except that separate class votes are required for certain
amendments to the GM Certificate of Incorporation, including any amendment
which adversely affects the rights, powers or privileges of any class, which
must also be approved by the holders of that class voting separately as a
class.
LIQUIDATION RIGHTS
In the event of the liquidation, dissolution or winding up of the business of
General Motors, whether voluntary or involuntary, the GM Certificate of
Incorporation provides that, after the holders of GM Preferred Stock (if any)
and GM Preference Stock receive the full preferential amounts to which they are
entitled, GM Class H Common Stockholders and GM $1 2/3 Common Stockholders will
receive the assets remaining for distribution to the GM's stockholders on a per
share basis in proportion to the respective per share liquidation units of such
classes. Subject to adjustment as described below under "--Subdivision or
Combination," each share of GM Class H Common Stock and GM $1 2/3 Common Stock
would be entitled to liquidation units of approximately one-half and one,
respectively. GM Class H Common Stockholders have no direct rights in the
equity or assets of Hughes Electronics, but rather have rights in the equity
and assets of General Motors (which includes 100% of the stock of Hughes
Electronics).
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RECAPITALIZATION
Under the GM Certificate of Incorporation, all outstanding shares of GM Class
H Common Stock may be recapitalized as shares of GM $1 2/3 Common Stock (1) at
any time in the sole discretion of the GM Board (provided that, during each of
the five full fiscal years preceding the exchange, the aggregate cash dividends
on the GM Class H Common Stock have been no less than the product of the Payout
Ratio (as defined below) for such year multiplied by the Available Separate
Consolidated Net Income of Hughes Electronics for the prior fiscal year) or (2)
automatically, if at any time General Motors disposes of substantially all of
the business of Hughes Aircraft (or its successors) or of substantially all of
the other business of Hughes Electronics to a person, entity or group of which
General Motors is not a majority owner. In the event of such a
recapitalization, each GM Class H Common Stockholder would receive shares of GM
$1 2/3 Common Stock having a market value, as of a specified date provided for
in the GM Certificate of Incorporation, equal to 120% of the market value of
such holder's GM Class H Common Stock on such date. Based on the dividends paid
on GM Class H Common Stock in 1992 through 1996, the conditions described in
clause (1) above would be satisfied during 1997.
No fractional shares of GM $1 2/3 Common Stock would be issued in any such
exchange. In lieu of fractional shares, GM Class H Common Stockholders would
receive cash equal to the product of (A) the fraction of a share of GM $1 2/3
Common Stock to which the holder would otherwise have been entitled multiplied
by (B) the average market price per share of GM $1 2/3 Common Stock on such
valuation date.
The "Payout Ratio" equals the lesser of (A) 0.25 or (B) the quotient of (x)
the total cash dividends paid on the GM $1 2/3 Common Stock in respect of such
fiscal year, divided by (y) the consolidated net income of General Motors and
its subsidiaries for each such fiscal year minus the Available Separate
Consolidated Net Income of EDS (as defined in Article Fourth of the GM
Certificate of Incorporation) for any portion of such fiscal year during which
EDS was a direct or indirect wholly owned subsidiary of General Motors and the
Available Separate Consolidated Net Income of Hughes Electronics for such
fiscal year.
SUBDIVISION OR COMBINATION
If General Motors subdivides (by stock split or otherwise) or combines (by
reverse stock split or otherwise) the outstanding shares of the GM $1 2/3
Common Stock or the GM Class H Common Stock, the voting and liquidation rights
of shares of GM Class H Common Stock relative to GM $1 2/3 Common Stock will be
appropriately adjusted. In the event of the issuance of shares of GM Class H
Common Stock as a dividend on shares of GM $1 2/3 Common Stock, the liquidation
rights of the applicable class of common stock would be adjusted so that the
relative aggregate liquidation rights of each stockholder would not be changed
as a result of such dividend.
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NEW GM CLASS H COMMON STOCK
INTRODUCTION
Upon the consummation of the Hughes Transactions, each outstanding share of
GM Class H Common Stock will be recapitalized and converted into one share of
New GM Class H Common Stock and will be entitled to receive a distribution of
Class A Common Stock in accordance with the Distribution Ratio. Persons who
currently hold GM Class H Common Stock will be holders of New GM Class H Common
Stock and Class A Common Stock. Reference is also made to the more detailed
provisions of, and such descriptions are qualified in their entirety by
reference to, Article Fourth of the GM Certificate of Incorporation, as
proposed to be amended in the GM Spin-Off Merger, a copy of which is attached
as Exhibit A to Appendix A to this document. WE URGE YOU TO READ APPENDIX A
(INCLUDING EXHIBIT A THERETO) CAREFULLY.
New GM Class H Common Stockholders will have no direct rights in the equity
or assets of New Hughes Electronics, but rather will have rights in the equity
and assets of General Motors (which will include 100% of the stock of New
Hughes Electronics). New GM Class H Common Stock has been designed to provide
holders with financial returns based on the performance of New Hughes
Electronics. The intent of this design objective has been achieved through (1)
allocations under the GM Certificate of Incorporation, as proposed to be
amended in the GM Spin-Off Merger, of the earnings of General Motors
attributable to New Hughes Electronics between amounts available for the
payment of dividends on New GM Class H Common Stock and amounts available for
the payment of dividends on the GM $1 2/3 Common Stock and (2) the dividend
policies and practices of the GM Board with respect to the New GM Class H
Common Stock, including the policy statement of the GM Board regarding certain
capital stock matters, all as more fully described elsewhere in this document.
General Motors, not New Hughes Electronics, will be the issuer of New GM Class
H Common Stock. The GM Board will be free at any time to change dividend
policies and practices with respect to New GM Class H Common Stock or the GM $1
2/3 Common Stock. See "Risk Factors Relating to GM's Dual-Class Common Stock
Capital Structure--GM Board Policies and Practices Are Subject to Change" in
Chapter 2.
GM CERTIFICATE OF INCORPORATION PROVISIONS REGARDING DIVIDENDS
Under the GM Certificate of Incorporation, as proposed to be amended in the
GM Spin-Off Merger, dividends may be paid on GM's two classes of common stock
to the extent of the assets of General Motors legally available for the payment
of dividends, subject to the rights of the holders of GM Preferred Stock (if
any) and GM Preference Stock, and subject to the allocation of the legally
available amount between GM's two classes of common stock, as described below.
The total amount legally available for the payment of dividends by a Delaware
corporation is generally the excess of the fair market value of the
corporation's net assets over amounts constituting the corporation's capital;
this excess amount is referred to as "surplus." Dividends may also be paid, if
there is no surplus, to the extent of the net profits for the then current
and/or the preceding fiscal year.
The GM Certificate of Incorporation, as proposed to be amended, will allocate
the total amount legally available for the payment of dividends on GM's common
stock between GM's two classes of common stock as follows:
. Dividends may be paid on the GM $1 2/3 Common Stock to the extent of the
assets of General Motors legally available for the payment of dividends
reduced by the sum of (1) the amount initially attributed by the GM Board
to the New GM Class H Common Stock as described below plus the paid in
surplus attributable to shares of New GM Class H Common Stock issued after
the closing of the Hughes Transactions, plus (2) the portion of the net
earnings of General Motors after the closing of the Hughes Transactions
attributed to the New GM Class H Common Stock in accordance with the GM
Certificate of Incorporation, which is based on the Available Separate
Consolidated Net Income of New Hughes
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Electronics, as described below, plus or minus (3) the amount of any
adjustment made by the GM Board as described below.
. Dividends may be paid on the New GM Class H Common Stock to the extent of
the assets of General Motors legally available for the payment of dividends
reduced by the sum of (1) the amount initially attributed by the GM Board
to the GM $1 2/3 Common Stock as described below plus the paid in surplus
attributable to shares of GM $1 2/3 Common Stock issued after the closing
of the Hughes Transactions, plus (2) all of the earnings of General Motors
after the closing of the Hughes Transactions other than the earnings
attributed to the New GM Class H Common Stock in accordance with the GM
Certificate of Incorporation, which is based on the Available Separate
Consolidated Net Income of New Hughes Electronics, as described below, plus
or minus (3) the amount of any adjustment that may be made by the GM Board
as described below.
. The GM Board has determined that the amount available for the payment of
dividends on the outstanding shares of GM $1 2/3 Common Stock as of the
closing of the Hughes Transactions will be the cumulative amount available
for dividends on such shares as of immediately before the closing, reduced
by a pro rata portion (approximately 74.7% based on the current Class H
Fraction) of the net reduction in GM's total stockholders' equity resulting
from the Hughes Transactions. The impact of this reduction is described
below on a pro forma basis as of September 30, 1997.
. The GM Board has determined that the amount initially available for the
payment of dividends on the shares of New GM Class H Common Stock to be
issued in the Hughes Transactions will be the cumulative amount available
for dividends on shares of GM Class H Common Stock as of immediately before
the closing of the Hughes Transactions, reduced by a pro rata portion
(approximately 25.3% based on the current Class H Fraction) of the net
reduction in GM's total stockholders' equity resulting from the Hughes
Transactions. The impact of this reduction is described below on a pro
forma basis as of September 30, 1997.
The amount available for dividends on each class of GM common stock will be
reduced from time to time by dividends paid on that class and will be adjusted
from time to time for changes to the amount of surplus attributed to the class
resulting from the repurchase or issuance of shares of that class. In addition,
the amount of surplus, and therefore the amount available for dividends on each
class, may be adjusted as provided by Delaware law for any reason deemed
appropriate by the GM Board. Delaware law permits the board of directors of a
corporation to adjust the total amount legally available for the payment of
dividends to reflect a re-valuation of the assets and liabilities of the
corporation in the exercise of its business judgment.
Subject to the foregoing, the declaration and payment of dividends on each
class of GM common stock, and the amount thereof, shall at all times be solely
in the discretion of the GM Board. The GM Board may, in its sole discretion,
declare dividends payable exclusively to the holders of GM $1 2/3 Common Stock,
exclusively to the holders of GM Class H Common Stock or to the holders of both
such classes in equal or unequal amounts, notwithstanding the respective
amounts of surplus available for dividends to each class, the respective voting
and liquidation rights of each class, the amount of prior dividends declared on
each class or any other factor.
As of September 30, 1997, based on the stockholders' equity of General Motors
reflected in its consolidated balance sheet at such date prepared in accordance
with generally accepted accounting principles and subject to the authority of
the GM Board to make adjustments as described above, the cumulative amount
available for payment of dividends on GM common stock was approximately $26.0
billion, of which approximately $22.5 billion was available for dividends on
the GM $1 2/3 Common Stock and approximately $3.5 billion was available for
dividends on the GM Class H Common Stock. Based on the Recent Raytheon Stock
Price, the estimated net effect of the Hughes Transactions on total
stockholders' equity would be a reduction of approximately $1.1 billion. The GM
Board has determined that it would be appropriate in the context of the Hughes
Transactions to allocate the net reduction in total stockholders' equity
between the two classes of GM common stock following the completion of the
Hughes Transactions in proportion to the
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derivative interests of the two existing classes of common stock in the
earnings of Hughes Electronics, which are reflected in the Class H Fraction.
Accordingly, the GM Board determined to allocate approximately 74.7% of the
net reduction to the GM $1 2/3 Common Stock, resulting in a pro forma amount
available for dividends on such stock of approximately $21.7 billion as of
September 30, 1997. Similarly, the GM Board has set the initial amount
available for dividends on the New GM Class H Common Stock to be issued upon
the closing of the Hughes Transactions as the amount available for the payment
of dividends on the GM Class H Common Stock immediately before the closing of
the Hughes Transactions less approximately 25.3% of the net reduction in total
stockholders' equity resulting from the Hughes Transactions, resulting in an
initial amount available for dividends on the New GM Class H Common Stock that
would have been approximately $3.3 billion on a pro forma basis as of
September 30, 1997.
As described above, under the GM Certificate of Incorporation, as proposed
to be amended in the GM Spin-Off Merger, the amortization of intangible assets
arising from the purchase accounting adjustments related to GM's acquisition
of Hughes Aircraft applicable to the telecommunications and space business of
Hughes Electronics will be charged against earnings attributable to GM $1 2/3
Common Stock and not against earnings attributable to New GM Class H Common
Stock. For additional information regarding these purchase accounting
adjustments, see the Hughes Telecom financial information set forth in
Appendix E to this document.
For purposes of determining the approximate earnings per share attributable
to New GM Class H Common Stock for financial reporting purposes, an investor
will be able to divide the quarterly earnings allocated to New GM Class H
Common Stock (the Available Separate Consolidated Net Income of New Hughes
Electronics) by the weighted average number of shares of New GM Class H Common
Stock outstanding during such quarter, which is the numerator of the fraction
described above. You will be able to obtain approximately the same
mathematical result by dividing the quarterly earnings used for computation of
the Available Separate Consolidated Net Income of New Hughes Electronics
(i.e., net income) by the denominator of the fraction described above.
DIVIDEND POLICY
Under Delaware law and the GM Certificate of Incorporation, as proposed to
be amended in the GM Spin-Off Merger, the GM Board will not be required to
declare dividends on any class of GM common stock. If and to the extent the GM
Board chooses to declare dividends on either or both of the classes of its
common stock, neither Delaware law nor the GM Certificate of Incorporation, as
proposed to be amended in the GM Spin-Off Merger, will require that there be
any proportionate or other fixed relationship between the amount of dividends
declared with respect to such different classes of common stock. The GM Board
reserves the right to reconsider from time to time its policies and practices
regarding dividends on GM common stock and to increase or decrease the
dividends paid on GM common stock on the basis of GM's consolidated financial
position, including liquidity, and other factors, including, with regard to
New GM Class H Common Stock, the earnings and consolidated financial position
of New Hughes Electronics. Information concerning General Motors and its
consolidated financial performance, including Management's Discussion and
Analysis, may be found in the documents incorporated into this document by
reference, including the GM 1996 Form 10-K.
In connection with its determination of the terms of the New GM Class H
Common Stock to be issued in the Hughes Transactions, the GM Board reviewed
its policies and practices with respect to GM's dual-class common stock
capital structure and, as described above, subject to consummation of the
Hughes Transactions, adopted a policy statement which will provide, among
other things, that the quarterly dividend policy of the GM Board with respect
to the New GM Class H Common Stock will be to declare and pay quarterly
dividends on the New GM Class H Common Stock in an amount equal to the product
of (1) the aggregate amount of each quarterly dividend received by General
Motors as a stockholder of New Hughes Electronics, if any, multiplied by (2)
the fraction used to determine the Available Separate Consolidated Net Income
of New
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Hughes Electronics at the time such dividend was declared by New Hughes
Electronics. The policy statement
further provides that GM's payment of a quarterly dividend on the New GM Class
H Common Stock will be made as soon as practicable after receipt of the
corresponding dividend payment from New Hughes Electronics. As set forth
therein, this policy statement may at any time and from time to time be
modified or rescinded by the GM Board. The GM Board has no present intention to
modify or rescind this policy statement. See "Considerations Relating to GM's
Dual-Class Common Stock Capital Structure--New GM Board Policy Statement"
above.
Following the completion of the Hughes Transactions, future earnings (if any)
from the telecommunications and space business of New Hughes Electronics will
be retained for the development of that business. As a result, it is not
currently expected that dividends will initially be paid by New Hughes
Electronics to General Motors. Accordingly, the GM Board does not currently
intend to pay initially any cash dividends on New GM Class H Common Stock.
VOTING RIGHTS
New GM Class H Common Stockholders will be entitled to a fixed number of
votes per share on all matters submitted to GM's common stockholders for a vote
and, with specified exceptions, as described below, will vote together as a
single class with the GM $1 2/3 Common Stockholders on all matters (including
the election and removal of directors), based on their respective voting rights
as set forth in the GM Certificate of Incorporation, as proposed to be amended
in the GM Spin-Off Merger. The number of votes to which each share of New GM
Class H Common Stock will be entitled to the greater of (1) one-half or (2) a
number (rounded to the nearest one-tenth) which reflects the relative market
value of New GM Class H Common Stock compared to the market value of GM $1 2/3
Common Stock, to be determined based on the average trading prices of such
stocks during the 20-trading day period starting on the eleventh trading day
following the consummation of the Hughes Transactions. Each share of GM $1 2/3
Common Stock will continue to be entitled to one vote after the Hughes
Transactions. The number of votes to which each share of GM Class H Common
Stock and GM $1 2/3 Common Stock will be entitled will be subject to adjustment
as described below under
"--Subdivision or Combination." New GM Class H Common Stock will be entitled to
vote separately as a class only on (1) any amendment to the GM Certificate of
Incorporation which adversely affects the rights, powers or privileges of the
New GM Class H Common Stock and (2) any increase in the number of authorized
shares of New GM Class H Common Stock.
LIQUIDATION RIGHTS
In the event of the liquidation, dissolution or winding up of the business of
General Motors, whether voluntary or involuntary, the GM Certificate of
Incorporation, as proposed to be amended in the GM Spin-Off Merger, provides
that, after the holders of GM Preferred Stock (if any) and GM Preference Stock
receive the full preferential amounts to which they are entitled, New GM Class
H Common Stockholders and GM $1 2/3 Common Stockholders will receive the assets
remaining for distribution to GM's stockholders on a per share basis in
proportion to the respective per share liquidation units of such classes.
Subject to adjustment as described below under "--Subdivision or Combination,"
each share of New GM Class H Common Stock will be entitled to liquidation units
equal to the number of votes to which each such share is entitled, determined
as described above under "--Voting Rights," and each share of GM $1 2/3 Common
Stock will be entitled to one liquidation unit. New GM Class H Common
Stockholders will have no direct rights in the equity or assets of New Hughes
Electronics, but rather will have rights in the equity and assets of General
Motors (which will include 100% of the stock of New Hughes Electronics).
RECAPITALIZATION AND CERTAIN OTHER TRANSACTIONS
Under the GM Certificate of Incorporation, as proposed to be amended in the
GM Spin-Off Merger, all outstanding shares of New GM Class H Common Stock may
be recapitalized as shares of GM $1 2/3 Common
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Stock (1) at any time after December 31, 2002 in the sole discretion of the GM
Board or (2) automatically, if at
any time General Motors, in one transaction or a series of related
transactions, disposes of substantially all of the business of New Hughes
Electronics (or its successors) to a person, entity or group of which General
Motors is not a majority owner. For purposes of this recapitalization provision
of the GM Certificate of Incorporation, "substantially all of the business" of
New Hughes Electronics will mean at least 80% of the business of New Hughes
Electronics, based on the fair market value of the assets, both tangible and
intangible, of New Hughes Electronics as of the time of the proposed
transaction. No automatic recapitalization will occur upon a disposition in
connection with the dissolution, liquidation and winding up of General Motors
and the distribution of the net assets of General Motors to GM's common
stockholders. In the event of any recapitalization, each New GM Class H Common
Stockholder would receive shares of GM $1 2/3 Common Stock having a market
value, as of a specified date provided for in the GM Certificate of
Incorporation, as proposed to be amended in the GM Spin-Off Merger, equal to
120% of the market value of such holder's New GM Class H Common Stock on such
date.
No fractional shares of GM $1 2/3 Common Stock would be issued in any such
exchange. In lieu of fractional shares, a New GM Class H Common Stockholder
would receive cash equal to the product of (A) the fraction of a share of GM $1
2/3 Common Stock to which the holder would otherwise have been entitled
multiplied by (B) the average market price per share of GM $1 2/3 Common Stock
on such valuation date.
As described above, the GM Board has adopted, subject to consummation of the
Hughes Transactions, a policy statement which will provide, among other things,
that, subject to certain exceptions, in the event that New Hughes Electronics
transfers any material assets to General Motors, the GM Board shall declare and
pay a dividend or make a distribution so that there will be distributed to New
GM Class H Common Stockholders a portion of such assets (or cash or other
assets having an equivalent fair value) that is not less than their
proportionate tracking stock interest in New Hughes Electronics (determined
accordingly to the fraction used to calculate the Available Separate
Consolidated Net Income of New Hughes Electronics) at the time of such
transfer. The policy statement further provides that, subject to certain
exceptions, in the event that New Hughes Electronics transfers any such
material assets to GM's stockholders, the portion of such assets transferred to
the New GM Class H Common Stockholders will not be less than their
proportionate tracking stock interest in New Hughes Electronics (determined as
described above) at the time of such transfer. The exceptions to the foregoing
provisions include an exception for any transfer for which Hughes Electronics
shall have received fair compensation. However, the policy statement further
provides that General Motors will not acquire in one transaction or a series of
transactions a significant portion (more than 33%) of the business of New
Hughes Electronics for compensation without receiving the consent of the
holders of a majority of the outstanding shares of New GM Class H Common Stock,
voting as a separate class, and GM $1 2/3 Common Stock, voting as a separate
class.
SUBDIVISION OR COMBINATION
If General Motors subdivides (by stock split or otherwise) or combines (by
reverse stock split or otherwise) the outstanding shares of the GM $1 2/3
Common Stock or the New GM Class H Common Stock, the voting and liquidation
rights of shares of New GM Class H Common Stock relative to GM $1 2/3 Common
Stock will be appropriately adjusted. In the event of the issuance of shares of
New GM Class H Common Stock as a dividend on shares of GM $1 2/3 Common Stock,
the liquidation rights of the applicable class of common stock would be
adjusted so that the relative aggregate liquidation rights of each stockholder
would not be changed as a result of such dividend.
STOCK EXCHANGE LISTING
Application has been made to list the New GM Class H Common Stock on the NYSE
and such application has been granted subject to notice of issuance. It is
expected that New GM Class H Common Stock will be listed on the NYSE under the
symbol "GMH."
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. will serve as the Transfer Agent and Registrar for the New
GM Class H Common Stock.
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NEW RAYTHEON CAPITAL STOCK
INTRODUCTION
Under the New Raytheon Certificate of Incorporation, the authorized capital
stock of New Raytheon will consist of Class A Common Stock, par value $0.01 per
share, Class B Common Stock, par value $0.01 per share, and New Raytheon
Preferred Stock, par value $0.01 per share.
Holders of both classes of GM common stock will receive Class A Common Stock
in the GM Spin-Off Merger. Upon the consummation of the Raytheon Merger
(pursuant to which the then outstanding Raytheon Common Stock will be converted
on a share-for-share basis into Class B Common Stock of New Raytheon), Class A
Common Stock will be one of two classes of common stock of New Raytheon,
neither of which will be a "tracking stock." There are no current plans for the
New Raytheon Board to issue New Raytheon Preferred Stock.
THE FOLLOWING DESCRIPTIONS OF NEW RAYTHEON CAPITAL STOCK (1) ARE SUMMARIES
AND DO NOT PURPORT TO BE COMPLETE AND (2) GIVE EFFECT TO THE CONSUMMATION OF
THE HUGHES DEFENSE SPIN-OFF AND THE RAYTHEON MERGER. SEE "DESCRIPTION OF THE
HUGHES TRANSACTIONS" AND "DESCRIPTION OF THE RAYTHEON MERGER" IN CHAPTER 3 AND
"COMPARISON OF GM CLASS H COMMON STOCK, NEW GM CLASS H COMMON STOCK AND CLASS A
COMMON STOCK" ABOVE. REFERENCE IS ALSO MADE TO THE MORE DETAILED PROVISIONS OF,
AND SUCH DESCRIPTIONS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, THE
FORMS OF THE NEW RAYTHEON CERTIFICATE OF INCORPORATION AND THE NEW RAYTHEON BY-
LAWS, COPIES OF WHICH ARE FILED WITH THE SEC AS EXHIBITS TO A REGISTRATION
STATEMENT OF WHICH THIS DOCUMENT IS A PART.
COMMON STOCK
With respect to the election or removal of directors, (1) Class A Common
Stockholders, representing approximately 30% of the equity ownership of New
Raytheon as of immediately after the Raytheon Merger Effective Time, will be
entitled to such number of votes for each share of Class A Common Stock as
shall be necessary to entitle the holders of all shares of Class A Common Stock
to vote, in the aggregate, 80.1% of the total voting power of all holders of
New Raytheon Common Stock and (2) Class B Common Stockholders, representing
approximately 70% of the equity ownership of New Raytheon as of immediately
after the Raytheon Merger Effective Time, will be entitled to one vote for each
share of Class B Common Stock, which votes shall represent, in the aggregate,
19.9% of the total voting power of all holders of New Raytheon Common Stock.
The New Raytheon Board will determine the number of votes for each share of
Class A Common Stock outstanding promptly following the fixing of a record date
for each annual or special meeting of stockholders at which directors are to be
elected or a vote with respect to removal of directors is to be taken. A
plurality of votes cast shall elect directors. With respect to all stockholder
matters other than the election and removal of directors, the Class A Common
Stockholders and the Class B Common Stockholders will each be entitled to a
single vote per share and the approval of any such matter will require the
approval of both classes of New Raytheon Common Stock, each voting as a
separate class. Except as may be provided in connection with any class or
series of New Raytheon Preferred Stock issued from time to time or as may
otherwise be required by law or the New Raytheon Certificate of Incorporation,
the New Raytheon Common Stock will be the only capital stock of New Raytheon
entitled to vote in the election and removal of directors and other matters
presented to the stockholders of New Raytheon from time to time. The New
Raytheon Common Stock will not have cumulative voting rights.
Under Delaware law and the New Raytheon Certificate of Incorporation, the New
Raytheon Board will not be required to declare dividends on either class of New
Raytheon Common Stock. The New Raytheon Board reserves the right to reconsider
from time to time its policies and practices regarding dividends on New
Raytheon Common Stock and to increase or decrease the dividends paid on New
Raytheon Common Stock on the basis of New Raytheon's consolidated financial
position, including liquidity, and other factors. Subject to the rights of
holders of New Raytheon Preferred Stock (if any) and applicable law, the Class
A Common Stockholders and the Class B Common Stockholders will be entitled to
receive such dividends as may be
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lawfully declared from time to time by the New Raytheon Board. The Class A
Common Stockholders and the Class B Common Stockholders will be entitled to
receive the same amount per share of any such dividends, provided that the New
Raytheon Board may declare a dividend or distribution of shares of Class A
Common Stock to Class A Common Stockholders and shares of Class B Common Stock
to Class B Common Stockholders so long as, immediately following such dividend
or other distribution, the number of shares of Class A Common Stock and Class B
Common Stock then outstanding bears the same relationship to each other as
immediately prior to such dividend or other distribution. Raytheon's current
dividend policy is to pay a quarterly dividend of $0.20 per share on Raytheon
Common Stock. Raytheon does not expect to change its policy prior to the
Raytheon Merger. It is currently expected that New Raytheon's dividend policy
with respect to the Class A Common Stock and the Class B Common Stock after the
Raytheon Merger will not differ from Raytheon's current dividend policy with
respect to Raytheon Common Stock.
In the case of any split, subdivision, combination or reclassification of
Class A Common Stock or Class B Common Stock, the shares of Class A Common
Stock or the Class B Common Stock, as the case may be, shall also be split,
subdivided, combined or reclassified so that the number of shares of Class A
Common Stock and Class B Common Stock outstanding immediately following such
split, subdivision, combination or reclassification shall bear the same
relationship to each other as immediately prior to such split, subdivision,
combination or reclassification.
Upon any liquidation, dissolution or winding up of New Raytheon, whether
voluntary or involuntary, the Class A Common Stockholders and the Class B
Common Stockholders will be entitled to receive such assets as are available
for distribution to stockholders in proportion to the number of shares held by
such holders, respectively, without regard to class, after there shall have
been paid or set aside for payment the full amounts necessary to satisfy any
creditors and any preferential or participating rights to which the holders of
each outstanding series of New Raytheon Preferred Stock (if any) are entitled
by the express terms of such series.
New Raytheon may not directly or indirectly redeem, purchase, repurchase or
otherwise acquire for consideration any shares of New Raytheon Common Stock
unless such action is (1) effected ratably in accordance with the number of
outstanding shares of Class A Common Stock and Class B Common Stock, (2) for
consideration of the same type and amount as to shares of each class and (3)
not in any other way prejudicial to the rights of the holders of one class of
New Raytheon Common Stock in favor of the other class of New Raytheon Common
Stock. In the case of an offer to purchase shares of New Raytheon Common Stock
by New Raytheon made to all holders of New Raytheon Common Stock, New Raytheon
will purchase shares of New Raytheon Common Stock ratably in accordance with
the number of shares of each class of New Raytheon Common Stock tendered
thereunder.
Under the New Raytheon Certificate of Incorporation, in the event of any
corporate merger, consolidation, purchase or acquisition of property or stock,
or other reorganization in which any consideration is to be received by the
Class A Common Stockholders or the Class B Common Stockholders, the holders of
each class must receive the same type and amount of consideration on a per
share basis.
The outstanding shares of New Raytheon Common Stock will be fully paid and
nonassessable. The New Raytheon Common Stock will not have any preemptive,
subscription or conversion rights. Additional shares of authorized New Raytheon
Common Stock may be issued, as authorized by the New Raytheon Board from time
to time, without stockholder approval, except as may be required by applicable
stock exchange requirements.
Except as indicated above, the rights of the Class A Common Stockholders and
the Class B Common Stockholders are in all respects and for all purposes and in
all circumstances identical, and New Raytheon will not in any other manner
directly or indirectly take any other action or in any other fashion agree to,
facilitate, condone or support any transaction in which the Class A Common
Stockholders and the Class B Common Stockholders are subject to discriminatory
or unequal treatment.
The dual-class capitalization of New Raytheon is designed, among other
things, to allow the Hughes Defense Spin-Off and the Hughes Telecom Spin-Off to
each be treated as a tax-free distribution for U.S.
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federal income tax purposes. However, the dual-class capitalization may have
certain adverse consequences. In particular, while we expect the shares of both
Class A Common Stock and Class B Common Stock to trade on the NYSE, the listing
policies of the NYSE with respect to corporations with dual-class
capitalizations may change in the future, and there can be no assurance that
such policies will allow for the continued listing of the lower vote Class B
Common Stock.
PREFERRED STOCK
The New Raytheon Board is empowered, without approval of its stockholders, to
cause shares of New Raytheon Preferred Stock to be issued in one or more
series, with the numbers of shares of each series and the powers, preferences,
rights and limitations of each series to be determined by it. Among the
specific matters that may be determined by the New Raytheon Board are the rate
of dividends (if any), the terms of redemption (if any), the obligation to
purchase or redeem pursuant to a sinking fund or otherwise, and the terms
thereof (if any), the amount payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of New
Raytheon, rights and terms of conversion or exchange (if any) and voting rights
(if any). The Series A Preferred Stock of New Raytheon described under "--New
Raytheon Rights Agreement" below is a series of New Raytheon Preferred Stock
that has been authorized by the Hughes Defense Board.
Although the New Raytheon Board currently has no plans to issue New Raytheon
Preferred Stock, the issuance of shares of New Raytheon Preferred Stock, or the
issuance of rights to purchase such shares, could be used to discourage an
unsolicited acquisition proposal. For example, a business combination could be
impeded by the issuance of a series of New Raytheon Preferred Stock containing
class voting rights that would enable the holder or holders of such series to
block any such transaction. Alternatively, a business combination could be
facilitated by the issuance of a series of New Raytheon Preferred Stock having
sufficient voting rights to provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of New
Raytheon Preferred Stock could adversely affect the voting power of the holders
of the New Raytheon Common Stock. Although the New Raytheon Board is required
to make any determination to issue any such stock based on its judgment as to
the best interests of the stockholders of New Raytheon, the New Raytheon Board
could act in a manner that would discourage an acquisition attempt or other
transaction that some, or a majority, of the stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over prevailing market prices of such stock. The New Raytheon Board
does not at present intend to seek stockholder approval prior to any issuance
of currently authorized stock, unless otherwise required by law or applicable
stock exchange requirements. The New Raytheon Board's ability to issue New
Raytheon Preferred Stock, however, is limited by certain provisions of the
Spin-Off Separation Agreement for a specified period of time after the GM Spin-
Off Merger Effective Time. See "Separation and Transition Arrangements--Summary
of Spin-Off Separation Agreement--Preservation of the Tax-Free Status of the
Hughes Transactions and the Raytheon Merger" in Chapter 3.
NEW RAYTHEON RIGHTS AGREEMENT
In connection with the Raytheon Merger, the Hughes Defense Board intends to
adopt the New Raytheon Rights Agreement, effective as of immediately prior to
the Raytheon Merger Effective Time. Immediately prior to the Raytheon Merger
Effective Time, the Hughes Defense Board will declare a dividend of one New
Raytheon Right to be paid at the GM Spin-Off Merger Effective Time in the case
of Class A Common Stock and at the Raytheon Merger Effective Time in respect of
each share of the Class B Common Stock to the holder of record thereof as of
such effective time. Thus, each share of Class A Common Stock distributed to
GM's common stockholders in the Hughes Defense Spin-Off will have a New
Raytheon Right attached. The following description of the New Raytheon Rights
and the New Raytheon Rights Agreement (1) is a summary and does not purport to
be complete and (2) gives effect to the consummation of the Hughes Transactions
and the Raytheon Merger.
Each New Raytheon Right will entitle the registered holder to purchase from
New Raytheon one one-hundredth of a share of New Raytheon Junior Preferred
Stock at a price per one one-hundredth of a share to be
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determined by the Hughes Defense Board prior to the Raytheon Merger Effective
Time (the "Exercise Price"), subject to adjustment. The terms of the New
Raytheon Rights will be set forth in the New Raytheon Rights Agreement.
The New Raytheon Rights (1) will not be exercisable until the New Raytheon
Rights Effective Date (as defined below) and (2) will expire on the 10th
anniversary of the Raytheon Merger Effective Date (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the New Raytheon
Rights are earlier redeemed or exchanged by New Raytheon, in each case, as
described below.
The Exercise Price payable, and the number of shares of Series A Junior
Participating Preferred Stock, $0.01 par value of New Raytheon (the "New
Raytheon Junior Preferred Stock") or other securities or property issuable,
upon exercise of the New Raytheon Rights are subject to adjustment from time to
time to prevent dilution under the following circumstances:
. in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of New Raytheon Junior Preferred Stock;
. upon the grant to holders of the shares of New Raytheon Junior Preferred
Stock of certain rights or warrants to subscribe for or purchase shares of
New Raytheon Junior Preferred Stock at a price, or securities convertible
into shares of New Raytheon Junior Preferred Stock with a conversion price,
less than the then-current market price of the shares of New Raytheon
Junior Preferred Stock; or
. upon the distribution to holders of the shares of New Raytheon Junior
Preferred Stock of evidences of indebtedness or assets (other than certain
dividend payments) or of subscription rights or warrants (other than those
referred to above).
The number of outstanding New Raytheon Rights and the number of one one-
hundredths of a share of New Raytheon Junior Preferred Stock issuable upon
exercise of each New Raytheon Right are also subject to adjustment in the event
of a stock split of New Raytheon Common Stock or a stock dividend on New
Raytheon Common Stock payable in New Raytheon Common Stock or subdivisions,
consolidations or combinations of New Raytheon Common Stock occurring, in any
such case, prior to the New Raytheon Rights Effective Date.
The New Raytheon Rights received on the Raytheon Merger Effective Date will
be evidenced by the certificates representing shares of New Raytheon Common
Stock which will be on deposit with State Street Bank and Trust Company as
Transfer Agent and Registrar for New Raytheon, until the New Raytheon Rights
Effective Date. Ownership of New Raytheon Rights will be reflected on the
account statements received in connection with the book-entry ownership of
shares of New Raytheon Common Stock, including the Class A Common Stock
distributed in the Hughes Defense Spin-Off. The "New Raytheon Rights Effective
Date" is a date which is the earlier to occur of (1) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of 15% or more of (a) the
outstanding shares of Class A Common Stock, (b) the outstanding shares of Class
B Common Stock, or (c) the aggregate voting power in the election of directors
(each, a "Triggering Holding") or (2) 10 business days (or a later date
determined by the New Raytheon Board prior to any person or group becoming an
Acquiring Person) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of a Triggering
Holding.
The New Raytheon Rights Agreement will provide that, until the New Raytheon
Rights Effective Date (or earlier redemption or expiration of the New Raytheon
Rights):
. the New Raytheon Rights will be transferred with and only with the shares
of New Raytheon Common Stock;
. certificates representing shares of New Raytheon Common Stock will contain
a notation incorporating the terms of the New Raytheon Rights by reference;
and
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. the surrender for transfer of any certificates representing shares of New
Raytheon Common Stock will also constitute the transfer of the New Raytheon
Rights associated with the shares of New Raytheon Common Stock represented
by such certificate.
As soon as practicable following the New Raytheon Rights Effective Date,
separate certificates evidencing the New Raytheon Rights ("New Raytheon Rights
Certificates") will be mailed to holders of record of the shares of New
Raytheon Common Stock as of the close of business on the New Raytheon Rights
Effective Date. Such separate New Raytheon Rights Certificates alone will then
evidence the New Raytheon Rights.
Flip-in Right. In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person, each holder of a New Raytheon
Right, other than New Raytheon Rights beneficially owned by the Acquiring
Person (which rights become void upon acquisition of a Triggering Holding),
will thereafter have the right to receive, upon exercise thereof at the then-
current Exercise Price, that number of shares of Class B Common Stock having a
market value of two times the Exercise Price of the New Raytheon Right (such
right being referred to as a "Flip-in Right"). Thus, if Class B Common Stock at
the time the Flip-in Right became exercisable were trading at $30 per share and
the Exercise Price at such time were $120, each New Raytheon Right would
thereafter be exercisable at $120 for eight shares of Class B Common Stock.
Flip-over Right. In the event that, at any time on or after the date that any
person has become an Acquiring Person, New Raytheon is acquired in a merger or
other business combination transaction or 50% or more of consolidated assets or
earning power are sold, each holder of a New Raytheon Right will thereafter
have the right to receive, upon the exercise thereof at the then-current
Exercise Price, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
Exercise Price of the New Raytheon Right (such right being referred to as a
"Flip-over Right"). Thus, if the acquiring company's common stock at the time
of such transaction were trading at $30 per share and the Exercise Price of the
New Raytheon Rights at such time were $120, each New Raytheon Right would
thereafter be exercisable at $120 for eight shares (i.e., the number of shares
that could be purchased for $240, or two times the exercise price of the
rights) of the acquiring company's common stock.
Exchange. At any time after any person or group of affiliated or associated
persons becomes an Acquiring Person and prior to the acquisition by such person
or group of 50% or more of the outstanding shares of New Raytheon Common Stock,
the New Raytheon Board may exchange the New Raytheon Rights (other than New
Raytheon Rights owned by such person or group which will have become void), in
whole or in part, at an exchange ratio of one share of Class B Common Stock, or
one one-hundredth of a share of New Raytheon Junior Preferred Stock, per New
Raytheon Right (subject to adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of a Triggering Holding of New
Raytheon Common Stock, the New Raytheon Board may redeem the New Raytheon
Rights in whole, but not in part, at a price of $0.01 per New Raytheon Right
(the "Redemption Price"). The redemption of the New Raytheon Rights may be made
effective at such time, on such basis and with such conditions as the New
Raytheon Board, in its sole discretion, may establish. Immediately upon any
redemption of the New Raytheon Rights, the right to exercise the New Raytheon
Rights will terminate and the only right of the holders of New Raytheon Rights
will be to receive the Redemption Price.
Shares of New Raytheon Junior Preferred Stock purchasable upon exercise of
the New Raytheon Rights will not be redeemable. Each share of New Raytheon
Junior Preferred Stock will be entitled to a minimum preferential quarterly
dividend payment of $1.00 per share but will be entitled to an aggregate
dividend equal to 100 times the dividend declared per share of New Raytheon
Common Stock. In the event of liquidation, the holders of the New Raytheon
Junior Preferred Stock will be entitled to a minimum preferential liquidation
payment of $100 per share but will be entitled to an aggregate payment equal to
100 times the payment made per share of New Raytheon Common Stock. Each share
of New Raytheon Junior Preferred Stock will have 100 votes, and will vote on
all matters together with the Class B Common Stockholders. Finally, in the
event of any
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merger, consolidation or other transaction in which New Raytheon Common Stock
is exchanged, each share of New Raytheon Junior Preferred Stock will be
entitled to receive an amount equal to 100 times the amount received per share
of New Raytheon Common Stock. These rights are protected by customary
antidilution provisions.
Because of the nature of the dividend, liquidation and voting rights of New
Raytheon Junior Preferred Stock, the value of the one one-hundredth interest in
a share of New Raytheon Junior Preferred Stock purchasable upon exercise of
each New Raytheon Right should approximate the value of one share of Class B
Common Stock.
With certain exceptions, no adjustment in the Exercise Price will be required
until cumulative adjustments require an adjustment of at least 1% in such
Exercise Price. No fractional shares of New Raytheon Junior Preferred Stock
will be issued (other than fractions which are integral multiples of one one-
hundredth of a share of New Raytheon Junior Preferred Stock, which may, at the
election of the New Raytheon Board, be evidenced by depositary receipts) and in
lieu thereof, an adjustment in cash will be made based on the market price of
the shares of New Raytheon Junior Preferred Stock on the last trading day prior
to the date of exercise.
The terms of the New Raytheon Rights may be amended by the New Raytheon Board
without the consent of the holders of the New Raytheon Rights, including an
amendment to lower (1) the threshold at which a person becomes an Acquiring
Person and (2) the percentage of New Raytheon Common Stock proposed to be
acquired in a tender or exchange offer that would cause the New Raytheon Rights
Effective Date to occur, to not less than the greater of (a) the sum of 0.001%
and the largest percentage of the outstanding New Raytheon Common Stock then
known to New Raytheon to be beneficially owned by any person or group of
affiliated or associated persons and (b) 10%, except that, from and after such
time as any person or group of affiliated or associated persons becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the New Raytheon Rights.
Until a New Raytheon Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of New Raytheon, including, without limitation,
the right to vote or to receive dividends.
The New Raytheon Rights related to the shares of Class A Common Stock
distributed in the Hughes Defense Spin-Off are being registered under the
Exchange Act, with such shares. In the event that the New Raytheon Rights
become exercisable, New Raytheon will register the shares of New Raytheon
Junior Preferred Stock for which the New Raytheon Rights may be exercised in
accordance with applicable law.
The New Raytheon Rights will have certain antitakeover effects. The New
Raytheon Rights will cause substantial dilution to any person or group that
attempts to acquire New Raytheon without the approval of the New Raytheon
Board. As a result, the overall effect of the New Raytheon Rights may be to
render more difficult or discourage any attempt to acquire New Raytheon even if
such acquisition may be favorable to the interests of New Raytheon's
stockholders. Because the New Raytheon Board can redeem the New Raytheon
Rights, the New Raytheon Rights should not interfere with a merger or other
business combination approved by the New Raytheon Board. The New Raytheon
Rights will be distributed to protect New Raytheon's stockholders from coercive
or abusive takeover tactics and to give the New Raytheon Board more negotiating
leverage in dealing with prospective acquirors.
LIMITATION ON NEW RAYTHEON DIRECTORS' LIABILITY
The New Raytheon Certificate of Incorporation provides, as authorized by
Section 102(b)(7) of the Delaware General Corporation Law, that a director of
New Raytheon will not be personally liable to New Raytheon or its stockholders
for monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption or limitation is prohibited under the Delaware General
Corporation Law.
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The inclusion of this provision in the New Raytheon Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefited New Raytheon and its stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Like General Motors, New Raytheon is a Delaware corporation and subject to
Section 203 of the Delaware General Corporation Law. Generally, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the time such stockholder became an interested stockholder, unless (1) prior to
such time, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (2) upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced or (3) at
or subsequent to such time, the business combination is approved by the board
of directors and authorized by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder. A
"business combination" includes (a) any merger or consolidation of the
corporation with the interested stockholder, (b) any sale, lease, exchange or
other disposition, except proportionately as a stockholder of such corporation,
to or with the interested stockholder of assets of the corporation having an
aggregate market value equal to 10% or more of either the aggregate market
value of all the assets of the corporation or the aggregate market value of all
the outstanding stock of the corporation, (c) certain transactions resulting in
the issuance or transfer by the corporation of stock of the corporation to the
interested stockholder, (d) certain transactions involving the corporation
which have the effect of increasing the proportionate share of the stock of any
class or series of the corporation which is owned by the interested stockholder
or (e) certain transactions in which the interested stockholder receives
financial benefits provided by the corporation. An "interested stockholder"
generally is (1) any person that owns 15% or more of the outstanding voting
stock of the corporation, (2) any person that is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period prior to the
date on which it is sought to be determined whether such person is an
interested stockholder and (3) the affiliates or associates of any such person.
LIMITATIONS ON CHANGES IN CONTROL
The New Raytheon By-Laws contain provisions requiring that advance notice be
delivered to New Raytheon of any business to be brought by a stockholder before
an annual meeting of stockholders and providing for certain procedures to be
followed by stockholders in nominating persons for election to the New Raytheon
Board. Generally, such advance notice provisions provide that the stockholder
must give written notice to the Secretary of New Raytheon not less than 90 days
nor more than 120 calendar days before the first anniversary of the preceding
year's annual meeting. In the event that the date of the annual meeting is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be delivered to
the Secretary of New Raytheon not earlier than the close of business on the
120th calendar day prior to such annual meeting and not later than the close of
business on the later of the 90th calendar day prior to such annual meeting or
the 10th calendar day following the calendar day on which public announcement
of the date of such meeting is first made by New Raytheon. In the event that
the number of directors to be elected to the New Raytheon Board is increased
and there is no public announcement by New Raytheon naming all of the nominees
for director or specifying the size of the increased New Raytheon Board at
least 100 calendar days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice will also be considered timely if it is
delivered not later than the close of business on the 10th calendar day
following the day on which public announcement is first made by New Raytheon.
The notice must set forth specific information regarding such stockholder and
such business or director nominee, as described in the New Raytheon By-Laws.
For the annual meeting of stockholders in 1998, the first anniversary of the
previous year's meeting shall be deemed to be May 28, 1998.
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The New Raytheon Certificate of Incorporation provides that, except as may be
provided by the New Raytheon Certificate of Incorporation or in the resolution
or resolutions providing for the issuance of any series of New Raytheon
Preferred Stock, the number of directors shall not be fewer than three nor more
than fifteen and provides for a classified board of directors, consisting of
three classes as nearly equal in size as practicable. Each class holds office
until the third annual stockholders' meeting for election of directors
following the most recent election of such class, except that the initial terms
of the three classes expire in 1998, 1999 and 2000, respectively. See "Chapter
5: New Raytheon." A director of New Raytheon may be removed only for cause.
The New Raytheon Certificate of Incorporation provides that stockholders may
not act by written consent in lieu of a meeting. Special meetings of the
stockholders may be called by the Chairman of the New Raytheon Board or by the
New Raytheon Board (if approved by a majority of directors which New Raytheon
would have if there were no vacancies), but may not be called by stockholders.
No business other than that stated in the notice shall be transacted at any
special meeting. In the event New Raytheon calls a special meeting for the
purpose of electing one or more directors to the New Raytheon Board, any
stockholder may nominate a person or persons (as the case may be), for election
to such position(s) as specified in the notice of special meeting, if notice by
the stockholder is delivered to the Secretary of New Raytheon not earlier than
the close of business on the 120th calendar day prior to such special meeting
and not later than the close of business on the later of the 90th calendar day
prior to such special meeting or the 10th calendar day following the calendar
day on which public announcement of the date of such meeting and the nominees
proposed by the New Raytheon Board to be elected at such meeting is first made
by New Raytheon.
The New Raytheon Certificate of Incorporation provides that the New Raytheon
Board, in determining whether to take or refrain from taking corporate action
on any matter, including making or declining to make any recommendation to the
stockholders of New Raytheon, may in its discretion consider the long-term as
well as short-term best interests of New Raytheon (including the possibility
that these interests may be best served by the continued independence of New
Raytheon), taking into account, and weighing as the directors deem appropriate,
the effects of such action on employees, suppliers and customers of New
Raytheon and its subsidiaries, the effect upon communities in which offices or
other facilities of New Raytheon are located and any other factors the
directors consider pertinent.
In order to preserve the tax-free status of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off and the Raytheon Merger, New Raytheon will be subject
to certain covenants under the Spin-Off Separation Agreement which will act to
prohibit New Raytheon from entering into or permitting (to the extent that New
Raytheon has the right to prohibit) certain transactions, such as (1) certain
acquisition transactions, stock issuance transactions and stock buyback
transactions for two years following the Raytheon Merger Effective Time and (2)
certain recapitalizations, reincorporations and similar transactions affecting
the rights and privileges of New Raytheon Common Stock, in each case unless
General Motors has, in its sole and absolute discretion, which discretion shall
be exercised in good faith solely to preserve the tax-free status of the Hughes
Defense Spin-Off, the Hughes Telecom Spin-Off and the Raytheon Merger,
determined that such transactions would not jeopardize the tax-free status of
any of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off and the
Raytheon Merger. In addition, for three years following the Hughes Defense
Spin-Off, New Raytheon will be prohibited from amending or changing the New
Raytheon Certificate of Incorporation or the New Raytheon By-Laws in such a way
as to affect the composition or size of the New Raytheon Board, the manner in
which the New Raytheon Board is elected or the duties and responsibilities of
the New Raytheon Board unless General Motors has, in its sole and absolute
discretion, which discretion shall be exercised in good faith solely to
preserve the tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom
Spin-Off and the Raytheon Merger, determined that such actions would not
jeopardize the tax-free status of any of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off and the Raytheon Merger. For additional information
regarding these prohibitions, see "Separation and Transition Arrangements--
Summary of Spin-Off Separation Agreement--Preservation of Tax-Free Status of
the Hughes Transactions and the Raytheon Merger" in Chapter 3.
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The foregoing provisions of the New Raytheon Certificate of Incorporation,
the New Raytheon By-Laws and the Spin-Off Separation Agreement, together with
the New Raytheon Rights Agreement and the provisions of Section 203 of the
Delaware General Corporation Law, could have the effect of delaying, deferring
or preventing a change in control of New Raytheon or the removal of existing
management, of deterring potential acquirors from making an offer to
stockholders of New Raytheon and of limiting any opportunity to realize
premiums over prevailing market prices for New Raytheon Common Stock in
connection therewith. For a description of certain other factors that could
limit such changes in control and offers, see "Risk Factors Regarding New
Raytheon After the Raytheon Merger--Certain Limitations on Changes in Control
of New Raytheon; New Raytheon's Ability to Participate in Future Defense
Industry Consolidation" in Chapter 2. This could be the case notwithstanding
that a majority of New Raytheon's stockholders might benefit from such a change
in control or offer.
STOCK EXCHANGE LISTING
Application will be made to list the Class A Common Stock and the Class B
Common Stock on the NYSE. It is expected that the trading symbol on the NYSE
for the Class A Common Stock will be "RTNA" and the trading symbol for the
Class B Common Stock will be "RTNB."
TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company will serve as the Transfer Agent and
Registrar for the New Raytheon Common Stock.
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CHAPTER 7
CONSENT SOLICITATION AND
CERTAIN OTHER MATTERS
<TABLE>
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<S> <C>
SOLICITATION OF WRITTEN CONSENT OF GM'S COMMON STOCKHOLDERS...... 269
Matter to Be Approved........................................... 269
Action by Written Consent....................................... 269
Other Consent Solicitation Matters.............................. 270
Certain Plans................................................... 271
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
GENERAL MOTORS.................................................. 272
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE................. 273
ESTIMATED FEES AND EXPENSES...................................... 274
LEGAL MATTERS.................................................... 275
EXPERTS.......................................................... 275
WHERE YOU CAN FIND MORE INFORMATION.............................. 276
</TABLE>
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CHAPTER 7: CONSENT SOLICITATION AND CERTAIN OTHER MATTERS
SOLICITATION OF WRITTEN CONSENT OF GM'S
COMMON STOCKHOLDERS
MATTER TO BE APPROVED
We are furnishing this document to you in connection with our solicitation of
your approval of the Hughes Transactions, including the adoption of the GM
Spin-Off Merger Agreement.
The Hughes Transactions which you are being asked to approve include the
Hughes Reorganization, the GM Spin-Off Merger (pursuant to which, among other
things, the Hughes Defense Spin-Off and the recapitalization and conversion of
GM Class H Common Stock into New GM Class H Common Stock will be effected), the
Master Separation Agreement and all of the other agreements contemplated
thereby and the completion of the other transactions and events described in
the GM Spin-Off Merger Agreement.
In order to consummate the Hughes Transactions, General Motors must obtain
the consent of the holders of (1) a majority of the outstanding shares of GM $1
2/3 Common Stock, voting as a separate class and (2) a majority of the
outstanding shares of GM Class H Common Stock, voting as a separate class. If
General Motors obtains both of these approvals, as required by applicable law,
General Motors will also have obtained the approval of a majority of the voting
power of all outstanding shares of both classes of GM common stock, voting
together as a single class based on their respective per share power pursuant
to the provisions set forth in the GM Certificate of Incorporation. When voting
together as a single class with respect to any proposal, holders of record of
GM $1 2/3 Common Stock are entitled to one vote per share and holders of record
of GM Class H Common Stock are entitled to one-half of a vote per share.
You are not being asked to approve the Raytheon Merger, which has already
been approved by Hughes Electronics as the sole stockholder of Hughes Defense.
Although you are not being asked to approve the Raytheon Merger, the Raytheon
Merger is conditioned upon, among other things, the approval of the Hughes
Transactions by GM's common stockholders as described in this document. We and
Raytheon are obligated to complete the Raytheon Merger immediately after the
consummation of the Hughes Defense Spin-Off. If the Hughes Transactions are not
completed, the Raytheon Merger will not take place and, if the Raytheon Merger
cannot be completed, the Hughes Transactions will not be completed. See
"Description of the Raytheon Merger" in Chapter 3.
The GM Board has unanimously recommended that you approve the Hughes
Transactions. To the best of GM's knowledge, all of GM's directors and
executive officers currently intend to consent to the Hughes Transactions and,
except in their capacities as members of the Hughes Electronics Board or the GM
President's Council as described above under "Introduction to the Hughes
Transactions--The Issuers" in Chapter 1 and "Special Factors--Background of the
Hughes Transactions" and "--Recommendations of the Capital Stock Committee and
the GM Board; Fairness of the Hughes Transactions" in Chapter 3, none of GM's
executive officers who are not directors have made any recommendations with
respect to the Hughes Transactions.
ACTION BY WRITTEN CONSENT
We have delivered this document to you in order to obtain your written
consent to consummate the Hughes Transactions. We will not hold a special
meeting of GM's common stockholders with respect to the Hughes Transactions.
Only GM's common stockholders of record on October 15, 1997, the Record Date,
are entitled to consent with respect to the Hughes Transactions. On the Record
Date, there were outstanding approximately 708 million shares of GM $1 2/3
Common Stock held by approximately 566,374 holders of record and approximately
103 million shares of GM Class H Common Stock held by approximately 233,240
holders of record. Approval of the Hughes Transactions by GM's common
stockholders will be deemed to be obtained once consents have been received and
not revoked from holders of the number of outstanding shares of GM $1 2/3
Common Stock and GM Class H Common Stock required for approval as described
above. In no event will this be sooner than 20 business days after the date on
which we complete the mailing of this
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document. Notwithstanding the foregoing, if we do not receive the number of
consents required to approve the Hughes Transactions within 60 days of the date
of the earliest dated consent delivered to us, no consent will be effective to
approve the Hughes Transactions and we will not consummate the Hughes
Transactions or the Raytheon Merger.
The shares represented by each executed consent submitted with respect to the
proposal to approve the Hughes Transactions will be deemed to have approved the
Hughes Transactions.
If you participate in any of the employee benefit or other plans described
below or maintain other accounts under a different name (e.g., with and without
a middle initial), you may receive more than one set of solicitation materials.
To ensure that all of your shares are voted, you must execute and return every
consent received.
You may revoke your consent at any time before the approval of the Hughes
Transactions by GM's common stockholders, which will occur when unrevoked
consents representing the requisite number of shares required to approve the
Hughes Transactions are delivered to General Motors (but no sooner than 20
business days after the completion of the mailing of this document to GM's
common stockholders). To revoke your consent, file with the Secretary of
General Motors a written notice of revocation or another form of written
consent bearing a date later than the date of the consent. Any such notice of
revocation of written consent should be sent to General Motors at the following
address:
General Motors Corporation General Motors Building 3044
West Grand Boulevard Detroit, Michigan 48202-3091
Attention: Secretary
OTHER CONSENT SOLICITATION MATTERS
Under the rules of the NYSE, brokers who hold shares in street names may not
consent on behalf of customers to non-routine proposals such as the approval of
the Hughes Transactions without specific instructions from such customers.
Thus, "broker non-votes" with respect to the proposal to approve the Hughes
Transactions will have the effect of a vote against such proposal.
Arrangements will be made to furnish copies of solicitation materials to
fiduciaries, custodians and brokerage houses for forwarding to beneficial
owners of GM $1 2/3 Common Stock and GM Class H Common Stock. Brokers, dealers,
banks, voting trustees and their nominees who desire a supply of this
solicitation material for transmittal to beneficial owners should write to
General Motors at the following address:
General Motors Corporation c/o Morrow & Co., Inc.909
Third Avenue, 20th Floor New York, New York 10022-4799
General Motors will bear the cost of preparing and mailing this document and
related materials to GM's common stockholders. General Motors will solicit
written consents by mail, and the directors, officers and employees of General
Motors may also solicit written consents by telephone, facsimile or personal
interview. These persons will receive no additional compensation for such
services. In addition, General Motors has retained Morrow & Co., Inc. to assist
in soliciting written consents regarding the Hughes Transactions. General
Motors has agreed to pay Morrow & Co., Inc. a fee of $125,000 and reasonable
out-of-pocket expenses for its solicitation services. General Motors has also
retained Morrow & Co., Inc. to assist in providing information regarding the
Hughes Transactions.
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CERTAIN PLANS
If you are a participant in the General Motors Savings-Stock Purchase Program
for Salaried Employees in the United States (the "GM SSPP"), the General Motors
Personal Savings Plan for Hourly-Rate Employees in the United States (the "GM
PSP"), the General Motors Canadian Savings-Stock Purchase Program (the "GM
Canadian SSPP"), the Hughes Salaried Employees' Thrift and Savings Plan (the
"Hughes Salaried Plan"), the Hughes Tucson Bargaining Employees' Thrift and
Savings Plan (the "Hughes Tucson Plan"), the Hughes California Hourly
Employees' Thrift and Savings Plan (the "Hughes California Plan"), the Hughes
Thrift and Savings Plan, the Saturn Individual Savings Plan for Represented
Members (the "Saturn ISP"), the Saturn Personal Choices Savings Plan for Non-
Represented Members (the "Saturn PCSP") or the GMAC Mortgage Corporation
Savings Incentive Plan ("the "GMAC SIP"), each of your consents will also serve
as a voting instruction for the trustees, plan committees or independent
fiduciaries of those plans. With respect to the GM SSPP, the Hughes Salaried
Plan, the Hughes Tucson Plan, the Hughes California Plan, the Hughes Thrift and
Savings Plan, the Saturn PCSP and the GMAC SIP, if voting instructions are not
received for shares in such plans, those shares will be voted by the trustee,
plan committee or independent fiduciary. For the GM PSP and the Saturn ISP,
shares in such plans for which voting instructions are not received will not be
voted unless the trustee of each plan determines, respectively, that it is
required to do so under ERISA. For the GM Canadian SSPP, shares for which
voting instructions are not received will not be voted.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF GENERAL MOTORS
The following table sets forth, based on information available to General
Motors as of September 30, 1997, beneficial ownership of both classes of GM
common stock for each current director, the Chief Executive Officer and the
four other most highly compensated executive officers of General Motors and all
current directors and officers of General Motors as a group. Each of these
individuals, and the group as a whole, are owners of less than one percent of
the outstanding shares and voting power of both classes of GM common stock
(based on the number of shares of the applicable class outstanding on the
Record Date).
These shares do not include any shares of GM $1 2/3 Common Stock or GM Class
H Common Stock held by the pension and profit sharing plans or endowment funds
of other corporations or by educational and charitable institutions of which
such directors and officers serve as directors or trustees.
The following table also sets forth, based on information available to
General Motors as of September 30, 1997, the three persons known to General
Motors to be beneficial owners of more than five percent of either class of GM
common stock.
<TABLE>
<CAPTION>
SHARES DEFERRED
BENEFICIALLY STOCK STOCK
DIRECTORS CLASS OF STOCK OWNED UNITS TOTAL OPTIONS(A)
- --------- ----------------------- ------------ -------- ------- ----------
<S> <C> <C> <C> <C> <C>
A. L. Armstrong......... GM $1 2/3 Common Stock 1,500 17,846 19,346 1,000
GM Class H Common Stock 112 4,760 4,872 --
P. Barnevik............. GM $1 2/3 Common Stock 10,000 359 10,359 --
GM Class H Common Stock -- -- -- --
J. H. Bryan............. GM $1 2/3 Common Stock 2,000 4,428 6,428 1,000
GM Class H Common Stock -- -- -- --
T. E. Everhart.......... GM $1 2/3 Common Stock 400 8,378 8,778 1,000
GM Class H Common Stock -- 4,620 4,620 --
C. T. Fisher, III....... GM $1 2/3 Common Stock 3,388 8,817 12,205 1,000
GM Class H Common Stock 58 4,397 4,455 --
G. M. C. Fisher......... GM $1 2/3 Common Stock 5,000 401 5,401 1,000
GM Class H Common Stock -- -- -- --
J. W. Marriott, Jr...... GM $1 2/3 Common Stock 1,000 6,333 7,333 --
GM Class H Common Stock -- 2,460 2,460 --
A. D. McLaughlin........ GM $1 2/3 Common Stock 951 1,686 2,637 --
GM Class H Common Stock -- 963 963 --
H. J. Pearce............ GM $1 2/3 Common Stock 16,995 23,263 40,258 115,168
GM Class H Common Stock 23,888 7,340 31,228 54,084(b)
E. Pfeiffer............. GM $1 2/3 Common Stock 1,000 1,357 2,357 --
GM Class H Common Stock -- 112 112 --
J. G. Smale............. GM $1 2/3 Common Stock 16,000 5,417 21,417 1,000
GM Class H Common Stock 200 45 245 --
J. F. Smith, Jr......... GM $1 2/3 Common Stock 84,727 54,039 138,766 514,790
GM Class H Common Stock 19,687 11,209 30,896 --
L. W. Sullivan.......... GM $1 2/3 Common Stock 100 2,365 2,465 --
GM Class H Common Stock -- 441 441 --
D. Weatherstone......... GM $1 2/3 Common Stock 6,000 16,478 22,478 --
GM Class H Common Stock -- 5,407 5,407 --
</TABLE>
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CHAPTER 7: CONSENT SOLICITATION AND CERTAIN OTHER MATTERS
<TABLE>
<CAPTION>
SHARES DEFERRED
BENEFICIALLY STOCK STOCK
DIRECTORS CLASS OF STOCK OWNED UNITS TOTAL OPTIONS(A)
- --------- ----------------------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
T. H. Wyman............. GM $1 2/3 Common Stock 1,000 5,898 6,898 1,000
GM Class H Common Stock 250 2,730 2,980 --
<CAPTION>
OTHER NAMED EXECUTIVES
- ----------------------
<S> <C> <C> <C> <C> <C>
C. M. Armstrong(c)...... GM $1 2/3 Common Stock 6,318 -- 6,318 25,000
GM Class H Common Stock 61,652 15,274 76,926 211,818
L. R. Hughes............ GM $1 2/3 Common Stock 18,443 24,775 43,218 171,667
GM Class H Common Stock 7,683 5,485 13,168 --
G. R. Wagoner, Jr....... GM $1 2/3 Common Stock 18,742 24,472 43,214 208,557
GM Class H Common Stock 6,234 5,485 11,719 --
All directors and
officers of
General Motors as a
group.................. GM $1 2/3 Common Stock 193,564 206,312 399,876 1,042,182
GM Class H Common Stock 119,764 70,728 190,492 265,902
<CAPTION>
FIVE PERCENT OWNERS
- -------------------
<S> <C> <C> <C> <C> <C>
The Capital Group
Companies, Inc.
333 South Hope Street
Los Angeles, CA 90071... GM Class H Common Stock 5,383,900 -- 5,383,900 --
Putnam Investments, Inc.
One Post Office Square
Boston, MA 02109........ GM Class H Common Stock 6,527,777 -- 6,527,777 --
Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109........ GM $1 2/3 Common Stock 60,407,423 -- 60,407,423 --
GM Class H Common Stock 110,004 -- 110,004 --
</TABLE>
- ----------
(a) GM common stock that may be acquired within 60 days through exercise of
stock options.
(b) In connection with the Hughes Transactions, 50% of these options will be
adjusted and converted into options for shares of New GM Class H Common
Stock and 50% of these options will be adjusted and converted into options
for shares of GM $1 2/3 Common Stock.
(c) Resigned from his position as Chairman and Chief Executive Officer of
Hughes Electronics on October 20, 1997. See "Recent Developments--New
Leadership Team at Hughes Electronics" in Chapter 1.
As of the Record Date, directors and executive officers of General Motors
held an aggregate of 193,564 outstanding shares of GM $1 2/3 Common Stock and
119,794 outstanding shares of GM Class H Common Stock. In each case, such
holdings constituted, as of the Record Date, less than 1% of the outstanding
shares of each class of GM common stock.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This document contains certain forward-looking statements and information
relating to General Motors (including Delco and Delphi) and Hughes Telecom that
are based on the beliefs of General Motors and/or Hughes Telecom management as
well as assumptions made by and information currently available to General
Motors and/or Hughes Telecom management. When used in this document, the words
"anticipate," "believe," "estimate" and "expect" and similar expressions, as
they relate to General Motors (including Delco and Delphi), Hughes Telecom or
GM management or Hughes Telecom management, are intended to identify forward-
looking statements. Such statements reflect the current view of General Motors
and/or Hughes Telecom with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the risk factors described in
this document. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described in this
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document as anticipated, believed, estimated or expected. General Motors and
Hughes Telecom do not intend to update these forward-looking statements.
This document also contains certain forward-looking statements and
information relating to Hughes Defense, Raytheon and New Raytheon that are
based on the beliefs of Raytheon and/or Hughes Defense management as well as
assumptions made by and information currently available to Raytheon and/or
Hughes Defense management. When used in this document, the words "anticipate,"
"believe," "estimate" and "expect" and similar expressions, as they relate to
Hughes Defense, Raytheon, New Raytheon or Raytheon management or Hughes Defense
management, are intended to identify forward-looking statements. Such
statements reflect the current views of Raytheon and/or Hughes Defense with
respect to future events and are subject to certain risks, uncertainties and
assumptions, including the risk factors described in this document. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this document as anticipated, believed, estimated or expected.
Raytheon and Hughes Defense do not intend to update these forward-looking
statements.
Statements made concerning expected financial performance (including future
revenue and earnings growth), ongoing business strategies and possible future
action which Hughes Electronics intends to pursue to achieve strategic
objectives for each of its three principal business segments (including the
Hughes Transactions) constitute forward-looking information. The implementation
of these strategies and of such future actions and the achievement of such
financial performance are each subject to numerous conditions, uncertainties
and risk factors. Accordingly, no assurance can be given that Hughes
Electronics will be able to successfully accomplish its strategic objectives or
achieve such financial performance. The principal important risk factors which
could cause actual performance and future actions to differ materially from the
forward-looking statements made in this document include economic conditions,
product demand and market acceptance, government action, competition, ability
to achieve cost reductions, GM's global sourcing strategy with respect to
automotive electronics, GM NAO volumes, technological risk, interruptions to
production attributable to causes outside Hughes Electronics' control, and the
receipt of various approvals with respect to the Hughes Transactions.
ESTIMATED FEES AND EXPENSES
Estimated costs and fees of General Motors and its subsidiaries incurred in
connection with the Hughes Transactions and the Raytheon Merger are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Goldman Sachs............................................... $28.5
Merrill Lynch............................................... 21.0
Salomon Brothers............................................ 21.0
Legal Fees and Expenses..................................... 12.0
Printing and Mailing Expenses............................... 7.5
Exchange Agent/Transfer Agent Fees.......................... 3.8
SEC Filing Fees............................................. 2.8
Solicitation and Information Agent Fees and Expenses........ 1.0
Accounting Fees and Expenses................................ 0.8
Miscellaneous............................................... 1.6
------
Total..................................................... $100.0
======
</TABLE>
In general, all costs and expenses of either General Motors or Hughes Defense
in connection with the Hughes Defense Spin-Off and the Raytheon Merger will be
paid by the party that incurs such costs and expenses. Pursuant to the Spin-Off
Separation Agreement, General Motors or one of its subsidiaries will pay all
fees and out-of-pocket expenses of Hughes Defense in connection with Hughes
Transactions and the Raytheon Merger except that Hughes Defense will pay all
costs and expenses relating exclusively to the Raytheon
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CHAPTER 7: CONSENT SOLICITATION AND CERTAIN OTHER MATTERS
Merger. General Motors or its subsidiaries (excluding Hughes Defense) will also
pay all fees and expenses relating to the Hughes Transactions except (1) the
costs of printing and engraving the certificates representing the Hughes
Defense Common Stock, (2) fees of any transfer or exchange agent engaged by
Hughes Defense and (3) all fees relating to the listing of the Hughes Defense
Common Stock on the NYSE, all of which will be paid by Hughes Defense. See
"Separation and Transition Arrangements--Summary of Spin-Off Separation
Agreement" in Chapter 3.
With respect to those fees and expenses to be borne by General Motors or
Hughes Telecom, General Motors and Hughes Telecom have agreed that all costs
and expenses which relate exclusively to the Hughes Transactions (not including
those incurred in connection with the Raytheon Merger) will be paid by General
Motors and all of such costs and expenses which relate exclusively to the
Raytheon Merger will be paid by New Hughes Electronics. In addition, they have
agreed that certain of such costs and expenses which relate to both the Hughes
Transactions and the Raytheon Merger will be shared equally by General Motors
and New Hughes Electronics. These costs and expenses include the SEC filing
fees, the printing and mailing expenses and the solicitation and information
agent fees and expenses. As a result of these arrangements, we estimate that
General Motors will pay for approximately 55% and New Hughes Electronics will
pay for approximately 45% of the above-listed fees and expenses.
LEGAL MATTERS
The validity of the shares of New GM Class H Common Stock to be distributed
to the former GM Class H Common Stockholders upon the consummation of the
Hughes Transactions will be passed upon for General Motors by Warren G.
Andersen, Esq., Attorney, Legal Staff of General Motors. The validity of the
shares of Class A Common Stock to be distributed to the GM $1 2/3 Common
Stockholders and the former GM Class H Common Stockholders upon the
consummation of the Hughes Defense Spin-Off will be passed upon for Hughes
Defense by Weil, Gotshal & Manges LLP. Certain matters relating to U.S. federal
income tax considerations in connection with the Hughes Transactions will be
passed upon for General Motors by Kirkland & Ellis. Certain matters relating to
the U.S. federal income tax considerations in connection with the Raytheon
Merger will be passed upon for Hughes Defense by Weil, Gotshal & Manges LLP.
EXPERTS
The consolidated financial statements and financial statement schedule of
General Motors Corporation and subsidiaries as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996, included
in the GM 1996 Form 10-K, incorporated by reference in this document, have been
audited by Deloitte & Touche LLP, independent public accountants, as stated in
their report appearing therein, and have been so incorporated by reference in
this document in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements and financial statement schedule of
Hughes Electronics Corporation as of December 31, 1996 and 1995 and for each of
the years in the three-year period ended December 31, 1996, included in Exhibit
99 to the GM 1996 Form 10-K, incorporated by reference in this document, have
been audited by Deloitte & Touche LLP, independent public accountants, as
stated in their reports appearing therein, and have been so incorporated by
reference in reliance upon such reports given upon the authority of that firm
as experts in accounting and auditing.
The combined financial statements of Hughes Defense as of December 31, 1996
and 1995 and for each of the years in the three-year period ended December 31,
1996, included in Appendix C to this document, have been audited by Deloitte &
Touche LLP, independent public accountants, as stated in their reports
appearing therein, and have been so included in reliance upon such reports
given upon the authority of that firm as experts in accounting and auditing.
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The combined financial statements of Delco as of December 31, 1996 and 1995
and for each of the years in the three-year period ended December 31, 1996,
included in Appendix D to this document, have been audited by Deloitte & Touche
LLP, independent public accountants, as stated in their reports appearing
therein, and have been so included in reliance upon such reports given upon the
authority of that firm as experts in accounting and auditing.
The combined financial statements of Hughes Telecom as of December 31, 1996
and 1995 and for each of the years in the three-year period ended December 31,
1996, included in Appendix E to this document, have been audited by Deloitte &
Touche LLP, independent public accountants, as stated in their reports
appearing therein, and have been so included in reliance upon such reports
given upon the authority of that firm as experts in accounting and auditing.
The consolidated financial statements and financial statement schedule of
Raytheon Company and Subsidiaries as of December 31, 1996 and 1995 and for each
of the years in the three-year period ended December 31, 1996, included in the
Raytheon 1996 Form 10-K, incorporated by reference in this document, have been
audited by Coopers & Lybrand L.L.P., independent auditors, as stated in their
reports appearing therein, and have been so incorporated by reference in
reliance upon such reports given upon the authority of that firm as experts in
accounting and auditing.
The financial statements of the Defense Business of Texas Instruments
Incorporated as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996, included in Raytheon's Form 8-K
dated March 14, 1997, which is incorporated into this document by reference,
have been audited by Ernst & Young LLP, independent auditors, as stated in
their reports appearing therein, and have been so incorporated by reference in
reliance upon such reports given upon the authority of that firm as experts in
accounting and auditing.
The consolidated financial statements of PanAmSat Corporation as of December
31, 1996 and 1995 and for each of the years in the three-year period ended
December 31, 1996, included in the PanAmSat Proxy Statement on Schedule 14A,
filed on April 18, 1997, incorporated by reference in this document, have been
audited by Arthur Andersen LLP, independent auditors, as stated in their
reports appearing therein, and have been so incorporated by reference in
reliance upon such reports given upon the authority of that firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
General Motors is subject to the information requirements of the Exchange Act
and files reports and other information with the SEC. You may read and copy any
reports or other information General Motors files at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may
also request copies of these documents upon payment of a duplicating fee, by
writing to the SEC's Public Reference Section. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. GM's SEC
filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at "http://www.sec.gov," and
the web site maintained by General Motors at "http://www.gm.com."
GM $1 2/3 Common Stock and GM Class H Common Stock are listed on the NYSE. GM
$1 2/3 Common Stock is also listed on the Chicago Stock Exchange, the Pacific
Stock Exchange and the Philadelphia Stock Exchange.
Each of General Motors and Hughes Defense has filed a registration statement
with respect to its stock to be issued to GM common stockholders in the Hughes
Transactions. Pursuant to SEC rules and regulations, this document does not
contain all the information you can find in such registration statements. You
may read and copy this information in the same way as any other information
that General Motors files with the SEC.
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Statements in this document concerning any document filed as an exhibit to such
registration statements are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to one or
both registration statements. Each of such statements is qualified in its
entirety by such reference.
General Motors has filed a Schedule 13E-3 Transaction Statement under the
Exchange Act with respect to the Hughes Transactions. Pursuant to the rules and
regulations of the SEC, this document omits certain information contained in
the Schedule 13E-3, including reports of financial advisors referred to in this
document and filed as exhibits to the Schedule 13E-3. These reports, in the
forms filed with the SEC, may be inspected and copied, and obtained by mail,
from the SEC as set forth above and will be available for inspection and
copying at the principal executive offices of General Motors at General Motors
Corporation, 100 Renaissance Center, Detroit, Michigan 48243-7301 during
regular business hours by any interested stockholder of General Motors or his
or her representative who has been so designated in writing.
The SEC allows us to "incorporate by reference" information into this
document, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC, including GM's
regular annual and quarterly reports. The information incorporated by reference
is deemed to be part of this document, except for any information superseded by
information in this document.
This document incorporates by reference the documents set forth below that
General Motors previously filed with the SEC. These documents contain important
information about General Motors and its finances and the Hughes Transactions.
<TABLE>
<CAPTION>
SEC FILINGS (FILE NO. 1-143) PERIOD
---------------------------- ------
<S> <C>
Annual Report on Form 10-K....... Year ended December 31, 1996
Quarterly Reports on Form 10-Q..... Quarters ended March 31, 1997, June
30, 1997 and September 30, 1997
(currently expected to be filed on or
about November 12, 1997).
Current Reports on Form 8-K........ Dated January 16, 1997, January 27,
1997, March 12, 1997, April 14, 1997,
May 23, 1997, May 27, 1997, July 1,
1997, July 14, 1997, October 6, 1997
and October 13, 1997.
</TABLE>
This document also incorporates by reference the documents set forth below
that Raytheon previously filed with the SEC. These documents contain important
information about Raytheon and Texas Instruments Defense and their finances.
<TABLE>
<CAPTION>
SEC FILINGS (FILE NO. 1-2833) PERIOD
----------------------------- ------
<S> <C>
Annual Report on Form 10-K....... Year ended December 31, 1996
Quarterly Reports on Form 10-Q... Quarters ended March 30, 1997, June
29, 1997 and September 28, 1997
(currently expected to be filed on or
about November 10, 1997).
Current Reports on Form 8-K...... Dated January 4, 1997, January 16,
1997, March 14, 1997, July 11, 1997,
September 10, 1997 and October 7, 1997
(as amended by the Current Report on
Form 8-K/A filed on October 28, 1997).
</TABLE>
We are also incorporating by reference additional documents that we and
Raytheon file with the SEC between the date of this document and the
consummation of the Hughes Transactions. Any statement in this document or in a
document incorporated or deemed to be incorporated by reference in this
document shall be deemed to be modified or superseded for purposes of this
document to the extent that a statement contained in this document or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference in this document modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed to constitute a part of
this document, except as so modified or superseded.
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CHAPTER 7: CONSENT SOLICITATION AND CERTAIN OTHER MATTERS
As noted above under "Raytheon Information" in Chapter 1, Raytheon is seeking
approval of the Raytheon Merger by its existing common stockholders and, in
connection therewith, is sending the Raytheon Solicitation Statement to its
common stockholders. The Raytheon Solicitation Statement contains information
about Raytheon, about the Raytheon Merger and about the business and prospects
of New Raytheon that may be of interest to you in considering the Hughes
Transactions. We are incorporating into this document by reference the
following sections of the Raytheon Solicitation Statement, which is a part of a
Registration Statement on Form S-4 of HE Holdings, Inc. (Registration No. 333-
39861), filed on November 10, 1997, as amended (which we refer to as the
"Raytheon Registration Statement"), which has been filed with the SEC: (1)
"Background," (2) "Appendix A--Merger Agreement," (3) "Appendix B-I--Bear
Stearns Fairness Opinion," (4) "Appendix B-II--CSFB Fairness Opinion," (5)
"Appendix C--Raytheon Consolidated Financial Statements" and (6) "Appendix E--
TI Defense Financial Statements." Although the Raytheon Registration Statement
is technically a filing of HE Holdings, most of the information in the Raytheon
Registration Statement, including information in the Raytheon Solicitation
Statement relating to the business of Raytheon, historical and pro forma
financial information and data relating to Raytheon and the information in the
section entitled "Background," has been solely prepared by Raytheon and
provided to HE Holdings for inclusion in the Raytheon Registration Statement.
The "Background" section of the Raytheon Solicitation Statement contains,
among other things, (1) information about the background of the Raytheon Merger
from Raytheon's point of view, including information about the Raytheon board
of directors' consideration of the Raytheon Merger and its decision to approve
the Raytheon Merger and recommend it to the stockholders of Raytheon, as to
which we have no direct knowledge, and (2) summaries of opinions of Raytheon's
financial advisors, Bear Stearns and CSFB, regarding the fairness, in the case
of Bear Stearns, of the Raytheon Merger and, in the case of CSFB, of the
Raytheon Merger Consideration (as defined in the CSFB opinion), to the holders
of Raytheon Common Stock from a financial point of view. Appendix A to the
Raytheon Solicitation Statement contains a copy of the Raytheon Merger
Agreement. Appendix B-I to the Raytheon Solicitation Statement contains a copy
of the opinion of Bear Stearns, financial advisor to Raytheon, to the effect
that, as of the date of the opinion and based upon and subject to certain
matters stated in the opinion, the Raytheon Merger is fair to Raytheon
stockholders from a financial point of view. Appendix B-II to the Raytheon
Solicitation Statement contains a copy of the opinion of CSFB, financial
advisor to Raytheon, to the effect that, as of the date of the opinion and
based upon and subject to certain matters stated in the opinion, the Merger
Consideration (as defined in the opinion) was fair to the holders of Raytheon
Common Stock from a financial point of view. You should note, however, that
these materials were prepared for Raytheon's board of directors in connection
with the Raytheon Merger, and Raytheon's board of directors and its financial
advisors did not consider your interests as a stockholder of General Motors.
In addition, this document incorporates by reference (1) PanAmSat's
Consolidated Financial Statements contained in pages FIN-1 through FIN-19 of
the Proxy Statement on Schedule 14A, filed on April 18, 1997, of PanAmSat (File
No. 0-26712) and (2) the unaudited financial statements of PanAmSat contained
in the Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1997 of
PanAmSat.
If you are a GM common stockholder, we may have already sent you some of the
GM documents incorporated by reference, but you can obtain any document
incorporated by reference through us or the SEC. Documents incorporated by
reference are available from General Motors without charge, excluding all
exhibits unless we have specifically incorporated by reference an exhibit in
this document. You may obtain documents incorporated by reference in this
document by making a request to General Motors by telephone at (800) 331-9922
or in writing at the following address:
General Motors Corporation MC 482-111-238 3044 West
Grand Boulevard Detroit, Michigan 48202-3091 Tel: (313)
556-2044
If you would like to request documents from General Motors, please do so
within 15 business days of the date of the mailing of this document in order to
ensure timely delivery. Mailing is currently expected to be completed on or
about November 18, 1997, but could be completed sooner.
278
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GLOSSARY
GLOSSARY
This Glossary contains certain terms used throughout this document. Certain
other terms used exclusively in only one portion of this document do not appear
in this Glossary. Unless otherwise indicated, all definitions speak as of the
date of this document.
"Available Separate Consolidated Net Income of Hughes Electronics" means, for
any quarterly period, an amount representing the separate consolidated net
income of Hughes Electronics for such period excluding the effects of GM
purchase accounting adjustments arising at the time of GM's acquisition of
Hughes Aircraft, calculated for such period and multiplied by a fraction, the
numerator of which is a number equal to the weighted average number of shares
of GM Class H Common Stock outstanding during the quarter (approximately 102
million during the third quarter of 1997) and the denominator of which was
approximately 400 million for the third quarter of 1997; provided that such
fraction shall never be greater than one. This term is defined in the GM
Certificate of Incorporation as part of the terms of the GM Class H Common
Stock and is used in determining the amount available for the payment of
dividends on the GM Class H Common Stock.
"Available Separate Consolidated Net Income of New Hughes Electronics" means,
for any quarterly period, an amount representing the separate consolidated net
income of New Hughes Electronics for such period excluding the effects of GM
purchase accounting adjustments arising at the time of GM's acquisition of
Hughes Aircraft, calculated for such period and multiplied by a fraction, the
numerator of which is a number equal to the weighted average number of shares
of New GM Class H Common Stock outstanding during the quarter and the
denominator of which will initially be the denominator of the fraction
described above in "Available Separate Consolidated Net Income of Hughes
Electronics" as of immediately prior to the GM Spin-Off Merger Effective Time
(currently expected to be approximately 400 million); provided that such
fraction shall never be greater than one. This term will be defined in the GM
Certificate of Incorporation, as proposed to be amended in the GM Spin-Off
Merger, as part of the terms of the New GM Class H Common Stock and will be
used in determining the amount available for the payment of dividends on the
New GM Class H Common Stock. The GM Certificate of Incorporation, as proposed
to be amended in the GM Spin-Off Merger, will use the term "Available Separate
Consolidated Net Income of Hughes" to refer to what this document refers to as
the Available Separate Consolidated Net Income of New Hughes Electronics.
"Avicom Divestiture" means the agreement of Hughes Telecom to sell
substantially all of the assets and liabilities of the Hughes Avicom business
to Rockwell Collins, Inc. See "Business of Hughes Telecom--Hughes Avicom" in
Chapter 4.
"Bear Stearns" means Bear, Stearns & Co. Inc., in its capacity as financial
advisor to Raytheon in connection with the Raytheon Merger.
"Capital Stock Committee" means a standing committee of the GM Board,
comprised entirely of independent directors of General Motors, which oversees
those matters in which the two classes of GM's common stockholders may have
divergent interests.
"Class A Common Stock" means the Class A Common Stock, $0.01 par value per
share, of Hughes Defense (i.e., HE Holdings) which will be distributed to GM's
common stockholders pursuant to the GM Spin-Off Merger.
"Class A Common Stockholder" means a holder of Class A Common Stock.
"Class A Share Value" means the average closing market price of Raytheon
Common Stock during the 30-day period ending on the fifth day before the
consummation of the Raytheon Merger.
"Class B Common Stock" means the Class B Common Stock, $0.01 par value per
share, of Hughes Defense (i.e., HE Holdings) which will be distributed to
Raytheon's common stockholders pursuant to the Raytheon Merger.
"Class B Common Stockholder" means a holder of Class B Common Stock.
"Class H Distribution" means the total number of shares of Class A Common
Stock to be distributed to GM Class H Common Stockholders.
279
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GLOSSARY
"Class H Fraction" means the fraction which expresses the relationship
between the number of shares of GM Class H Common Stock outstanding and the
Class H Dividend Base, which is the denominator of the fraction that is used in
the GM Certificate of Incorporation to allocate the earnings of Hughes
Electronics between GM's two classes of common stock for dividend purposes. See
"Special Factors--The Distribution Ratio" in Chapter 3.
"CSFB" means Credit Suisse First Boston Corporation, in its capacity as
financial advisor to Raytheon in connection with the Raytheon Merger.
"Code" means the Internal Revenue Code of 1986, as amended.
"Delaware General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended.
"Delco" means Delco Electronics Corporation, a Delaware corporation and (1)
before the Hughes Reorganization, a wholly owned subsidiary of Hughes
Electronics comprising the automotive electronics business of Hughes
Electronics, and (2) after the Hughes Reorganization, a wholly owned subsidiary
of General Motors comprising the automotive electronics business of Hughes
Electronics. "Delco" also means, as appropriate, the automotive electronics
business of Hughes Electronics.
"Delphi" means Delphi Automotive Systems, the automotive components sector of
General Motors.
"Department of Defense" means the U.S. Department of Defense.
"Distribution Ratio" means the relationship between (1) the number of shares
of Class A Common Stock to be allocated and distributed to the GM $1 2/3 Common
Stockholders and (2) the number of shares of Class A Common Stock to be
allocated and distributed to the GM Class H Common Stockholders, pursuant to
the Hughes Defense Spin-Off. For a description of the Distribution Ratio and
the methodology used by the GM Board to determine the Distribution Ratio, see
"Special Factors--The Distribution Ratio" in Chapter 3.
"EDS" means Electronic Data Systems Corporation, a Delaware corporation and
formerly a wholly owned subsidiary of General Motors.
"EDS Split-Off" means the split-off of EDS from General Motors consummated on
June 7, 1996, pursuant to which all of the outstanding shares of common stock
of EDS were exchanged for all of the outstanding shares of the Class E Common
Stock, $0.10 par value, of General Motors.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"FTC" means the U.S. Federal Trade Commission.
"General Motors" or "GM" means General Motors Corporation, a Delaware
corporation. When we refer to "GM" or "General Motors" in this document, we
mean General Motors and its subsidiaries (including Hughes Defense prior to the
Hughes Defense Spin-Off) unless the context indicates that we mean otherwise.
"GMAC" means General Motors Acceptance Corporation, a New York corporation
and a wholly owned subsidiary of General Motors.
"GM Board" means the Board of Directors of General Motors.
"GM By-Laws" means the By-Laws of General Motors, as amended.
"GM Certificate of Incorporation" means the Restated Certificate of
Incorporation of General Motors, as amended.
280
<PAGE>
GLOSSARY
"GM Class H Common Stock" means the Class H Common Stock, $0.10 par value per
share, of General Motors.
"GM Class H Common Stockholder" means a holder of GM Class H Common Stock.
"GM 1996 Form 10-K" means the Annual Report on Form 10-K of General Motors
for the year ended December 31, 1996.
"GM $1 2/3 Common Stock" means the Common Stock, $1 2/3 par value per share,
of General Motors and, following the GM Spin-Off Merger Effective Time, the
Common Stock, $1 2/3 par value per share, of General Motors as the surviving
corporation of the GM Spin-Off Merger.
"GM $1 2/3 Common Stockholder" means a holder of GM $1 2/3 Common Stock.
"GM Preference Stock" means the Preference Stock, $0.10 par value per share,
of General Motors (including the Series B 9 1/8% Preference Stock, the Series D
7.92% Preference Stock and the Series G 9.12% Preference Stock).
"GM Preferred Stock" means the Preferred Stock, without par value, of General
Motors.
"GM President's Council" means a standing council of certain members of
senior management of General Motors, appointed by the GM Board and charged with
senior policy-making authority, currently comprised of persons holding the
following positions: (1) the Chairman, Chief Executive Officer and President of
General Motors (Mr. John F. Smith, Jr.), (2) the Vice Chairman of General
Motors, who has responsibility for, among other things, Hughes Electronics (Mr.
Harry J. Pearce), (3) the Executive Vice President of General Motors and
President of Delphi Automotive Systems (Mr. J.T. Battenberg III), (4) the
Executive Vice President and President, International Operations of General
Motors (Mr. Louis P. Hughes), (5) the Executive Vice President and Chief
Financial Officer of General Motors (Mr. J. Michael Losh) and (6) the Executive
Vice President of General Motors and President of GM NAO (Mr. G. Richard
Wagoner). Prior to October 20, 1997, the GM President's Council also included
Mr. C. Michael Armstrong, then Chairman and Chief Executive Officer of Hughes
Electronics.
"GM Recapitalization" means the recapitalization and conversion of each
issued and outstanding share of GM Class H Common Stock into one share of New
GM Class H Common Stock and the right to receive a distribution of Class A
Common Stock in accordance with the Distribution Ratio. The GM Recapitalization
will be accomplished pursuant to the GM Spin-Off Merger.
"GM Recapitalization Opinion" means the opinion of Kirkland & Ellis, outside
tax counsel to General Motors, to the effect that the GM Recapitalization will
constitute a tax-free reorganization within the meaning of Section 368(a) of
the Code.
"GM Spin-Off Merger" means the merger of Merger Sub with General Motors, with
General Motors as the surviving corporation of the GM Spin-Off Merger, to
effect, among other things, the Hughes Defense Spin-Off and the GM
Recapitalization.
"GM Spin-Off Merger Agreement" means the Agreement and Plan of Merger by and
between General Motors and Merger Sub, dated as of October 17, 1997, as
amended.
"GM Spin-Off Merger Effective Time" means the time at which the GM Spin-Off
Merger becomes effective.
"GM Transfer Agent" means BankBoston, N.A., in its capacity as the transfer
agent for the GM common stock.
281
<PAGE>
GLOSSARY
"Goldman Sachs" means Goldman, Sachs & Co., in its capacity as financial
advisor to General Motors, Hughes Electronics and Hughes Defense in connection
with the Raytheon Merger.
"Goldman Sachs Fairness Opinion" means the written opinion of Goldman Sachs,
dated as of January 16, 1997, addressed to the Boards of Directors of General
Motors, Hughes Electronics and Hughes Defense in connection with the Raytheon
Merger that, on the basis of and subject to the assumptions and limitations and
other matters set forth therein, as of the date thereof, the Aggregate
Consideration (as defined therein) is fair to the GM Group (as defined therein)
as a whole.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations promulgated thereunder.
"HE Holdings" means HE Holdings, Inc., a Delaware corporation and (1) before
the Hughes Reorganization, a wholly owned subsidiary of Hughes Electronics
comprising the defense electronics business and the telecommunications and
space business of Hughes Electronics, and (2) after the Hughes Reorganization
(but before the Hughes Defense Spin-Off), a wholly owned subsidiary of General
Motors comprising the defense electronics business of Hughes Electronics. HE
Holdings is the corporate name currently used by the corporation that was
called "Hughes Aircraft Company" when it was acquired by General Motors in
1985. HE Holdings will be the issuer of the Class A Common Stock to be
distributed in the Hughes Defense Spin-Off. In the Raytheon Merger, Raytheon
will merge with and into HE Holdings, with HE Holdings as the surviving
corporation, which will be renamed "Raytheon Company" in connection with the
merger. With respect to periods following the Raytheon Merger Effective Time,
we sometimes refer in this document to HE Holdings as "New Raytheon."
"Hughes Aircraft" means the corporation that was called "Hughes Aircraft
Company" when it was acquired by General Motors in 1985. This corporation is
currently named "HE Holdings, Inc." See the definition of "HE Holdings."
"Hughes Defense" means HE Holdings. "Hughes Defense" also means, as
appropriate, the defense electronics business of Hughes Electronics.
"Hughes Defense By-Laws" means the Amended and Restated By-Laws of Hughes
Defense, which will continue as the by-laws of New Raytheon after the Raytheon
Merger. With respect to periods following the Raytheon Merger Effective Time,
we sometimes refer in this document to the Hughes Defense By-Laws as the "New
Raytheon By-Laws."
"Hughes Defense Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of Hughes Defense, which will continue as the
certificate of incorporation of New Raytheon after the Raytheon Merger. With
respect to periods following the Raytheon Merger Effective Time, we sometimes
refer in this document to the Hughes Defense Certificate of Incorporation as
the "New Raytheon Certificate of Incorporation."
"Hughes Defense Common Stock" means the Class A Common Stock and the Class B
Common Stock. With respect to periods following the Raytheon Merger Effective
Time, we sometimes refer in this document to the Hughes Defense Common Stock as
"New Raytheon Common Stock."
"Hughes Defense Recapitalization" means the adoption by Hughes Defense of the
Hughes Defense Certificate of Incorporation, which authorizes Class A Common
Stock and Class B Common Stock, and the recapitalization of the common stock,
no par value per share, of Hughes Defense into shares of Class A Common Stock.
"Hughes Defense Registration Statement" means the Registration Statement on
Form S-4 of Hughes Defense, as amended and including exhibits, to register with
the SEC the shares of Class A Common Stock to be distributed in the Hughes
Defense Spin-Off. This document is part of the Hughes Defense Registration
Statement.
"Hughes Defense Spin-Off" means the spin-off of Hughes Defense from General
Motors.
282
<PAGE>
GLOSSARY
"Hughes Defense Spin-Off Committee" means a special committee of the GM Board
formed to supervise the process of soliciting interest in Hughes Defense and to
oversee matters relating to the Hughes Transactions. The Hughes Defense Spin-
Off Committee, which has been renamed the "Hughes Transactions Committee," is
currently comprised of John G. Smale, Thomas H. Wyman, John H. Bryan, Ann D.
McLaughlin, Edmund T. Pratt and Dennis Weatherstone. See "Special Factors--
Background of the Hughes Transactions" in Chapter 3.
"Hughes Electronics" means Hughes Electronics Corporation, a Delaware
corporation and a wholly owned subsidiary of General Motors. See the definition
of "New Hughes Electronics."
"Hughes Electronics Board" means the Board of Directors of Hughes
Electronics.
"Hughes Network Systems" means Hughes Network Systems, Inc., a Delaware
corporation and a wholly owned subsidiary of Hughes Defense.
"Hughes Reorganization" means all transfers of assets and liabilities by and
among Delco, Hughes Telecom and Hughes Defense and their respective
subsidiaries, the Hughes Telecom Spin-Off, the transfer of Delco from Hughes
Electronics to General Motors, the merger of Hughes Electronics with General
Motors (resulting in the liquidation of Hughes Electronics), the merger of the
subsidiary of Hughes Defense which principally operates the defense electronics
business with Hughes Defense (i.e., HE Holdings) (resulting in the liquidation
of that subsidiary) and the Hughes Defense Recapitalization.
"Hughes Telecom" means, before the Hughes Reorganization, the
telecommunications and space business of Hughes Electronics. "Hughes Telecom"
also means, as appropriate, the telecommunications and space business of New
Hughes Electronics with respect to periods after the Hughes Reorganization.
"Hughes Telecom Spin-Off" means the spin-off of Hughes Telecom by Hughes
Defense to General Motors.
"Hughes Transactions" means collectively (1) the Hughes Reorganization, (2)
the Hughes Defense Spin-Off, (3) the GM Recapitalization, (4) the consummation
of the GM Spin-Off Merger, (5) the execution and delivery of each of the
Separation Agreements and (6) the consummation of the other transactions and
events contemplated by the Transaction Agreements.
"Hughes Transactions Exchange Agent" means BankBoston, N.A. in its capacity
as the exchange agent for the Hughes Transactions.
"Implementation Agreement" means the Implementation Agreement by and between
General Motors and Raytheon, dated as of January 16, 1997, as amended.
"Intercompany Payment" means the application of the proceeds of the new
indebtedness to be incurred by Hughes Defense as contemplated by the Raytheon
Merger Agreement. Such proceeds (up to $4.0 billion) will be made available to
Hughes Telecom, with the amount, if any, in excess of $4.0 billion being made
available to General Motors through the repayment of intercompany loans owing
to Delco, which will be transferred to General Motors. See "Description of the
Raytheon Merger--Raytheon Merger Agreement--Certain Covenants--Indebtedness" in
Chapter 3.
"Intercompany Payment Amount" means, as set forth in the Raytheon Merger
Agreement, the amount of indebtedness for borrowed money that may be incurred
by Hughes Defense prior to the Raytheon Merger Effective Time. See "Description
of the Raytheon Merger--Raytheon Merger Agreement--Certain Covenants--
Indebtedness" in Chapter 3.
"IRS" means the Internal Revenue Service of the U.S. Department of Treasury.
"IRS Ruling" means the letter ruling, dated as of July 11, 1997, received
from the IRS which holds, in part, that each of (1) the distribution of Class A
Common Stock to the GM Class H Common Stockholders and the GM $1 2/3 Common
Stockholders as contemplated by the GM Spin-Off Merger Agreement and (2) the
283
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GLOSSARY
Hughes Telecom Spin-Off will constitute a tax-free (to the applicable
distributing corporation and its stockholders) distribution under Sections 355
and 368(a)(1)(D) of the Code. The IRS Ruling includes a holding which
constitutes the IRS Supplemental Ruling defined below.
"IRS Supplemental Ruling" means the holding contained in the IRS Ruling that
the consummation of the transactions contemplated by the GM Spin-Off Merger
Agreement and the consummation of the Raytheon Merger will not in any way
jeopardize the tax-free status of the EDS Split-Off.
"Master Separation Agreement" means the Master Separation Agreement among
General Motors, Hughes Telecom, Delco and Hughes Defense, to be entered into in
connection with the consummation of the Hughes Transactions.
"Merger Sub" means GM Mergeco Corporation, a Delaware corporation and a
wholly owned subsidiary of General Motors, formed for the purpose of effecting
the GM Spin-Off Merger.
"Merrill Lynch" means Merrill Lynch, Pierce, Fenner & Smith Incorporated, in
its capacity as financial advisor to General Motors in connection with the
Hughes Transactions.
"Net Transaction Effect" means the Net Transaction Effect Base Amount, plus,
if the Intercompany Payment Amount exceeds $4.0 billion, such excess multiplied
by the Class H Fraction as of immediately prior to the GM Spin-Off Merger
Effective Time. See "Special Factors--The Distribution Ratio" in Chapter 3.
"Net Transaction Effect Base Amount" means $6.5 billion multiplied by the
Class H Fraction as of immediately prior to the GM Spin-Off Merger Effective
Time. See "Special Factors--The Distribution Ratio" in Chapter 3.
"New GM Class H Common Stock" means the Class H Common Stock, $0.10 par value
per share, of General Motors to be issued in the GM Spin-Off Merger.
"New GM Class H Common Stockholder" means a holder of New GM Class H Common
Stock.
"New Hughes Electronics" means a wholly owned subsidiary of General Motors
comprising the business of Hughes Telecom. See the definition of "Hughes
Telecom."
"New Raytheon" means Hughes Defense (i.e., HE Holdings) as the surviving
corporation of the Raytheon Merger.
"New Raytheon Board" means the Board of Directors of New Raytheon.
"New Raytheon By-Laws" means the Amended and Restated By-Laws of New
Raytheon, after the consummation of the Raytheon Merger. See the definition of
"Hughes Defense By-Laws."
"New Raytheon Capital Stock" means the New Raytheon Common Stock and the New
Raytheon Preferred Stock.
"New Raytheon Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of New Raytheon. See the definition of "Hughes
Defense Certificate of Incorporation."
"New Raytheon Common Stock" means the Class A Common Stock and the Class B
Common Stock of New Raytheon. See the definition of "Hughes Defense Common
Stock."
"New Raytheon Preferred Stock" means the Preferred Stock, $0.01 par value per
share, of New Raytheon.
284
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GLOSSARY
"New Raytheon Right" means a right to purchase one one-hundredth of a share
of New Raytheon Junior Preferred Stock as provided in the New Raytheon Rights
Agreement.
"New Raytheon Rights Agreement" means the Rights Agreement, to be entered
into by and between HE Holdings and the Rights Agent (as defined in the New
Raytheon Rights Agreement).
"NYSE" means the New York Stock Exchange, Inc.
"$1 2/3 Distribution" means the total number of shares of Class A Common
Stock to be distributed to GM $1 2/3 Common Stockholders.
"Original Merrill Lynch Fairness Opinion" means the written opinion of
Merrill Lynch, dated October 6, 1997, addressed to the GM Board that, as of
such date, on the basis of and subject to the assumptions, limitations and
other matters set forth therein, taking into account all relevant aspects of
the Hughes Transactions and the Raytheon Merger, the consideration to be
provided to General Motors and its subsidiaries and to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders in the Hughes Transactions
was fair from a financial point of view to the GM $1 2/3 Common Stockholders
and to the GM Class H Common Stockholders.
"Original Salomon Brothers Fairness Opinion" means the written opinion of
Salomon Brothers, dated October 6, 1997, addressed to the GM Board that, as of
such date, on the basis of and subject to the assumptions, limitations and
other matters set forth therein, taking into account all relevant aspects of
the Hughes Transactions and the Raytheon Merger, the consideration to be
provided to General Motors and its subsidiaries and to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders in the Hughes Transactions
was fair from a financial point of view to the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders.
"PanAmSat" means, before the PanAmSat Merger, PanAmSat Corporation, a
Delaware corporation. "PanAmSat" also means, as appropriate, PanAmSat
Corporation with respect to periods after the PanAmSat Merger.
"PanAmSat Merger" means the series of transactions resulting in the merger of
the satellite services operations of each of Hughes Telecom and PanAmSat into a
new, publicly held company, which we also refer to herein as "PanAmSat," which
were consummated on May 16, 1997.
"Raytheon" means Raytheon Company, a Delaware corporation.
"Raytheon Common Stock" means the Common Stock, $1.00 par value per share, of
Raytheon.
"Raytheon Merger" means the merger of Raytheon with Hughes Defense pursuant
to the Raytheon Merger Agreement.
"Raytheon Merger Agreement" means the Agreement and Plan of Merger by and
between Hughes Defense and Raytheon, dated as of January 16, 1997, as amended.
"Raytheon Merger Effective Time" means the time at which the Raytheon Merger
becomes effective, which will be immediately following the consummation of the
GM Spin-Off Merger.
"Raytheon Merger Exchange Agent" means State Street Bank and Trust Company in
its capacity as the exchange agent for the Raytheon Merger.
"Raytheon Merger Opinions" means collectively the opinions of Wachtell,
Lipton, Rosen & Katz, counsel to Raytheon, and Weil, Gotshal & Manges LLP,
counsel to Hughes Defense, each to the effect that the Raytheon Merger will
constitute a tax-free reorganization within the meaning of Section 368(a) of
the Code.
285
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GLOSSARY
"Raytheon 1996 Form 10-K" means the Annual Report on Form 10-K of Raytheon
for the year ended December 31, 1996.
"Raytheon Registration Statement" means the Registration Statement on Form S-
4 of HE Holdings, Inc. (Registration No. 333-39861), filed on November 10,
1997, as amended and including exhibits, to register with the SEC the shares of
Class B Common Stock to be distributed in the Raytheon Merger.
"Raytheon Solicitation Statement" means the proxy/consent solicitation
statement of Raytheon with respect to the Raytheon Merger, which is a part of
the Raytheon Registration Statement. The "Background" section and certain
appendices of the Raytheon Solicitation Statement have been incorporated into
this document by reference. See "Where You Can Find More Information" in
Chapter 7.
"Record Date" means October 15, 1997.
"Registration Statements" means (1) the Registration Statement on Form S-4 of
General Motors, as amended and including exhibits, to register with the SEC the
shares of New GM Class H Common Stock to be distributed in the GM Spin-Off
Merger and (2) the Hughes Defense Registration Statement.
"Requisite Stockholder Approval" means the approval by (1) a majority of the
outstanding shares of GM Class H Common Stock, voting as a separate class, and
(2) a majority of the outstanding shares of GM $1 2/3 Common Stock, voting as a
separate class.
"Salomon Brothers" means Salomon Brothers Inc, in its capacity as financial
advisor to General Motors in connection with the Hughes Transactions.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, together with
the rules and regulations promulgated thereunder.
"Separation Agreements" means collectively the Master Separation Agreement,
the Spin-Off Separation Agreement, the Tax Sharing Agreement and all of the
other agreements contemplated by the Master Separation Agreement.
"Schedule 13E-3" means the Schedule 13E-3 Transaction Statement, as amended
and including the exhibits, filed by General Motors in connection with the
Hughes Transactions.
"Spin-Off Separation Agreement" means the Spin-Off Separation Agreement by
and between Hughes Defense and General Motors, to be entered into in connection
with the consummation of the Hughes Transactions.
"Tax Sharing Agreement" means the Tax Sharing Agreement by and among General
Motors, Hughes Defense and Hughes Telecom, to be entered into in connection
with the consummation of the Hughes Transactions.
"Texas Instruments" means Texas Instruments Incorporated, a Delaware
corporation.
"Texas Instruments Defense" means the defense systems and electronics
business of Texas Instruments, which was acquired by Raytheon on July 11, 1997.
"Texas Instruments Defense Acquisition" means the acquisition by Raytheon of
Texas Instruments Defense on July 11, 1997.
"Transaction Agreements" means the GM Spin-Off Merger Agreement, the
Implementation Agreement, the Raytheon Merger Agreement and the Separation
Agreements.
286
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GLOSSARY
"Treasury Regulations" means the rules and regulations promulgated by the
U.S. Department of Treasury under the Code.
"Updated Merrill Lynch Fairness Opinion" means the written opinion of Merrill
Lynch, dated November 10, 1997, addressed to the GM Board that, as of such
date, on the basis of and subject to the assumptions, limitations and other
matters set forth therein, taking into account all relevant aspects of the
Hughes Transactions and the Raytheon Merger, the consideration to be provided
to General Motors and its subsidiaries and to the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders in the Hughes Transactions was fair from
a financial point of view to the GM $1 2/3 Common Stockholders and to the GM
Class H Common Stockholders.
"Updated Salomon Brothers Fairness Opinion" means the written opinion of
Salomon Brothers, dated November 10, 1997, addressed to the GM Board that, as
of such date, on the basis of and subject to the assumptions, limitations and
other matters set forth therein, taking into account all relevant aspects of
the Hughes Transactions and the Raytheon Merger, the consideration to be
provided to General Motors and its subsidiaries and to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders in the Hughes Transactions
was fair from a financial point of view to the GM $1 2/3 Common Stockholders
and to the GM Class H Common Stockholders.
287
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APPENDICES
<TABLE>
<CAPTION>
<C> <S> <C>
APPENDIX A GM Spin-Off Merger Agreement
Exhibit A: Article Fourth of the GM
Certificate of Incorporation, After
Giving Effect to the
GM Spin-Off Merger
APPENDIX B Fairness Opinions
Updated Merrill Lynch Fairness Opinion
Updated Salomon Brothers Fairness
Opinion
Goldman Sachs Fairness Opinion
Hughes Defense Combined Financial
APPENDIX C Statements
Independent Auditors' Report
Hughes Defense Combined Financial
Statements
and Notes Thereto
APPENDIX D Delco Combined Financial Statements
Independent Auditors' Report
Delco Combined Financial Statements
and Notes Thereto
Hughes Telecom Combined Financial
APPENDIX E Statements
Independent Auditors' Report
Hughes Telecom Combined Financial
Statements
and Notes Thereto
</TABLE>
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
GENERAL MOTORS CORPORATION
AND
GM MERGECO CORPORATION
DATED AS OF OCTOBER 17, 1997
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement") is made and entered into as
of October 17, 1997 by and between General Motors Corporation, a Delaware
corporation ("GM"), and GM Mergeco Corporation, a Delaware corporation and a
wholly owned subsidiary of GM ("Mergeco"). GM and Mergeco are sometimes
referred to herein individually as a "Party" and collectively as the "Parties."
Certain capitalized terms used herein have the meanings ascribed to such terms
in Section 1 hereof.
WHEREAS, Hughes is an indirect wholly owned subsidiary of GM;
WHEREAS, Hughes and Raytheon desire to combine Raytheon's business with the
Defense Business pursuant to the Hughes Merger Agreement;
WHEREAS, as a condition to entering into the Hughes Merger Agreement,
Raytheon has required that GM and Hughes agree that, at the time of
consummation of the Hughes Merger, Hughes be an independent, publicly owned
company, comprising the Defense Business;
WHEREAS, Mergeco has been formed for the purpose of effectuating the spin-off
of Hughes from GM and certain related transactions;
WHEREAS, the Parties intend that, subject to the terms and conditions hereof,
Mergeco will merge with and into GM in a tax-free (to GM and the holders of GM
Common Stocks) transaction pursuant to which, among other things, (i) the GM
Class H Stockholders will receive a distribution of shares of Hughes Class A
Common Stock in respect of their shares of GM Class H Common Stock and GM Class
H Common Stock will be recapitalized into New GM Class H Common Stock and (ii)
the GM $1 2/3 Common Stockholders will receive a distribution of shares of
Hughes Class A Common Stock in respect of their shares of GM $1 2/3 Common
Stock; and
WHEREAS, the GM board of directors has determined that the transactions
contemplated hereby are desirable and in the best interests of GM and the
holders of the GM Common Stocks and, by resolutions duly adopted, has approved
and adopted this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the Parties hereby agree as follows:
Section 1. Definitions
"1 2/3 Defense Distribution" means 102,630,503 minus the Class H Defense
Distribution.
"Agreement" has the meaning set forth in the preface above.
"Average Closing Price of Raytheon Common Stock" means the average closing
price of Raytheon common stock, regular way, on the New York Stock Exchange
during the 30-day period ending five days prior to the effective time of the
Hughes Merger.
"Class H Defense Distribution" means the sum of:
(i) the product of multiplying (A) 102,630,503 times (B) the Class H
Fraction, plus
(ii) the result of dividing (Y) the Net Transaction Effect by (Z) the
Average Closing Price of Raytheon Common Stock.
"Class H Dividend Base" means the denominator of the fraction used to
calculate the Available Separate Consolidated Net Income of Hughes (as defined
in the GM Certificate of Incorporation), as of immediately prior to the
Effective Time.
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"Class H Fraction" means a fraction, the numerator of which is equal to the
total number of shares of GM Class H Common Stock outstanding immediately prior
to the Effective Time and the denominator of which is equal to the Class H
Dividend Base.
"Closing" has the meaning set forth in Section 2(b) below.
"Closing Time" has the meaning set forth in Section 2(b) below.
"Code" means the Internal Revenue Code of 1986, as amended, together with the
rules and regulations promulgated thereunder.
"Defense Business" has the meaning ascribed to such term in the Master
Separation Agreement.
"Delaware Certificate of Merger" has the meaning set forth in Section 2(c)
below.
"Delaware General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended.
"Delco" has the meaning ascribed to such term in the Master Separation
Agreement.
"EDS" means Electronic Data Systems Corporation, a Delaware corporation and a
former wholly owned subsidiary of GM.
"Effective Time" has the meaning set forth in Section 2(d)(i) below.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"GM" has the meaning set forth in the preface above.
"GM Certificate of Incorporation" means the Amended and Restated Certificate
of Incorporation of GM, as amended and in effect immediately prior to the
Effective Time.
"GM Class H Common Stock" means the Class H Common Stock, $0.10 par value per
share, of GM.
"GM Class H Stockholder" means any holder of record of GM Class H Common
Stock.
"GM Common Stocks" means collectively the GM $1 2/3 Common Stock and the GM
Class H Common Stock.
"GM Implementation Agreement" means the Implementation Agreement dated as of
January 16, 1997 by and between GM and Raytheon, as amended from time to time.
"GM Transactions" means collectively (i) the HEC Reorganization, (ii) the
Hughes Recapitalization, (iii) the spin-off of Hughes from GM as contemplated
hereby, (iv) the recapitalization of GM Class H Common Stock into New GM Class
H Common Stock as contemplated hereby, (v) the consummation of the Spin-Off
Merger pursuant hereto, (vi) the execution and delivery of each of the
Separation Agreements and (vii) the consummation of the other transactions and
events contemplated hereby.
"GM $1 2/3 Common Stock" means, as of immediately prior to the Effective
Time, the Common Stock, $1 2/3 par value per share, of GM and, at and after the
Effective Time, the Common Stock, $1 2/3 par value per share, of the Surviving
Corporation.
"GM $1 2/3 Common Stockholder" means any holder of record of GM $1 2/3 Common
Stock.
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"Governmental Authority" means any court, arbitral tribunal, administrative
agency or commission or other governmental or regulatory body, agency,
instrumentality or authority.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"HEC" means Hughes Electronics Corporation, a Delaware corporation, a wholly
owned subsidiary of GM and the sole stockholder of Hughes.
"HEC Reorganization" means the Telecom Spin-Off, the transfer of Delco by HEC
to GM or another subsidiary of GM, the merger of Hughes Subsidiary with and
into Hughes and all related transfers of assets and liabilities by and among
Hughes, Telecom and Delco and their respective subsidiaries.
"Hughes" means HE Holdings, Inc., a Delaware corporation and an indirectly
wholly owned subsidiary of GM.
"Hughes Class A Common Stock" means the Class A Common Stock, $0.01 par value
per share, of Hughes, as set forth in Exhibit A to the Hughes Merger Agreement.
"Hughes Class B Common Stock" means the Class B Common Stock, $0.01 par value
per share, of Hughes, as set forth in Exhibit A to the Hughes Merger Agreement.
"Hughes Distribution Ratio" means the relationship between (i) the number of
shares of Hughes Class A Common Stock to be allocated and distributed to the
holders of GM $1 2/3 Common Stock and (ii) the number of shares of Hughes Class
A Common Stock to be allocated and distributed to the holders of GM Class H
Common Stock, in each case pursuant to the Spin-Off Merger, as set forth in
Section 2(d) hereof.
"Hughes Merger" means the merger of Raytheon with and into Hughes, with
Hughes as the surviving corporation.
"Hughes Merger Agreement" means the Agreement and Plan of Merger dated as of
January 16, 1997 by and between Hughes and Raytheon, as amended from time to
time.
"Hughes Recapitalization" means the adoption by Hughes of a certificate of
incorporation authorizing the Hughes Class A Common Stock and Hughes Class B
Common Stock and the recapitalization of the shares of Hughes Common Stock
owned by GM into shares of Hughes Class A Common Stock.
"Hughes Spin-Off Separation Agreement" means the Hughes Spin-Off Separation
Agreement attached as Exhibit J to the Master Separation Agreement, as amended
from time to time in accordance with the terms thereof and Section 4.2(b) of
the GM Implementation Agreement.
"Hughes Subsidiary" means Hughes Aircraft Company, a Delaware corporation
and, immediately prior to the consummation of the transactions constituting the
HEC Reorganization, a wholly owned subsidiary of Hughes.
"Intercompany Payment" has the meaning ascribed to such term in the Hughes
Merger Agreement.
"Intercompany Payment Amount" has the meaning ascribed to such term in the
Hughes Merger Agreement.
"IRS" means the Internal Revenue Service.
"Master Separation Agreement" means the Master Separation Agreement attached
as Exhibit B to the GM Implementation Agreement, as amended from time to time
in accordance with the terms thereof and Section 4.2(b) of the GM
Implementation Agreement.
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"Mergeco" has the meaning set forth in the preface above.
"Mergeco Share" means any share of the Common Stock, $0.01 par value, of
Mergeco.
"Merrill Lynch" has the meaning set forth in Section 3(c) below.
"Net Transaction Effect" means $6.5 billion multiplied by the Class H
Fraction; plus, if the Intercompany Payment Amount exceeds $4.0 billion, an
amount equal to such excess multiplied by the Class H Fraction.
"New GM Class H Common Stock" means the Class H Common Stock, $0.10 par value
per share, of GM, as described on Exhibit A attached hereto.
"Parties" has the meaning set forth in the preface above.
"Party" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an association, a
joint stock company, a trust, a joint venture, an unincorporated organization
or a governmental entity (or any department, agency or political subdivision
thereof).
"Raytheon" means Raytheon Company, a Delaware corporation.
"Registration Statements" means all registration statements under the
Securities Act and the proxy or consent solicitation statement under the
Exchange Act required to be filed by GM and Hughes in connection with the GM
Transactions.
"Requisite Stockholder Approval" means the approval of the holders of (i) a
majority of the voting power of all outstanding shares of the GM Common Stocks,
voting together as a single class based on their respective per share voting
power pursuant to the provisions set forth in the GM Certificate of
Incorporation, (ii) a majority of the outstanding shares of GM $1 2/3 Common
Stock, voting as a separate class, and (iii) a majority of the outstanding
shares of GM Class H Common Stock, voting as a separate class.
"Ruling" has the meaning set forth in Section 3(e) below.
"Salomon Brothers" has the meaning set forth in Section 3(c) below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, together with
the rules and regulations promulgated thereunder.
"Separation Agreements" means collectively the Master Separation Agreement
and all of the other agreements contemplated thereby.
"Spin-Off Merger" has the meaning set forth in Section 2(a) below.
"Subsidiary" means, with respect to a Party, any corporation or other
organization, whether incorporated or unincorporated, of which at least a
majority of the securities or interests having by the terms thereof ordinary
voting power to elect at least a majority of the board of directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such Party or by
any one or more of its subsidiaries, or by such Party and one or more of its
subsidiaries.
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<PAGE>
"Supplemental Ruling" has the meaning set forth in Section 3(f) below.
"Surviving Corporation" has the meaning set forth in Section 2(a) below.
"Tax-Free Status of the EDS Split-Off" means the nonrecognition of taxable
gain or loss for United States federal income tax purposes to GM and GM's
current or former stockholders, including, without limitation, the former
holders of GM's Class E Common Stock, par value $0.10 per share, in connection
with the split-off of EDS from GM which split-off was consummated on June 7,
1996.
"Telecom" has the meaning ascribed to such term in the Master Separation
Agreement.
"Telecom Spin-Off" means the spin-off of Telecom by Hughes to GM.
Section 2. Basic Transaction.
(a) The Spin-Off Merger. On the terms and subject to the conditions of this
Agreement, Mergeco shall merge with and into GM (the "Spin-Off Merger") at and
as of the Effective Time. GM shall be the corporation surviving the Spin-Off
Merger (the "Surviving Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Kirkland & Ellis,
153 East 53rd Street, New York, New York, or at such other place as GM may
determine, on such date and at such time as GM may determine (the "Closing
Time"), which time shall be on or after the time at which all conditions to the
obligations of GM to consummate the transactions contemplated hereby are
satisfied or waived by GM and which time shall be immediately prior to the
consummation of the Hughes Merger.
(c) Actions at the Closing. At the Closing, GM will cause to be filed with
the Secretary of State of the State of Delaware, as provided in Section 251 of
the Delaware General Corporation Law, a Certificate of Merger (the "Delaware
Certificate of Merger").
(d) Effects of Spin-Off Merger.
(i) General. The Spin-Off Merger shall become effective at such time (the
"Effective Time") as GM files the Delaware Certificate of Merger with the
Secretary of State of the State of Delaware or as is otherwise specified in
the Delaware Certificate of Merger. The Spin-Off Merger shall have the
effects set forth in Section 259 of the Delaware General Corporation Law.
The Surviving Corporation may, at any time after the Effective Time, take
any action (including the execution and delivery of any document) in the
name and on behalf of either GM or Mergeco in order to carry out and
effectuate the transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. At the Effective Time, Article Fourth
of the GM Certificate of Incorporation will be amended to read in its
entirety as set forth in Exhibit A attached hereto and the GM Certificate of
Incorporation as in effect at and as of immediately prior to the Effective
Time, with Article Fourth as so amended and with all Certificates of
Designations then in effect, shall be the Certificate of Incorporation of
the Surviving Corporation.
(iii) Bylaws. The Bylaws of GM as in effect at and as of immediately prior
to the Effective Time will remain the Bylaws of the Surviving Corporation
without any modification or amendment as a result of the Spin-Off Merger.
(iv) Directors and Officers. The directors and officers of GM in office at
and as of immediately prior to the Effective Time will remain the directors
and officers of the Surviving Corporation (retaining their respective
positions and terms of office).
(v) Distribution on and Recapitalization of GM Class H Common Stock. At
and as of the Effective Time, by virtue of the Spin-Off Merger and without
any action on the part of GM, Mergeco, any holder of
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<PAGE>
any capital stock of GM or any other Person, (A) each share of GM Class H
Common Stock issued and outstanding as of immediately prior to the Effective
Time (other than shares to be cancelled in accordance with Section
2(d)(viii)) shall be recapitalized and converted into one fully paid and
nonassessable share of New GM Class H Common Stock and the right to receive
a distribution of such number of fully paid and nonassessable shares of
Hughes Class A Common Stock which is equal to the Class H Defense
Distribution divided by the number of shares of GM Class H Common Stock
(other than shares to be cancelled in accordance with 2(d)(viii))
outstanding as of immediately prior to the Effective Time (rounded to the
nearest 0.00001 of a share) and (B) all such shares of GM Class H Common
Stock shall be cancelled and shall cease to exist. No share of GM Class H
Common Stock shall be exchanged for GM $1 2/3 Common Stock at a 120%
exchange ratio as currently provided under certain circumstances in the GM
Certificate of Incorporation by virtue of the Spin-Off Merger. Accordingly,
from and after the Effective Time, (x) for all purposes of determining the
record holders of New GM Class H Common Stock and Hughes Class A Common
Stock, the holders of GM Class H Common Stock as of immediately prior to the
Effective Time shall be deemed to be holders of New GM Class H Common Stock
and Hughes Class A Common Stock distributed to such holders pursuant to this
subsection and (y) subject to any transfer of such stock, each such holder
shall be entitled to receive all dividends payable on, and exercise voting
rights and all other rights and privileges with respect to, New GM Class H
Common Stock and Hughes Class A Common Stock distributed to such holders
pursuant to this subsection. Each such holder shall be entitled, upon proper
surrender (in accordance with the requirements specified in the letter of
transmittal and other instructions provided to such holder following the
Effective Time) of the certificate or certificates representing the shares
of GM Class H Common Stock formerly held by such holder, to receive a
certificate or certificates representing, or other evidence of ownership of,
shares of New GM Class H Common Stock and shares of Hughes Class A Common
Stock then held by such holder.
(vi) Distribution on and Conversion of GM $1 2/3 Common Stock. At and as
of the Effective Time, by virtue of the Spin-Off Merger and without any
action on the part of GM, Mergeco, any holder of any capital stock of GM or
any other Person, each share of GM $1 2/3 Common Stock issued and
outstanding as of immediately prior to the Effective Time (subject to
Section 2(d)(viii)) shall be converted into (A) one fully paid and
nonassessable share of GM $1 2/3 Common Stock of the Surviving Corporation
having the same designations, rights, powers and preferences, and the same
qualifications, limitations and restrictions thereof, as the share of GM $1
2/3 Common Stock being converted pursuant thereto and (B) the right to
receive a distribution of such number of fully paid and nonassessable shares
of Hughes Class A Common Stock which is equal to the $1 2/3 Defense
Distribution divided by the number of shares of GM $1 2/3 Common Stock
(other than shares described in Section 2(d)(viii)) outstanding as of
immediately prior to the Effective Time (rounded to the nearest 0.00001 of a
share). Accordingly, from and after the Effective Time, (x) for all purposes
of determining the record holders of Hughes Class A Common Stock, the
holders of GM $1 2/3 Common Stock as of immediately prior to the Effective
Time shall be deemed to be holders of Hughes Class A Common Stock
distributed to such holders pursuant to this subsection and (y) subject to
any transfer of such stock, each such holder shall be entitled to receive
all dividends payable on, and exercise voting rights and all other rights
and privileges with respect to, Hughes Class A Common Stock distributed to
such holder pursuant to this subsection. Without any action on the part of
any holder of GM $1 2/3 Common Stock, following the Effective Time each such
holder shall receive a certificate or certificates representing, or other
evidence of ownership of, the shares of Hughes Class A Common Stock then
held by such holder as a result of the foregoing.
(vii) Other GM Capital Stock. All classes and series of GM capital stock
outstanding as of immediately prior to the Effective Time, other than GM
Class H Common Stock and GM $1 2/3 Common Stock, shall remain unaffected as
a result of the Spin-Off Merger. At and as of the Effective Time, the
capital stock of the Surviving Corporation, other than the New Class H
Common Stock, shall be represented by the certificates representing the
corresponding capital stock of GM outstanding as of immediately prior to the
Effective Time.
(viii) Treasury Shares. At and as of the Effective Time, by virtue of the
Spin-Off Merger, without any action on the part of GM, Mergeco or any other
Person, each share of GM Class H Common Stock
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held by GM as treasury stock as of immediately prior to the Effective Time
shall be cancelled and retired and shall cease to exist, and no stock or
other consideration shall be delivered in exchange therefor. No share of GM
$1 2/3 Common Stock held by GM as treasury stock as of immediately prior to
the Effective Time shall be converted into the right to receive a
distribution of any shares of Hughes Class A Common Stock in connection
herewith.
(ix) Mergeco Shares. Each Mergeco Share issued and outstanding as of
immediately prior to the Effective Time shall be cancelled and retired and
shall cease to exist and no stock or other consideration shall be delivered
in exchange therefor.
(e) Closing of Transfer Records. After the Effective Time, transfers of
shares of GM Class H Common Stock outstanding prior to the Effective Time shall
not be made on the stock transfer books of the Surviving Corporation or
otherwise.
(f) Exchange Procedures. Certificates representing, or other evidence of
ownership of, the shares of New GM Class H Common Stock and Hughes Class A
Common Stock to which holders of GM Common Stocks are entitled pursuant to
Sections 2(d)(v) and (vi) shall be delivered as contemplated in Section 2.1(d)
of the Hughes Spin-Off Separation Agreement.
(g) GM Ownership of Hughes Class A Common Stock. As of immediately after the
Effective Time, GM shall not own any shares of Hughes Class A Common Stock.
Section 3. Conditions to Obligation to Close. The obligation of GM to
consummate the Spin-Off Merger is subject to satisfaction of the following
conditions:
(a) no temporary restraining order, preliminary or permanent injunction or
other order or decree which prevents the consummation of any of the
transactions contemplated by this Agreement shall have been issued and remain
in effect, and no statute, rule or regulation shall have been enacted by any
Governmental Authority which prevents the consummation of any of the
transactions contemplated by this Agreement;
(b) the GM Transactions, including the adoption of this Agreement, shall have
received the Requisite Stockholder Approval;
(c) GM shall have received from each of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Salomon Brothers Inc ("Salomon Brothers") a
written opinion, dated on or about the date of the proxy or consent
solicitation statement included in the Registration Statements, addressed to
GM's board of directors that, as of such date, on the basis of and subject to
the assumptions, limitations and other matters set forth therein, taking into
account all relevant aspects of the GM Transactions, the consideration to be
provided to GM and its subsidiaries and to the holders of GM $1 2/3 Common
Stock and the holders of GM Class H Common Stock in the GM Transactions is
fair, from a financial point of view, to the holders of GM $1 2/3 Common Stock
and to the holders of GM Class H Common Stock, together with a consent
authorizing the inclusion of such opinion in the Registration Statements, and
neither of such opinions shall have been withdrawn, revoked or modified;
(d) GM shall have received from Goldman, Sachs & Co. a written confirmation,
dated on or about the date of the proxy or consent solicitation statement
included in the Registration Statements, of its opinion, dated January 16,
1997, to the boards of directors of GM, HEC and Hughes that, as of such date,
on the basis of and subject to the assumptions, limitations and other matters
set forth therein, the Aggregate Consideration (as defined therein) is fair to
the GM Group (as defined therein) as a whole, together with a consent
authorizing the use of such opinion and confirmation in connection with the
Registration Statements, and neither of such opinion or confirmation shall have
been withdrawn, revoked or modified;
(e) GM shall have received a ruling from the IRS (the "Ruling"), in form and
substance reasonably satisfactory to GM, to the effect that each of (i) the
distribution of Hughes Class A Common Stock to GM Class H Stockholders and GM
$1 2/3 Stockholders as contemplated by this Agreement and (ii) the Telecom
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<PAGE>
Spin-Off will constitute a tax-free (to the applicable distributing corporation
and its stockholders) distribution under Sections 355 and 368(a)(1)(D) of the
Code, and GM shall not have been notified by the IRS that the Ruling has been
withdrawn, invalidated or modified in any way, and GM shall not have determined
in good faith, on the basis of advice of tax counsel, that the representations
and assumptions underlying the Ruling are not true and correct in all material
respects;
(f) GM shall have received a ruling from the IRS (the "Supplemental Ruling"),
in form and substance reasonably satisfactory to GM, that the consummation of
the transactions contemplated by this Agreement and the consummation of the
Hughes Merger will not in any way jeopardize the Tax-Free Status of the EDS
Split-Off, and GM shall not have been notified by the IRS that the Supplemental
Ruling has been withdrawn, invalidated or modified in any way, and GM shall not
have determined in good faith, on the basis of advice of tax counsel, that the
representations and assumptions underlying the Supplemental Ruling are not true
and correct in all material respects;
(g) GM shall have received an opinion from Kirkland & Ellis, in form and
substance reasonably satisfactory to GM, to the effect that, on the basis of
and subject to the assumptions, representations, limitations and other matters
set forth therein, (i) the recapitalization of GM Class H Common Stock into New
GM Class H Common Stock contemplated hereby will be tax-free to GM and the
holders thereof and (ii) each of GM Class H Common Stock and New GM Class H
Common Stock is stock of GM for U.S. federal income tax purposes;
(h) each of the HEC Reorganization and the Hughes Recapitalization shall have
been fully consummated;
(i) each of the Separation Agreements shall have been fully executed and
delivered, and each of the same shall be in full force and effect;
(j) GM's board of directors shall not have determined in good faith, in the
exercise of its fiduciary obligations under applicable law, on the basis of
oral or written advice of outside counsel, that consummation of the GM
Transactions would not be both in the best interests of GM and its common
stockholders and fair to the holders of GM $1 2/3 Common Stock and to the
holders of GM Class H Common Stock;
(k) all conditions to the Hughes Merger, other than the consummation of the
Spin-Off Merger, shall have been satisfied or waived (provided that any such
waiver by Hughes shall have been made only with GM's consent) and the parties
to the Hughes Merger Agreement shall be prepared to cause the consummation of
the Hughes Merger immediately following the Effective Time;
(l) all applicable waiting periods (and any extensions thereof) under the
Hart-Scott-Rodino Act and any applicable similar law of any foreign
jurisdiction with respect to the GM Transactions shall have expired or
otherwise been terminated and the Parties shall have made all other required
notifications with respect to the GM Transactions and shall have received all
other required authorizations, consents and approvals with respect to the GM
Transactions of all governments and governmental agencies to which GM, its
Subsidiaries or the GM Transactions are subject (including, without limitation,
those of foreign governments and governmental agencies);
(m) the Registration Statements shall have become effective under the
Securities Act and the Exchange Act and no stop order suspending the
effectiveness of any of the Registration Statements shall have been issued and
no proceeding for that purpose shall have been initiated by the SEC;
(n) the shares of New GM Class H Common Stock and Hughes Class A Common Stock
shall have been approved for listing on the New York Stock Exchange, subject to
official notice of issuance; and
(o) the Intercompany Payment shall have been paid in full.
GM may waive any condition specified in this Section 3 in its sole discretion.
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Section 4. Termination.
(a) Termination of Agreement. GM may terminate this Agreement (with the prior
authorization of its board of directors, if applicable, whether before or after
receipt of the Requisite Stockholder Approval) as provided below:
(i) GM may terminate this Agreement by giving written notice to Mergeco at
any time prior to the Effective Time in the event that GM's board of
directors determines in good faith, in the exercise of its fiduciary
obligations under applicable law, on the basis of oral or written advice of
outside counsel, (A) that consummation of the GM Transactions as then set
forth herein would not be both in the best interests of GM and its common
stockholders and fair to the holders of GM $1 2/3 Common Stock and the
holders of GM Class H Common Stock and (B) that the foregoing determination
could not reasonably be avoided by adjusting the Hughes Distribution Ratio
so as to satisfy the conditions set forth in Section 1.1 of the GM
Implementation Agreement as of the date of such adjustment;
(ii) GM may terminate this Agreement by giving written notice to Mergeco
at any time prior to the Effective Time in the event that (A) any opinion or
confirmation referred to in Section 3(c) is withdrawn or revoked or (B) any
opinion or confirmation referred to in Section 3(d) is withdrawn or revoked.
(iii) GM may terminate this Agreement by giving written notice to Mergeco
at any time prior to the Effective Time in the event that GM has been
notified by the IRS that the Ruling has been withdrawn, invalidated or
modified in an adverse manner or has been notified by the IRS or otherwise
reasonably determines, on the basis of advice of outside tax counsel, that
the consummation of any of (A) the distribution of Hughes Class A Common
Stock to GM Class H Stockholders and GM $1 2/3 Stockholders, (B) the Telecom
Spin-Off and (C) the recapitalization of the GM Class H Common Stock into
New GM Class H Common Stock will not be tax-free as contemplated by Section
3(e) or Section 3(g);
(iv) GM may terminate this Agreement by giving written notice to Mergeco
at any time prior to the Effective Time in the event that GM has been
notified by the IRS that the Supplemental Ruling has been withdrawn,
invalidated or modified or has been notified by the IRS or otherwise
reasonably determines, on the basis of advice of outside tax counsel, that
the consummation of the transactions contemplated by this Agreement will
jeopardize the Tax-Free Status of the EDS Split-Off;
(v) GM may terminate this Agreement by giving written notice to Mergeco in
the event the GM Transactions, including the adoption of this Agreement,
fail to receive the Requisite Stockholder Approval at the time contemplated
by the Registration Statements; and
(vi) GM may terminate this Agreement by giving written notice to Mergeco
at any time following the termination of the Hughes Merger Agreement or the
GM Implementation Agreement in accordance with their terms.
(b) Effect of Termination. If GM terminates this Agreement pursuant to
Section 4(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except for any
liability of any Party then in breach).
Section 5. Amendment. Subject to Section 4.2(b) of the GM Implementation
Agreement, this Agreement may be amended at any time and from time to time if
set forth in a writing executed by both Parties; provided, however, that any
such amendment made after this Agreement has received the Requisite Stockholder
Approval shall not (i) alter or change the amount or kind of shares,
securities, cash and/or property to be distributed to, or the rights to be
received in exchange for or on recapitalization and conversion of, the GM Class
H Common Stock, (ii) alter or change the amount or kind of shares, securities,
cash and/or property to be distributed to, or the rights to be received by, GM
$1 2/3 Common Stockholders, (iii) alter or change any term of the Certificate
of Incorporation of the Surviving Corporation or (iv) alter or change any of
the terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class or series of GM capital stock.
* * * * *
A-9
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on as of
the date first above written.
GENERAL MOTORS CORPORATION
/s/ General Motors Corporation
GM MERGECO CORPORATION
/s/ GM Mergeco Corporation
A-10
<PAGE>
EXHIBIT A TO GM SPIN-OFF MERGER AGREEMENT
ARTICLE FOURTH OF THE GM AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION, AFTER GIVING EFFECT TO THE SPIN-OFF MERGER
The complete text of Article Fourth of the General Motors Certificate of
Incorporation, as proposed to be amended, appears below. New text is set forth
in bold type and underlined. Deleted text has been lined through. Footnotes are
for informational purposes only.
ARTICLE FOURTH
The total authorized capital stock of the Corporation is as follows:
2,706,000,000 shares, of which 6,000,000 shares shall be Preferred Stock,
without par value ("Preferred Stock"), 100,000,000 shares shall be Preference
Stock, $0.10 par value ("Preference Stock"), and 2,600,000,000 shares shall be
Common Stock, of which 2,000,000,000 shares shall be Common Stock, $1 2/3 par
value ("Common Stock"), and 600,000,000 shares shall be Class H Common Stock,
$0.10 par value ("Class H Common Stock").
DIVISION I:
COMMON STOCK
AND CLASS H COMMON STOCK.
The Common Stock and the Class H Common Stock shall be identical in all
respects and shall have equal rights and privileges, except as otherwise
provided in this Article FOURTH. The relative rights, privileges and
restrictions of the shares of each class are as follows:
(a) Dividend Rights.
Subject to the express terms of any outstanding series of Preferred Stock or
Preference Stock, dividends may be paid in cash or otherwise upon the Common
Stock and the Class H Common Stock out of the assets of the Corporation in the
relationship and upon the terms provided for below with respect to each such
class:
(1) Dividends on Common Stock.
Dividends on Common Stock may be declared and paid only to the extent of the
assets of the Corporation legally available FOR THE PAYMENT OF DIVIDENDS
<therefor> reduced by an amount equal to the sum of (A) THE AMOUNT DETERMINED
BY THE GM BOARD TO BE AVAILABLE FOR THE PAYMENT OF DIVIDENDS ON THE CLASS H
COMMON STOCK AS OF /1/ (THE "HUGHES TRANSACTIONS DATE") PLUS the paid in
surplus attributable to SHARES OF <the> Class H Common Stock ISSUED AFTER THE
HUGHES TRANSACTIONS DATE; and (B) that portion of the earned surplus of the
Corporation attributable to the Available Separate Consolidated Net Income of
Hughes (as defined in subparagraph (A)(4)) EARNED SINCE THE HUGHES TRANSACTIONS
DATE <(a)(5)) earned since the date of the acquisition by the Corporation of
Hughes Electronics Corporation, its subsidiaries and successors ("Hughes")>.
Dividends declared and paid with respect to shares of Common Stock and any
adjustments to CAPITAL OR surplus resulting from either (i) the repurchase or
issuance of any shares of Common Stock or (ii) any other reason deemed
appropriate by the Board of Directors shall be subtracted from or added to the
<amounts> AMOUNT available for the payment of dividends on Common Stock.
Subject to the foregoing, the declaration and payment of dividends on the
Common Stock, and the amount thereof, shall at all times be solely in the
discretion of the Board of Directors of the Corporation.
(2) Dividends on Class H Common Stock.
Dividends on the Class H Common Stock may be declared and paid only to the
extent of the assets of the Corporation legally available FOR THE PAYMENT OF
DIVIDENDS <therefor> reduced by an amount equal to the sum of (A) THE AMOUNT
DETERMINED BY THE GM BOARD TO BE AVAILABLE FOR THE PAYMENT OF DIVIDENDS ON THE
COMMON STOCK AS OF THE HUGHES TRANSACTIONS DATE PLUS the paid in surplus
attributable to SHARES OF <the> Common Stock ISSUED AFTER THE HUGHES
TRANSACTIONS DATE; and (B) the earned surplus of the Corporation EARNED SINCE
THE HUGHES TRANSACTIONS DATE exclusive of that portion of such earned surplus
attributable to the Available Separate Consolidated Net Income of Hughes earned
since the HUGHES TRANSACTIONS DATE <date of the acquisition of Hughes by the
Corporation >. Dividends declared and paid with respect to shares of
- ------
1 Insert date of the Effective Time (as defined in the Agreement and Plan of
Merger to which this Exhibit is attached).
A-11
<PAGE>
Class H Common Stock and any adjustments to CAPITAL OR surplus resulting from
either (i) the repurchase or issuance of any shares of Class H Common Stock or
(ii) any other reason deemed appropriate by the Board of Directors shall be
subtracted from or added to the <amounts> AMOUNT available for the payment of
dividends on Class H Common Stock. Subject to the foregoing, the declaration
and payment of dividends on the Class H Common Stock, and the amount thereof,
shall <be> at all times be solely in the discretion of the Board of Directors
of the Corporation.
(3) Discrimination Between Common Stock and Class H Common Stock.
The Board of Directors, subject to the provisions of subparagraphs (a)(1) and
(a)(2), may, in its sole discretion, declare dividends payable exclusively to
the holders of Common Stock, exclusively to the holders of Class H Common Stock
or to the holders of both such classes in equal or unequal amounts,
notwithstanding the respective amounts <of surplus> available for dividends to
each class, the respective voting and liquidation rights of each class, the
amount of prior dividends declared on each class or any other factor.
(4)< Available Separate Consolidated Net Income of EDS.
The "Available Separate Consolidated Net Income of EDS" for any period during
which Electronic Data Systems Corporation (together with its subsidiaries and
successors, "EDS") was a direct or indirect wholly-owned subsidiary of the
Corporation shall mean the separate net income of EDS on a consolidated basis,
determined in accordance with generally accepted accounting principles without
giving effect to any adjustment which would result from accounting for the
acquisition of EDS by the Corporation using the purchase method, calculated for
each quarterly accounting period and multiplied by a fraction, the numerator of
which shall be the weighted average number of shares of Class E Common Stock
outstanding during such accounting period and the denominator of which shall
initially be 121,888,889; provided, that such fraction shall in no event be
greater than one. The denominator of the foregoing fraction shall be adjusted
from time to time as deemed appropriate by the Board of Directors of the
Corporation (i) to reflect subdivisions (by stock split or otherwise) and
combinations (by reverse stock split or otherwise) of the Class E Common Stock
and stock dividends payable in shares of Class E Common Stock to holders of
Class E Common Stock, (ii) to reflect the fair market value of contributions of
cash or property by the Corporation to EDS or of cash or property of the
Corporation to, or for the benefit of, employees of EDS in connection with
employee benefit plans or arrangements of the Corporation or any of its
subsidiaries, (iii) to reflect the number of shares of capital stock of the
Corporation contributed to, or for the benefit of, employees of EDS in
connection with benefit plans or arrangements of the Corporation or any of its
subsidiaries, (iv) to reflect payments by EDS to the Corporation of amounts
applied to the repurchase by the Corporation of shares of Class E Common Stock,
and (v) to reflect the number of shares of Class E Common Stock repurchased by
EDS and no longer outstanding; provided, that in the case of adjustments
pursuant to clause (iv) or clause (v) above, adjustments shall be made only to
the extent that the Board of Directors of the Corporation, in its sole
discretion, shall have approved such repurchase of shares by the Corporation or
EDS and, in the case of clause (iv) above, shall declare such payments by EDS
to be applied to such repurchase. Any changes in the numerator or denominator
of the foregoing fraction occurring after the end of a quarterly accounting
period shall not result in an adjustment to the Available Separate Consolidated
Net Income of EDS for such quarterly accounting period or any prior period. For
all purposes, determination of the Available Separate Consolidated Net Income
of EDS shall be in the sole discretion of the Board of Directors of the
Corporation and shall be final and binding on all stockholders of the
Corporation.
(5)> Available Separate Consolidated Net Income of Hughes.
The "Available Separate Consolidated Net Income of Hughes" shall mean the
separate net income of Hughes ELECTRONICS CORPORATION, ITS SUBSIDIARIES AND
SUCCESSORS AFTER THE HUGHES TRANSACTIONS DATE ("HUGHES") on a consolidated
basis, determined in accordance with generally accepted accounting principles,
without giving effect to any adjustment which would result from accounting for
the acquisition of Hughes AIRCRAFT COMPANY by the Corporation using the
purchase method, calculated for each quarterly accounting
A-12
<PAGE>
period and multiplied by a fraction, the numerator of which shall be the
weighted average number of shares of Class H Common Stock outstanding during
such accounting period and the denominator of which shall initially be
<200,000,000> /2/; provided, that such fraction shall in no event
be greater than one. The denominator of the foregoing fraction shall be
adjusted from time to time as deemed appropriate by the Board of Directors of
the Corporation (i) to reflect subdivisions (by stock split or otherwise) and
combinations (by reverse stock split or otherwise) of the Class H Common Stock
and stock dividends payable in shares of Class H Common Stock to holders of
Class H Common Stock, (ii) to reflect the fair market value of contributions of
cash or property by the Corporation to Hughes or of cash or property of the
Corporation to, or for the benefit of, employees of Hughes in connection with
employee benefit plans or arrangements of the Corporation or any of its
subsidiaries, (iii) to reflect the number of shares of capital stock of the
Corporation contributed to, or for the benefit of, employees of Hughes in
connection with benefit plans or arrangements of the Corporation or any of its
subsidiaries, (iv) to reflect payments by Hughes to the Corporation of amounts
applied to the repurchase by the Corporation of shares of Class H Common Stock,
and (v) to reflect the number of shares of Class H Common Stock repurchased by
Hughes and no longer outstanding; provided, that in the case of adjustments
pursuant to clause (iv) or clause (v) above, adjustments shall be made only to
the extent that the Board of Directors of the Corporation, in its sole
discretion, shall have approved such repurchase of shares by the Corporation or
Hughes and, in the case of clause (iv) above, shall declare such payments by
Hughes to be applied to such repurchase. Any changes in the numerator or
denominator of the foregoing fraction occurring after the end of a quarterly
accounting period shall not result in an adjustment to the Available Separate
Consolidated Net Income of Hughes for such quarterly accounting period or any
prior period. For all purposes, determination of the Available Separate
Consolidated Net Income of Hughes shall be in the sole discretion of the Board
of Directors of the Corporation and shall be final and binding on all
stockholders of the Corporation.
(b) Voting Rights.
The holders of Common Stock and Class H Common Stock shall vote together as a
single class on all matters; provided, however, that (i) the holders of Common
Stock voting separately as a class shall be entitled to approve by the vote of
a majority of the shares of Common Stock then outstanding any amendment,
alteration or repeal of any of the provisions of this Certificate of
Incorporation which adversely affects the rights, powers or privileges of the
Common Stock; (ii) the holders of Class H Common Stock voting separately as a
class shall be entitled to approve by the vote of a majority of the shares of
Class H Common Stock then outstanding any amendment, alteration or repeal of
any of the provisions of this Certificate of Incorporation which adversely
affects the rights, powers or privileges of the Class H Common Stock; and (iii)
any increase in the number of authorized shares of Class H Common Stock shall
be subject to approval by both (A) the holders of a majority of the shares of
Common Stock and Class H Common Stock then outstanding, voting together as a
single class based upon their respective voting rights, and (B) the holders of
a majority of the shares of Class H Common Stock then outstanding, voting
separately as a class. Subject to adjustment pursuant to paragraph (e) hereof,
each holder of Common Stock shall be entitled to one vote, in person or by
proxy, for each share of Common Stock standing in his name on the stock
transfer books of the Corporation; and each holder of Class H Common Stock
shall be entitled to <one-half (0.5)> THE CLASS H PORTION (AS DEFINED BELOW) of
a vote, in person or by proxy, for each share of Class H Common Stock standing
in his name on the stock transfer books of the Corporation. FOR PURPOSES OF
THIS PARAGRAPH (B) AND PARAGRAPH (D) OF DIVISION I OF THIS ARTICLE FOURTH,
"CLASS H PORTION" SHALL MEAN THE GREATER OF (X) 0.50 AND (Y) AN AMOUNT, ROUNDED
TO THE NEAREST ONE-TENTH, EQUAL TO (I) THE AVERAGE OF THE CLOSING PRICES (AS
DEFINED IN SUBPARAGRAPH (C)(5)) OF A SHARE OF CLASS H COMMON STOCK DURING THE
PERIOD OF TWENTY (20) CONSECUTIVE TRADING DAYS BEGINNING ON /3/ DIVIDED
BY (II) THE AVERAGE OF THE CLOSING PRICES OF A SHARE OF COMMON STOCK DURING
SUCH PERIOD.
- ------
2 Insert the number equal to the denominator of the Class H Dividend Base (as
defined in the Agreement and Plan of Merger to which this Exhibit is
attached) as of the Hughes Transactions Date.
3 Insert the date of the 11th trading day on the New York Stock Exchange after
the Hughes Transactions Date.
A-13
<PAGE>
(c) Exchangeability.
(1) After December 31, <1995> 2002, the Board of Directors of the
Corporation, in its sole discretion and by a majority vote of the directors
then in office, may at any time effect a recapitalization of the Corporation by
declaring that all of the outstanding shares of Class H Common Stock shall be
exchanged for fully paid and nonassessable shares of Common Stock in accordance
with the Exchange Rate (as defined in subparagraph (c)(4))<; provided, that the
Board of Directors may effect such recapitalization only if, during each of the
five full fiscal years preceding such recapitalization, the Board of Directors
has declared and paid cash dividends on the Class H Common Stock equal to or
greater than the Class H Payout Ratio for such year (as defined in subparagraph
(c)(2)) multiplied by the Available Separate Consolidated Net Income of Hughes
for the prior fiscal year.>.
<(2) For purposes of this paragraph (c) of Division I of this Article FOURTH,
the term "Class H Payout Ratio" shall mean, for any fiscal year, the lesser of
(A) 0.25 or (B) the quotient of (x) the total cash dividends paid on the Common
Stock in respect of such fiscal year, divided by (y) (i) the consolidated net
income of the Corporation and its subsidiaries for such fiscal year minus (ii)
the Available Separate Consolidated Net Income of EDS for any portion of such
fiscal year during which EDS was a direct or indirect wholly owned subsidiary
of the Corporation, minus (iii) the Available Separate Consolidated Net Income
of Hughes for such fiscal year; provided, that nothing in this paragraph (c)
shall be deemed to limit or restrict the authority of the Board of Directors of
the Corporation to declare and pay dividends on Class H Common Stock and Common
Stock at such times and in such amounts as the Board of Directors in its sole
discretion (subject to paragraph (a)) may determine.
(3)>(2) In the event of the sale, transfer, assignment or other disposition
by the Corporation of <substantially all of the business of Hughes Aircraft
Company, its subsidiaries and successors or of substantially all of the other
business of Hughes> SUBSTANTIALLY ALL OF THE BUSINESS OF HUGHES (AS DEFINED IN
SUBPARAGRAPH (C)(3)) to a person, entity or group of which the Corporation is
not a majority owner (whether by merger, consolidation, sale of assets or
stock, liquidation, dissolution, winding up or otherwise), effective upon the
consummation of such sale, transfer, assignment or other disposition and
automatically without any action on the part of the Corporation or its Board of
Directors or on the part of the holders of shares of Class H Common Stock, the
Corporation shall be recapitalized and all outstanding shares of Class H Common
Stock shall be exchanged for fully paid and nonassessable shares of Common
Stock at the Exchange Rate<(as defined in subparagraph (c)(4)).>.
(3) FOR PURPOSES OF SUBPARAGRAPH (C)(2) OF THIS SUBPARAGRAPH (C) OF DIVISION
I OF THIS ARTICLE FOURTH, THE TERM "SUBSTANTIALLY ALL OF THE BUSINESS OF
HUGHES" SHALL MEAN 80% OR MORE OF THE BUSINESS OF HUGHES, BASED ON THE FAIR
MARKET VALUE OF THE ASSETS, BOTH TANGIBLE AND INTANGIBLE, OF HUGHES AS OF THE
TIME THAT THE PROPOSED TRANSACTION IS APPROVED BY THE BOARD OF DIRECTORS OF THE
CORPORATION.
(4) For purposes of this paragraph (c) of Division I of this Article FOURTH,
the term "Exchange Rate" applicable to the Class H Common Stock shall mean the
number of shares of Common Stock for which each share of Class H Common Stock
shall be exchangeable pursuant to subparagraphs (c)(1) and <(c)(3)>(C)(2), as
the case may be, of this paragraph (c) determined as follows: Each share of
Class H Common Stock shall be exchangeable for such number of shares of Common
Stock (calculated to the nearest five decimal places) as is determined by
dividing (A) the product resulting from multiplying (i) the Average Market
Price Per Share (as defined in subparagraph (c)(5)) of such Class H Common
Stock by (ii) 1.2, by (B) the Average Market Price Per Share of Common Stock.
(5) For purposes of <computing the Exchange Rate applicable to the Class H
Common Stock pursuant to> this paragraph (c) of Division I of this Article
FOURTH, the "Average Market Price Per Share" of Common Stock or Class H Common
Stock, as the case may be, shall mean the average of the <daily closing prices
per> CLOSING PRICES OF A share <for> OF such Common Stock or Class H Common
Stock for the fifteen (15) consecutive trading days ending one (1) trading day
prior to either (A) in the case of an exchange pursuant to subparagraph (c)(1),
the date the Exchange Notice (as defined in subparagraph (c)(8)) is mailed or
(B) in the
A-14
<PAGE>
case of an exchange pursuant to subparagraph <(c)(3)>(C)(2), the date of the
public announcement by the Corporation or one of its subsidiaries of the first
to occur of the following: that the Corporation or one of its subsidiaries (1)
has entered into an agreement in principle with respect to such transaction or
(2) has entered into a definitive agreement with respect thereto. <The closing
price for each day shall be> FOR PURPOSES OF THIS PARAGRAPH (C) OF DIVISION I
OF THIS ARTICLE FOURTH, THE "CLOSING PRICE" OF A SHARE OF COMMON STOCK OR CLASS
H COMMON STOCK FOR EACH DAY SHALL MEAN the closing sales price THEREFOR as
reported in The Wall Street Journal or, if not reported therein, as reported in
another newspaper of national circulation chosen by the Board of Directors of
the Corporation or, in case no such sale takes place on such day, the average
of the closing bid and asked prices regular way on the New York Stock Exchange,
or if the Common Stock or Class H Common Stock is not then listed or admitted
to trading on the New York Stock Exchange, on the largest principal national
securities exchange on which such stock is then listed or admitted to trading,
or if not listed or admitted to trading on any national securities exchange,
then the last reported sale prices for such shares in the over-the-counter
market, as reported on the National Association of Securities Dealers Automated
Quotation System, or, if such sale prices shall not be reported thereon, the
average of the closing bid and asked prices so reported, or, if such bid and
asked prices shall not be reported thereon, as the same shall be reported by
the National Quotation Bureau Incorporated, or, in all other cases, an
appraised market value furnished by any New York Stock Exchange member firm
selected from time to time by the Board of Directors or the Finance Committee
of the Corporation for that purpose.
(6) No fraction of a share of Common Stock shall be issued in connection with
the exchange of shares of Class H Common Stock into Common Stock, but in lieu
thereof, each holder of Class H Common Stock who would otherwise be entitled to
a fractional interest of a share of Common Stock shall, upon surrender of such
holder's certificate or certificates (IF ANY) representing shares of Class H
Common Stock, BE ENTITLED TO receive a cash payment (without interest) (the
"Fractional Payment") equal to the product resulting from multiplying (A) the
fraction of a share of Common Stock to which such holder would otherwise have
been entitled by (B) the Average Market Price Per Share of the Common Stock <on
the Exchange Date (as defined in subparagraph (c)(8))>.
(7) No adjustments in respect of dividends shall be made upon the exchange of
any shares of Class H Common Stock; provided, however, that if the Exchange
Date (AS DEFINED IN SUBPARAGRAPH (C)(8)) with respect to Class H Common Stock
shall be subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto but prior to the payment or
distribution thereof, the registered holders of such shares at the close of
business on such record date shall be entitled to receive the dividend or other
distribution payable on such shares on the date set for payment of such
dividend or other distribution notwithstanding the exchange of such shares or
the Corporation's default in payment of the dividend or distribution due on
such date.
(8) At such time or times as the Corporation exercises <it> ITS right to
cause all of the shares of Class H Common Stock to be exchanged for Common
Stock in accordance with subparagraph (c)(1) of this paragraph (c) of Division
I of this Article FOURTH and at such time as the Corporation causes the
exchange of such Class H Common Stock for Common Stock as a result of a sale,
transfer, assignment or other disposition of the type referred to in
subparagraph <(c)(3)>(C)(2) of this paragraph (c), the Corporation shall give
notice of such exchange to the holders of Class H Common Stock whose shares are
to be exchanged, by mailing by first-class mail a notice of such exchange (the
"Exchange Notice"), in the case of an exchange in accordance with subparagraph
(c)(1) not less than thirty (30) nor more than sixty (60) days prior to the
date fixed for such exchange (the "Exchange Date"), and in the case of an
exchange in accordance with subparagraph <(c)(3)>(C)(2) as soon as practicable
before or after the Exchange Date, in either case to their last addresses as
they shall appear upon the Corporation's books. Each such Exchange Notice shall
specify the Exchange Date and the Exchange Rate applicable to such exchange,
and shall state that issuance of certificates representing, OR OTHER EVIDENCE
OF OWNERSHIP OF, Common Stock to be received upon exchange of shares of Class H
Common Stock shall be, IF SUCH SHARES OF CLASS H COMMON STOCK ARE HELD IN
CERTIFICATED FORM, upon surrender of certificates representing such shares of
Class H Common Stock.
A-15
<PAGE>
(9) Before any holder of shares of Class H Common Stock WHO HOLDS SUCH SHARES
IN CERTIFICATED FORM shall be entitled to receive certificates representing
<such>, OR OTHER EVIDENCE OF OWNERSHIP OF, shares of Common Stock<, he> FOR
WHICH SUCH SHARES OF CLASS H COMMON STOCK WERE EXCHANGED, SUCH HOLDER shall
surrender at such office as the Corporation shall specify certificates for such
shares of Class H Common Stock duly endorsed to the Corporation or in blank or
accompanied by proper instruments of transfer to the Corporation or in blank,
unless the Corporation shall waive such requirement. The Corporation will, as
soon as practicable after such surrender of ANY SUCH certificates representing
<such> shares of Class H Common Stock, issue and deliver at the office of the
transfer agent representing the Common Stock to the person for whose account
such shares of Class H Common Stock were so surrendered, or to his nominee or
nominees, certificates representing, OR OTHER EVIDENCE OF OWNERSHIP OF, the
number of whole shares of Common Stock to which <he> SUCH HOLDER shall be
entitled as aforesaid, together with the Fractional Payment, if any.
(10) From and after the Exchange Date, all rights of a holder of shares of
Class H Common Stock which were exchanged for shares of Common Stock shall
cease except for the right<, upon surrender of the certificates representing
such shares of Class H Common Stock,> to receive certificates representing, OR
OTHER EVIDENCE OF OWNERSHIP OF, shares of Common Stock together with a
Fractional Payment, if any, as contemplated by subparagraphs (c)(6) and (c)(9)
of this paragraph (c) and rights to dividends as provided in subparagraph
(c)(7)<. No>; PROVIDED, HOWEVER, THAT NO holder of a certificate which
immediately prior to the Exchange Date represented shares of Class H Common
Stock shall be entitled to receive any <dividend or other distribution with
respect to shares of Common Stock> OF THE FOREGOING until surrender of such
<holder's certificate for a certificate or certificates representing shares of
Common Stock> CERTIFICATE. Upon such surrender, there shall be paid to the
holder the amount of any dividends or other distributions (without interest)
which theretofore became payable with respect to a record date after the
Exchange Date, but which were not paid by reason of the foregoing, with respect
to the number of whole shares of Common Stock represented by the certificate or
certificates issued upon such surrender. From and after the Exchange Date
applicable to the Class H Common Stock, the Corporation shall, however, be
entitled to treat the certificates for Class H Common Stock which have not yet
been surrendered for exchange as evidencing the ownership of the number of
whole shares of Common Stock for which the shares of Class H Common Stock
represented by such certificates shall have been exchanged, notwithstanding the
failure to surrender such certificates.
(11) If any <certificate for> shares of Common Stock <is> ARE to be issued in
a name other than that in which the <certificate representing> shares of Class
H Common Stock <surrendered in exchange> EXCHANGED therefor <is> ARE
registered, it shall be a condition of such issuance that the person requesting
such issuance shall pay any transfer or other taxes required by reason of the
issuance of <certificates for> such shares of Common Stock in a name other than
that of the record holder of the <certificate surrendered> SHARES OF CLASS H
COMMON STOCK EXCHANGED THEREFOR, or shall establish to the satisfaction of the
Corporation or its agent that such tax has been paid or is not applicable.
Notwithstanding anything to the contrary in this paragraph (c), the Corporation
shall not be liable to a holder of shares of Class H Common Stock for any
shares of Common Stock or dividends or distributions thereon delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(12) At such time as any Exchange Notice is delivered with respect to any
shares of Class H Common Stock, or at the time of the Exchange Date, if
earlier, the Corporation shall have reserved and kept available, solely for the
purpose of issuance upon exchange of the outstanding shares of Class H Common
Stock, such number of shares of Common Stock as shall be issuable upon the
exchange of the number of shares of Class H Common Stock specified or to be
specified in the Exchange Notice, provided, that nothing contained herein shall
be construed to preclude the Corporation from satisfying its obligations in
respect of the exchange of the outstanding shares of Class H Common Stock by
delivery of purchased shares of Common Stock which are held in the treasury of
the Corporation.
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<PAGE>
(d) Liquidation Rights.
In the event of the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after there shall have been paid
or set apart for the holders of Preferred Stock and Preference Stock the full
preferential amounts to which they are entitled, the holders of Common Stock
and Class H Common Stock shall be entitled to receive the assets of the
Corporation remaining for distribution to its stockholders, on a per share
basis in proportion to the respective per share liquidation units of such
classes. Subject to adjustment pursuant to paragraph (e) hereof, each share of
Common Stock and Class H Common Stock shall <initially> be entitled to
liquidation units of one (1.0) and <one-half (0.5)> THE CLASS H PORTION,
respectively.
(e) Subdivision or Combination.
(1) If after <December 20, 1985> THE HUGHES TRANSACTIONS DATE, the
Corporation shall in any manner subdivide (by stock split or otherwise) or
combine (by reverse stock split or otherwise) the outstanding shares of the
Common Stock or Class H Common Stock, or pay a stock dividend in shares of any
class to holders of that class, the per share voting rights specified in
paragraph (b) and the per share liquidation units specified in paragraph (d) of
Class H Common Stock relative to Common Stock shall be appropriately adjusted
so as to avoid any dilution in the aggregate voting or liquidation rights of
any class. Distribution by the Corporation of shares of any class of its common
stock as a dividend on any other class of its common stock shall not require an
adjustment pursuant to this paragraph (e)(1).
(2) If after <December 20, 1985> THE HUGHES TRANSACTIONS DATE, the
Corporation shall distribute shares of Class H Common Stock <(such class being
hereinafter referred to as the "Distributed Class")> as a dividend (the
"Dividend") on Common Stock<(such class being hereinafter referred to as the
"Recipient Class")>, then the per share liquidation rights of the classes of
common stock set forth in paragraph (d) above, as they may have been previously
adjusted, shall be adjusted so that:
(A) each holder of shares of <any class other than the Recipient Class
>CLASS H COMMON STOCK shall be entitled to, with respect to such holder's
interest in <each such class> SUCH CLASS H COMMON STOCK, the same percentage
of the aggregate liquidation units of all shares of the Corporation's common
stock immediately after the Dividend as such holder was entitled to<,> with
respect to such holder's interest in such <class> CLASS H COMMON STOCK
immediately prior to the Dividend; and
(B) each holder of shares of <the Recipient Class> COMMON STOCK shall be
entitled to, with respect to such holder's interest in <the Recipient Class>
COMMON STOCK and all shares of <the Distributed Class >CLASS H COMMON STOCK
issued with respect to such holder's shares of <the Recipient Class> COMMON
STOCK, the same percentage of the aggregate liquidation units of all shares
of the Corporation's common stock immediately after the Dividend as such
holder was entitled to with respect to such holder's interest in <the
Recipient Class> COMMON STOCK immediately prior to the Dividend; provided,
that any adjustment pursuant to this subparagraph (e)(2)(B) shall be made to
the liquidation units of <the Recipient Class> COMMON STOCK.
In no event will any adjustments be made pursuant to this subparagraph (e)(2)
if the adjustment called for herein would reduce the liquidation units of any
class of common stock to less than zero.
(3) The determination of any adjustment required under this paragraph (e)
shall be made by the Corporation's Board of Directors; any such determination
shall be binding and conclusive upon all holders of shares of all classes of
the Corporation's common stock. Following any such determination, the Secretary
of the Corporation shall maintain a record of any such adjustment.
A-17
<PAGE>
DIVISION II:
PREFERRED STOCK.
A statement of the relative rights of the holders of Preferred Stock and a
statement of the limits of variation between each series of Preferred Stock as
to rate of dividends and price of redemption and a statement of the voting
powers and the designations, powers, privileges and rights, and the
qualifications, limits or restrictions thereof of the various series thereof,
except so far as the Board of Directors is expressly authorized to fix the same
by resolution or resolutions for the various series of the Preferred Stock, are
as follows:
Preferred Stock of the Corporation may be issued in various series as may be
determined from time to time by the Board of Directors, each such series to be
distinctly designated. All shares of any one series of Preferred Stock shall be
alike in every particular, and all series shall rank equally and be identical
in all respects except as to the dividend rate and the amount payable upon the
exercise of the right to redeem.
The dividend on the Preferred Stock of each series shall be such rate as may
be fixed by the Board of Directors in the resolution or resolutions providing
for the issuance of the Preferred Stock of such series, and as shall be stated
on the face or back of the certificates of stock therefor.
The amount payable on the exercise of the right to redeem Preferred Stock of
each series shall be an amount as may be fixed by the Board of Directors in the
resolution or resolutions providing for the issuance of the Preferred Stock of
such series, and as shall be stated on the face or back of the certificates of
stock therefor.
All other provisions herein set forth in respect of the Preferred Stock of
the Corporation shall apply to all the Preferred Stock of the Corporation,
irrespective of any variations between the Preferred Stock of the different
series.
The holders of the Preferred Stock shall be entitled to receive cumulative
dividends, when and as declared by the Board of Directors, at the rates fixed
for the respective series in the Certificate of Incorporation or in the
resolution or resolutions of the Board of Directors providing for the issuance
of the respective series, and no more, payable quarterly on the dates to be
fixed by the By-Laws. The periods between such dates commencing on such dates
are herein designated as "dividend periods." Dividends on all shares of any one
series shall commence to accrue and be cumulative from the first day of the
current dividend period within which shares of such series are first issued,
but in the event of the issue of additional shares of such series subsequent to
the date of the first issue of said shares of such series, all dividends paid
on the shares of such series prior to the issue of such additional shares and
all dividends declared payable to holders of record of shares of such series of
a date prior to such issue shall be deemed to have been paid in respect of the
additional shares so issued. Such dividends on the Preferred Stock shall be in
preference and priority to any payment on any other class of stock of the
Corporation.
The dividends on the Preferred Stock shall be cumulative and shall be payable
before any dividend on the Common Stock or Class H Common Stock or any series
of the Preference Stock shall be paid or set apart so that if in any year
dividends at the rates determined for the respective series of the Preferred
Stock shall not be paid thereon, the deficiency shall be payable before any
dividend shall be paid upon or set apart for the Common Stock or Class H Common
Stock or any series of the Preference Stock. Dividends shall not be declared
and paid on the shares of Preferred Stock of any one series for any dividend
period unless dividends have been or are contemporaneously paid or declared and
set apart for payment thereof on the shares of Preferred Stock of all series,
for all the dividend periods terminating on the same or an earlier date.
Whenever all cumulative dividends on the Preferred Stock outstanding shall
have been paid and a sum sufficient for the payment of the next ensuing
quarterly dividend on the Preferred Stock outstanding shall have been set aside
from the surplus or net profits, the Board of Directors may declare dividends
on the Common Stock or Class H Common Stock or any series of the Preference
Stock, payable then or thereafter, out of any
A-18
<PAGE>
remaining surplus or net profits, and no holders of any shares of any series of
Preferred Stock, as such, shall be entitled to share therein.
At the option of the Board of Directors, the Preferred Stock shall be subject
to redemption at the amounts fixed for the respective series in the Certificate
of Incorporation or in the resolution or resolutions of the Board of Directors
providing for the issuance of the respective series, together, in the case of
each class or series, with accrued dividends on the shares to be redeemed, on
any dividend paying date in such manner as the Board of Directors may
determine.
The holders of the Preferred Stock shall not have any voting power
whatsoever, except upon the question of selling, conveying, transferring or
otherwise disposing of the property and assets of the Corporation as an
entirety and except as otherwise required by law.
DIVISION III:
PREFERENCE STOCK.
The Board of Directors is authorized, subject to limitations prescribed by
law and the provisions of this Article FOURTH, to provide for the issuance of
Preference Stock from time to time in one or more series of any number of
shares, with a distinctive serial designation for each series, provided that
the aggregate number of shares issued and not cancelled of any and all such
series shall not exceed the total number of shares of Preference Stock
authorized by this Article FOURTH, all as shall hereafter be stated and
expressed in the resolution or resolutions providing for the issue of such
Preference Stock from time to time adopted by the Board of Directors. Subject
to said limitations, and provided that each series of Preference Stock shall
rank junior to the Preferred Stock with respect to the payment of dividends and
distributions in liquidation, each series of Preference Stock (a) may have such
voting powers, full or limited, or may be without voting powers; (b) may be
subject to redemption at such time or times and at such prices; (c) may be
entitled to receive dividends (which may be cumulative or noncumulative) at
such rate or rates, on such conditions, and at such times, and payable in
preference to, or in such relation to, the dividends payable on any other class
or classes or series of stock; (d) may have such rights upon the dissolution
of, or upon any distribution of the assets of, the Corporation; (e) may be made
convertible into, or exchangeable for, shares of any other class or classes of
or any other series of the same or any other class or classes of stock of the
Corporation or any other issuer, at such price or prices or at such rates of
exchange, and with such adjustments; (f) may be entitled to the benefit of a
sinking fund to be applied to the purchase or redemption of shares of such
series in such amount or amounts; (g) may be entitled to the benefit of
conditions and restrictions upon the creation of indebtedness of the
Corporation or any subsidiary, upon the issue of any additional stock
(including additional shares of such series or of any other series) and upon
the payment of dividends or the making of other distributions on, and the
purchase, redemption or other acquisition by the Corporation or any subsidiary
of any outstanding stock of the Corporation; and (h) may have such other
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof; all as shall be stated in said resolution
or resolutions providing for the issue of such series of Preference Stock.
Shares of any series of Preference Stock which have been redeemed (whether
through the operation of a sinking fund or otherwise) or which, if convertible
or exchangeable, have been converted into or exchanged for shares of stock of
any other class or classes shall have the status of authorized and unissued
shares of Preference Stock of the same series and may be reissued as a part of
the series of which they were originally a part or may be reclassified and
reissued as part of a new series of Preference Stock to be created by
resolution or resolutions of the Board of Directors or as part of any other
series of Preference Stock, all subject to the conditions or restrictions on
issuance set forth in the resolution or resolutions adopted by the Board of
Directors providing for the issue of any series of Preference Stock.
A-19
<PAGE>
DIVISION IV:
MISCELLANEOUS.
From time to time, the Preferred Stock, the Preference Stock, the Common
Stock and the Class H Common Stock may be increased or decreased according to
law, and may be issued in such amounts and proportions as shall be determined
by the Board of Directors, and as may be permitted by law.
In the event of any liquidation or dissolution or winding up, whether
voluntary or otherwise, of the Corporation, the holders of the Preferred Stock
shall be entitled to be paid the redemption price of each series in full, as
aforesaid, out of the assets whether capital or surplus, and, in every case,
the unpaid dividends accrued on such shares, whether or not earned or declared,
before any distribution of the assets to be distributed shall be made to the
holders of Common Stock or Class H Common Stock or any series of the Preference
Stock; but the holders of such shares shall be entitled to no further
participation in such distribution. If the assets distributable on such
liquidation, dissolution or winding up shall be insufficient to permit the
payment to the holders of the Preferred Stock of the full amount of the
redemption price of each series in full as aforesaid and accrued dividends as
aforesaid, the said assets shall be distributed pro rata among the holders of
the respective series of the Preferred Stock. After all payments are made as
aforesaid, any required payments shall be made with respect to the Preference
Stock, if any, outstanding, and the remaining assets and funds shall be divided
among and paid to the holders of Common Stock and Class H Common Stock pro rata
in proportion to the respective per share liquidation units of such classes.
The merger or consolidation of the Corporation into or with any other
corporation shall not be or be deemed to be a distribution of assets or a
dissolution, liquidation or winding up for the purposes of this paragraph.
Any Preferred Stock, Preference Stock, Common Stock or Class H Common Stock,
authorized hereunder or under any amendment hereof, in the discretion of the
Board of Directors, may be issued, except as herein otherwise provided, in
payment for property or services, or as bonuses to employees of the Corporation
or employeEs of subsidiary companies, or for other assets or securities
including cash, necessary or desirable, in the judgment of the Board of
Directors, to be purchased or acquired from time to time for the Corporation,
or for any other lawful purpose of the Corporation.
If it seems desirable so to do, the Board of Directors may from time to time
issue scrip for fractional shares of stock. Such scrip shall not confer upon
the holder any right to dividends or any voting or other rights of a
stockholder of the Corporation, but the Corporation shall from time to time,
within such time as the Board of Directors may determine or without limit of
time if the Board of Directors so determines, issue one or more whole shares of
stock upon the surrender of scrip for fractional shares aggregating the number
of whole shares issuable in respect of the scrip so surrendered, provided that
the scrip so surrendered shall be properly endorsed for transfer if in
registered form.
A-20
<PAGE>
APPENDIX B
FAIRNESS OPINIONS
<PAGE>
Corporate and Institutional
Client Group
World Financial Center
North Tower
New York, New York 10281-1328
212 449 1000
LOGO
November 10, 1997
Board of Directors
General Motors Corporation
General Motors Building
3044 West Grand Boulevard
Detroit, Michigan 48202-3091
Members of the Board:
General Motors Corporation ("GM") proposes to engage in a series of
transactions involving its wholly owned subsidiary Hughes Electronics
Corporation ("Hughes Electronics"). GM proposes that (1) certain assets and
liabilities will be transferred among HE Holdings Inc., a wholly owned
subsidiary of Hughes Electronics ("Hughes Defense"), Delco Electronics
Corporation, a wholly owned subsidiary of Hughes Electronics ("Delco"), and the
subsidiaries of Hughes Defense engaged in the telecommunications and space
business (collectively, "Hughes Telecom") and their respective subsidiaries;
(2) Hughes Defense will incur up to $4.9 billion of debt, with the exact amount
to be determined pursuant to the Raytheon Merger Agreement (as defined below),
with Hughes Telecom receiving as equity at least $3.9 billion (less the amount
of other outstanding Hughes Defense indebtedness) from the proceeds of the new
debt (the "Hughes Telecom Funding"); (3) Hughes Electronics will be merged with
and into GM, as a result of which Hughes Defense and Delco will become direct
wholly owned subsidiaries of GM; (4) Hughes Aircraft Company, the subsidiary of
Hughes Defense that is the principal operator of the defense electronics
business of Hughes Defense, will be merged with and into Hughes Defense; and
(5) Hughes Defense will distribute 100% of the stock of Hughes Telecom to GM
(the "Hughes Telecom Spin-Off") (collectively, the "Hughes Reorganization").
The Hughes Reorganization will be effected largely pursuant to a master
separation agreement to be entered into among GM, Hughes Telecom, Delco and
Hughes Defense (the "Master Separation Agreement").
Immediately following the consummation of the Hughes Reorganization, GM
proposes to spin off Hughes Defense (the "Hughes Defense Spin-Off" and,
together with the Hughes Reorganization, the "Hughes Transactions"). The Hughes
Defense Spin-Off will be accomplished through a merger (the "GM Spin-Off
Merger") of GM Mergeco Corporation, a newly formed wholly owned subsidiary of
GM ("Merger Sub"), with and into GM pursuant to an agreement and plan of merger
to be entered into between GM and Merger Sub (the "GM Spin-Off Merger
Agreement"). Pursuant to the GM Spin-Off Merger, (1) each share of GM's Class H
Common Stock, par value $0.10 per share (the "GM Class H Common Stock"), will
be recapitalized and converted into one share of a new class of GM common stock
also to be called Class H Common Stock, par value $0.10 per share (the "New GM
Class H Common Stock"), and the right to receive a pro rata interest in the
Class H Defense Distribution (as defined below) of Class A Common Stock, par
value $0.01 per share, of Hughes Defense (the "Class A Common Stock") and (2)
each share of GM's Common Stock, par value $1 2/3 per share (the "GM $1 2/3
Common Stock"), will remain outstanding and will, among other things, represent
the right to receive a pro rata interest in the $1 2/3 Defense Distribution (as
defined below) of Class A Common Stock. You have advised us that the number of
shares of Class A Common Stock to be distributed to the holders of New GM Class
H Common Stock (the "Class H Defense Distribution") in the Hughes Defense
B-1
<PAGE>
Spin-Off will equal the sum of (i) the product of (A) 102,630,503 (the total
number of shares of Class A Common Stock to be distributed in the Hughes
Defense Spin-Off) and (B) the Class H Fraction (as defined below), plus (ii)
the amount obtained by dividing (C) the Net Transaction Effect (as defined
below) by (D) the Average Closing Price of Raytheon Common Stock (as defined
below). The remainder of the 102,630,503 shares of Class A Common Stock to be
distributed in the Hughes Defense Spin-Off will be distributed to the holders
of the GM $1 2/3 Common Stock (the "$1 2/3 Defense Distribution"). The "Class H
Fraction" is the fraction equivalent to the tracking stock interest of the GM
Class H Common Stock in the earnings of Hughes Defense (as contemplated by the
Restated Certificate of Incorporation of GM, as amended (the "GM Certificate of
Incorporation")) as of the time immediately prior to the Hughes Defense Spin-
Off. The "Net Transaction Effect", as determined by the Board of Directors of
GM, is (i) an amount equal to the product of (x) $6.5 billion and (y) the Class
H Fraction plus (ii) an amount equal to the product of (x) the amount by which
the Hughes Defense indebtedness outstanding immediately prior to the Hughes
Defense Spin-Off exceeds $4.0 billion and (y) the Class H Fraction. The
"Average Closing Price of Raytheon Common Stock" will be the average closing
market price of common stock, par value $1.00 per share, of Raytheon ("Raytheon
Common Stock") during the 30-day period ending on the fifth day prior to the
consummation of the Raytheon Merger (as defined below).
Immediately after consummation of the Hughes Defense Spin-Off, and in
accordance with the terms of the Agreement and Plan of Merger dated as of
January 16, 1997 (the "Raytheon Merger Agreement") between Hughes Defense and
Raytheon Company ("Raytheon"), Raytheon will be merged with and into Hughes
Defense (the "Raytheon Merger" and, together with the Hughes Transactions, the
"Transactions"). Pursuant to the Raytheon Merger, each outstanding share of
Raytheon Common Stock will be converted into the right to receive one share of
Class B common stock, par value $0.01 per share, of Hughes Defense (the "Class
B Common Stock"). Immediately following consummation of the Raytheon Merger,
the Class A Common Stock will represent approximately 30.3% of the outstanding
common stock (and 80.1% of the voting power in the election and removal of
directors) of Hughes Defense, and the Class B Common Stock will represent
approximately 69.7% of the outstanding common stock (and 19.9% of the voting
power in the election and removal of directors) of Hughes Defense. You have
advised us that GM has received a private letter ruling (the "IRS Ruling") from
the Internal Revenue Service to the effect, and we have assumed, that the
Hughes Defense Spin-Off and the Hughes Telecom Spin-Off will each be treated as
a tax-free distribution under Section 355 of the Internal Revenue Code of 1986,
as amended.
The management of GM has advised us that, subsequent to the consummation of
the Hughes Transactions, GM's management expects to combine the operations of
Delco and Delphi Automotive Systems, the automotive components sector of GM
("Delphi") (the "Delco/Delphi Combination").
As a result of the Hughes Transactions, (1) the existing holders of GM Class
H Common Stock will relinquish their approximately 25% tracking stock interest
in Hughes Defense and Delco, will receive the Class H Defense Distribution and
will maintain approximately a 25% tracking stock interest in Hughes Telecom
through their ownership of New GM Class H Common Stock and (2) the existing
holders of GM $1 2/3 Common Stock will relinquish their approximately 75%
tracking stock interest in Hughes Defense, will receive the $1 2/3 Defense
Distribution, will maintain approximately a 75% tracking stock interest in
Hughes Telecom through their continued ownership of GM $1 2/3 Common Stock and,
also through their ownership of GM $1 2/3 Common Stock, will have 100% of the
tracking stock interest in the Delco/Delphi Combination.
You have asked us whether, in our opinion, taking into account all relevant
aspects of the Transactions, the consideration to be provided to GM and its
subsidiaries and to the holders of GM $1 2/3 Common Stock and the holders of GM
Class H Common Stock in the Hughes Transactions is fair from a financial point
of view to the holders of the GM $1 2/3 Common Stock and the holders of the GM
Class H Common Stock.
B-2
<PAGE>
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed GM's Annual Reports, Forms 10-K and related financial information
for the three fiscal years ended December 31, 1996, GM's Forms 10-Q and
the related unaudited financial information for the quarterly periods
ended March 31, 1997 and June 30, 1997 and unaudited financial information
for the quarterly period ended September 30, 1997;
(2) reviewed Raytheon's Annual Reports, Forms 10-K and related financial
information for the three fiscal years ended December 31, 1996, Raytheon's
Forms 10-Q and the related unaudited financial information for the
quarterly periods ended March 31, 1997 and June 30, 1997 and unaudited
financial information for the quarterly period ended September 30, 1997;
(3) reviewed Hughes Electronics' Annual Reports and related financial
information for the three fiscal years ended December 31, 1996;
(4) reviewed certain information, including historical financial data and
financial projections, relating to the business, earnings, cash flow,
assets, liabilities and prospects of Hughes Electronics, Hughes Defense,
Delco, Hughes Telecom and Raytheon furnished to us by GM, Hughes
Electronics and Raytheon, as the case may be;
(5) conducted discussions with members of senior management of GM, Hughes
Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom and Raytheon
concerning their respective businesses and prospects and their views
regarding the strategic rationale for, and the financial effects on GM,
Hughes Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom and
Raytheon of the Hughes Transactions, the Delco/Delphi Combination and the
Raytheon Merger;
(6) reviewed certain information, including financial projections relating to
the amount and timing of the revenue and cost savings synergies and
related expenses expected to result from the Raytheon Merger (the
"Raytheon Merger Expected Synergies"), furnished to us by GM, Hughes
Electronics, Hughes Defense and Raytheon;
(7) conducted discussions with members of senior management of GM, Hughes
Electronics, Hughes Defense and Raytheon concerning the Raytheon Merger
Expected Synergies;
(8) reviewed certain information, including financial projections relating to
the amount and timing of the revenue and cost savings synergies and
related expenses expected to result from the Delco/Delphi Combination (the
"Delco/Delphi Expected Synergies"), furnished to us by GM, Delco and
Delphi;
(9) conducted discussions with members of senior management of GM, Delco and
Delphi concerning the Delco/Delphi Expected Synergies;
(10) conducted discussions with members of senior management of GM, Hughes
Electronics and Hughes Telecom concerning recent and pending regulatory
changes in the telecommunications industry, the competitive environment of
the telecommunications and space industry and the need for Hughes Telecom
to maintain the financial flexibility to enable Hughes Telecom to respond
to competitive challenges and to avail itself of potential opportunities
in such environment;
(11) compared the results of operations of Hughes Defense, Delco and Raytheon
with those of certain companies that we deemed to be reasonably similar to
Hughes Defense, Delco and Raytheon, respectively;
(12) considered the pro forma effects, including accounting, profit sharing and
other pro forma effects, on each of GM, Hughes Defense and Hughes Telecom
of the Hughes Transactions and the Raytheon Merger;
(13) reviewed the Raytheon Merger Agreement and exhibits thereto;
(14) reviewed the Implementation Agreement, dated as of January 16, 1997,
between GM and Raytheon and exhibits thereto (the "Implementation
Agreement");
B-3
<PAGE>
(15) reviewed the form of the Master Separation Agreement and exhibits thereto
attached to the Implementation Agreement as Exhibit B;
(16) reviewed the form of the GM Spin-Off Merger Agreement attached to the
Implementation Agreement as Exhibit A;
(17) reviewed the GM Certificate of Incorporation and the GM By-Laws, as
amended;
(18) reviewed the Solicitation Statement/Prospectus dated November 10, 1997
(the "GM Solicitation Statement/Prospectus") to be furnished to the
holders of the GM Class H Common Stock and the GM $1 2/3 Common Stock,
including the text of Article Fourth of the GM Certificate of
Incorporation, as proposed to be amended in connection with the GM Spin-
Off Merger, and the new GM Board policy statement regarding GM's dual-
class common stock capital structure set forth therein;
(19) reviewed the IRS Ruling and the request to the Internal Revenue Service
for such ruling; and
(20) reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we deemed
necessary, including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness of
all information supplied or otherwise made available to us, discussed with or
reviewed by or for us, or publicly available, and we have not assumed any
responsibility for independently verifying such information or undertaken an
independent evaluation or appraisal of the assets or liabilities of GM, Hughes
Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom and Raytheon, or
been furnished with any such evaluation or appraisal. In addition, we have not
assumed any obligation to conduct, nor have we conducted, any physical
inspection of the properties or facilities of GM, Hughes Electronics, Hughes
Defense, Delco, Delphi, Hughes Telecom or Raytheon. With respect to the
financial projections and the analyses of the Raytheon Merger Expected
Synergies and the Delco/Delphi Expected Synergies furnished to or discussed
with us by GM, Hughes Electronics, Hughes Defense, Delco, Delphi, Hughes
Telecom and Raytheon, as the case may be, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgments of the managements of GM, Hughes Electronics, Hughes Defense, Delco,
Delphi, Hughes Telecom or Raytheon as to the expected future financial
performance of Hughes Electronics, Hughes Defense, Delco, Hughes Telecom or
Raytheon, and as to the Raytheon Merger Expected Synergies and the Delco/Delphi
Expected Synergies, as the case may be. We have assumed that each of the Hughes
Transactions and the Raytheon Merger will be consummated in accordance with its
terms. We have also assumed that the Hughes Transactions will have the
accounting treatment set forth in the GM Solicitation Statement/Prospectus.
Our opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date hereof.
In connection with the preparation of this opinion, we have not been
authorized by GM or the Board of Directors to solicit, nor have we solicited,
third-party indications of interest with respect to a business combination or
other extraordinary transaction involving Hughes Electronics or any of its
subsidiaries or assets.
We have received fees for our services as financial advisor to GM in
connection with the Hughes Transactions and will receive additional fees for
our services that are contingent upon the approval by the Board of Directors
of, and the consummation of, certain of the Hughes Transactions. In addition,
GM has agreed to indemnify us for certain liabilities arising out of our
engagement. We have also, in the past, provided financial advisory and
financing services to GM and its affiliates and Raytheon and may continue to do
so and have received, and may receive, fees for the rendering of such services.
In addition, in the ordinary course of our business, we may actively trade
shares of the GM $1 2/3 Common Stock, the GM Class H Common Stock, the Raytheon
Common Stock and other securities of GM and Raytheon for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
B-4
<PAGE>
This opinion is for the use and benefit of the Board of Directors. We express
no opinion as to the prices at which either the New GM Class H Common Stock or
the GM $1 2/3 Common Stock will trade subsequent to the consummation of the
Hughes Transactions.
On the basis of and subject to the foregoing, we are of the opinion that,
taking into account all relevant aspects of the Transactions, the consideration
to be provided to GM and its subsidiaries and to the holders of GM $1 2/3
Common Stock and the holders of GM Class H Common Stock in the Hughes
Transactions is fair from a financial point of view to the holders of the GM $1
2/3 Common Stock and the holders of the GM Class H Common Stock.
Very truly yours,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
B-5
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B-6
<PAGE>
SALOMON BROTHERS INC
Seven World Trade Center
New York, New York 10048
212-783-7000 ----------------
SALOMON
BROTHERS
----------------------------
- --------------------------------------------------------------------------------
SALOMON BROTHERS INC & WORLDWIDE AFFILIATES
- --------------------------------------------------------------------------------
Atlanta . Bangkok . Beijing . Boston . Chicago . Frankfurt . Hong Kong . London
. Los Angeles . Madrid . Melbourne . Mexico . Milan
Moscow . New Delhi . New York . Osaka . Paris . San Francisco . Seoul .
Singapore . Sidney . Taipei . Tokyo . Toronto . Zug . Zurich
November 10, 1997
Board of Directors
General Motors Corporation
General Motors Building
3044 West Grand Boulevard
Detroit, Michigan 48202-3091
Members of the Board:
We understand that General Motors Corporation ("General Motors") and its
wholly owned subsidiary Hughes Electronics Corporation ("Hughes Electronics")
propose to engage in a series of related transactions consisting of the
following: (i) certain assets and liabilities of Hughes Electronics and its
subsidiaries will be transferred among HE Holdings Inc., a wholly owned
subsidiary of Hughes Electronics comprising the defense electronics business of
Hughes Electronics ("Hughes Defense"), Delco Electronics Corporation, a wholly
owned subsidiary of Hughes Electronics ("Delco"), and the telecommunications
and space business of Hughes Electronics ("Hughes Telecom"); (ii) Hughes
Defense will incur indebtedness in an amount (up to $4.9 billion) determined
pursuant to the Agreement and Plan of Merger dated as of January 16, 1997
between Raytheon Company ("Raytheon") and Hughes Defense (the "Raytheon Merger
Agreement"); (iii) at least $3.9 billion of the proceeds of the indebtedness to
be incurred by Hughes Defense will be used to pay other borrowings of Hughes
Electronics with the remainder received by Hughes Telecom as equity in the form
of a cash infusion; (iv) the common stock of Delco and Hughes Telecom will be
distributed to General Motors; (v) the Class A Common Stock of Hughes Defense
will be distributed (the "Hughes Defense Spin-Off") to the holders of Common
Stock, $1 2/3 par value per share, of General Motors ("GM $1 2/3 Common
Stock"), and the holders of Class H Common Stock, $0.10 par value per share, of
General Motors ("GM Class H Common Stock"), in accordance with the Distribution
Ratio (as defined below), with holders of GM $1 2/3 Common Stock and GM Class H
Common Stock receiving an aggregate of 102,630,503 shares of Class A Common
Stock, par value $.01 per share, of Hughes Defense; (vi) immediately following
the Hughes Defense Spin-Off, Hughes Defense will merge with Raytheon (the
"Raytheon Merger;" the merged company being referred to as "New Raytheon"),
with the Class A Common Stock of Hughes Defense remaining outstanding as Class
A Common Stock of New Raytheon, representing 30.3% of the outstanding common
stock (and 80.1% of the voting power in the election and removal of directors)
of New Raytheon, and each outstanding share of Raytheon Common Stock being
converted into one share of Class B Common Stock of New Raytheon; and (vii)
each outstanding share of GM Class H Common Stock will be recapitalized and
converted automatically into one share of a new class of GM Common Stock ("New
GM Class H Common Stock"), which will be a tracking stock relating to Hughes
Telecom, as a result of which holders of GM Class H Common Stock will
relinquish their tracking stock interest in Delco and holders of GM $1 2/3
Common Stock will increase their interest in Delco. The transactions described
in clauses (i) through (iv) of the immediately preceding sentence are referred
to collectively as the "Hughes Reorganization," all of the transactions
described in the immediately preceding sentence are referred to collectively as
the "Transactions," and the Transactions other than the Raytheon Merger are
referred to as the "Hughes Transactions." The Hughes Reorganization will be
effected largely pursuant to a master separation agreement and related
agreements to be entered into among General Motors, Hughes Telecom, Delco and
Hughes Defense (collectively, the "Master
B-7
<PAGE>
----------------
SALOMON
BROTHERS
----------------------------
Separation Agreement"). The consummation of the Hughes Transactions is subject
to the satisfaction or waiver of the conditions to the Raytheon Merger.
You have advised us that the number of shares of Class A Common Stock to be
distributed to the holders of GM Class H Common Stock (the "Class H Defense
Distribution") in the Hughes Defense Spin-Off will equal the sum of (i) the
product of (A) 102,630,503 (the total number of shares of Class A Common Stock
to be distributed in the Hughes Defense Spin-Off) and (B) the Class H Fraction
(as defined below), plus (ii) the amount obtained by dividing (C) the Net
Transaction Effect (as defined below) by (D) the Average Closing Price of
Raytheon Common Stock (as defined below). The remainder of the 102,630,503
shares of Class A Common Stock to be distributed in the Hughes Defense Spin-Off
will be issued to the holders of the GM $1 2/3 Common Stock (the "$1 2/3
Defense Distribution"). The ratio of the Class H Defense Distribution to the $1
2/3 Defense Distribution is referred to as the "Distribution Ratio." The "Class
H Fraction" is the fractional equivalent to the tracking stock interest of the
GM Class H Common Stock in the earnings of Hughes Defense (as contemplated by
the Restated Certificate of Incorporation of General Motors, as amended) as of
the time immediately prior to the Hughes Defense Spin-Off. The "Net Transaction
Effect," as determined by the Board of Directors of General Motors (which is
intended to compensate the holders of the GM Class H Common Stock fairly for
the net effect of all other aspects of the Hughes Transactions on their
investment in General Motors (principally the relinquishment of their tracking
stock interest in the earnings of Delco)), is an amount equal to the product of
(i) $6.5 billion plus the amount by which the Hughes Defense indebtedness
outstanding immediately prior to the Hughes Defense Spin-Off exceeds $4.0
billion and (ii) the Class H Fraction. The "Average Closing Price of Raytheon
Common Stock" will be the average closing market price of Raytheon Common Stock
during the 30-day period ending on the fifth day prior to the consummation of
the Raytheon Merger.
The terms of the Hughes Transactions are more fully described in the General
Motors Solicitation Statement/Prospectus (the "Solicitation Statement"). You
have advised us that General Motors has received a private letter ruling from
the Internal Revenue Service (the "Private Letter Ruling") to the effect, and
we have assumed, that for U.S. federal income tax purposes the Hughes Defense
Spin-Off and certain other aspects of the Hughes Transactions will be treated
as tax-free distributions under Section 355 of the Internal Revenue Code of
1986, as amended. We have also assumed that the Hughes Transactions will have
the U.S. federal income tax consequences and the accounting treatment set forth
in the Solicitation Statement.
The management of General Motors has advised us that, subsequent to the
consummation of the Hughes Transactions, General Motors' management expects to
combine the operations of Delco and Delphi Automotive Systems ("Delphi"), the
automotive components sector of General Motors (the "Delco/Delphi
Combination").
You have requested our opinion as investment bankers as to the fairness, from
a financial point of view, taking into account all relevant aspects of the
Transactions, to the holders of the GM $1 2/3 Common Stock and to the holders
of the GM Class H Stock, of the consideration to be provided to General Motors
and its subsidiaries and to such common stockholders of General Motors in the
Hughes Transactions.
As you are aware, Salomon Brothers Inc has acted as financial advisor to
General Motors in connection with the Hughes Transactions and will receive a
fee for its services, a substantial portion of which is contingent upon
consummation of the Hughes Transactions. We have also previously rendered
certain other investment banking and financial advisory services to General
Motors and its subsidiaries, including Hughes Electronics, and to Raytheon,
including advice with respect to various acquisitions and capital market
transactions, for which we received substantial compensation. In addition, in
the ordinary course of our business, we actively trade the debt and equity
B-8
<PAGE>
----------------
SALOMON
BROTHERS
----------------------------
securities of both General Motors (including its subsidiaries) and Raytheon for
our own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such securities.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) a copy of the Solicitation Statement;
(ii) the Raytheon Merger Agreement; (iii) the merger agreement pursuant to
which the Hughes Defense Spin-Off will be effected; (iv) a draft version of the
Master Separation Agreement; (v) certain publicly available information
concerning General Motors and Hughes Electronics; (vi) certain publicly
available information concerning Raytheon; (vii) certain other internal
information, primarily financial in nature, including forecasts concerning the
business and operations of General Motors, Hughes Defense, Delco, Delphi, and
Hughes Telecom furnished to us by General Motors, Hughes Defense, Delco, Delphi
and Hughes Telecom for purposes of our analysis; (viii) certain other internal
information, primarily financial in nature, including forecasts concerning the
business and operations of Raytheon furnished to us by Raytheon for purposes of
our analysis; (ix) certain publicly available information concerning the
trading of, and the trading market for, the GM $1 2/3 Common Stock, the GM
Class H Common Stock and the Raytheon Common Stock; (x) the Restated
Certificate of Incorporation of General Motors and the amendments thereto
contemplated as part of the Hughes Transactions; (xi) the Policy Statement to
be adopted by the General Motors Board of Directors with respect to General
Motors' two classes of common stock upon issuance of the New GM Class H Common
Stock; (xii) certain publicly available information with respect to certain
other companies that we believe to be comparable to each of Hughes Defense,
Delco, Hughes Telecom and Raytheon and the trading markets for certain of such
other companies' securities; (xiii) the Private Letter Ruling and the request
for such ruling; and (xiv) certain publicly available information concerning
the nature and terms of certain other transactions that we consider relevant to
our inquiry. We have also considered such other information, financial studies,
analyses, investigations and financial, economic and market criteria that we
deemed relevant. We have also met with certain officers and employees of
General Motors, Hughes Defense, Delco, Delphi, Hughes Telecom and Raytheon to
discuss the foregoing as well as other matters we believe relevant to our
inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have neither attempted
independently to verify nor assumed any responsibility for verifying any of
such information. We have not conducted or assumed any responsibility for
conducting a physical inspection of any of the properties or facilities of
Hughes Defense, Delco, Delphi, Hughes Telecom or Raytheon, nor have we made or
obtained or assumed any responsibility for making or obtaining any independent
evaluations or appraisals of any of such properties or facilities. We have
assumed that all documents which we have reviewed in draft form will not, when
finalized or executed, differ in any material respect from the drafts we have
reviewed. With respect to projections (including estimates of projected revenue
and cost synergies resulting from the Raytheon Merger and from the Delco/Delphi
Combination), we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of the respective companies as to the respective future financial
performances of such companies, and we express no view with respect to the
accuracy or completeness of such projections or the assumptions on which they
were based. You have advised us that in the absence of the other Hughes
Transactions (or another transaction or series of transactions resulting in the
transfer of Delco from Hughes Electronics to General Motors such that the
tracking stock interest in the earnings of Delco held by holders of GM Class H
Common Stock is reallocated to holders of GM $1 2/3 Common Stock), General
Motors would be unable to realize fully the anticipated benefits of the
Delco/Delphi Combination. We have further assumed that the Hughes Transactions
will be consummated on the terms described, and in accordance with the timing
contemplated, in the Solicitation Statement and in accordance with all
applicable laws and provisions of General Motors' constituent instruments.
B-9
<PAGE>
----------------
SALOMON
BROTHERS
----------------------------
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of operations of each
of Hughes Defense, Delco, Delphi, Hughes Telecom and Raytheon; (ii) the
business prospects of each of Hughes Defense, Delco, Delphi, Hughes Telecom,
Raytheon and New Raytheon; (iii) the historical and current market for the GM
$1 2/3 Common Stock, the GM Class H Common Stock, the Raytheon Common Stock,
and for the equity securities of certain other companies that we believe to be
comparable to Hughes Defense, Delco, Delphi, Hughes Telecom, Raytheon and New
Raytheon; (iv) the prospective market for each of the New GM Class H Common
Stock and the common stock of New Raytheon following the Hughes Transactions;
(v) the expected cost savings and other financial synergies to be realized by
General Motors as a result of the Delco/Delphi Combination; (vi) the expected
impact of the Hughes Transactions on profit sharing payments from General
Motors required under an agreement with the United Auto Workers; and (vii) the
nature and terms of certain other transactions that we believe to be relevant.
We have also taken into account our assessment of general economic, market and
financial conditions and our knowledge of the defense, telecommunications and
automotive component industries as well as our experience in connection with
similar transactions and securities valuation generally. As you are aware, we
have not been requested to solicit, and we accordingly have not solicited,
alternative proposals with respect to the disposition of, or any other
extraordinary transaction involving, any of Hughes Defense, Delco or Hughes
Telecom.
Our opinion necessarily is based upon conditions as they exist and can be
evaluated on the date hereof and by rendering this opinion we assume no
responsibility to update or revise our opinion based upon circumstances or
events occurring after the date hereof. Our opinion as expressed below does not
address the fairness of the Raytheon Merger (as to which you have been advised
by another financial advisor). Our opinion as expressed below does not
constitute an opinion or imply any conclusions as to the prices at which New
Raytheon Common Stock, GM $1 2/3 Common Stock or New GM Class H Common Stock
may trade following consummation of the Hughes Transactions. Our opinion is, in
any event, limited to the fairness, from a financial point of view, to the
holders of the GM $1 2/3 Common Stock and to the holders of the GM Class H
Common Stock of the consideration to be provided to General Motors and its
subsidiaries and to such common stockholders of General Motors in the Hughes
Transactions taken as a whole, and does not address General Motors' underlying
business decision to effect the Hughes Transactions or constitute a
recommendation to any holder of the GM $1 2/3 Common Stock or any holder of GM
Class H Common Stock as to how such holder should vote with respect to the
Hughes Transactions.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, taking into account all relevant aspects of the Transactions, the
consideration to be provided to General Motors and its subsidiaries and to the
common stockholders of General Motors in the Hughes Transactions is fair, from
a financial point of view, to the holders of the GM $1 2/3 Common Stock and to
the holders of the GM Class H Common Stock.
Very truly yours,
SALOMON BROTHERS INC
B-10
<PAGE>
January 16, 1997
Board of Directors
General Motors Corporation
767 Fifth Avenue
New York, NY 10053
Board of Directors
Hughes Electronics Corporation
P.O. Box 80028
7200 Hughes Terrace
Los Angeles, CA 90045
Board of Directors
HE Holdings, Inc.
7200 Hughes Terrace
Los Angeles, CA 90045
Ladies and Gentlemen:
You have requested our opinion as to the fairness to (i) HE Holdings, Inc., a
Delaware corporation ("Hughes"), (ii) Hughes Electronics Corporation, a
Delaware corporation ("HEC") and the holder of the outstanding shares of Common
Stock, par value $0.01 per share (the "Shares"), of Hughes, (iii) General
Motors Corporation, a Delaware corporation and the parent of HEC ("GM"), (iv)
the holders of GM's Common Stock, par value $1 2/3 per share (the "1 2/3 Common
Stock"), and (v) the holders of GM's Class H Common Stock, par value $0.10 per
share (the "GM Class H Common Stock" and together with the 1 2/3 Common Stock,
the "Common Shares") (Hughes, HEC, GM and the holders of the Common Shares
collectively referred to herein as the "GM Group"), of the Aggregate
Consideration (as defined below) as contemplated by the Agreement and Plan of
Merger dated as of January 16, 1997 by and between Raytheon Company, a Delaware
corporation ("Raytheon"), and Hughes (the "Agreement"). Pursuant to the
Agreement, Raytheon will merge ( the "Merger") with and into Hughes, which at
such time and after giving effect to the GM Transactions (as defined below),
will be comprised primarily of the defense-related businesses of Hughes.
Pursuant to the Merger, (i) each issued and outstanding whole share of Class
A Common Stock (as defined below) will remain outstanding and will be
unchanged; (ii) each issued and outstanding fractional share of
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Goldman, Sachs & Co. | 85 Broad Street | New York, New York 10004
Tel: 212-902-1000
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Class A Common Stock will be converted into and represent an equivalent
fractional share of Class B Common Stock (as defined below), which will be sold
by the Exchange Agent as provided in the Agreement; and (iii) each issued and
outstanding share of Common Stock, par value $0.01 per share ("Raytheon Common
Stock"), of Raytheon will be converted into and represent one share of Class B
Common Stock. Immediately following the Merger, as contemplated by the
Agreement, the holders of the Class A Common Stock will own, in the aggregate,
approximately 30% of the outstanding common stock of Hughes (the "Equity
Interest"). Prior to the Hughes Spin-off (as defined below) and Merger, Hughes
is to have indebtedness for borrowed money in an amount not to exceed $9.5
billion minus the Class A Common Stock Amount (as defined below) ((the
"Permitted Indebtedness") and together with the Equity Interest, the "Aggregate
Consideration"). The "Class A Common Stock Amount" is equal to (x) 102,630,503
shares multiplied by (y) the average closing price of Raytheon Common Stock on
the New York Stock Exchange during the 30-day period ending 5 days prior to the
Effective Time (as defined in the Agreement); provided, that in the event that
such average closing price is greater than $54.29, the Permitted Indebtedness
will be an amount determined as if such average closing price was deemed to be
$54.29, and in the event such average closing price is less that $44.42, the
Permitted Indebtedness will be an amount determined as if such average closing
price was deemed to be $44.42.
You have informed us that prior to the Merger, among other things, (i) Hughes
will effectuate the Telecom Spin-off (as defined in the Hughes Distribution
Agreement (as defined below)); (ii) HEC will be liquidated into GM, as a result
of which Delco Electronics Corporation, a Delaware corporation and a wholly
owned subsidiary of HEC, will become a direct, wholly-owned subsidiary of GM;
(iii) Hughes Aircraft Company, a Delaware corporation, will merge with and into
Hughes with Hughes as the surviving entity; (iv) Hughes will recapitalize its
outstanding capital stock into Class A Common Stock, par value $0.01 per share
("Class A Common Stock"), and provide for a Class B Common Stock, par value
$0.01 per share ("Class B Common Stock"); (v) a wholly-owned subsidiary of GM
("Mergeco") will merge with and into GM, pursuant to which, among other things,
the Class A Common Stock will be distributed to and allocated among the holders
of the Common Shares with the result that Hughes will be a publicly held
company prior to the consummation of the Merger (the "Hughes Spin-Off"); and
(vi) GM will recapitalize its GM Class H Common Stock into a new class of GM
common stock (the transactions set forth in clauses (i) through (vi) above
being referred to herein as the "GM Transactions").
It is understood that we are not opining as to the fairness of the GM
Transactions or as to the fairness of the distribution to and allocation among
the holders of the Common Shares of the Class A Common Stock in the Hughes
Spin-Off. In fact, you have advised us that GM expects to receive, from other
financial advisors opinions as to the fairness to the holders of the Common
Shares, from a financial point of view, of the consideration to be received by
GM and its subsidiaries and common stockholders in the GM Transactions. Our
opinion is directed only to the fairness of the Aggregate Consideration to be
received by the GM Group as a whole and does not (i) address GM's underlying
business decision to effect the GM Transactions, (ii) address the fairness of
the allocation of the Aggregate Consideration among the members of the GM Group
or (iii) constitute a recommendation concerning how holders of the Common
Shares should vote with respect to the GM Transactions.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with Hughes having provided certain investment banking services to
Hughes and HEC from time to time and having acted as financial advisor to
Hughes, HEC and GM in connection with, and having participated in certain of
the negotiations leading to, the Agreement. We are also familiar with Raytheon
having provided certain investment banking services to Raytheon from time to
time, including having acted as its financial advisor in connection with the
acquisition of Chrysler Technologies Airborne Systems in June 1996 and acting
as a dealer in connection with its issuance of commercial paper.
B-12
<PAGE>
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Implementation Agreement dated as of January 16, 1997 by and
between GM and Raytheon (the "Implementation Agreement"); the form of Agreement
and Plan of Merger by and between GM and Mergeco, attached as an exhibit to the
Implementation Agreement (the "Hughes Distribution Agreement"); the form of
Master Separation Agreement among GM, Hughes and the other parties identified
therein, attached as an exhibit to the Implementation Agreement, including the
form of the Hughes Spin-Off Separation Agreement attached thereto; Annual
Reports of HEC for the five years ended December 31, 1995; Annual Reports to
Stockholders of Raytheon on Form 10-K for the five years ended December 31,
1995; certain interim reports to stockholders and Quarterly Reports on Form 10-
Q for Raytheon; certain other communications from GM and Raytheon to their
respective stockholders; and certain internal financial analyses and forecasts
for Hughes and Raytheon prepared by their respective managements. We also have
held discussions with members of the senior management of Hughes and Raytheon
regarding their past and current business operations, financial condition and
future prospects of their respective companies, including forecasts of revenue
and cost synergies that are expected to result from the Merger. In addition, we
have reviewed the reported price and trading activity for the shares of
Raytheon Common Stock; compared certain financial and stock market information
for Raytheon with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the aerospace and defense industry
specifically and in other industries generally and performed such other studies
and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed the accuracy and completeness
thereof in all material respects for purposes of this opinion. In that regard,
we have assumed, with your consent, that the financial forecasts prepared by
Hughes and Raytheon, including without limitation, projected revenue and cost
synergies resulting from the Merger, have been reasonably prepared on a basis
reflecting the best currently available judgments and estimates of Hughes and
Raytheon and that such forecasts will be realized in all material respects in
the amounts and at the times contemplated thereby. In addition, we have not
made an independent evaluation or appraisal of the assets and liabilities of
Hughes or Raytheon or any of their subsidiaries and we have not been furnished
with any such evaluation or appraisal. Our advisory services and the opinion
expressed herein are provided for the information and assistance of the Boards
of Directors of GM, HEC and Hughes in connection with their consideration of
the Merger. You have informed us that the Boards of Directors of GM, HEC and
Hughes are considering the Merger in the context of the GM Transactions. As
stated above, we are not opining as to the fairness of the GM Transactions. We
are not expressing any opinion herein as to the prices at which the Class A
Common Stock, the Class B Common stock or the GM Class H Common Stock may trade
if and when they are issued.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the
Aggregate Consideration is fair to the GM Group as a whole.
Very truly yours,
GOLDMAN, SACHS & CO.
B-13
<PAGE>
APPENDIX C
HUGHES DEFENSE
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
UNAUDITED COMBINED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Combined Statement of Income and Parent Company's Net Investment....... C-1
Combined Balance Sheet................................................. C-2
Combined Statement of Cash Flows....................................... C-3
Notes to Combined Financial Statements................................. C-4
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND INDEPENDENT
AUDITORS' REPORT
Independent Auditors' Report........................................... C-6
Combined Statement of Income and Parent Company's Net Investment....... C-7
Combined Balance Sheet................................................. C-8
Combined Statement of Cash Flows....................................... C-9
Notes to Combined Financial Statements................................. C-10
</TABLE>
<PAGE>
HUGHES DEFENSE
COMBINED STATEMENT OF INCOME AND
PARENT COMPANY'S NET INVESTMENT
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
REVENUES
Net sales................................................ $5,157.1 $4,588.8
Other income (expense), net.............................. 10.3 (2.0)
-------- --------
Total Revenues......................................... 5,167.4 4,586.8
-------- --------
COSTS AND EXPENSES
Cost of sales and other operating charges, exclusive of
items listed below...................................... 4,245.6 3,756.7
Selling, general, and administrative expenses............ 273.6 227.4
Depreciation and amortization............................ 116.4 101.7
Amortization of GM purchase accounting adjustments
related to Hughes Aircraft Company...................... 75.8 75.8
Interest expense......................................... 72.1 66.7
-------- --------
Total Costs and Expenses............................... 4,783.5 4,228.3
-------- --------
INCOME BEFORE INCOME TAXES................................. 383.9 358.5
Income taxes............................................... 176.6 164.9
-------- --------
NET INCOME............................................... 207.3 193.6
-------- --------
Parent Company's Net Investment, beginning of period....... 4,823.0 4,680.2
Net contributions from Parent Company.................... 243.3 107.2
Change in foreign currency translation adjustment........ (8.0) (5.8)
-------- --------
PARENT COMPANY'S NET INVESTMENT, END OF PERIOD............. $5,265.6 $4,975.2
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
C-1
<PAGE>
HUGHES DEFENSE
COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $ 72.9 $ 59.7
Accounts and notes receivable (less allowances)... 686.5 612.7
Contracts in process, less advances and progress
payments of $886.9 and $956.2.................... 1,579.1 1,581.2
Inventories....................................... 445.2 337.7
Deferred income taxes............................. 232.9 285.3
Prepaid expenses.................................. 30.6 31.1
-------- --------
Total Current Assets............................ 3,047.2 2,907.7
-------- --------
Property, net....................................... 1,094.5 1,085.1
-------- --------
Intangible Assets, net of amortization of $1,360.3
and $1,268.5....................................... 2,892.4 2,907.4
-------- --------
Investments and Other Assets, principally at cost
(less allowances).................................. 128.0 128.2
-------- --------
Total Assets.................................... $7,162.1 $7,028.4
======== ========
LIABILITIES AND PARENT COMPANY'S NET INVESTMENT
Current Liabilities
Accounts payable.................................. $ 326.7 $ 278.3
Advances on contracts............................. 309.7 396.8
Notes and loans payable........................... 118.6 94.5
Accrued liabilities............................... 780.2 1,119.4
-------- --------
Total Current Liabilities....................... 1,535.2 1,889.0
-------- --------
Long-Term Debt and Capitalized Leases............... 32.4 34.4
-------- --------
Other Liabilities and Deferred Credits.............. 179.4 174.4
-------- --------
Deferred Income Taxes............................... 149.5 107.6
-------- --------
Contingent Liabilities
Parent Company's Net Investment..................... 5,265.6 4,823.0
-------- --------
Total Liabilities and Parent Company's Net
Investment..................................... $7,162.1 $7,028.4
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
C-2
<PAGE>
HUGHES DEFENSE
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
1997 1996
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 207.3 $ 193.6
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation and amortization............................ 116.4 101.7
Amortization of GM purchase accounting adjustments
related to Hughes Aircraft Company...................... 75.8 75.8
Deferred income taxes and other.......................... 94.9 16.9
Change in other operating assets and liabilities
Accounts receivable.................................... (53.1) 105.2
Contracts in process................................... 11.1 (72.3)
Inventories............................................ (107.0) (137.2)
Accounts payable....................................... 43.7 (43.3)
Advances on contracts.................................. (87.1) (75.5)
Accrued liabilities.................................... (341.1) (156.5)
Other.................................................. 6.8 (45.6)
------- -------
Net Cash Used in Operating Activities...................... (32.3) (37.2)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in companies, net of cash acquired.............. (143.3) (28.7)
Expenditures for property.................................. (95.5) (113.3)
Proceeds from disposal of property......................... 22.1 38.4
(Increase) Decrease in notes receivable.................... (3.2) 28.4
------- -------
Net Cash Used in Investing Activities...................... (219.9) (75.2)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in notes and loans payable.................... 24.1 36.4
Increase in long-term debt................................. 7.4 17.8
Decrease in long-term debt................................. (9.4) (31.3)
Net contributions from Parent Company...................... 243.3 107.2
------- -------
Net Cash Provided By Financing Activities.................. 265.4 130.1
------- -------
Net increase in cash and cash equivalents.................... 13.2 17.7
Cash and cash equivalents at beginning of the period......... 59.7 15.7
------- -------
Cash and cash equivalents at the end of the period........... $ 72.9 $ 33.4
======= =======
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
C-3
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited combined financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments
(consisting of only normal recurring items) which are necessary for a fair
presentation have been included. The results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year.
On January 16, 1997, Hughes Electronics Corporation ("Hughes Electronics"),
General Motors Corporation ("GM"), the parent of Hughes Electronics, and
Raytheon Company ("Raytheon") announced a series of planned transactions that
would include:
. The tax-free spin-off of 100% of the defense business of Hughes
Electronics ("Hughes Defense") to holders of GM's $1 2/3 par value and
Class H Common Stocks followed immediately by the tax-free merger of that
business with Raytheon, after which there would be outstanding two classes
of Raytheon/Hughes Defense common stock;
. The transfer of Delco Electronics Corporation and related entities
("Delco"), from Hughes Electronics to GM and a reallocation of the
derivative interest in the earnings of Delco currently held by GM Class H
common stockholders to holders of GM $1 2/3 par value Common Stock; and
. The recapitalization of GM Class H Common Stock into a GM tracking stock
linked to the telecommunications and space business of Hughes Electronics
("Hughes Telecom"). GM would continue to own 100% of Hughes Telecom.
On July 14, 1997, GM received a ruling from the Internal Revenue Service
that its contemplated spin-off of Hughes Defense would be tax-free to GM and
its stockholders. In addition, GM and Raytheon have reached agreement with the
U.S. Department of Justice and U.S. Department of Defense regarding the basis
upon which the merger of Hughes Defense and Raytheon can proceed consistent
with the Government's enforcement of U.S. antitrust laws. On October 6, 1997,
the GM Board of Directors approved the final terms for the above described
transactions. The planned transactions must be approved by holders of GM $1
2/3 par value and Class H Common Stocks, among a number of other conditions.
In addition, the merger of Hughes Defense and Raytheon is subject to approval
by Raytheon stockholders. No assurance can be given that the above
transactions will be completed. GM expects to solicit stockholders' approval
of the planned transactions during the fourth quarter of 1997, after certain
conditions are satisfied.
Hughes Defense is not a legal entity. The combined financial statements
present the financial position, results of operations and cash flows of Hughes
Defense, which consists primarily of operations included in the Aerospace and
Defense Systems segment of Hughes Electronics, certain other businesses
identified in the Merger Agreements and certain Hughes Electronics Corporate
assets, liabilities, income and expenses attributable to Hughes Defense. The
combined financial statements do not include certain other defense operations
of Hughes Electronics which will not be merged with Raytheon, consisting
principally of the defense business of Hughes Electronics currently reported
in the Hughes Electronics Telecommunications and Space segment. All
transactions and balances between the entities included in the combined
financial statements have been eliminated. All Hughes Defense amounts due from
or payable to other Hughes Electronics businesses, except for certain loans
payable to affiliates which are included in notes and loans payable, have been
reported in Parent Company's Net Investment.
The combined financial statements include allocations of corporate expenses
from Hughes Electronics including research and development, general
management, human resources, financial, legal, tax, quality, communications,
marketing, international, employee benefits and other miscellaneous services.
These costs and expenses have been charged to Hughes Defense based either on
usage or using allocation methodologies which
C-4
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
comply with U.S. Government cost accounting standards, primarily based upon
total revenues, certain tangible assets and payroll expenses. Management
believes the allocations were made on a reasonable basis.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market, principally using the
average cost method.
Major Classes of Inventories
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Productive material and supplies............... $ 59.1 $ 63.5
Work in process and finished goods............. 386.1 274.2
------ ------
Total........................................ $445.2 $337.7
====== ======
</TABLE>
NOTE 3: CONTINGENT LIABILITIES
In conjunction with its performance on long-term contracts, Hughes Defense is
contingently liable under standby letters of credit and bonds in the amount of
$236.6 million at September 30, 1997. In Hughes Defense's past experience, no
material claims have been made against these financial instruments.
Hughes Defense is subject to potential liability under government regulations
and various claims and legal actions which are pending or may be asserted
against it. The aggregate ultimate liability of Hughes Defense under these
government regulations and under these claims and actions, was not determinable
at September 30, 1997. In the opinion of Hughes Electronics and Hughes Defense
management, such liability is not expected to have a material adverse effect on
Hughes Defense's combined operations or financial position.
NOTE 4: NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130
and 131. SFAS 130, "Reporting Comprehensive Income," establishes accounting
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. This statement requires
that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information,"
establishes accounting standards for the way public enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. Hughes Defense
will adopt SFAS Nos. 130 and 131 which are effective for fiscal years beginning
after December 15, 1997.
C-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hughes Electronics Corporation:
We have audited the Combined Balance Sheet of the Defense Business of Hughes
Electronics Corporation and subsidiaries ("Hughes Defense") as of December 31,
1996 and 1995 and the related Combined Statements of Income and Parent
Company's Net Investment and of Cash Flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of Hughes Defense's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hughes Defense at December 31, 1996 and
1995 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the combined financial statements, effective
January 1, 1994 Hughes Defense changed its method of accounting for
postemployment benefits.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 21, 1997
C-6
<PAGE>
HUGHES DEFENSE
COMBINED STATEMENT OF INCOME
AND PARENT COMPANY'S NET INVESTMENT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Net Sales.................................... $6,382.7 $5,921.8 $5,896.0
Other income, net............................ 9.1 43.0 22.5
-------- -------- --------
Total Revenues........................... 6,391.8 5,964.8 5,918.5
-------- -------- --------
COSTS AND EXPENSES
Cost of sales and other operating charges,
exclusive of items listed below............. 5,211.1 4,783.4 4,762.2
Selling, general and administrative expenses. 321.6 311.0 323.2
Depreciation and amortization................ 145.3 139.2 164.2
Amortization of GM purchase accounting
adjustments related to Hughes Aircraft
Company..................................... 101.3 101.3 101.3
Interest expense............................. 92.3 75.9 64.9
-------- -------- --------
Total Costs and Expenses................. 5,871.6 5,410.8 5,415.8
-------- -------- --------
INCOME BEFORE INCOME TAXES....................... 520.2 554.0 502.7
Income taxes..................................... 239.3 235.4 226.2
-------- -------- --------
Income before cumulative effect of accounting
change.......................................... 280.9 318.6 276.5
Cumulative effect of accounting change........... -- -- 7.1
-------- -------- --------
NET INCOME..................................... 280.9 318.6 269.4
-------- -------- --------
Parent Company's Net Investment, beginning of
period......................................... 4,680.2 4,198.2 4,283.3
Net (distributions to) contributions from
Parent Company.............................. (136.1) 173.2 (354.8)
Change in minimum pension liability.......... 0.4 (5.0) --
Foreign currency translation adjustment...... (2.4) (4.8) 0.3
-------- -------- --------
PARENT COMPANY'S NET INVESTMENT, END OF PERIOD.. $4,823.0 $4,680.2 $4,198.2
======== ======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
C-7
<PAGE>
HUGHES DEFENSE
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................. $ 59.7 $ 15.7
Accounts and notes receivables (less allowances)........... 612.7 754.6
Contracts in process, less advances and progress payments
of $956.2 and $1,259.2.................................... 1,581.2 1,460.2
Inventories................................................ 337.7 291.3
Deferred income taxes...................................... 285.3 325.6
Prepaid expenses........................................... 31.1 32.6
-------- --------
Total Current Assets..................................... 2,907.7 2,880.0
-------- --------
Property, net................................................ 1,085.1 1,061.9
-------- --------
Intangible Assets, net of amortization of $1,268.5 and
$1,149.3.................................................... 2,907.4 2,993.0
-------- --------
Investments and Other Assets, principally at cost (less
allowances)................................................. 128.2 91.0
-------- --------
Total Assets............................................. $7,028.4 $7,025.9
======== ========
LIABILITIES AND PARENT COMPANY'S NET INVESTMENT
Current Liabilities
Accounts payable........................................... $ 278.3 $ 267.6
Advances on contracts...................................... 396.8 441.1
Notes and loans payable.................................... 94.5 84.0
Accrued liabilities........................................ 1,119.4 1,167.2
-------- --------
Total Current Liabilities................................ 1,889.0 1,959.9
-------- --------
Long-term Debt and Capitalized Leases........................ 34.4 49.7
-------- --------
Other Liabilities and Deferred Credits....................... 174.4 200.9
-------- --------
Deferred Income Taxes........................................ 107.6 135.2
-------- --------
Commitments and Contingent Liabilities
Parent Company's Net Investment.............................. 4,823.0 4,680.2
-------- --------
Total Liabilities and Parent Company's Net Investment.... $7,028.4 $7,025.9
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
C-8
<PAGE>
HUGHES DEFENSE
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 280.9 $ 318.6 $ 269.4
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................... 145.3 139.2 164.2
Amortization of GM purchase accounting
adjustments related to Hughes Aircraft Company. 101.3 101.3 101.3
Deferred income taxes and other................. 19.6 (25.8) 16.4
Change in other operating assets and liabilities
Accounts receivable........................... 148.0 46.8 (254.6)
Contracts in process.......................... (117.2) (153.9) 337.5
Inventories................................... (46.2) (84.7) 28.5
Accounts payable.............................. 9.7 (146.6) (143.9)
Advances on contracts......................... (44.3) 38.5 45.9
Accrued liabilities........................... (62.8) 253.8 (164.3)
Other......................................... (81.3) (154.0) 63.3
------- ------- -------
Net Cash Provided by Operating Activities......... 353.0 333.2 463.7
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in companies, net of cash acquired..... (28.7) (549.2) --
Expenditures for property......................... (178.3) (99.4) (174.1)
Proceeds from disposal of property................ 45.2 58.6 87.6
Proceeds from sale of businesses.................. -- 23.6 --
(Increase) decrease in notes receivable........... (6.3) 6.7 3.8
------- ------- -------
Net Cash Used in Investing Activities............. (168.1) (559.7) (82.7)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in notes and loans payable........... 10.5 18.2 57.2
Payment on long-term debt......................... (15.3) (7.9) (26.3)
Net (distributions to) contributions from Parent
Company.......................................... (136.1) 173.2 (354.8)
------- ------- -------
Net Cash (Used in) Provided by Financing
Activities....................................... (140.9) 183.5 (323.9)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 44.0 (43.0) 57.1
Cash and cash equivalents at beginning of the year.. 15.7 58.7 1.6
------- ------- -------
Cash and cash equivalents at end of the year........ $ 59.7 $ 15.7 $ 58.7
======= ======= =======
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
C-9
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
On January 16, 1997, Hughes Electronics Corporation ("Hughes Electronics"),
General Motors Corporation ("GM"), the parent of Hughes Electronics and
Raytheon Company ("Raytheon") announced a series of planned transactions that
would include:
. The tax-free spin-off of 100% of the defense business of Hughes
Electronics ("Hughes Defense") to holders of GM's $1 2/3 par value and
Class H Common Stocks followed immediately by the tax-free merger of that
business with Raytheon, after which there would be outstanding two
classes of Raytheon/Hughes Defense common stock;
. The transfer of Delco Electronics Corporation and Related Entities
("Delco"), from Hughes Electronics to GM and a reallocation of the
derivative interest in the earnings of Delco currently held by GM Class H
common stockholders to holders of GM $1 2/3 par value Common Stock; and
. The recapitalization of GM Class H Common Stock into a GM tracking stock
linked to the telecommunications and space business of Hughes Electronics
("Hughes Telecom"). GM would continue to own 100% of Hughes Telecom.
The planned transactions are subject to approval by holders of GM $1 2/3 par
value and Class H Common Stocks. In addition, the merger of the Hughes Defense
with Raytheon, which is contingent upon the spin-off of Hughes Defense, is
subject to approval by the stockholders of Raytheon. The planned transactions
also are subject to a variety of regulatory approvals.
Hughes Defense is not a legal entity. The combined financial statements
present the financial position, results of operations and cash flows of Hughes
Defense, which consists primarily of operations included in the Aerospace and
Defense Systems segment of Hughes, certain other businesses identified in the
Merger Agreements and certain Hughes Electronics Corporate assets, liabilities,
income and expenses attributable to Hughes Defense. The combined financial
statements do not include certain other defense operations of Hughes
Electronics which will not be merged with Raytheon, consisting principally of
the defense business of Hughes Electronics currently reported in the Hughes
Electronics Telecommunications and Space segment. All transactions and balances
between the entities included in the combined financial statements have been
eliminated. All Hughes Defense amounts due from or payable to other Hughes
Electronics businesses, except for certain loans payable to affiliates, which
are included in notes and loans payable, have been reported in Parent Company's
Net Investment.
The combined financial statements include allocations of corporate expenses
from Hughes Electronics including research and development, general management,
human resources, financial, legal, tax, quality, communications, marketing,
international, employee benefits and other miscellaneous services. These costs
and expenses have been charged to Hughes Defense based either on usage or using
allocation methodologies which comply with U.S. Government cost accounting
standards, primarily based upon total revenues, certain tangible assets and
payroll expenses. Management believes the allocations were made on a reasonable
basis.
Hughes Defense participates in a centralized cash management system wherein
cash receipts are transferred to and cash disbursements are funded by Hughes
daily. Accordingly, the Combined Balance Sheet includes only cash and cash
equivalents held by Hughes Defense, consisting principally of cash held by
foreign operations. Interest expense in the Combined Statement of Income and
Parent Company's Net Investment includes interest expense associated with the
debt included in the Combined Balance Sheet plus an allocated share of total HE
Holdings, Inc. interest expense.
Hughes Defense operates in one segment: the development, production and
support of advanced defense electronics systems including missile, airborne
radar and communications, information, training and simulation, command and
control, torpedoes and sonar, electro-optical, air traffic control and guidance
and control.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported therein. Due to the inherent uncertainty involved
in making estimates, actual results reported in future periods may be based
upon amounts which differ from those estimates.
C-10
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Sales under long-term contracts are recognized primarily using the
percentage-of-completion (cost-to-cost) method of accounting. Under this
method, sales are recorded equivalent to costs incurred plus a portion of the
profit expected to be realized, determined based on the ratio of costs incurred
to estimated total costs at completion. Sales under certain commercial long-
term contracts and to outside customers not pursuant to long-term contracts
generally are recognized as products are shipped or services are rendered.
Profits expected to be realized on long-term contracts are based on estimates
of total sales value and costs at completion. These estimates are reviewed and
revised periodically throughout the lives of the contracts and adjustments to
profits resulting from such revisions are recorded in the accounting period in
which the revisions are made. Estimated losses on contracts are recorded in the
period in which they are identified.
Certain contracts contain cost or performance incentives which provide for
increases in profits for surpassing stated objectives and decreases in profits
for failure to achieve such objectives. Amounts associated with incentives are
included in estimates of total sales values when there is sufficient
information to relate actual performance to the objectives.
Cash Flows
Cash equivalents consist of highly liquid investments purchased with original
maturities of 90 days or less.
Net cash provided by operating activities reflects cash payments for interest
made by Hughes Defense and by Hughes Electronics on behalf of Hughes Defense of
$92.3 million, $75.9 million and $64.9 million in 1996, 1995 and 1994,
respectively. Cash payments for income taxes made by Hughes Electronics on
behalf of Hughes Defense amounted to $226.6 million, $299.0 million and $209.1
million in 1996, 1995 and 1994, respectively.
Accounts Receivable and Contracts in Process
Accounts receivable principally are related to long-term contracts and
programs. Amounts billed under retainage provisions of contracts are not
significant and substantially all amounts are collectible within one year.
Contracts in process are stated at costs incurred plus estimated profit, less
amounts billed to customers and advances and progress payments applied.
Engineering, tooling, manufacturing and applicable overhead costs, including
administrative, research and development and selling expenses, are charged to
costs and expenses when incurred. Contracts in process include amounts relating
to contracts with long production cycles and $87.3 million of the 1996 amount
is expected to be billed after one year. Contracts in process in 1996 also
includes approximately $43.8 million relating to claims and requests for
equitable adjustments. Under certain contracts with the U.S. Government,
progress payments are received based on costs incurred on the respective
contracts. Title to the inventories related to such contracts (included in
contracts in process) vests with the U.S. Government.
Inventories
Inventories are stated at the lower of cost or market, principally using the
average cost method.
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Major Classes of Inventories
Productive material and supplies................. $ 63.5 $ 75.6
Work in process and finished goods............... 274.2 215.7
-------- --------
Total.......................................... $ 337.7 $ 291.3
======== ========
</TABLE>
Property and Depreciation
Property is carried at cost. Depreciation of property is provided for based
on estimated useful lives generally using accelerated methods. Recoverability
of property is periodically evaluated by assessing whether the net book value
can be recovered over its remaining life through undiscounted cash flows
generated by the asset.
C-11
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets
Effective December 31, 1985, GM acquired Hughes Aircraft Company ("HAC"), now
a wholly owned subsidiary of Hughes Electronics. The acquisition of HAC was
accounted for as a purchase. The excess of the purchase price over the net
tangible assets acquired, $4,244.7 million, was assigned to intangible assets,
primarily goodwill. The portion of such intangible assets and related
amortization attributable to Hughes Defense has been reflected in the
accompanying combined financial statements.
Intangible assets are amortized using the straight-line method over periods
not exceeding 40 years. Recover- ability is periodically evaluated by assessing
whether the unamortized carrying amount can be recovered over its remaining
life through undiscounted cash flows generated by underlying tangible assets.
Income Taxes
Hughes Defense, along with other Hughes Electronics businesses and
subsidiaries, joins with GM in filing a consolidated U.S. federal income tax
return. Current and deferred income taxes are computed by Hughes Electronics
and allocated to Hughes Defense according to principles established by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Deferred income tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes,
as measured by applying currently enacted tax laws. Hughes Electronics has paid
Hughes Defense's share of the consolidated income tax liability. The income
taxes that would have been paid by Hughes Defense if it were a separate
taxpayer but were not paid under Hughes Electronics' policy results in an
increase in the Parent Company's Net Investment.
Research and Development
Expenditures for research and development are charged to costs and expenses
as incurred and amounted to $84.2 million in 1996, $100.0 million in 1995 and
$126.8 million in 1994.
Financial Instruments
Hughes Electronics enters into foreign exchange-forward contracts on behalf
of Hughes Defense to reduce Hughes Defense's exposure to fluctuations in
foreign exchange rates. Such foreign exchange-forward contracts are accounted
for in the accompanying combined financial statements as hedges to the extent
they are designated as, and are effective as, hedges of firm foreign currency
commitments.
Foreign Currency
Substantially all of Hughes Defense's foreign operations have determined the
local currency to be their functional currency. Accordingly, most foreign
entities translate assets and liabilities from their local currencies to U.S.
dollars using year-end exchange rates. Income and expense accounts are
translated at the average rates in effect during the year. The related
translation adjustments are included in the foreign currency translation
adjustment in the Combined Statement of Income and Parent Company's Net
Investment. Foreign currency transaction net gains and losses included in the
combined operating results were not material in all years presented.
Market Concentrations
Sales under U.S. Government contracts were approximately 70%, 71% and 74% of
net sales in 1996, 1995 and 1994, respectively. No single U.S. Government
program accounted for more than 10% of revenues.
New Accounting Standards
Effective January 1, 1996, Hughes Defense adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The adoption of this new
accounting standard did not have a material effect on Hughes Defense's combined
operating results or financial position.
C-12
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1994, Hughes Defense adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This Statement requires accrual of the
costs of benefits provided to former or inactive employees after employment,
but before retirement. The unfavorable cumulative effect on Hughes Defense of
adopting this Statement was $7.1 million, net of income taxes of $4.4 million.
The charge primarily related to extended disability benefits which are accrued
on a service-driven basis.
NOTE 3: RELATED-PARTY TRANSACTIONS
The following table summarizes the significant related party transactions
between Hughes Defense and other GM and Hughes Electronics entities:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Revenues............................................ $400.0 $273.6 $219.1
Costs and expenses:
Purchases......................................... 41.8 38.6 50.5
Cost of sales..................................... 352.5 249.2 203.7
Allocation of corporate expenses.................. 150.4 157.3 192.6
Imputed interest.................................. 82.1 65.3 60.6
</TABLE>
Imputed interest was charged at a rate of 3.6% to Hughes Defense based on its
average adjusted net operating assets for the years ended 1996, 1995 and 1994.
NOTE 4: PROPERTY, NET
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1996 1995
------------ -------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Land and improvements..................... 20 - 40 $ 102.8 $ 108.2
Buildings and unamortized leasehold
improvements............................. 3 - 45 842.7 828.0
Machinery and equipment................... 3 - 23 1,306.4 1,323.0
Furniture, fixtures and office machines... 7 - 10 65.7 60.7
Construction in progress.................. 105.9 77.1
-------- --------
Total................................... 2,423.5 2,397.0
Less accumulated depreciation............. 1,338.4 1,335.1
-------- --------
Property, net............................. $1,085.1 $1,061.9
======== ========
</TABLE>
C-13
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: NOTES AND LOANS PAYABLE AND LONG-TERM DEBT AND CAPITALIZED LEASES
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS
IN MILLIONS)
<S> <C> <C>
Loans payable to banks..................................... $ 10.2 $ 13.0
Loans payable to affiliate................................. 82.9 65.1
Current portion of long-term debt.......................... 1.4 5.9
------ ------
Total notes and loans payable............................ $ 94.5 $ 84.0
====== ======
Foreign bank debt.......................................... $ 27.1 $ 53.8
Other...................................................... -- 1.6
------ ------
Subtotal................................................. 27.1 55.4
Less current portion....................................... 1.4 5.9
------ ------
Long-term debt............................................. 25.7 49.5
Capitalized leases......................................... 8.7 0.2
------ ------
Total long-term debt and capitalized leases................ $ 34.4 $ 49.7
====== ======
</TABLE>
At December 31, 1996, loans payable to affiliate, a subsidiary of GM,
consists of $82.9 million with a maturity date of July 15, 1997, of which $34.9
million bears interest at a rate which approximates the London Interbank
Offered Rate ("LIBOR") plus 0.10% and the remaining $48.0 million bears
interest at a rate which approximates LIBOR plus 0.625%. At December 31, 1996,
all foreign bank debt was denominated in British pounds sterling, bearing
interest at rates ranging from 5.9% to 7.1%, with maturity dates from 1997 to
2003.
Annual maturities of long-term debt and capitalized leases are $1.4 million
in 1997, $2.4 million in 1998, $2.5 million in 1999, $2.8 million in 2000, $3.1
million in 2001 and $23.6 million thereafter.
Property with a net book value of $14.8 million at December 31, 1996 was
pledged as collateral under such debt.
NOTE 6: ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Payrolls and other compensation........................ $ 344.5 $ 349.7
Contract related provisions............................ 587.0 620.6
Accrual for restructuring.............................. 11.6 88.0
Other.................................................. 176.3 108.9
-------- --------
Total................................................ $1,119.4 $1,167.2
======== ========
</TABLE>
NOTE 7: INCOME TAXES
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
U.S. federal, state and foreign taxes currently
payable.......................................... $226.6 $299.0 $209.1
U.S. federal, state and foreign deferred tax
liabilities
(assets)--net.................................... 12.7 (63.6) 17.1
------ ------ ------
Total income tax provision...................... $239.3 $235.4 $226.2*
====== ====== ======
</TABLE>
- --------
* Excluding effect of accounting change.
C-14
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income before income taxes included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
U.S. income......................................... $525.5 $546.2 $487.9
Foreign (loss) income............................... (5.3) 7.8 14.8
------ ------ ------
Total............................................. $520.2 $554.0 $502.7
====== ====== ======
</TABLE>
The combined income tax provision was different than the amount computed
using the U.S. statutory income tax rate for the reasons set forth in the
following table:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Expected tax at U.S. statutory income tax rate... $182.0 $193.9 $175.9
U.S. state and local income taxes................ 20.3 21.6 19.6
Investment tax credits........................... -- (15.0) --
Purchase accounting adjustments.................. 35.5 35.5 35.5
Non-deductible goodwill amortization............. 5.2 2.8 1.4
Other............................................ (3.7) (3.4) (6.2)
------ ------ ------
Combined income tax provision.................. $239.3 $235.4 $226.2*
====== ====== ======
</TABLE>
- --------
* Excluding effect of accounting change.
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Profits on long-term
contracts.................... $185.6 $ -- $205.2 $ --
Employee benefit programs..... 60.4 -- 56.8 --
Depreciation.................. -- 128.6 -- 156.8
Accrued expenses.............. 18.0 -- 6.5 --
Other......................... 75.5 11.8 100.8 11.8
------ ------ ------ ------
Subtotal.................... 339.5 140.4 369.3 168.6
Valuation allowance........... (21.4) -- (10.3) --
------ ------ ------ ------
Total deferred taxes........ $318.1 $140.4 $359.0 $168.6
====== ====== ====== ======
</TABLE>
No provision has been made for U.S. Federal income taxes to be paid on the
portion of the undistributed earnings of foreign subsidiaries deemed
permanently reinvested. At December 31, 1996 and 1995, undistributed earnings
of foreign subsidiaries amounted to approximately $49.8 million and $46.0
million, respectively. Repatriation of all accumulated foreign earnings would
have resulted in tax liabilities of $13.8 million and $12.6 million,
respectively.
At December 31, 1996, Hughes Defense had $61.0 million of foreign operating
loss carryforwards which expire in varying amounts between 1997 and 2001. The
valuation allowance consists of a provision for all of the foreign operating
loss carryforwards.
C-15
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: RETIREMENT AND INCENTIVE PLANS
Certain employees of Hughes Defense and other Hughes Electronics businesses
participate in contributory and non-contributory defined benefit retirement
plans (the "Plans") maintained by Hughes Electronics. The Plans are available
to substantially all full-time employees of Hughes Defense. Benefits are based
on years of service and compensation earned during a specified period of time
before retirement. The accumulated plan benefit obligations and plan net assets
for the employees of Hughes Defense have not been separately determined and are
not included in the Combined Balance Sheet. However, the fair value of plan
assets exceeds the accumulated plan benefit obligations related to the Plans.
In addition, employees of Hughes Defense and other Hughes Electronics
businesses participate in certain other postretirement and postemployment
benefit plans, principally health and life insurance plans, which are unfunded.
The accumulated postretirement and postemployment benefit obligations related
to employees of Hughes Defense have not been separately determined and are not
included in the Combined Balance Sheet. Hughes Defense recorded expenses
related to the pension, postretirement and postemployment benefits plans of
approximately $60.7 million, $31.9 million and $21.4 million in 1996, 1995 and
1994, respectively.
Certain other Hughes Defense employees (principally foreign employees and
those employed by the businesses acquired in the CAE-Link and Magnavox
Electronic Systems Company acquisitions (see Note 10)) are covered by
contributory and non-contributory defined benefit retirement plans, where
benefits are based on years of service and compensation earned during a
specified period of time before retirement. The net pension cost, assets and
liabilities related to these plans are not significant.
Certain eligible employees of Hughes Defense participate in the Hughes
Electronics Corporation Incentive Plan pursuant to which shares, rights, or
options to acquire GM Class H Common Stock may be granted through May 31, 1997.
The option price is equal to 100% of the fair market value of GM Class H Common
Stock on the date the options are granted. These non-qualified options
generally expire 10 years from the dates of grant and are subject to earlier
termination under certain conditions.
Employees of Hughes Defense also participate in other Hughes Electronics
health and welfare plans. Charges related to these plans were $132.6 million,
$147.0 million and $195.6 million in 1996, 1995 and 1994, respectively.
NOTE 9: SPECIAL PROVISION FOR RESTRUCTURING
In 1992, Hughes Electronics recorded a special restructuring charge of
$1,237.0 million primarily attributable to redundant facilities and related
employment costs. Approximately $833.1 million was attributable to Hughes
Defense and comprehended a reduction of Hughes Defense worldwide employment, a
major facilities consolidation and a reevaluation of certain business lines
that no longer met Hughes Defense strategic objectives. Restructuring costs of
$75.4 million, $140.8 million and $184.4 million attributable to Hughes Defense
were charged against the reserve during 1996, 1995 and 1994, respectively. The
remaining liability attributable to Hughes Defense of $16.1 million relates
primarily to reserves for excess facilities and other site consolidation costs.
It is expected that these costs will be expended predominantly during 1997.
NOTE 10: ACQUISITIONS AND DIVESTITURES
In December 1996, Hughes Defense announced that it had reached an agreement
to acquire the Marine Systems Division of Alliant Techsystems, Inc. for $141.0
million. The Marine Systems Division is a leader in lightweight torpedo
manufacturing and the design and manufacturing of underwater surveillance,
sonar and mine warfare systems. The acquisition was completed in the first
quarter of 1997. Also in 1996, Hughes Defense acquired an enterprise with
operations that complement existing technological capabilities for $28.7
million.
C-16
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In February 1995, Hughes Defense acquired substantially all of the assets of
CAE-Link Corporation for $176.0 million. CAE-Link is an established supplier of
simulation, training and technical services, primarily to the U.S. military and
NASA. In December 1995, Hughes Defense acquired all of the stock of Magnavox
Electronic Systems Company ("Magnavox") for $382.4 million. Magnavox is a
leading supplier of military tactical communications, electronic warfare and
command and control systems.
All acquisitions were accounted for using the purchase method of accounting.
The operating results of the entities acquired were combined with those of
Hughes Defense from their respective acquisition dates. These acquisitions did
not have a material impact on the operating results of Hughes Defense. The
purchase price of each acquisition was allocated to the net assets acquired,
including intangible assets, based upon their estimated fair values at the
dates of acquisition.
During 1995, Hughes Defense divested several non-strategic enterprises
generating aggregate proceeds of approximately $23.6 million with no
significant net income impact.
NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, Hughes Electronics enters into transactions
utilizing financial instruments with off-balance sheet risk on behalf of Hughes
Defense to reduce Hughes Defense exposure to fluctuations in foreign exchange
rates. The primary class of derivatives used is foreign exchange-forward
contracts. These instruments involve, to varying degrees, elements of credit
risk in the event a counterparty should default and market risk as the
instruments are subject to rate and price fluctuations. Credit risk is managed
through the periodic monitoring and approval of financially sound
counterparties. Market risk is mitigated because the derivatives are used to
hedge underlying transactions. Cash receipts or payments on these contracts
normally occur at maturity. Hughes Electronics holds derivatives on behalf of
Hughes Defense only for purposes other than trading.
Foreign exchange-forward contracts are legal agreements between two parties
to purchase and sell a foreign currency, for a price specified at the contract
date, with delivery and settlement in the future. Hughes Electronics uses these
agreements on behalf of Hughes Defense to hedge risk of changes in foreign
currency exchange rates associated with certain firm commitments denominated in
foreign currency.
The total notional amount of foreign exchange-forward contracts entered into
by Hughes Defense at December 31, 1996 and 1995, was approximately $23.0
million and $31.0 million, respectively. The total notional amount of foreign
exchange-forward contracts entered into by Hughes Electronics on behalf of
Hughes Defense at December 31, 1996 and 1995, was approximately $136.0 million
and $148.0 million, respectively.
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS
For notes and loans payable and long-term debt, the estimated fair value was
$120.2 million and $134.2 million at December 31, 1996 and 1995, respectively.
Such fair value is based on quoted market prices for similar issues or on
current rates offered to Hughes Defense for debt of similar remaining
maturities. The carrying value of debt with an original term of less than 90
days is assumed to approximate fair value.
The fair values of derivative financial instruments reflect the estimated
amounts Hughes Defense would receive or pay to terminate the contracts at the
reporting date, which takes into account the current unrealized gains or losses
on open contracts that are deferred and recognized when the offsetting gains
and losses are recognized on the related hedged items. The fair value of
foreign exchange-forward contracts is estimated based on foreign exchange rate
quotes at the reporting date. At December 31, 1996 and 1995, the total
estimated fair
C-17
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
value of open contracts, which were in a net gain (loss) position, was $0.4
million and ($0.5) million, respectively. No amounts were recorded on the
Combined Balance Sheet for these contracts in 1996 and 1995. For all financial
instruments not described above, fair value approximates book value.
NOTE 13: COMMITMENTS AND CONTINGENT LIABILITIES
In December 1994, Hughes Electronics entered into an agreement with Computer
Sciences Corporation ("CSC") whereby CSC provides a significant amount of data
processing services required by the non-automotive businesses of Hughes
Electronics. Baseline service payments to CSC are expected to aggregate
approximately $1.5 billion over the term of the eight-year agreement. Based on
historical usage, approximately 85% of the costs incurred under the agreement
are attributable to Hughes Defense. The contract is cancelable by Hughes
Electronics with substantial early termination penalties.
Minimum future commitments under operating leases having noncancelable lease
terms in excess of one year, primarily for real property, aggregating $1,048.6
million, are payable as follows: $98.6 million in 1997, $86.0 million in 1998,
$88.8 million in 1999, $84.2 million in 2000, $74.4 million in 2001 and $616.6
million thereafter. Certain of these leases contain escalation clauses and
renewal or purchase options. Rental expenses under operating leases were $96.2
million in 1996, $114.1 million in 1995 and $133.7 million in 1994.
In conjunction with its performance on long-term contracts, Hughes Defense is
contingently liable under standby letters of credit and bonds in the amount of
$227.0 million at December 31, 1996. In Hughes Defense's past experience, no
material claims have been made against these financial instruments.
Hughes Defense is subject to potential liability under government regulations
and various claims and legal actions which are pending or may be asserted
against it. The aggregate ultimate liability of Hughes Defense under these
government regulations and under these claims and actions, was not determinable
at December 31, 1996. In the opinion of Hughes Electronics and Hughes Defense
management, such liability is not expected to have a material adverse effect on
Hughes Defense combined operations or financial position.
NOTE 14: EXPORT SALES
Export sales from the U.S. were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Europe............................................. $321.5 $319.7 $ 363.5
Asia............................................... 335.8 269.6 204.0
Middle East........................................ 244.9 302.9 347.0
Canada............................................. 54.3 25.6 70.7
Other.............................................. 12.4 10.4 18.6
------ ------ --------
Total............................................ $968.9 $928.2 $1,003.8
====== ====== ========
</TABLE>
C-18
<PAGE>
APPENDIX D
DELCO
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
UNAUDITED COMBINED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Combined Statement of Income and Parent Company's Net Investment....... D-1
Combined Balance Sheet................................................. D-2
Combined Statement of Cash Flows....................................... D-3
Notes to Combined Financial Statements................................. D-4
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND INDEPENDENT
AUDITORS' REPORT
Independent Auditors' Report........................................... D-6
Combined Statement of Income and Parent Company's Net Investment....... D-7
Combined Balance Sheet................................................. D-8
Combined Statement of Cash Flows....................................... D-9
Notes to Combined Financial Statements................................. D-10
</TABLE>
<PAGE>
DELCO
COMBINED STATEMENT OF INCOME AND
PARENT COMPANY'S NET INVESTMENT
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
REVENUES
Net Sales
General Motors and affiliates.......................... $3,740.8 $3,847.8
Outside................................................ 369.4 392.3
Other income (expense), net
Interest income--General Motors and affiliates......... 143.6 133.3
Other.................................................. (1.1) 5.9
-------- --------
Total Revenues....................................... 4,252.7 4,379.3
-------- --------
COSTS AND EXPENSES
Cost of sales and other operating charges, exclusive of
items listed below...................................... 3,388.2 3,339.7
Selling, general, and administrative expenses............ 169.6 198.3
Depreciation and amortization............................ 166.5 151.7
-------- --------
Total Costs and Expenses............................. 3,724.3 3,689.7
-------- --------
INCOME BEFORE INCOME TAXES................................. 528.4 689.6
Income taxes............................................... 200.8 256.0
-------- --------
NET INCOME............................................... 327.6 433.6
-------- --------
Parent Company's Net Investment, beginning of period....... 3,662.1 3,402.1
Net distributions to Parent Company...................... (184.1) (206.1)
-------- --------
PARENT COMPANY'S NET INVESTMENT, END OF PERIOD............. $3,805.6 $3,629.6
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
D-1
<PAGE>
DELCO
COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $ 245.3 $ 741.0
Accounts receivable (less allowances)
General Motors and affiliates................... 65.0 82.3
Trade receivables............................... 142.0 170.9
Notes receivable--Hughes Electronics.............. 3,065.9 1,976.2
Contracts in process.............................. 44.0 112.5
Inventories....................................... 629.3 688.3
Deferred income taxes............................. 58.9 76.4
Prepaid expenses.................................. 16.6 10.4
-------- --------
Total Current Assets.......................... 4,267.0 3,858.0
-------- --------
Notes receivable--Hughes............................ -- 200.0
-------- --------
Property, net....................................... 974.9 1,066.1
-------- --------
Investments and Other Assets, principally at cost
(less allowances).................................. 138.9 139.0
-------- --------
Deferred Income Taxes............................... 210.6 201.0
-------- --------
Total Assets.................................. $5,591.4 $5,464.1
======== ========
LIABILITIES AND PARENT COMPANY'S NET INVESTMENT
Current liabilities
Accounts payable
General Motors and affiliates................... $ 15.0 $ 35.2
Other trade payables............................ 297.0 322.2
Advances on contracts............................. -- 40.9
Loans payable to General Motors................... 33.2 27.8
Income taxes payable.............................. 68.3 59.7
Accrued liabilities
General Motors and affiliates................... 33.3 44.1
Other liabilities............................... 221.0 204.3
-------- --------
Total Current Liabilities..................... 667.8 734.2
-------- --------
Other Liabilities and Deferred Credits.............. 55.7 48.8
-------- --------
Postretirement Benefits Other Than Pensions......... 1,062.3 1,019.0
-------- --------
Contingent Liabilities
Parent Company's Net Investment..................... 3,805.6 3,662.1
-------- --------
Total Liabilities and Parent Company's Net
Investment................................... $5,591.4 $5,464.1
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
D-2
<PAGE>
DELCO
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
----------------
1997 1996
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 327.6 $ 433.6
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................ 166.5 151.7
Provision for postretirement benefits other than
pensions, net of cash payments.......................... 43.3 22.9
Net loss on sale of property............................. 10.6 1.9
Deferred income taxes.................................... 7.9 20.6
Change in other operating assets and liabilities
Accounts receivable.................................... 46.2 19.9
Contracts in process................................... 68.5 70.8
Inventories............................................ 59.0 (129.0)
Accounts payable....................................... (45.4) 9.7
Advances on contracts.................................. (40.9) (48.9)
Income taxes payable................................... 8.6 43.0
Accrued liabilities.................................... 5.9 9.6
Other.................................................. (1.3) (5.8)
------- -------
Net Cash Provided by Operating Activities.................. 656.5 600.0
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and special tools................ (101.5) (163.3)
Proceeds from disposal of property......................... 17.7 1.4
Increase in notes receivable--Hughes Electronics........... (889.7) (445.9)
------- -------
Net Cash Used in Investing Activities...................... (973.5) (607.8)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in loans payable to General Motors............ 5.4 27.8
Net Distributions to Parent Company........................ (184.1) (206.1)
------- -------
Net Cash Used in Financing Activities...................... (178.7) (178.3)
------- -------
Net decrease in cash and cash equivalents.................... (495.7) (186.1)
Cash and cash equivalents at beginning of the period......... 741.0 926.1
------- -------
Cash and cash equivalents at the end of the period........... $ 245.3 $ 740.0
======= =======
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
D-3
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited combined financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments
(consisting of only normal recurring items) which are necessary for a fair
presentation have been included. The results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year.
On January 16, 1997, Hughes Electronics Corporation ("Hughes Electronics"),
General Motors Corporation ("GM"), the parent of Hughes Electronics, and
Raytheon Company ("Raytheon") announced a series of planned transactions that
would include:
. The tax-free spin-off of 100% of the defense business of Hughes Electronics
("Hughes Defense") to holders of GM's $1 2/3 par value and Class H Common
Stocks followed immediately by the tax-free merger of that business with
Raytheon, after which there would be outstanding two classes of
Raytheon/Hughes Defense common stock;
. The transfer of Delco Electronics Corporation and Related Entities
("Delco"), from Hughes Electronics to GM and a reallocation of the
derivative interest in the earnings of Delco currently held by GM Class H
common stockholders to holders of GM $1 2/3 par value Common Stock; and
. The recapitalization of GM Class H Common Stock into a GM tracking stock
linked to the telecommunications and space business of Hughes Electronics
("Hughes Telecom"). GM would continue to own 100% of Hughes Telecom.
On July 14, 1997, GM received a ruling from the Internal Revenue Service that
its contemplated spin-off of Hughes Defense would be tax-free to GM and its
stockholders. In addition, GM and Raytheon have reached agreement with the U.S.
Department of Justice and U.S. Department of Defense regarding the basis upon
which the merger of Hughes Defense and Raytheon can proceed consistent with the
Government's enforcement of U.S. antitrust laws. On October 6, 1997, the GM
Board of Directors approved the final terms for the above described
transactions. The planned transactions must be approved by holders of GM $1 2/3
par value and Class H Common Stocks, among a number of other conditions. In
addition, the merger of Hughes Defense and Raytheon is subject to approval by
Raytheon stockholders. No assurance can be given that the above transactions
will be completed. GM expects to solicit stockholders' approval of the planned
transactions during the fourth quarter of 1997, after certain conditions are
satisfied.
Delco is not a legal entity. The combined financial statements present the
financial position, results of operations and cash flows of Delco, which
consists primarily of operations included in the Automotive Electronics segment
of Hughes Electronics, certain other Hughes Electronics businesses and certain
Hughes Electronics Corporate assets, liabilities, income and expenses
attributable to Delco. Delco includes the accounts of Delco Electronics
Corporation, its domestic and foreign subsidiaries which are more than 50%
owned and related entities, which are under common ownership and common
management. Delco's share of earnings or losses of associated companies in
which at least 20%, but not more than 50%, of the voting securities are owned
is included in combined operating results under the equity method of
accounting.
The combined financial statements include allocations of corporate expenses
from Hughes Electronics including financial, legal, tax, corporate
communications, and human resources. In addition, GM provides certain services
to and administers certain programs for Delco, including payroll
administration, employee medical insurance and property and casualty insurance,
financial, legal, tax and human resources. These costs have been charged to
Delco based either on usage or using allocation methodologies primarily based
upon total revenues, certain tangible assets and payroll expenses. Management
believes the allocations were made on a reasonable basis.
D-4
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market, principally using the
average cost method.
Major Classes of Inventories:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Productive materials, work in process,
vehicles and supplies..................... $449.3 $492.2
Finished product and service parts......... 180.0 196.1
------ ------
Total.................................... $629.3 $688.3
====== ======
</TABLE>
NOTE 3: CONTINGENT LIABILITIES
In the normal course of business, Delco is subject to potential liability
under product recall announced by vehicle original equipment manufacturers,
such as GM, as they relate to products manufactured and sold by Delco. Delco is
also subject to potential liability under government regulations and various
claims and legal actions which are pending or may be asserted against them.
Some of the pending actions purport to be class actions. The aggregate ultimate
liability of Delco under these potential recalls, government regulations,
claims and actions was not determinable at September 30, 1997. In the opinion
of management, such liability is not expected to have a material adverse effect
on Delco's combined operations or financial position.
D-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hughes Electronics Corporation:
We have audited the Combined Balance Sheet of Delco Electronics Corporation
and Related Entities ("Delco") as of December 31, 1996 and 1995 and the related
Combined Statements of Income and Parent Company's Net Investment and of Cash
Flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of Delco's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Delco at December 31, 1996 and 1995 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the combined financial statements, effective
January 1, 1994 Delco changed its method of accounting for postemployment
benefits.
/s/ Deloitte & Touche LLP
Indianapolis, Indiana
October 3, 1997
D-6
<PAGE>
DELCO
COMBINED STATEMENT OF INCOME AND
PARENT COMPANY'S NET INVESTMENT
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Net sales
General Motors and affiliates............ $4,990.2 $5,176.9 $4,916.0
Outside customers........................ 569.9 580.3 644.7
Other Income, net
Interest Income--General Motors and
Hughes Electronics...................... 180.2 183.0 139.0
Other.................................... 22.2 12.6 11.6
-------- -------- --------
Total Revenues....................... 5,762.5 5,952.8 5,711.3
-------- -------- --------
COSTS AND EXPENSES
Cost of sales and other operating charges,
exclusive of items listed below............. 4,421.0 4,452.8 4,414.3
Selling, general, and administrative
expenses.................................... 276.5 260.6 192.3
Depreciation and amortization................ 204.4 155.6 145.0
-------- -------- --------
Total Costs and Expenses................. 4,901.9 4,869.0 4,751.6
-------- -------- --------
INCOME BEFORE INCOME TAXES....................... 860.6 1,083.8 959.7
Income taxes..................................... 325.8 411.3 364.7
-------- -------- --------
Income before cumulative effect of accounting
change.......................................... 534.8 672.5 595.0
Cumulative effect of accounting change........... -- -- 35.2
-------- -------- --------
NET INCOME..................................... 534.8 672.5 559.8
-------- -------- --------
Parent Company's Net Investment, beginning of
period......................................... 3,402.1 2,949.5 2,566.7
Net distributions to Parent Company............ (274.8) (219.9) (177.0)
-------- -------- --------
PARENT COMPANY'S NET INVESTMENT, END OF PERIOD.. $3,662.1 $3,402.1 $2,949.5
======== ======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
D-7
<PAGE>
DELCO
COMBINED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................. $ 741.0 $ 926.1
Accounts receivable (less allowances)
General Motors and affiliates............................ 82.3 135.1
Trade receivables........................................ 170.9 169.4
Notes receivable--Hughes Electronics....................... 1,976.2 1,239.1
Contracts in process....................................... 112.5 178.8
Inventories................................................ 688.3 555.6
Deferred income taxes...................................... 76.4 56.1
Prepaid expenses........................................... 10.4 16.0
-------- --------
Total Current Assets................................... 3,858.0 3,276.2
-------- --------
Notes receivable--Hughes Electronics........................ 200.0 500.0
-------- --------
Property, net............................................... 1,066.1 1,083.4
-------- --------
Investments and Other Assets--principally at cost (less
allowances)................................................ 139.0 122.8
-------- --------
Deferred Income Taxes....................................... 201.0 204.0
-------- --------
Total Assets........................................... $5,464.1 $5,186.4
======== ========
LIABILITIES AND PARENT COMPANY'S NET INVESTMENT
Current Liabilities
Accounts payable
General Motors and affiliates............................ $ 35.2 $ 56.2
Other trade payables..................................... 322.2 257.4
Advances on Contracts...................................... 40.9 108.1
Loan payable to General Motors............................. 27.8 19.3
Income taxes payable....................................... 59.7 58.0
Accrued liabilities
General Motors and affiliates............................ 44.1 59.8
Other liabilities........................................ 204.3 209.1
-------- --------
Total Current Liabilities.............................. 734.2 767.9
-------- --------
Other Liabilities and Deferred Credits...................... 48.8 58.9
-------- --------
Postretirement Benefits Other Than Pensions................. 1,019.0 957.5
-------- --------
Commitments and Contingent Liabilities
Parent Company's Net Investment............................. 3,662.1 3,402.1
-------- --------
Total Liabilities and Parent Company's Net Investment.. $5,464.1 $5,186.4
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
D-8
<PAGE>
DELCO
COMBINED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of accounting
change....................................... $ 534.8 $ 672.5 $ 595.0
Adjustments to reconcile income before
cumulative effect of accounting change to net
cash provided by operating activities
Depreciation and amortization............. 204.4 155.6 145.0
Provision for postretirement benefits
other than pensions, net of cash
payments................................. 61.5 42.9 102.6
Net loss on sale of property.............. 19.5 11.8 5.2
Deferred income taxes*.................... (17.3) (26.8) (81.7)
Change in other operating assets and
liabilities
Accounts receivable................... 51.3 (76.7) 217.6
Contracts in process.................. 66.3 (9.7) (90.9)
Inventories........................... (132.7) 3.8 (51.2)
Accounts payable...................... 43.8 (45.2) 15.6
Advances on contracts................. (67.2) 52.5 1.4
Income taxes payable.................. 1.7 8.4 (23.9)
Accrued liabilities................... (20.5) (141.9) 156.9
Other*................................ (40.3) (2.9) (39.7)
------- -------- --------
Net Cash Provided by Operating Activities..... 705.3 644.3 951.9
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in companies, net of cash acquired. -- (63.2) --
Expenditures for property and special tools... (196.5) (264.1) (165.7)
Proceeds from disposal of property............ 9.5 10.4 7.7
Increase in notes receivable--Hughes
Electronics.................................. (437.1) (390.8) (138.3)
------- -------- --------
Net Cash Used in Investing Activities......... (624.1) (707.7) (296.3)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in loans payable to
General Motors............................... 8.5 (33.8) (8.6)
Net distributions to Parent Company........... (274.8) (219.9) (177.0)
------- -------- --------
Net Cash Used in Financing Activities......... (266.3) (253.7) (185.6)
------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (185.1) (317.1) 470.0
Cash and cash equivalents at beginning of the
year............................................ 926.1 1,243.2 773.2
------- -------- --------
Cash and cash equivalents at end of the year..... $ 741.0 $ 926.1 $1,243.2
======= ======== ========
</TABLE>
- --------
*1994 amounts exclude the effect of accounting change.
Reference should be made to the Notes to Combined Financial Statements.
D-9
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Organization and Combination
On January 16, 1997, Hughes Electronics Corporation ("Hughes Electronics"),
General Motors Corporation ("GM"), the parent of Hughes Electronics, and
Raytheon Company ("Raytheon") announced a series of planned transactions that
would include:
. The tax-free spin-off of 100% of the defense business of Hughes
Electronics ("Hughes Defense") to holders of GM's $1 2/3 par value and
Class H Common Stocks followed immediately by the tax-free merger of that
business with Raytheon, after which there would be outstanding two classes
of Raytheon/Hughes Defense common stock;
. The transfer of Delco Electronics Corporation and Related Entities
("Delco"), from Hughes Electronics to GM and a reallocation of the
derivative interest in the earnings of Delco currently held by GM Class H
common stockholders to holders of GM $1 2/3 par value Common Stock; and
. The recapitalization of GM Class H Common Stock into a GM tracking stock
linked to the telecommunications and space business of Hughes Electronics
("Hughes Telecom"). GM would continue to own 100% of Hughes Telecom.
The planned transactions are subject to approval by holders of GM $1 2/3 par
value and Class H Common Stocks. In addition, the merger of Hughes Defense
with Raytheon, which is contingent upon the spin-off of the Hughes Defense, is
subject to approval by the stockholders of Raytheon. The planned transactions
also are subject to a variety of regulatory approvals.
Delco is not a legal entity. The combined financial statements present the
financial position, results of operations and cash flows of Delco, which
consists primarily of operations included in the Automotive Electronics
segment of Hughes Electronics, certain other Hughes Electronics businesses and
certain Hughes Electronics Corporate assets, liabilities, income and expenses
attributable to Delco. Delco includes the accounts of Delco Electronics
Corporation, its domestic and foreign subsidiaries which are more than 50%
owned and related entities, which are under common ownership and common
management. Delco's share of earnings or losses of associated companies in
which at least 20%, but not more than 50%, of the voting securities are owned
is included in combined operating results under the equity method of
accounting.
The combined financial statements include allocations of corporate expenses
from Hughes Electronics including financial, legal, tax, corporate
communications, and human resources. In addition, GM provides certain services
to and administers certain programs for Delco, including payroll
administration, employee medical insurance and property and casualty
insurance, financial, legal, tax and human resources. These costs have been
charged to Delco based either on usage or using allocation methodologies
primarily based upon total revenues, certain tangible assets and payroll
expenses. Management believes the allocations were made on a reasonable basis.
Delco participates in a centralized cash management system wherein cash
receipts are transferred to and cash disbursements are funded by Hughes
Electronics daily. Hughes Electronics maintains records of net amounts of cash
transferred to Hughes Electronics from Delco and allocates interest income to
Delco at rates which approximate the average rate of return on Hughes
Electronics' cash portfolio. Such interest income aggregated $32.8 million in
1996, $49.5 million in 1995 and $32.7 million in 1994. GM also allocates
interest income to Delco based on amounts owed to Delco by GM during any given
month as a result of sales of products manufactured by Delco and sold to GM
and affiliates. Such interest income is based on rates which approximate the
average rate of return on GM's cash portfolio and aggregated $10.2 million in
1996, $8.5 million in 1995 and $7.3 million in 1994.
D-10
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Delco operates in one segment and designs and manufactures modern, high-
technology electronics for use in automobiles and light trucks, including
radios, controls for engines and transmissions, ignition modules, pressure
sensors, navigation and communication systems, modules and sensors for airbags,
controllers for anti-lock brakes, climate control, dashboard instrumentation,
vehicle security electronics and other automotive electronic products. Delco
also designs and manufactures certain components for military vehicles.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported therein. Due to the inherent uncertainty involved
in making estimates, actual results reported in future periods may be based
upon amounts which differ from those estimates.
Revenue Recognition
Sales to GM affiliates and to outside customers are generally recognized as
products are shipped or services are rendered. Estimated losses on contracts
are recorded when identified.
Sales under long-term contracts are recognized using the percentage-of-
completion (cost-to-cost) method of accounting. Under this method, sales are
recorded equivalent to costs incurred plus a portion of the profit expected to
be realized, determined based on the ratio of costs incurred to estimated total
costs at completion.
Profits expected to be realized on long-term contracts are based on estimates
of total sales value and costs at completion. These estimates are reviewed and
revised periodically throughout the lives of contracts, and adjustments to
profits resulting from such revisions are recorded in the accounting period in
which the revisions are made. Estimated losses on contracts are recorded in the
period in which they are identified.
Product-Related Expenses
Advertising and sales promotion, research and development and other product-
related costs are charged to expense as incurred; provisions for estimated
expenses related to product warranty are made at the time the products are
sold. Advertising expense amounted to $12.5 million in 1996, $16.1 million in
1995 and $16.2 million in 1994. Research and development expense was $502.4
million in 1996, $526.8 million in 1995 and $516.8 million in 1994.
Cash Flows
Cash equivalents consist of highly liquid investments purchased with original
maturities of 90 days or less.
Net cash provided by operating activities reflects cash payments for income
taxes of $343.1 million, $438.1 million and $446.4 million in 1996, 1995 and
1994, respectively.
Inventories
Inventories are stated at the lower of cost or market primarily using the
weighted average cost and the first-in, first-out (FIFO) methods.
D-11
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Major Classes of Inventories:
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Productive material, work in process, vehicles and
supplies.............................................. $492.2 $397.6
Finished product and service parts..................... 196.1 158.0
------ ------
Total................................................ $688.3 $555.6
====== ======
</TABLE>
Property and Depreciation
Property is carried at cost. Depreciation is provided based on estimated
useful lives of groups of property generally using accelerated methods, which
accumulate depreciation of approximately two-thirds of the depreciable cost
during the first half of the estimated useful lives.
Expenditures for special tools are amortized over their estimated useful
lives, primarily using the units of production method. Amortization is applied
directly to the asset account. Replacement of special tools for reasons other
than changes in products is charged directly to cost of sales.
Income Taxes
Delco, along with other Hughes Electronics businesses and subsidiaries, joins
with GM in filing a consolidated U.S. federal income tax return. Current and
deferred income taxes are computed by Hughes Electronics and allocated to Delco
according to principles established by Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred income tax
assets and liabilities reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes, as measured by applying currently
enacted tax laws. Provision has also been made for U.S. federal income tax to
be paid on that portion of the undistributed earnings of the foreign
subsidiaries that has not been deemed permanently reinvested.
Foreign Currency
Most of Delco's foreign operations have determined the local currency to be
their functional currency. Accordingly, most foreign entities translate assets
and liabilities from their local currencies to U.S. dollars using year-end
exchange rates. Income and expense accounts are translated at the average rates
in effect during the year. Net foreign currency transaction gains (losses)
included in the Combined Statement of Income amounted to $1.8 million in 1996,
($2.8) million in 1995 and ($0.6) million in 1994.
Market Concentrations and Labor Force
Sales to GM and affiliates, consisting of various automotive electronic
component parts, comprised approximately 89.7% of total sales in 1996, 89.9% in
1995 and 88.4% in 1994.
Delco, on a world-wide basis, has a concentration of labor supply in
employees working under collective bargaining agreements, which represent
approximately 88% of its hourly work force.
New Accounting Standards and Accounting Changes
In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130
and 131. SFAS 130, "Reporting Comprehensive Income," establishes accounting
standards for reporting and display of
D-12
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," establishes accounting standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997.
Effective January 1, 1996, Delco adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This Statement establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of this new accounting standard did
not have a material effect on Delco's combined operating results or financial
position.
Effective January 1, 1994, Delco adopted SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." The Statement requires accrual of the costs of
benefits provided to former or inactive employees after employment, but before
retirement. The unfavorable cumulative effect of adopting this Standard was
$35.2 million, net of income taxes. The charge primarily related to extended
disability benefits which are accrued on a service-driven basis.
NOTE 3: RELATED-PARTY TRANSACTIONS
In the ordinary course of its operations Delco sells its products to and
purchases certain products and services from GM and affiliates. In addition,
Delco receives allocations of corporate expenses and enters into other
transactions with Hughes Electronics and GM and affiliates. The following
summarizes Delco's significant transactions with such related parties.
Sales and Purchases
The amounts due from and to GM and affiliates result from sales of products
to and purchases of materials, vehicles and services from units controlled by
GM. Vehicles purchased from GM amounted to approximately $87.6 million in 1996,
$80.8 million in 1995 and $64.0 million in 1994. Other purchases from GM and
affiliates, including computer systems services provided by Electronic Data
Systems Corporation prior to its split-off from GM in May, 1996, amounted to
approximately $75.0 million in 1996, $176.1 million in 1995 and $167.4 million
in 1994.
Allocations of Expenses
Allocations of corporate expenses from Hughes Electronics amounted to $19.4
million in 1996, $18.8 million in 1995 and $12.8 million in 1994, and are
included in Selling, general and administrative expenses in the Combined
Statement of Income. Costs charged to Delco by GM for services provided were
not material.
Notes Receivable and Interest Income
Notes receivable from Hughes Electronics bear interest at rates ranging from
the London Interbank Offered Rate ("LIBOR") plus 0.15% to a rate of 9.5%. Delco
recorded interest income related to the notes receivable from Hughes
Electronics of $137.2 million in 1996, $125.0 million in 1995 and $99.0 million
in 1994.
D-13
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Loan Payable
The loan payable to GM bears interest at a rate which approximates LIBOR plus
0.15% (5.8% at December 31, 1996) and matures December 31, 1997. Interest
expense paid to GM amounted to $1.6 million in 1996, $3.2 million in 1995 and
$2.9 million in 1994.
NOTE 4: PROPERTY, NET
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
(YEARS) 1996 1995
--------- -------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Land and improvements......................... -- $ 33.4 $ 29.8
Buildings and leasehold improvements.......... 40 318.8 311.1
Machinery and equipment....................... 5-15 1,556.0 1,507.8
Furniture, fixtures, and office machines...... 5-15 23.4 25.2
Construction in progress...................... -- 131.5 152.6
-------- --------
Total....................................... 2,063.1 2,026.5
Less accumulated depreciation................. 1,084.7 1,011.1
-------- --------
Net real estate, plants, and equipment........ 978.4 1,015.4
Special tools--less amortization.............. 1-3 87.7 68.0
-------- --------
Property, net................................. $1,066.1 $1,083.4
======== ========
</TABLE>
NOTE 5: OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Payrolls and other compensation............................ $139.7 $ 99.9
Contract-related provisions................................ 6.8 39.0
Other...................................................... 57.8 70.2
------ ------
Total.................................................... $204.3 $209.1
====== ======
</TABLE>
D-14
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: INCOME TAXES
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
U.S. federal, state and foreign taxes currently
payable......................................... $343.1 $438.1 $446.4
U.S. federal, state and foreign deferred tax
liabilities
(assets)--net................................... (17.3) (26.8) (81.7)
------ ------ ------
Total income tax provision..................... $325.8 $411.3 $364.7*
====== ====== ======
</TABLE>
- --------
*Excluding effect of accounting change.
Income before income taxes included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U.S. income........................................ $767.7 $ 992.5 $892.6
Foreign income..................................... 92.9 91.3 67.1
------ -------- ------
Total............................................ $860.6 $1,083.8 $959.7
====== ======== ======
</TABLE>
The combined income tax provision was different than the amount computed
using the U.S. statutory income tax rate for the reasons set forth in the
following table:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Expected tax at U.S. statutory income tax rate... $301.2 $379.3 $335.9
U.S. state and local income taxes................ 30.1 38.0 31.8
Foreign tax rate differential.................... (10.0) (6.1) (5.6)
Other............................................ 4.5 0.1 2.6
------ ------ ------
Combined income tax provision.................... $325.8 $411.3 $364.7*
====== ====== ======
</TABLE>
- --------
*Excluding effect of accounting change.
D-15
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Postretirement benefits other
than pensions................. $427.3 $ -- $376.2 $ --
Accrued expenses............... 42.9 -- 92.8 --
Employee benefits.............. 9.0 13.4 9.0 6.9
Depreciation................... -- 99.5 -- 94.5
Tax on unremitted earnings of
foreign subsidiaries.......... -- 93.4 -- 82.8
Other.......................... 12.3 5.9 18.5 52.2
------ ------ ------ ------
Subtotal..................... 491.5 212.2 496.5 236.4
Valuation allowance............ (1.9) -- -- --
------ ------ ------ ------
Total deferred taxes......... $489.6 $212.2 $496.5 $236.4
====== ====== ====== ======
</TABLE>
Provision has been made for U.S. federal income taxes to be paid on that
portion of the undistributed earnings of foreign subsidiaries that has not been
deemed permanently reinvested. At December 31, 1996 and 1995, undistributed
earnings of foreign subsidiaries amounted to approximately $407.2 million and
$346.9 million, respectively. Repatriation of all accumulated foreign earnings
would have resulted in tax liabilities of $108.3 million and $97.2 million,
respectively, for which Delco has provided deferred tax liabilities of $93.4
million and $82.8 million, respectively.
At December 31, 1996, Delco had $5.7 million of foreign operating loss
carryforwards which expire in 2001. The valuation allowance includes a
provision for all of the foreign operating loss carryforwards.
NOTE 7: RETIREMENT AND INCENTIVE PLANS
Substantially all the U.S. employees of Delco participate in the defined
benefit and defined contribution pension plans of GM. Plans covering
represented U.S. employees generally provide benefits of stated amounts for
each year of service, as well as significant supplemental benefits for U.S.
employees who retire with 30 years of service before normal retirement age. The
benefits provided by the plans covering U.S. salaried employees are generally
based on years of service and the employee's salary history. Certain
nonqualified pension plans covering U.S. executives are based on targeted wage
replacement percentages and are unfunded. The accumulated plan benefit
obligation and plan net assets for the employees of Delco are not determined
separately; however, GM charged Delco $53.1 million in 1996, $50.9 million in
1995 and $93.3 million in 1994, for benefits earned by these U.S. employees in
those years. Various foreign employees are covered under other pension plans,
which are not material to Delco.
Certain eligible employees of Delco participate in the Hughes Electronics
Corporation Incentive Plan pursuant to which shares, rights, or options to
acquire GM Class H Common Stock may be granted through May 31, 1997. The option
price is equal to 100% of the fair market value of GM Class H Common Stock on
the date the options are granted. These non-qualified options generally expire
10 years from the dates of grant and are subject to earlier termination under
certain conditions.
NOTE 8: OTHER POSTRETIREMENT BENEFITS
Substantially all of the U.S. employees of Delco participate in various
postretirement medical, dental, vision and life insurance plans of GM. SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
requires that the cost of such benefits be recognized in the combined financial
statements during the period U.S. employees provide service to Delco.
D-16
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The components of non-pension postretirement benefit cost are set forth
below:
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Benefits earned during the year..................... $ 24.2 $22.2 $ 34.8
Interest accrued on benefits earned in prior years.. 83.2 82.9 88.5
Net amortization.................................... (1.8) (5.3) 10.3
------ ----- ------
Total non-pension postretirement benefit cost..... $105.6 $99.8 $133.6
====== ===== ======
</TABLE>
The following table displays the components of Delco's net postretirement
benefit obligation as recognized in the Combined Balance Sheet at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
attributable to
Current Retirees..................................... $ 549.0 $ 528.1
Fully eligible active plan participants.............. 194.9 162.7
Other active plan participants....................... 388.5 383.2
-------- -------
Accumulated postretirement benefit obligation.......... 1,132.4 1,074.0
Unrecognized net amount resulting from changes in plan
experience and actuarial assumptions.................. (80.0) (83.1)
-------- -------
Net postretirement benefit obligation.................. 1,052.4 990.9
Less current portion................................... 33.4 33.4
-------- -------
Net long-term postretirement benefit obligation.... $1,019.0 $ 957.5
======== =======
</TABLE>
The following table summarizes the principal assumptions used in determining
the actuarial value of the accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate............................ 7.8% 7.5% 8.8%
Weighted average discount rate of increase in future
compensation levels related to pay-related life
insurance................................................ 4.4% 4.3% 4.2%
Base weighted average health-care cost trend rate(1)...... 6.5% 6.5% 8.7%
Ultimate sustained weighted average health-care cost trend
rate in 2002(2).......................................... 5.0% 5.0% 5.5%
</TABLE>
- --------
(1) Current year trend rate assumed at beginning of year is adjusted to actual
in determining year-end obligations.
(2) Rate remains at 6.5% through 1999, and then decreases on a linear basis
through 2002, to the ultimate weighted average trend rate of 5.0%
A one percentage point increase in each future year of the weighted average
health-care cost trend rate would increase the accumulated postretirement
benefit obligation at December 31, 1996 by approximately $114.0 million, and
increase the service and interest cost components of the 1996 postretirement
benefit expense by approximately $12.8 million.
Delco has disclosed in the combined financial statements certain amounts
associated with estimated future postretirement benefits other than pensions
and characterized such amounts as "accumulated postretirement benefit
obligations," "liabilities" or "obligations." Notwithstanding the recording of
such amounts and the use of these terms, Delco does not admit or otherwise
acknowledge that such amounts or existing postretirement benefit plans of Delco
(other than pensions) represent legally enforceable liabilities of Delco.
D-17
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: PROFIT SHARING PLANS
Most U.S. employees of Delco participate in profit sharing plans which
provide a range of percentage payouts when Delco's U.S. income before income
taxes exceeds certain minimum thresholds. Delco distributed profit sharing
payouts of approximately $14 million in 1996, $19 million in 1995 and $18
million in 1994.
NOTE 10: DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, Hughes Electronics enters into transactions
utilizing financial instruments with off-balance sheet risk on behalf of Delco
to reduce Delco's exposure to fluctuations in foreign exchange rates. The
primary class of derivatives used by Delco is foreign exchange-forward
contracts. These instruments involve, to varying degrees, elements of credit
risk in the event a counterparty should default and market risk as the
instruments are subject to rate and price fluctuations. Credit risk is managed
through the periodic monitoring and approval of financially sound
counterparties. Market risk is mitigated because the derivatives are used to
hedge underlying transactions. Cash receipts or payments on these contracts
normally occur at maturity. Hughes Electronics holds derivatives on behalf of
Delco only for purposes other than trading.
Foreign exchange-forward contracts are legal agreements between two parties
to purchase and sell a foreign currency, for a price specified at the contract
date, with delivery and settlement in the future. Hughes Electronics uses these
agreements on behalf of Delco to hedge risk of changes in foreign currency
exchange rates associated with certain firm commitments denominated in foreign
currency.
The total notional amount of foreign exchange-forward contracts entered into
by Hughes on behalf of Delco at December 31, 1996 and 1995, was approximately
$28.9 million and $8.6 million, respectively. Delco's open contracts extend for
periods averaging six months.
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of derivative financial instruments reflect the estimated
amounts Delco would receive or pay to terminate the contracts at the reporting
date, which takes into account the current unrealized gains or losses on open
contracts that are deferred and recognized when the offsetting gains and losses
are recognized on the relate hedged items. The fair value of foreign exchange-
forward contracts is estimated based on foreign exchange rate quotes at the
reporting date. At December 31, 1996 and 1995, the estimated fair value of open
contracts held by Hughes Electronics on behalf of Delco which were in a net
gain (loss) position, was $1.9 million and $(0.1) million, respectively. No
amounts were recorded on the Combined Balance Sheet for these contracts in 1996
and 1995. The fair value of related party notes receivable from Hughes
Electronics is not determinable due to the lack of a market for such
instruments. For all financial instruments not described above, fair value
approximates book value.
NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES
In July 1993, Delco entered into an agreement with Electronic Data Systems
Corporation ("EDS") whereby EDS is the primary supplier of Delco's data
processing services through December 31, 1998. Delco does not guarantee minimum
service payments to EDS, however Delco must use EDS' services in accordance
with GM's master service agreement with EDS.
In the normal course of business, Delco is subject to potential liability
under product recalls announced by vehicle original equipment manufacturers,
such as GM, as they relate to products manufactured and sold by Delco. Delco is
also subject to potential liability under government regulations and various
claims and legal actions which are pending or may be asserted against them.
Some of the pending actions purport to be class actions. The aggregate ultimate
liability of Delco under these potential recalls, government regulations,
claims and actions was not determinable at December 31, 1996. In the opinion of
management, such liability is not expected to have a material adverse effect on
Delco's combined operations or financial position.
D-18
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13: SEGMENT REPORTING
Delco operates in one business segment: the design and manufacture of modern
high-technology electronics for use in automobiles.
Geographic Segments
Delco has foreign operations in Europe, Asia Pacific, Mexico and South
America, which are included in Other Geographic Areas below. Sales and revenues
between geographic areas are made at negotiated selling prices.
<TABLE>
<CAPTION>
OTHER
UNITED GEOGRAPHIC
1996 STATES AREAS ELIMINATIONS COMBINED
- ---- -------- ---------- ------------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales and Revenues
Sales to GM and Affiliates....... $4,934.1 $ 56.1 -- $4,990.2
Sales to unaffiliated customers.. 415.1 154.8 -- 569.9
Other Income..................... 184.8 17.6 -- 202.4
Sales among geographic areas..... 81.9 654.1 $(736.0) --
-------- ------ ------- --------
Total........................ $5,615.9 $882.6 $(736.0) $5,762.5
-------- ------ ------- --------
Income before cumulative effect of
accounting change.................. $ 438.8 $ 96.0 -- $ 534.8
-------- ------ ------- --------
Total Assets........................ $5,046.8 $549.4 $(132.1) $5,464.1
======== ====== ======= ========
<CAPTION>
OTHER
UNITED GEOGRAPHIC
1995 STATES AREAS ELIMINATIONS COMBINED
- ---- -------- ---------- ------------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales and Revenues
Sales to GM and Affiliates....... $5,125.5 $ 51.4 -- $5,176.9
Sales to unaffiliated customers.. 462.5 117.8 -- 580.3
Other Income..................... 182.5 13.1 -- 195.6
Sales among geographic areas..... 88.5 651.5 $(740.0) --
-------- ------ ------- --------
Total........................ $5,859.0 $833.8 $(740.0) $5,952.8
-------- ------ ------- --------
Income before cumulative effect of
accounting change.................. $ 576.4 $ 96.1 -- $ 672.5
-------- ------ ------- --------
Total Assets........................ $4,717.7 $567.7 $ (99.0) $5,186.4
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
OTHER
UNITED GEOGRAPHIC
1994 STATES AREAS ELIMINATIONS COMBINED
- ---- -------- ---------- ------------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales and Revenues
Sales to GM and Affiliates....... $4,903.0 $ 13.0 -- $4,916.0
Sales to unaffiliated customers.. 570.1 74.6 -- 644.7
Other Income..................... 140.9 9.7 -- 150.6
Sales among geographic areas..... 90.9 623.2 $(714.1) --
-------- ------ ------- --------
Total........................ $5,704.9 $720.5 $(714.1) $5,711.3
-------- ------ ------- --------
Income before cumulative effect of
accounting change.................. $ 536.9 $ 58.1 -- $ 595.0
-------- ------ ------- --------
Total Assets........................ $4,533.2 $445.0 $(135.8) $4,842.4
======== ====== ======= ========
</TABLE>
D-19
<PAGE>
DELCO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
Export sales from the U.S. were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Asia Pacific................................... $ 181.3 $ 185.5 $ 164.3
Europe......................................... 214.2 209.1 143.3
Other North America (Canada and Mexico)........ 833.7 953.4 737.9
Other.......................................... 42.3 40.8 27.9
-------- -------- --------
Total........................................ $1,271.5 $1,388.8 $1,073.4
======== ======== ========
</TABLE>
D-20
<PAGE>
APPENDIX E
HUGHES TELECOM
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
UNAUDITED COMBINED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Combined Statement of Income and Parent Company's Net Investment....... E-1
Combined Balance Sheet................................................. E-2
Combined Statement of Cash Flows....................................... E-3
Notes to Combined Financial Statements................................. E-4
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND INDEPENDENT
AUDITORS' REPORT
Independent Auditors' Report........................................... E-7
Combined Statement of Income and Parent Company's Net Investment....... E-8
Combined Balance Sheet................................................. E-9
Combined Statement of Cash Flows....................................... E-10
Notes to Combined Financial Statements................................. E-11
</TABLE>
<PAGE>
HUGHES TELECOM
COMBINED STATEMENT OF INCOME AND
PARENT COMPANY'S NET INVESTMENT
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
REVENUES
Product sales............................................. $2,064.4 $1,968.2
Direct broadcast, leasing and other services.............. 1,369.3 819.3
Other income, net......................................... 470.7 95.0
-------- --------
Total Revenues.......................................... 3,904.4 2,882.5
-------- --------
COSTS AND EXPENSES
Cost of products sold..................................... 1,567.8 1,455.7
Broadcast programming and other costs..................... 742.0 493.6
Selling, general, and administrative expenses............. 714.0 551.7
Depreciation and amortization............................. 195.3 141.7
Amortization of GM purchase accounting adjustments related
to Hughes Aircraft Company............................... 15.9 15.9
Interest expense.......................................... 58.1 30.1
-------- --------
Total Costs and Expenses................................ 3,293.1 2,688.7
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTERESTS......................................... 611.3 193.8
Income taxes................................................ 244.5 82.0
Minority interests in losses of subsidiaries................ 16.8 29.4
-------- --------
INCOME FROM CONTINUING OPERATIONS......................... 383.6 141.2
Income (loss) from discontinued operations.................. 1.2 (6.7)
-------- --------
NET INCOME................................................ 384.8 134.5
-------- --------
Parent Company's Net Investment, beginning of period........ 2,491.6 2,608.9
Net contributions from (distributions to) Parent Company.. 517 .6 (317.3)
-------- --------
PARENT COMPANY'S NET INVESTMENT, END OF PERIOD.............. $3,394.0 $2,426.1
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
E-1
<PAGE>
HUGHES TELECOM
COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $ 426.5 $ 6.7
Accounts and notes receivable (less allowances)... 462.3 423.0
Contracts in process, less advances and progress
payments of $63.4 and $54.2...................... 512.5 401.4
Inventories....................................... 601.3 423.1
Net assets of discontinued operations............. 35.3 35.0
Deferred subscriber acquisition costs............. 59.9 97.5
Prepaid expenses and other, including deferred
income taxes of $53.2
and $26.7........................................ 234.1 110.4
-------- --------
Total Current Assets............................ 2,331.9 1,497.1
-------- --------
Satellites, net..................................... 2,527.0 1,056.6
-------- --------
Property, net....................................... 805.1 690.8
-------- --------
Net Investment in Sales-type Leases................. 345.5 320.6
-------- --------
Intangible Assets, net of amortization of $299.5 and
$260.4............................................. 2,777.6 468.0
-------- --------
Investments and Other Assets--principally at cost
(less allowances).................................. 699.1 383.3
-------- --------
Total Assets.................................... $9,486.2 $4,416.4
======== ========
LIABILITIES AND PARENT COMPANY'S NET INVESTMENT
Current Liabilities
Accounts payable.................................. $ 411.4 $ 359.0
Advances on contracts............................. 264.7 287.8
Deferred revenues................................. 171.2 142.8
Accrued liabilities............................... 693.5 430.0
-------- --------
Total Current Liabilities....................... 1,540.8 1,219.6
-------- --------
Long-Term Debt...................................... 2,797.8 --
-------- --------
Deferred Gains on Sales and Leasebacks.............. 219.7 234.8
-------- --------
Accrued Operating Leaseback Expense................. 78.7 107.8
-------- --------
Other Liabilities and Deferred Credits.............. 328.7 136.9
-------- --------
Deferred Income Taxes............................... 483.3 204.1
-------- --------
Minority Interests.................................. 643.2 21.6
-------- --------
Contingencies
Parent Company's Net Investment..................... 3,394.0 2,491.6
-------- --------
Total Liabilities and Parent Company's Net
Investment..................................... $9,486.2 $4,416.4
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
E-2
<PAGE>
HUGHES TELECOM
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations...................... $ 383.6 $ 141.2
Adjustments to reconcile income from continuing
operations to net cash (used in) provided by operating
activities
Depreciation and amortization........................ 195.3 141.7
Amortization of GM purchase accounting adjustments
related to Hughes Aircraft Company.................. 15.9 15.9
Net gain on sales of investments and businesses...... (489.7) (120.3)
Gross profit on sales-type leases.................... (33.6) (47.9)
Deferred income taxes and other...................... 236.1 89.8
Change in other operating assets and liabilities
Accounts receivable................................ (28.4) (82.5)
Contracts in process............................... (111.1) 4.4
Inventories........................................ (178.2) (143.5)
Deferred subscriber acquisition costs.............. 37.6 --
Collections of principal on net investment in
sales-type leases................................. 17.1 18.5
Accounts payable................................... (82.1) 146.7
Advances on contracts.............................. (33.7) 147.4
Deferred revenues.................................. 28.4 46.4
Accrued liabilities................................ 272.3 3.2
Deferred gains on sales and leasebacks............. (15.1) (46.5)
Other.............................................. 19.8 (49.2)
--------- ---------
Net Cash Provided by Operating Activities.............. 234.2 265.3
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in companies, net of cash acquired.......... (1,466.2) --
Expenditures for property.............................. (140.8) (205.2)
Increase in satellites................................. (472.9) (146.4)
Proceeds from sale and leaseback of satellite
transponders.......................................... -- 252.0
Proceeds from disposal of property..................... (12.1) 16.2
--------- ---------
Net Cash Used in Investing Activities.................. (2,092.0) (83.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes and loans payables................... 1,759.1 --
Proceeds from sale of minority interest in subsidiary.. -- 137.5
Contributions from (distributions to) Parent Company... 517.6 (317.3)
--------- ---------
Net Cash Provided by (Used in) Financing Activities.... 2,276.7 (179.8)
--------- ---------
Net cash provided by continuing operations............... 418.9 2.1
Net cash provided by (used in) discontinued operations... 0.9 (3.1)
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 419.8 (1.0)
Cash and cash equivalents at beginning of the year....... 6.7 7.6
--------- ---------
Cash and cash equivalents at end of the period........... $ 426.5 $ 6.6
========= =========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
E-3
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited combined financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments
(consisting of only normal recurring items) which are necessary for a fair
presentation have been included. The results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year.
On January 16, 1997, Hughes Electronics Corporation ("Hughes Electronics"),
General Motors Corporation ("GM"), the parent of Hughes Electronics, and
Raytheon Company ("Raytheon") announced a series of planned transactions that
would include:
. The tax-free spin-off of 100% of the defense business of Hughes Electronics
("Hughes Defense") to holders of GM's $1 2/3 par value and Class H Common
Stocks followed immediately by the tax-free merger of that business with
Raytheon, after which there would be outstanding two classes of
Raytheon/Hughes Defense common stock;
. The transfer of Delco Electronics Corporation and Related Entities
("Delco"), from Hughes Electronics to GM and a reallocation of the
derivative interest in the earnings of Delco currently held by GM Class H
common stockholders to holders of GM $1 2/3 par value common stock; and
. The recapitalization of GM Class H Common Stock into a GM tracking stock
linked to the Telecommunications and Space business of Hughes ("Hughes
Telecom"). GM would continue to own 100% of Hughes Telecom.
On July 14, 1997, GM received a ruling from the Internal Revenue Service that
its contemplated spin-off of Hughes Defense would be tax-free to GM and its
stockholders. In addition, GM and Raytheon have reached agreement with the U.S.
Department of Justice and U.S. Department of Defense regarding the basis upon
which the merger of Hughes Defense and Raytheon can proceed consistent with the
Government's enforcement of U.S. antitrust laws. On October 6, 1997, the GM
Board of Directors approved the final terms for the above described
transactions. The planned transactions must be approved by holders of GM $1 2/3
par value and Class H common stocks, among a number of other conditions. In
addition, the merger of Hughes Defense and Raytheon is subject to approval by
Raytheon stockholders. No assurance can be given that the above transactions
will be completed. GM expects to solicit stockholders' approval of the planned
transactions during the fourth quarter of 1997, after certain conditions are
satisfied.
Hughes Telecom is not a legal entity. The combined financial statements
present the financial position, results of operations and cash flows of Hughes
Telecom, which consists primarily of the operations included in the
Telecommunications and Space segment of Hughes Electronics, certain other
Hughes Electronics businesses and certain Hughes Electronics Corporate assets,
liabilities, income and expenses attributable to Hughes Telecom. All
transactions and balances between the entities included in the combined
financial statements have been eliminated. All Hughes Telecom amounts due from
or payable to other Hughes Electronics businesses have been reported in Parent
Company's Net Investment.
The combined financial statements include allocations of corporate expenses
from Hughes Electronics including research and development, general management,
human resources, financial, legal, tax, quality, communications, marketing,
international, employee benefits and other miscellaneous services. These costs
and expenses have been charged to Hughes Telecom based either on usage or using
allocation methodologies primarily based upon total revenues, certain tangible
assets and payroll expenses. Management believes the allocations were made on a
reasonable basis.
E-4
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market principally using the
average cost method.
Major Classes of Inventories
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Productive material and supplies............... $ 82.1 $ 82.6
Work in process................................ 391.3 250.5
Finished goods................................. 127.9 90.0
------ ------
Total........................................ $601.3 $423.1
====== ======
</TABLE>
NOTE 3: OTHER INCOME, NET
Other income, net for the nine months ended September 30, 1997 includes a
$489.7 million pre-tax gain recognized in connection with the PanAmSat Merger.
The nine month period ended September 30, 1996 amount includes a $120.3 million
pre-tax gain from the sale of a 2.5% equity interest in DIRECTV(R) to AT&T.
NOTE 4: DISCONTINUED OPERATIONS
On November 3, 1997, Hughes Telecom entered into an agreement to sell
substantially all of the assets and liabilities of the Hughes Avicom
International, Inc. ("Hughes Avicom") business to Rockwell Collins, Inc. for
cash. Accordingly, the Hughes Avicom business is presented as a discontinued
operation. The sale is expected to close in the fourth quarter of 1997 pending
regulatory approval, and result in a gain. Revenues for the discontinued
operation were $86.1 million and $66.5 million for the nine months ended
September 30, 1997 and 1996, respectively. Net income (losses) from the
discontinued operation were $1.2 million and $(6.7) million for the nine months
ended September 30, 1997 and 1996, respectively, net of income tax expense
(benefit) of $0.9 million and $(6.8) million. The net assets of the
discontinued operation at September 30, 1997 and December 31, 1996 were $35.3
million and $35.0 million, respectively.
The sale will allow Hughes Telecom to better focus on its core space and
telecommunications segments. Hughes Avicom is a supplier of products and
services to the commercial airline market.
NOTE 5: CONTINGENCIES
Hughes Telecom has an agreement with a finance company under which the
finance company agreed to provide an open-end revolving credit program for
consumer purchases of DSS equipment, installations and ancillary items at
selected retail establishments. Funding under this program was discontinued
effective September 10, 1996. The aggregate outstanding balances under this
agreement at September 30, 1997 totaled approximately $170 million. Hughes
Telecom has certain rights regarding the administration of the program and the
losses from qualifying accounts under this program accrue to Hughes Telecom,
subject to certain indemnity obligations of the finance company. Hughes Telecom
has established allowances to provide for expected losses under the program.
The allowances are subject to periodic review as management collects additional
information about the performance of the consumer loan portfolios.
In conjunction with its performance on long-term contracts, Hughes Telecom is
contingently liable under standby letters of credit and bonds in the amount of
$293.0 million at September 30, 1997. In Hughes Telecom's past experience, no
material claims have been made against these financial instruments. In
addition, Hughes
E-5
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
Telecom has guaranteed up to $150.0 million of certain American Mobile
Satellite Corporation ("AMSC") bank debt due June, 2001. Hughes Telecom owns
approximately 27% of the common stock of AMSC. Hughes Telecom has also
guaranteed up to $172.1 million of a Surfin Ltd. revolving credit facility
which expires July, 1999. Hughes Telecom owns approximately 39% of Surfin Ltd.
Hughes Telecom is subject to potential liability under government regulations
and various claims and legal actions which are pending or may be asserted
against it. The aggregate ultimate liability of Hughes Telecom under these
government regulations, and under these claims and actions, was not
determinable at September 30, 1997. In the opinion of Hughes Electronics and
Hughes Telecom management, such liability is not expected to have a material
adverse effect on the Hughes Telecom's combined operations or financial
position.
Hughes Telecom has maintained a suit against the U.S. Government since
September 1973, regarding the government's infringement and use of a Hughes
Telecom patent (the "Williams Patent") covering "Velocity Control and
Orientation of a Spin Stabilized Body," principally satellites. On June 17,
1994, the U.S. Court of Claims awarded Hughes Telecom damages of $114.0
million. Because Hughes Telecom believed that the record supported a higher
royalty rate, it appealed that decision. The U.S. government, contending that
the award was too high, also appealed. On June 19, 1996, the Court of Appeals
for the Federal Circuit ("CAFC") affirmed the decision of the Court of Claims
which awarded Hughes Telecom $114.0 million in damages, together with interest.
The U.S. government petitioned the CAFC for a rehearing. That petition was
denied in October 1996. The U.S. government then filed a petition with the U.S.
Supreme Court seeking certiorari. On April 21, 1997 the U.S. Supreme Court,
citing a recent decision it had rendered in Warner-Jenkinson v. Hilton Davis,
remanded Hughes Telecom's suit over the Williams Patent back to the CAFC in
order to have the CAFC determine whether the ruling in the Williams Patent
matter was consistent with the U.S. Supreme Court's decision in the Warner-
Jenkinson case. The previous liability decision of the Court of Claims in the
Williams Patent matter, and its $114.0 million damage award to Hughes Telecom
currently remain in effect pending reconsideration of the case by the CAFC.
Hughes Telecom is unable to estimate the duration of this reconsideration
process. While no amount has been recorded in the financial statements of
Hughes Telecom to reflect the $114.0 million award, a resolution of this matter
could result in a gain that would be material to the earnings of GM
attributable to Class H Common Stock.
E-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hughes Electronics Corporation:
We have audited the Combined Balance Sheet of the Telecommunications and
Space Business of Hughes Electronics Corporation and subsidiaries ("Hughes
Telecom") as of December 31, 1996 and 1995 and the related Combined Statements
of Income and Parent Company's Net Investment and of Cash Flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of Hughes Telecom's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hughes Telecom at December 31, 1996 and
1995 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the combined financial statements, effective
January 1, 1994 Hughes Telecom changed its method of accounting for
postemployment benefits.
/s/ Deloitte & Touche LLP
Los Angeles, California
October 3, 1997, except for Note 14, as to which the date is November 3, 1997
E-7
<PAGE>
HUGHES TELECOM
COMBINED STATEMENT OF INCOME AND
PARENT COMPANY'S NET INVESTMENT
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Product sales................................... $3,009.0 $2,576.1 $2,322.5
Direct broadcast, leasing and other services.... 999.7 576.7 374.5
Other income (expense), net..................... 75.9 8.2 (9.2)
-------- -------- --------
Total Revenues................................ 4,084.6 3,161.0 2,687.8
-------- -------- --------
COSTS AND EXPENSES
Cost of products sold........................... 2,183.7 1,977.8 1,816.1
Broadcast programming and other costs........... 631.8 335.2 146.9
Selling, general and administrative expenses.... 788.5 488.4 358.8
Depreciation and amortization................... 194.6 179.9 139.9
Amortization and adjustment of GM purchase
accounting adjustments related to Hughes
Aircraft Company............................... 21.0 21.0 21.0
Interest expense................................ 42.9 61.1 52.0
-------- -------- --------
Total Costs and Expenses...................... 3,862.5 3,063.4 2,534.7
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTERESTS..................... 222.1 97.6 153.1
Income taxes...................................... 104.8 31.4 55.5
Minority interests in net losses of subsidiaries.. 52.6 4.6 --
-------- -------- --------
Income from continuing operations before
cumulative effect of accounting change........... 169.9 70.8 97.6
Loss from discontinued operations................. 7.4 64.6 54.1
Cumulative effect of accounting change............ -- -- 2.3
-------- -------- --------
NET INCOME.................................... 162.5 6.2 41.2
-------- -------- --------
Parent Company's Net Investment, beginning of
period........................................... 2,608.9 2,301.0 1,973.3
Net (distributions to) contributions from Parent
Company........................................ (279.8) 301.7 286.5
-------- -------- --------
PARENT COMPANY'S NET INVESTMENT, END OF PERIOD.... $2,491.6 $2,608.9 $2,301.0
======== ======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
E-8
<PAGE>
HUGHES TELECOM
COMBINED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................. $ 6.7 $ 7.6
Accounts and notes receivable (less allowances)............ 423.0 302.9
Contracts in process, less advances and progress payments
of $54.2 and $68.0........................................ 401.4 455.5
Inventories................................................ 423.1 301.6
Net assets of discontinued operations...................... 35.0 34.4
Deferred subscriber acquisition costs...................... 97.5 --
Prepaid expenses and other, including deferred income
taxes of $26.7 and $16.3.................................. 110.4 73.5
-------- --------
Total Current Assets..................................... 1,497.1 1,175.5
-------- --------
Satellites, net.............................................. 1,056.6 1,096.0
-------- --------
Property, net................................................ 690.8 551.4
-------- --------
Net Investment in Sales-type Leases.......................... 320.6 264.7
-------- --------
Intangible Assets, net of amortization of $260.4 and $233.2.. 468.0 489.0
-------- --------
Investments and Other Assets--principally at cost (less
allowances)................................................. 383.3 376.0
-------- --------
Total Assets............................................. $4,416.4 $3,952.6
======== ========
LIABILITIES AND PARENT COMPANY'S NET INVESTMENT
Current Liabilities
Accounts payable........................................... $ 359.0 $ 242.2
Advances on contracts...................................... 287.8 190.2
Deferred revenues.......................................... 142.8 29.1
Accrued liabilities........................................ 430.0 402.1
-------- --------
Total Current Liabilities................................ 1,219.6 863.6
-------- --------
Deferred Gains on Sales and Leasebacks....................... 234.8 183.2
-------- --------
Accrued Operating Leaseback Expense.......................... 107.8 69.1
-------- --------
Other Liabilities and Deferred Credits....................... 136.9 62.2
-------- --------
Deferred Income Taxes........................................ 204.1 125.4
-------- --------
Minority Interests........................................... 21.6 40.2
-------- --------
Commitments and Contingencies
Parent Company's Net Investment.............................. 2,491.6 2,608.9
-------- --------
Total Liabilities and Parent Company's Net Investment.... $4,416.4 $3,952.6
======== ========
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
E-9
<PAGE>
HUGHES TELECOM
COMBINED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations before
cumulative effect of accounting change........... $ 169.9 $ 70.8 $ 97.6
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities
Depreciation and amortization................... 194.6 179.9 139.9
Amortization of GM purchase accounting
adjustments related to Hughes Aircraft Company. 21.0 21.0 21.0
Net (gain) loss on investments and businesses
sold and held for sale......................... (120.3) 49.0 35.0
Gross profit on sales-type leases............... (51.8) (62.9) (56.1)
Deferred income taxes and other................. 91.9 (76.5) (22.9)
Change in other operating assets and liabilities
Accounts receivable............................ (120.1) (110.3) (20.2)
Contracts in process........................... 54.1 174.1 (90.6)
Inventories.................................... (121.5) (109.3) 56.2
Deferred subscriber acquisition costs.......... (97.5) -- --
Collections of principal on net investment in
sales-type leases............................. 31.2 19.6 10.6
Accounts payable............................... 116.8 7.1 111.3
Advances on contracts.......................... 97.6 8.6 (58.3)
Accrued liabilities............................ 22.4 86.4 68.8
Deferred revenues.............................. 113.7 22.5 6.6
Deferred gains on sales and leasebacks......... (57.2) (27.1) (27.1)
Other.......................................... (9.6) (155.4) (52.4)
------- ------- -------
Net Cash Provided by Operating Activities......... 335.2 97.5 219.4
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property......................... (261.5) (167.7) (143.2)
Increase in satellites............................ (191.6) (223.7) (349.9)
Proceeds from sale and leaseback of satellite
transponders..................................... 252.0 -- --
Proceeds from disposal of property................ 15.3 1.7 1.3
Proceeds from sales of investments and businesses. -- 17.5 --
------- ------- -------
Net Cash Used in Investing Activities............. (185.8) (372.2) (491.8)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of minority interest in
subsidiary....................................... 137.5 -- --
(Distributions to) contributions from Parent
Company.......................................... (279.8) 301.7 286.5
------- ------- -------
Net Cash (Used in) Provided by Financing
Activities....................................... (142.3) 301.7 286.5
------- ------- -------
Net cash provided by continuing operations.......... 7.1 27.0 14.1
Net cash used in discontinued operations............ (8.0) (25.2) (18.5)
------- ------- -------
Net (decrease) increase in cash and cash
equivalents........................................ (0.9) 1.8 (4.4)
Cash and cash equivalents at beginning of the year.. 7.6 5.8 10.2
------- ------- -------
Cash and cash equivalents at end of the year........ $ 6.7 $ 7.6 $ 5.8
======= ======= =======
</TABLE>
Reference should be made to the Notes to Combined Financial Statements.
E-10
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
On January 16, 1997, Hughes Electronics Corporation ("Hughes Electronics"),
General Motors Corporation ("GM"), the parent of Hughes Electronics and
Raytheon Company ("Raytheon"), announced a series of planned transactions that
would include:
. The tax-free spin-off of 100% of the defense business of Hughes Electronics
("Hughes Defense") to holders of GM's $1 2/3 par value and Class H Common
Stocks followed immediately by the tax-free merger of that business with
Raytheon, after which there would be outstanding two classes of
Raytheon/Hughes Defense common stock;
. The transfer of Delco Electronics Corporation and Related Entities
("Delco"), from Hughes Electronics to GM and a reallocation of the
derivative interest in the earnings of Delco currently held by GM Class H
common stockholders to holders of GM $1 2/3 par value Common Stock; and
. The recapitalization of GM Class H Common Stock into a GM tracking stock
linked to the telecommunications and space business of Hughes ("Hughes
Telecom"). GM would continue to own 100% of Hughes Telecom.
The planned transactions are subject to approval by holders of GM $1 2/3 par
value and Class H Common Stocks. In addition, the merger of Hughes Defense and
Raytheon, which is contingent upon the spin-off of Hughes Defense, is subject
to approval by the stockholders of Raytheon. The planned transactions also are
subject to a variety of regulatory approvals.
Hughes Telecom is not a legal entity. The combined financial statements
present the financial position, results of operations and cash flows of Hughes
Telecom, which consists primarily of the operations included in the
Telecommunications and Space segment of Hughes Electronics, certain other
Hughes Electronics businesses and certain Hughes Electronics Corporate assets,
liabilities, income and expenses attributable to Hughes Telecom. All
transactions and balances between the entities included in the combined
financial statements have been eliminated. All Hughes Telecom amounts due from
or payable to other Hughes Electronics businesses have been reported in Parent
Company's Net Investment.
The combined financial statements include allocations of corporate expenses
from Hughes Electronics including research and development, general management,
human resources, financial, legal, tax, quality, communications, marketing,
international, employee benefits and other miscellaneous services. These costs
and expenses have been charged to Hughes Telecom based either on usage or using
allocation methodologies primarily based upon total revenues, certain tangible
assets and payroll expenses. Management believes the allocations were made on a
reasonable basis.
Hughes Telecom participates in a centralized cash management system wherein
cash receipts are transferred to and cash disbursements are funded by Hughes
Electronics daily. Accordingly, the Combined Balance Sheet includes only cash
and cash equivalents held by Hughes Telecom, consisting principally of cash
held at operating subsidiaries. Interest expense in the Combined Statement of
Income and Parent Company's Net Investment includes an allocated share of total
Hughes Electronics interest expense.
Hughes Telecom is a leading manufacturer of communications satellites and
provider of satellite-based services. It owns and operates one of the world's
largest private fleets of geostationary communications satellites and is the
world's leading supplier of satellite-based private business networks. Hughes
Telecom also provides a broad range of satellite-related services and is a
leader in the U.S. direct broadcast satellite market with its programming
distribution service known as DIRECTV, which was introduced in the U.S. in 1994
and was the first high-powered, all digital, Direct-to-Home ("DTH") television
distribution service in North America. It also provides communications
equipment and services in the mobile communications and packet switching
markets.
E-11
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Its equipment and services are applied in, among other things, data, video and
audio transmission, cable and network television distribution, private business
networks, digital cellular communications and DTH satellite broadcast
distribution of television programming.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported therein. Due to the inherent uncertainty involved
in making estimates, actual results reported in future periods may be based
upon amounts which differ from those estimates.
Revenue Recognition
Revenues are generated from sales of satellites and telecommunications
equipment under long-term contracts, DTH broadcast subscriptions and outright
sales, sales-type leases and operating lease contracts with customers to
provide satellite transponders, transponder capacity and related services.
Sales under long-term contracts are recognized primarily using the
percentage-of-completion (cost-to-cost) method of accounting. Under this
method, sales are recorded equivalent to costs incurred plus a portion of the
profit expected to be realized, determined based on the ratio of costs incurred
to estimated total costs at completion. Profits expected to be realized on
long-term contracts are based on estimates of total sales value and costs at
completion. These estimates are reviewed and revised periodically throughout
the lives of the contracts, and adjustments to profits resulting from such
revisions are recorded in the accounting period in which the revisions are
made. Estimated losses on contracts are recorded in the period in which they
are identified.
Certain contracts contain cost or performance incentives which provide for
increases in profits for surpassing stated objectives and decreases in profits
for failure to achieve such objectives. Amounts associated with incentives are
included in estimates of total sales values when there is sufficient
information to relate actual performance to the objectives.
Sales which are not pursuant to long-term contracts are generally recognized
as products are shipped or services are rendered. DTH subscription revenues are
recognized when programming is viewed by subscribers. Programming billed in
advance of viewing is recorded as deferred revenues in the Combined Balance
Sheet.
Lease contracts qualifying for capital lease treatment (typically based on
the term of the lease) are accounted for as sales-type leases. For sales-type
lease transactions related to completed satellite transponders, at the time a
customer enters into a sales-type lease, revenues are recognized at the net
present value of the future minimum lease payments. The cost basis of the
transponder is removed and charged to cost of sales. During the term of the
lease, that portion of each periodic lease payment deemed to be attributable to
interest income is recognized as income in each respective period. The balance
of each periodic lease payment represents principal repayment and is recognized
as a reduction of net investment in sales-type leases. Interest income from
sales-type leases of $41.0 million, $26.9 million and $14.3 million is included
in product sales for the years ended December 31, 1996, 1995 and 1994.
Contracts for sales of transponders typically include telemetry, tracking and
control ("TT&C") service agreements. Revenues related to TT&C service
agreements are recognized as the services are performed.
Transponder and other lease contracts that do not qualify as sales-type
leases are accounted for as operating leases. Operating lease revenues are
recognized on a straight-line basis over each respective lease term.
Differences between operating lease payments received and revenues recognized
are deferred and included in accounts receivable.
E-12
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Hughes Telecom has entered into agreements for the sale and leaseback of
certain of its satellite transponders. Gains resulting from such transactions
are deferred and amortized over the leaseback period. The leaseback
transactions have been classified as operating leases and, therefore, the cost
and associated depreciation related to satellite transponders sold are not
included in the accompanying combined financial statements. Leaseback expense
is recorded using the straight-line method over the term of the lease, net of
amortization of the deferred gains. Differences between operating leaseback
payments made and expense recognized are deferred and included in accrued
operating leaseback expense.
Cash Flows
Cash equivalents consist of highly liquid investments purchased with original
maturities of 90 days or less.
Net cash provided by operating activities reflects cash payments for interest
made by Hughes Telecom and by Hughes Electronics on behalf of Hughes Telecom of
$55.8 million, $75.7 million and $66.0 million in 1996, 1995 and 1994,
respectively. Cash payments for income taxes made by Hughes Electronics on
behalf of Hughes Telecom amounted to $36.5 million, $160.5 million and $121.7
million in 1996, 1995 and 1994, respectively.
Contracts in Process
Contracts in process are stated at costs incurred plus estimated profit, less
amounts billed to customers and advances and progress payments applied.
Engineering, tooling, manufacturing, and applicable overhead costs, including
administrative, research and development and selling expenses, are charged to
costs and expenses when incurred. Contracts in process include amounts relating
to contracts with long production cycles, and $138.0 million of the 1996 amount
is expected to be billed after one year. Amounts billed under retainage
provisions of contracts are not significant, and substantially all amounts are
collectible within one year. Under certain contracts with the U.S. government,
progress payments are received based on costs incurred on the respective
contracts. Title to the inventories related to such contracts (included in
contracts in process) vests with the U.S. government.
Inventories
Inventories are stated at the lower of cost or market principally using the
average cost method.
Major Classes of Inventories
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Productive material and supplies........................... $ 82.6 $ 48.8
Work in process............................................ 250.5 153.3
Finished goods............................................. 90.0 99.5
------ ------
Total.................................................... $423.1 $301.6
====== ======
</TABLE>
Deferred Subscriber Acquisition Costs
During 1996, Hughes Telecom introduced certain rebate programs which reduced
the net retail price of Digital Satellite System ("DSS(R)") equipment when
consumers subscribed to and prepaid for DIRECTV programming services for a
minimum of one year. The rebate costs, net of accumulated amortization, which
totaled $97.5 million at December 31, 1996, have been recorded as deferred
subscriber acquisition costs and are being amortized over the one-year
subscription commitment period.
E-13
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property, Satellites and Depreciation
Property and Satellites are carried at cost. Satellite costs include
construction costs, launch costs, launch insurance, and capitalized interest.
Depreciation is computed generally using the straight line method over the
estimated useful lives of the assets. Recoverability of these assets is
periodically evaluated by assessing whether the net book value can be recovered
over its remaining life through undiscounted cash flows generated by the asset.
Intangible Assets
Effective December 31, 1985, GM acquired Hughes Aircraft Company ("HAC"), now
a wholly owned subsidiary of Hughes Electronics including certain of the
operations of Hughes Telecom. The acquisition of HAC was accounted for as a
purchase. The excess of the purchase price over the net tangible assets
acquired, $4,244.7 million, was assigned to intangible assets, primarily
goodwill. The portion of such intangible assets and related amortization
attributable to Hughes Telecom has been reflected in the accompanying combined
financial statements.
Intangible assets are amortized using the straight-line method over periods
not exceeding 40 years. Recoverability is periodically evaluated by assessing
whether the unamortized carrying amount can be recovered over its remaining
life through undiscounted cash flows generated by underlying tangible assets.
Software Development Costs
Other assets includes certain software development costs capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalized software development costs were $87.0 million and $68.3
million at December 31, 1996 and 1995, respectively, net of accumulated
amortization of $86.1 million and $74.6 million, respectively.
Income Taxes
Hughes Telecom, along with other Hughes Electronics businesses and
subsidiaries, joins with GM in filing a consolidated U.S. federal income tax
return. Current and deferred income taxes are computed by Hughes and allocated
to Hughes Telecom according to principles established by SFAS No. 109,
"Accounting for Income Taxes." Deferred income tax assets and liabilities
reflect the impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes, as measured by applying currently enacted tax
laws. Hughes Electronics has paid Hughes Telecom's share of the consolidated
income tax liability. The income taxes that would have been paid by Hughes
Telecom if it were a separate taxpayer but which were not paid under Hughes
Electronics' policy results in an increase in the Parent Company's Net
Investment.
Research and Development
Expenditures for research and development are charged to costs and expenses
as incurred and amounted to $94.6 million in 1996, $74.6 million in 1995 and
$86.7 million in 1994.
Foreign Currency
Substantially all of Hughes Telecom's foreign operations have determined the
local currency to be their functional currency. Accordingly, most foreign
entities translate assets and liabilities from their local currencies to U.S.
dollars using year-end exchange rates. Income and expense accounts are
translated at the average rates in effect during the year. Foreign currency
transaction net gains and losses included in the combined operating results
were not material in all years presented.
E-14
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Financial Instruments
Hughes Electronics enters into foreign exchange-forward contracts on behalf
of Hughes Telecom to reduce Hughes Telecom's exposure to fluctuations in
foreign currency exchange rates. Such foreign exchange-forward contracts are
accounted for in the accompanying combined financial statements as hedges to
the extent they are designated as, and are effective as, hedges of firm foreign
currency commitments.
Market Concentrations
Sales under U.S. Government contracts were 22.5%, 30.5% and 31.0% of net
sales in 1996, 1995 and 1994, respectively. Hughes Telecom sells services and
extends credit to a large number of customers in the commercial satellite
communications market and to a large number of residential consumers.
Management monitors its exposure to credit losses and maintains allowances for
anticipated losses.
New Accounting Standards and Accounting Changes
In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130
and 131. SFAS 130, "Reporting Comprehensive Income," establishes accounting
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. This statement requires
that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information,"
establishes accounting standards for the way public enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. Hughes Telecom
will adopt SFAS Nos. 130 and 131 which are effective for fiscal years beginning
after December 15, 1997.
Effective January 1, 1996, Hughes Telecom adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. The adoption of this new
accounting standard did not have a material effect on Hughes Telecom's combined
operating results or financial position.
Effective January 1, 1994, Hughes Telecom adopted SFAS 112, "Employers'
Accounting for Postemployment Benefits." This Statement requires accrual of the
costs of benefits provided to former or inactive employees after employment,
but before retirement. The adoption of this new accounting standard reduced net
income in 1994 by $2.3 million.
NOTE 3: RELATED-PARTY TRANSACTIONS
In the ordinary course of its operations, Hughes Telecom provides
telecommunications services and sells electronic components to, and purchases
sub-components from, related parties. In addition, Hughes Telecom receives
allocations of corporate expenses and interest costs from Hughes Electronics
and GM.
E-15
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the significant related party transactions
between Hughes Telecom and other GM and Hughes Electronics entities:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Revenues............................................ $ 50.8 $ 53.6 $ 48.0
Costs and expenses
Purchases......................................... 241.5 144.0 113.5
Allocation of corporate expenses.................. 75.6 60.5 70.9
Allocated interest................................ 53.2 74.7 64.2
</TABLE>
Interest was allocated to Hughes Telecom based on Hughes Telecom's average
adjusted net operating assets for the years ended 1996, 1995 and 1994. Hughes
Telecom capitalized interest of $12.9 million, $14.6 million and $14.0 million
for 1996, 1995 and 1994, respectively, as part of the cost of its satellites
under construction.
NOTE 4: OTHER INCOME (EXPENSE)
In March 1996, Hughes Telecom sold a 2.5% equity interest in DIRECTV, a
wholly owned operation of Hughes Telecom, to AT&T for $137.5 million, with
options to increase their ownership under certain conditions. The sale resulted
in a $120.3 million pre-tax gain which is included in other income.
During 1995, Hughes Telecom completed the divestiture of Hughes LAN Systems,
for which a pre-tax charge of $35.0 million was taken in 1994.
NOTE 5: PROPERTY AND SATELLITES, NET
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1996 1995
------------ -------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Land and improvements..................... 10-20 $ 47.5 $ 48.4
Buildings and unamortized leasehold
improvements............................. 30-45 272.4 227.8
Machinery and equipment................... 3-10 854.5 635.8
Furniture, fixtures and office machines... 5-8 67.3 47.8
Construction in progress.................. -- 106.2 199.8
-------- --------
Total................................... 1,347.9 1,159.6
Less accumulated depreciation............. 657.1 608.2
-------- --------
Property, net............................. $ 690.8 $ 551.4
======== ========
Satellites................................ 9-15 $1,400.1 $1,353.0
Less accumulated depreciation............. -- 343.5 257.0
-------- --------
Total................................... $1,056.6 $1,096.0
======== ========
</TABLE>
NOTE 6: LEASING ACTIVITIES
Future minimum lease payments due from customers under noncancellable
satellite transponder operating leases, exclusive of amounts due from
sublessees reported below are $159.1 million in 1997, $124.4 million in 1998,
$91.8 million in 1999, $83.0 million in 2000, $68.9 million in 2001 and $169.5
million thereafter.
E-16
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net investment in sales-type leases are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Total minimum lease payments.............................. $696.7 $533.0
Allowance for doubtful accounts........................... (18.0) (16.7)
Less unearned interest income............................. (337.5) (232.8)
------ ------
Total net investment in sales-type leases................. 341.2 283.5
Less current portion...................................... (20.6) (18.8)
------ ------
Total................................................... $320.6 $264.7
====== ======
</TABLE>
Future minimum payments due from customers under sales-type leases as of
December 31, 1996 are $62.3 million in 1997, $68.6 million in 1998, $74.0
million in 1999, $74.2 million in 2000, $74.2 million in 2001 and $343.4
million thereafter.
In February 1996, Hughes Telecom entered into a sale and leaseback of certain
satellite transponders on Galaxy III-R with General Motors Acceptance
Corporation ("GMAC"), a subsidiary of GM. Proceeds from the sale were $252.0
million, and the sale resulted in a gain of $108.8 million, which was deferred
and is being amortized over the seven-year leaseback period. In 1991 and 1992,
Hughes Telecom entered into agreements for the sale and leaseback of certain
transponders on SBS-6 and Galaxy VII, respectively, resulting in deferred gains
of $96.1 million in 1991 and $180.0 million in 1992, which are being amortized
over their respective leaseback periods. The transponder leaseback terms
include early buyout options of $151.7 million in 1998 and $366.2 million in
1999 and end of lease buyout options of $114.2 million in 2003 and $78.7
million in 2004. As of December 31, 1996, the future minimum leaseback amounts
payable to lessors under the operating leasebacks and the future minimum
sublease amounts due from sublessees under noncancelable subleases are as
follows:
<TABLE>
<CAPTION>
MINIMUM SUBLEASE
LEASEBACK AMOUNTS
PAYMENTS DUE
--------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
1997................................................... $110.4 $ 68.9
1998................................................... 107.3 56.4
1999................................................... 133.3 40.4
2000................................................... 164.7 40.5
2001................................................... 90.9 40.2
Thereafter............................................. 173.7 149.4
------ ------
Total................................................ $780.3 $395.8
====== ======
</TABLE>
NOTE 7: ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Payrolls and other compensation............................ $115.5 $102.9
Contract-related provisions................................ 159.5 189.6
Reserve for consumer finance and rebate programs........... 120.5 --
Other...................................................... 34.5 109.6
------ ------
Total.................................................... $430.0 $402.1
====== ======
</TABLE>
E-17
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: INCOME TAXES
The income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
U.S. federal, state and foreign taxes currently
payable.......................................... $ 36.5 $160.5 $121.7
U.S. federal, state and foreign deferred tax
liabilities
(assets)--net.................................... 68.3 (129.1) (66.2)
------ ------ ------
Total income tax provision...................... $104.8 $ 31.4 $ 55.5*
====== ====== ======
</TABLE>
- ------
*Excluding effect of accounting change.
Income from continuing operations before income taxes and minority interests
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
U.S. income.......................................... $218.4 $96.0 $154.5
Foreign income (loss)................................ 3.7 1.6 (1.4)
------ ----- ------
Total.............................................. $222.1 $97.6 $153.1
====== ===== ======
</TABLE>
The combined income tax provision was different than the amount computed
using the U.S. statutory income tax rate for the reasons set forth in the
following table:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Expected tax at U.S. statutory income tax rate... $ 77.7 $ 34.2 $ 53.6
U.S. state and local income taxes................ 9.4 4.1 6.5
Purchase accounting adjustments.................. 7.3 7.3 7.3
Foreign sales corporation tax benefit............ (24.0) (19.7) (15.8)
Investment tax credits........................... -- (5.0) --
Minority interests in partnerships' losses....... 17.7 2.0 --
Losses of equity method investee................. 14.8 4.2 1.9
Other............................................ 1.9 4.3 2.0
------ ------ ------
Total income tax provision..................... $104.8 $ 31.4 $ 55.5*
====== ====== ======
</TABLE>
- ------
*Excluding effect of accounting change.
E-18
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Profits on long-term contracts. $124.8 $133.3 $103.8 $142.1
Sales and leasebacks........... 119.6 88.4
Depreciation................... 255.2 209.0
Sale of equity interest in
DIRECTV....................... 48.7
Other.......................... 49.6 23.9 70.6 8.3
------ ------ ------ ------
Subtotal....................... 294.0 461.1 262.8 359.4
Valuation allowance............ (10.3) (12.5)
------ ------ ------ ------
Total deferred taxes......... $283.7 $461.1 $250.3 $359.4
====== ====== ====== ======
</TABLE>
No provision has been made for U.S. federal income taxes related to the
portion of undistributed earnings of foreign subsidiaries deemed permanently
reinvested. At December 31, 1996 and 1995, undistributed earnings of foreign
subsidiaries amounted to approximately $5.3 million and $5.1 million,
respectively. Repatriation of all accumulated earnings would have resulted in
tax liabilities of $0.5 million in both years.
At December 31, 1996, Hughes Telecom had $6.9 million of foreign operating
loss carryforwards which expire in varying amounts between 1997 and 2001. The
valuation allowance includes a provision for all of the foreign operating loss
carryforwards.
NOTE 9: RETIREMENT AND INCENTIVE PLANS
Certain employees of Hughes Telecom and other Hughes Electronics businesses
participate in contributory and non-contributory defined benefit retirement
plans (the "Plans") maintained by Hughes Electronics. These Plans are available
to substantially all full-time employees of Hughes Telecom. Benefits are based
on years of service and compensation earned during a specified period of time
before retirement. The accumulated plan benefit obligations and plan net assets
for the employees of Hughes Telecom have not been separately determined and are
not included in the Combined Balance Sheet. However, the fair value of plan
assets exceeds the accumulated plan benefit obligations related to these Plans.
In addition, employees of Hughes Telecom and other Hughes Electronics
businesses participate in certain other postretirement and postemployment
benefit plans, principally health and life insurance plans, which are unfunded.
The accumulated postretirement and postemployment benefit obligations related
to employees of Hughes Telecom have not been separately determined and are not
included in the Combined Balance Sheet. Hughes Telecom recorded expenses
related to the pension, postretirement and postemployment benefits plans of
approximately $27.6 million, $8.9 million and $6.9 million in 1996, 1995 and
1994, respectively.
Certain eligible employees of Hughes Telecom participate in the Hughes
Electronics Corporation Incentive Plan pursuant to which shares, rights, or
options to acquire GM Class H Common Stock may be granted through May 31, 1997.
The option price is equal to 100% of the fair market value of GM Class H Common
Stock on the date the options are granted. These non-qualified options
generally expire 10 years from the dates of grant and are subject to earlier
termination under certain conditions.
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<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Employees of Hughes Telecom also participate in other Hughes health and
welfare plans. Charges related to these plans were $61.7 million, $51.5 million
and $51.9 million in 1996, 1995 and 1994, respectively.
NOTE 10: SPECIAL PROVISION FOR RESTRUCTURING
In 1992, Hughes Electronics recorded a special restructuring charge of
$1,237.0 million primarily attributable to redundant facilities and related
employment costs. Approximately $155.6 million was attributable to Hughes
Telecom and comprehended a reduction of Hughes Telecom's employment, a major
facilities consolidation, and a reevaluation of certain business lines that no
longer met Hughes Telecom's strategic objectives. Restructuring costs of $19.4
million, $44.7 million and $39.7 million attributable to Hughes Telecom were
charged against the reserve during 1996, 1995 and 1994, respectively. The
remaining liability attributable to Hughes Telecom of $23.9 million relates
primarily to reserves for excess facilities. It is expected that these costs
will be expended predominantly during the next year.
NOTE 11: ACQUISITION OF PANAMSAT CORPORATION
In May 1997, Hughes Telecom and PanAmSat Corporation merged their respective
satellite services operations into a new publicly-held company, which retained
the name PanAmSat. Hughes Telecom contributed its Galaxy satellite services
business in exchange for a 71.5% interest in the new company. PanAmSat
stockholders received a 28.5% interest in the new company and $1.5 billion in
cash. Such cash consideration and other funds required to consummate the merger
were funded by new debt financing totaling $1,725.0 million provided by Hughes
Electronics, which borrowed such funds from GM. PanAmSat is a leading provider
of international satellite services.
NOTE 12: DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, Hughes Electronics enters into transactions
utilizing financial instruments with off-balance sheet risk on behalf of Hughes
Telecom to reduce Hughes Telecom's exposure to fluctuations in foreign currency
exchange rates. The primary class of derivatives used is foreign exchange-
forward contracts. These instruments involve, to varying degrees, elements of
credit risk in the event a counterparty should default and market risk as the
instruments are subject to rate and price fluctuations. Credit risk is managed
through the periodic monitoring and approval of financially sound
counterparties. Market risk is mitigated because the derivatives are used to
hedge underlying transactions. Cash receipts or payments on these contracts
normally occur at maturity. Hughes Electronics holds derivatives on behalf of
Hughes Telecom only for purposes other than trading.
Foreign exchange-forward contracts are legal agreements between two parties
to purchase and sell a foreign currency, for a price specified at the contract
date, with delivery and settlement in the future. Hughes Electronics uses these
agreements on behalf of Hughes Telecom to hedge risk of changes in foreign
currency exchange rates associated with certain firm commitments denominated in
foreign currency.
The total notional amount of foreign exchange-forward contracts entered into
by Hughes Telecom at December 31, 1996 and 1995, was approximately $1.0 million
and $4.0 million, respectively. The total notional amount of foreign exchange-
forward contracts entered into by Hughes Electronics on behalf of Hughes
Telecom at December 31, 1996 and 1995, was approximately $34.0 million and
$97.0 million, respectively.
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<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13: FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of derivative financial instruments reflect the estimated
amounts Hughes Telecom would receive or pay to terminate the contracts at the
reporting date, which takes into account the current unrealized gains or losses
on open contracts that are deferred and recognized when the offsetting gains
and losses are recognized on the related hedged items. The fair value of
foreign exchange-forward contracts is estimated based on foreign exchange rate
quotes at the reporting date. At December 31, 1996 and 1995, the total
estimated fair value of open contracts, which were in a net gain position, was
$2.3 million and $11.3 million, respectively. No amounts were recorded on the
Combined Balance Sheet for these contracts in 1996 and 1995. For all financial
instruments not described above, fair value approximates book value.
The carrying amount of the net investment in sales-type leases approximates
its fair value because the interest rates implicit in the leases approximate
current market rates.
NOTE 14: DISCONTINUED OPERATIONS
On November 3, 1997, Hughes Telecom entered into an agreement to sell
substantially all of the assets and liabilities of the Hughes Avicom
International, Inc. ("Hughes Avicom") business to Rockwell Collins, Inc. for
cash. Accordingly, the Hughes Avicom business is presented as a discontinued
operation. The sale is expected to close in the fourth quarter of 1997, pending
regulatory approval, and result in a gain. Revenues for the discontinued
operation were $89.9 million, $49.6 million and $75.7 million for the years
ended December 31, 1996, 1995 and 1994, respectively. Net losses from the
discontinued operation for the years ended December 31, 1996, 1995 and 1994,
respectively, were $7.4 million, $64.6 million and $54.1 million, net of income
tax benefits of $4.8 million, $41.8 million and $34.9 million.
The net assets of the discontinued operation are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Current assets......................................... $73.6 $101.8
Property, net.......................................... 10.3 9.8
Other assets........................................... 13.9 17.9
Current liabilities.................................... (62.1) (94.6)
Other liabilities...................................... (0.7) (0.5)
----- ------
Net assets of discontinued operations................ $35.0 $ 34.4
===== ======
</TABLE>
The sale will allow Hughes Telecom to better focus on its core space and
telecommunications segments. Hughes Avicom is a supplier of products and
services to the commercial airline market.
NOTE 15: COMMITMENTS AND CONTINGENCIES
Hughes Telecom signed agreements in 1995 and 1996 to procure commercial
satellite launches, a significant number of which are expected to be used in
connection with satellites ordered by outside customers. The agreements provide
for launches beginning in 1998 and also contain options for additional launch
vehicles. The total amount of the commitments, which is dependent upon the
number of options exercised, market conditions, and other factors, could exceed
$2.0 billion.
Hughes Telecom has an agreement with a finance company under which the
finance company agreed to provide an open-end revolving credit program for
consumer purchases of DSS equipment, installations and ancillary items at
selected retail establishments. Funding under this program was discontinued
effective September 10, 1996. The aggregate outstanding balances under this
agreement at December 31, 1996 totaled
E-21
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
$194.5 million. Hughes Telecom has certain rights regarding the administration
of the program and the losses from qualifying accounts under this program
accrue to Hughes Telecom, subject to certain indemnity obligations of the
finance company. Hughes Telecom has established allowances to provide for
expected losses under the program. The allowances are subject to periodic
review as management collects additional information about the performance of
the consumer loan portfolios.
In December 1994, Hughes Electronics entered into an agreement with Computer
Sciences Corporation (CSC) whereby CSC provides a significant amount of data
processing services required by the non-automotive businesses of Hughes
Electronics. Baseline service payments to CSC are expected to aggregate
approximately $1.5 billion over the term of the eight-year agreement. Based on
historical usage, approximately 10% of the costs incurred under the agreement
are attributable to Hughes Telecom. The contract is cancelable by Hughes
Electronics with substantial early termination penalties.
At December 31, 1996, minimum future commitments under noncancelable
operating leases having lease terms in excess of one year, exclusive of
satellite transponders leaseback payments disclosed in Note 6, are primarily
for real property and aggregated $221.3 million, payable as follows: $41.7
million in 1997, $29.2 million in 1998, $22.6 million in 1999, $21.3 million in
2000, $19.7 million in 2001 and $86.8 million thereafter. Certain of these
leases contain escalation clauses and renewal or purchase options. Rental
expenses under operating leases were $52.7 million in 1996, $54.7 million in
1995 and $63.6 million in 1994.
Hughes Telecom has commitments to purchase minimum quantities of certain
electronic components totaling approximately $129.0 million. In conjunction
with its performance on long-term contracts, Hughes Telecom is contingently
liable under standby letters of credit and bonds in the amount of $152.5
million at December 31, 1996. In Hughes Telecom's past experience, no material
claims have been made against these financial instruments. In addition, Hughes
Telecom has guaranteed up to $150.0 million of certain American Mobile
Satellite Corporation ("AMSC") bank debt due June, 2001. Hughes Telecom owns
approximately 27% of the common stock of AMSC. Hughes Telecom has also
guaranteed up to $150.0 million of a Surfin Ltd. revolving credit facility
which expires July, 1999. Hughes Telecom owns approximately 39% of Surfin Ltd.
Hughes Telecom is subject to potential liability under government regulations
and various claims and legal actions which are pending or may be asserted
against it. The aggregate ultimate liability of Hughes Telecom under these
government regulations, and under these claims and actions, was not
determinable at December 31, 1996. In the opinion of Hughes Electronics and
Hughes Telecom management, such liability is not expected to have a material
adverse effect on the Hughes Telecom's combined operations or financial
position.
Hughes Telecom has maintained a suit against the U.S. Government since
September 1973, regarding the government's infringement and use of a Hughes
Telecom patent (the "Williams Patent") covering "Velocity Control and
Orientation of a Spin Stabilized Body," principally satellites. On June 17,
1994, the U.S. Court of Claims awarded Hughes Telecom damages of $114.0
million. Because Hughes Telecom believed that the record supported a higher
royalty rate, it appealed that decision. The U.S. government, contending that
the award was too high, also appealed. On June 19, 1996, the Court of Appeals
for the Federal Circuit ("CAFC") affirmed the decision of the Court of Claims
which awarded Hughes Telecom $114.0 million in damages, together with interest.
The U.S. government petitioned the CAFC for a rehearing. That petition was
denied in October 1996. The U.S. government then filed a petition with the U.S.
Supreme Court seeking certiorari. On April 21, 1997, the U.S. Supreme Court,
citing a recent decision it had rendered in Warner-Jenkinson v. Hilton Davis,
remanded Hughes Telecom's suit over the Williams Patent back to the CAFC in
order to have the CAFC determine whether the ruling in the Williams Patent
matter was consistent with the U.S. Supreme Court's decision in the Warner-
Jenkinson case. The previous liability decision of the Court of Claims in the
Williams Patent matter, and its $114.0 million damage award to Hughes Telecom
currently remain in effect pending reconsideration of the case by the CAFC.
Hughes Telecom is unable to estimate the duration of this reconsideration
process. While no
E-22
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
amount has been recorded in the financial statements of Hughes Telecom to
reflect the $114.0 million award, a resolution of this matter could result in a
gain that would be material to the earnings of GM attributable to GM Class H
Common Stock.
NOTE 16: SEGMENT REPORTING
The Satellite Manufacturing segment is a world leader in the design and
construction of satellites and related components. The Network Systems segment
includes satellite-based business networks, wireless communications equipment
and other communications services. The Direct-to-Home Broadcast segment
provides digital programming services via satellite, primarily to residential
consumers, both in the U.S. and in foreign countries. The Satellite Services
segment is engaged in selling, leasing and operating satellite transponders and
provides services for cable television systems, news companies and private
business networks.
<TABLE>
<CAPTION>
DIRECT-TO- INTERCOMPANY
SATELLITE NETWORK HOME SATELLITE ELIMINATIONS
MANUFACTURING SYSTEMS BROADCAST SERVICES AND OTHER TOTAL
------------- -------- ---------- --------- ------------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1996
Revenues................ $2,050.2 $1,067.4 $ 744.4 $ 483.4 $(260.8) $4,084.6
Operating Profit (Loss)
(1).................... 181.7 116.1 (310.9) 243.0 (40.8) 189.1
Identifiable Assets (2). 1,085.4 958.7 1,077.1 1,275.5 19.7 4,416.4
Depreciation and
Amortization........... 52.1 28.3 67.3 58.5 9.4 215.6
Capital Expenditures
(3).................... 87.8 45.3 63.5 308.7 (55.9) 449.4
1995
Revenues................ $1,716.8 $ 909.2 $ 241.0 $ 394.0 $(100.0) $3,161.0
Operating Profit (Loss)
(1).................... 146.7 64.6 (159.0) 166.3 (68.1) 150.5
Identifiable Assets (2). 1,014.0 778.3 842.9 1,138.0 179.4 3,952.6
Depreciation and
Amortization........... 51.4 25.2 48.6 76.5 (0.8) 200.9
Capital Expenditures
(3).................... 53.2 50.5 107.5 280.5 (49.4) 442.3
1994
Revenues................ $1,462.4 $ 813.6 $ 108.3 $ 331.5 $ (28.0) $2,687.8
Operating Profit (Loss)
(1).................... 114.2 68.9 (44.0) 106.7 (31.5) 214.3
Identifiable Assets (2). 936.8 848.9 682.0 868.4 273.2 3,609.3
Depreciation and
Amortization........... 47.4 23.5 23.5 54.1 12.4 160.9
Capital Expenditures
(3).................... 35.6 36.8 265.4 114.7 (53.5) 399.0
</TABLE>
- ------
(1) Operating profit and depreciation and amortization include purchase
accounting adjustments associated with GM's purchase of Hughes Aircraft
Company related to Hughes Telecom of $17.7 million in 1996, 1995 and 1994,
respectively, attributable to Satellite Manufacturing; and $3.3 million in
1996, 1995 and 1994, respectively, attributable to Satellite Services.
Operating profit amounts related to the Satellite Manufacturing segment for
1995 and 1994 have been reclassified from prior presentations.
(2) Identifiable assets of the Satellite Manufacturing and Satellite Services
segments include the unamortized purchase accounting adjustments associated
with the purchase of Hughes Aircraft Company attributable to Hughes
Telecom. Satellite Manufacturing includes unamortized purchase accounting
adjustments of $395.1 million in 1996, $412.8 million in 1995 and $430.5
million in 1994. Satellite Services includes unamortized purchase
accounting adjustments of $72.9 million in 1996, $76.2 million in 1995 and
$79.5 million in 1994.
(3) Expenditures related to satellites are included in the segments as follows:
$259.2 million, $234.9 million and $59.2 million in 1996, 1995 and 1994,
respectively, for the Satellite Services segment; and $53.1 million and
$209.5 million in 1995 and 1994, respectively, for the Direct-To-Home
Broadcast segment.
E-23
<PAGE>
HUGHES TELECOM
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
A reconciliation of operating profit shown above to Income before Income
Taxes shown in the Combined Statement of Income and Parent Company's Net
Investment follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Operating Profit.................................. $189.1 $150.5 $214.3
Other Income--net................................. 75.9 8.2 (9.2)
Allocated Interest Expense........................ (42.9) (61.1) (52.0)
------ ------ ------
Income (Loss) from continuing operations before
Income Taxes and minority interests............ $222.1 $ 97.6 $153.1
====== ====== ======
</TABLE>
Export sales from the U.S. were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Europe............................................. $ 626.0 $292.9 $152.1
Asia............................................... 640.2 549.0 460.0
Latin America...................................... 86.9 34.4 85.0
Africa............................................. 28.2 14.1 4.9
Other.............................................. 14.1 34.1 35.3
-------- ------ ------
Total............................................ $1,395.4 $924.5 $737.3
======== ====== ======
</TABLE>
E-24
<PAGE>
To find any of the sections identified below, simply bend the document
slightly to expose the black tabs and open the document to the tab which
corresponds to the title of the section you wish to read.
TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION
CHAPTER 2: RISK FACTORS
CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
CHAPTER 5: NEW RAYTHEON
CHAPTER 6: CAPITAL STOCK
CHAPTER 7: CONSENT SOLICITATION AND CERTAIN OTHER MATTERS
GLOSSARY
APPENDICES
Printed on Recycled paper.
LOGO
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF HE HOLDINGS.
Delaware General Corporation Law
Under Section 145 of the Delaware General Corporation Law, HE Holdings is
empowered to indemnify its directors and officers in the circumstances therein
provided. Certain portions of Section 145 are summarized below:
Section 145(a) of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
Section 145(b) of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Section 145(c) of the Delaware General Corporation Law provides that to the
extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 145(a) and (b), or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith.
Section 145(d) of the Delaware General Corporation Law provides that any
indemnification under Section 145(a) and (b) (unless ordered by a court) shall
be made by the corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because such person has met the applicable
standard of conduct set forth in Section 145(a) and (b). Such determination
shall be made (1) by a majority vote of the directors who were not parties to
such action, suit or proceeding, even though less than a quorum, or (2) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (3) by the stockholders.
Section 145(e) of the Delaware General Corporation Law provides that
expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall
II-1
<PAGE>
ultimately be determined that such person is not entitled to be indemnified by
the corporation as authorized in Section 145. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the board of directors deems
appropriate.
Section 145(f) of the Delaware General Corporation Law provides that the
indemnification and advancement of expenses provided by, or granted pursuant
to, Section 145 shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Section 145(g) of the Delaware General Corporation Law provides that a
corporation shall have the power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against such person and incurred by such person in any such capacity, or
arising out of such person's capacity as such, whether or not the corporation
would have the power to indemnify such person against such liability under
Section 145.
Amended and Restated Certificate of Incorporation
The Amended and Restated Certificate of Incorporation of HE Holdings (the
"HE Holdings Certificate of Incorporation") provides that no director of HE
Holdings shall be personally liable to HE Holdings or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption or limitation is prohibited under the Delaware General
Corporation Law as it currently exists or as it may be amended in the future.
The HE Holdings Certificate of Incorporation also provides that HE Holdings
shall indemnify each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was a director or officer of HE Holdings (whether the basis
of such action, suit or proceeding is alleged action in an official capacity
as a director or officer or in any other capacity while serving as a director
or officer) to the fullest extent authorized by the Delaware General
Corporation Law as it currently exists or as it may be amended in the future,
against all expense, liability and loss (including attorneys' fees, judgment,
fines, payments in settlement and excise taxes or penalties arising under
ERISA) reasonably incurred or suffered by such person. Such indemnification
shall continue as to a person who ceases to be a director or officer of HE
Holdings and shall inure to the benefit of such person's heirs, executors and
administrators. HE Holdings shall not be required to indemnify a person in
connection with such action, suit or proceeding initiated by such person if it
was not authorized by the HE Holdings Board.
The HE Holdings Certificate of Incorporation also provides that HE Holdings
shall pay the expenses of directors and officers incurred in defending any
such action, suit or proceeding in advance of its final disposition; provided,
however, that, if and to the extent that the Delaware General Corporation Law
requires, the payment of expenses incurred by a director or officer in advance
of the final disposition of an action, suit or proceeding shall be made only
upon receipt of an undertaking by the director or officer to repay all amounts
advanced if it should be ultimately determined that the director or officer is
not entitled to be indemnified under the HE Holdings Certificate of
Incorporation or otherwise. If a claim for indemnification or advancement of
expenses by an officer or director under the HE Holdings Certificate of
Incorporation is not paid in full within thirty calendar days after a written
claim therefor has been received by HE Holdings, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in
part, shall be entitled also to be paid the expense of prosecuting such claim.
It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any action, suit or
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to HE Holdings) that the claimant has
not met the standard of conduct which makes it permissible under the Delaware
General Corporation Law for HE Holdings to indemnify the claimant for the
amount claimed. HE Holdings shall have the burden of proving such defense.
Neither the failure of HE Holdings to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because the claimant has met the applicable
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<PAGE>
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by HE Holdings that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
The right to indemnification and the payment of expenses conferred on any
person by the HE Holdings Certificate of Incorporation shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the HE Holdings Certificate of Incorporation or the
Amended and Restated By-Laws of HE Holdings, agreement, vote of stockholders
or disinterested directors or otherwise.
Any repeal or modification of these provisions of the HE Holdings
Certificate of Incorporation by the stockholders of HE Holdings shall not
adversely affect any limitation on the personal liability of directors for, or
any rights of directors in respect of, any cause of action, suit or claim
accruing or arising prior to the repeal or modification.
The HE Holdings Certificate of Incorporation also provides that HE Holdings
may maintain insurance to protect itself and any director, officer, employee
or agent of HE Holdings or another corporation, partnership, joint venture,
trust or other enterprise against any such expense, liability or loss, whether
or not HE Holdings would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
A copy of the HE Holdings Certificate of Incorporation is filed as Exhibit
3(a) to this Registration Statement.
Transaction Agreements
The Raytheon Merger Agreement provides that New Raytheon shall indemnify and
defend each individual who is or was an officer or director (as well as such
individual's heirs and legal representatives) of Raytheon or HE Holdings or
any of their respective subsidiaries prior to the Raytheon Merger Effective
Time against all losses, claims, damages, costs, expenses, liabilities or
judgments or amounts that are paid in settlement with the approval of New
Raytheon arising out of or in connection with any claim, action, suit,
proceeding or investigation based in whole or in part on, or arising in whole
or in part out of, (1) the fact that such person is or was a director or
officer of Raytheon or HE Holdings, whether pertaining to any matter existing
or occurring at or prior to the effective time of the Raytheon Merger (but in
the case of HE Holdings, only insofar as relating to the defense business of
HE Holdings) and (2) the Raytheon Merger Agreement or the transactions
contemplated by that agreement, in each case to the full extent Raytheon or HE
Holdings would have been permitted under the Delaware General Corporation Law,
their certificates of incorporation and their by-laws to indemnify such
person.
The Raytheon Merger Agreement also provides that New Raytheon shall pay the
expenses of directors and officers (including their heirs and legal
representatives) reasonably incurred in defending any action or proceeding in
advance of its final disposition to the full extent permitted by law upon
receipt of the undertaking contemplated by Section 145(e) of the Delaware
General Corporation Law. New Raytheon will use its commercially reasonable
efforts to assist in the vigorous defense of any such matter, provided that
New Raytheon shall not be liable for any settlement of any claim effected
without its written consent, which consent shall not be unreasonably withheld.
In the Master Separation Agreement, Delco and Hughes Telecom will agree to
indemnify and defend the directors and officers of HE Holdings and New
Raytheon against any losses, claims, damages, liabilities or actions arising,
whether prior to or following the Hughes Reorganization, out of or in
connection with the liabilities, assets and businesses of Delco and Hughes
Telecom, respectively. Hughes Telecom will also agree to indemnify the
directors and officers of HE Holdings and New Raytheon against any losses,
claims, damages, liabilities or actions arising out of any breach of its
representations and warranties to HE Holdings concerning the sufficiency of
the assets of HE Holdings immediately following the GM Spin-Off Merger. Delco
and Hughes Telecom will agree to reimburse the directors and officers of HE
Holdings and New Raytheon for any legal or
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<PAGE>
other expenses reasonably incurred in connection with the investigation or
defense of any such loss, claim, damage, liability or action. The amount of
indemnification provided under the Master Separation Agreement shall be
increased to take account of any net tax cost incurred by the director or
officer arising from the receipt or accrual of an indemnification payment
(grossed up for such increase) and reduced to take account of any net tax
benefit realized by the director or officer arising from incurring or paying
such loss or other liability.
In the Spin-Off Separation Agreement, General Motors will agree to indemnify
and defend the directors and officers of HE Holdings from and against all
losses relating to, arising from or due to: (1) any breach by General Motors
or its affiliates (excluding HE Holdings after the spin-off of HE Holdings) of
the Spin-Off Separation Agreement, (2) any untrue statement of a material fact
or any omission to state a material fact in the Hughes Defense Registration
Statement or the Registration Statement on Form S-4 of Hughes Defense, as
amended and including exhibits, to register with the SEC the shares of Class B
Common Stock relating to HE Holdings prior to the Raytheon Merger or the
Hughes Transactions (except the Raytheon Merger or plans regarding New
Raytheon after the Raytheon Merger and other forward-looking information
regarding New Raytheon) and (3) any breach of the representation of General
Motors in the Implementation Agreement that the execution and delivery of the
Transaction Agreements by, and the consummation of the transactions on the
part of, General Motors or any of its subsidiaries (excluding HE Holdings
after the Hughes Reorganization) will conflict with, or result in a breach of,
any provision of the certificates of incorporation or by-laws of General
Motors or any such subsidiary. The amount of indemnification provided for
under the Spin-Off Separation Agreement shall be increased to take account of
any net tax cost incurred by the director or officer arising from the receipt
or accrual of an indemnification payment (grossed up for such increase) and
reduced to take account of any net tax benefit realized by the director or
officer arising from incurring or paying such loss or other liability.
In the Tax Sharing Agreement, from and after the Distribution Date (as
defined therein), General Motors and Hughes Telecom jointly and severally
shall indemnify and hold harmless the directors and executive officers of HE
Holdings from and against (1) all Income Tax Liabilities (as defined therein)
incurred by any member of the GM Consolidated Group (as defined therein) in
respect of the Distribution (as defined therein) or the Raytheon Merger, (2)
all costs, expenses and damages associated with stockholder litigation or
controversies arising in connection with any proposed tax assessment or
controversy with respect to the Distribution or the Raytheon Merger, (3)
without duplication, all Income Tax Liabilities which Hughes Telecom (or any
other member of the GM Group (as defined herein)) is required to pay, or
reimburse HE Holdings for, pursuant to Section 2 thereof, and (4) all Income
Taxes (as defined therein) incurred by any member of the Hughes Group (as
defined therein) by reason of the breach by Hughes Telecom or General Motors
of any of its covenants hereunder and, in any case, any related costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses).
Insurance
General Motors will maintain until the GM Spin-Off Merger Effective Time
directors and officers liability insurance for directors and officers of HE
Holdings. Directors and officers of HE Holdings will remain entitled to assert
claims under such program for events, acts or omissions first reported prior
to the GM Spin-Off Merger Effective Time.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are exhibits to this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
2(a) Agreement and Plan of Merger by and between General Motors
Corporation and GM Mergeco Corporation, dated as of Octo-
ber 17, 1997 (included as Appendix A to the Solicitation
Statement/Prospectus which forms a part of this Registra-
tion Statement).
2(b) Agreement and Plan of Merger by and between HE Holdings,
Inc. and Raytheon Com-
pany, dated as of January 16, 1997 (filed as Exhibit 2(a)
to the Current Report on Form 8-K of General Motors Corpo-
ration, dated January 16, 1997, and incorporated herein by
reference).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
2(c) Implementation Agreement by and between General Motors
Corporation and Raytheon Company, dated as of January 16,
1997 (filed as Exhibit 2(b) to the Current Report on Form
8-K of General Motors Corporation, dated January 16, 1997,
and incorporated herein by reference).
2(d) Form of Master Separation Agreement among General Motors
Corporation, Hughes Network Systems, Inc., Delco Electron-
ics Corporation and HE Holdings, Inc.*
2(e) Form of Hughes Spin-Off Separation Agreement by and be-
tween HE Holdings, Inc. and General Motors Corporation.*
2(f) Form of Tax Sharing Agreement among General Motors Corpo-
ration, HE Holdings, Inc. and Hughes Network Systems,
Inc.*
3(a) Amended Certificate of Incorporation of HE Holdings, Inc.*
3(b) By-Laws of HE Holdings, Inc.*
3(c) Form of Amended and Restated Certificate of Incorporation
of HE Holdings, Inc.*
3(d) Form of Amended and Restated By-Laws of HE Holdings, Inc.*
4(a) Form of Amended and Restated Certificate of Incorporation
of HE Holdings, Inc. (filed as Exhibit 3(c) above).
4(b) Form of Amended and Restated By-Laws of HE Holdings, Inc.
(filed as Exhibit 3(d) above).
4(c) Raytheon Company $4 Billion Credit Agreement--Five-Year
Competitive Advance and Revolving Credit Facility (filed
as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the quarter ended March 30, 1997, of Raytheon Company, in-
corporated herein by reference).
4(d) Raytheon Company $3 Billion Credit Agreement--364-Day Com-
petitive Advance and Revolving Credit Facility (filed as
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
quarter ended March 30, 1997, of Raytheon Company, incor-
porated herein by reference).
4(e) HE Holdings, Inc. $3 Billion Credit Agreement--Five-Year
Competitive Advance and Revolving Credit Facility.*
4(f) HE Holdings, Inc. $2 Billion Credit Agreement--364-Day
Competitive Advance and Revolving Credit Facility.*
4(g) Indenture dated as of July 3, 1995 between Raytheon Com-
pany and The Bank of New York, Trustee (filed as an ex-
hibit to the Registration Statement on Form S-3, File No.
33-59241, and incorporated herein by reference).
4(h) Instruments defining the rights of holders of non-regis-
tered debt of HE Holdings, Inc. have been omitted from
this exhibit index because the amount of debt authorized
under any such agreement does not exceed 10% of the total
assets of HE Holdings, Inc. and its subsidiaries. HE Hold-
ings, Inc. agrees to furnish a copy of any such instrument
to the SEC upon request.
5 Opinion of Weil, Gotshal & Manges LLP.*
8(a) Opinion of Kirkland & Ellis.*
8(b) Opinion of Weil, Gotshal & Manges LLP.*
10(a) Raytheon Company 1976 Stock Option Plan, as amended (filed
as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, of Raytheon Company, and
incorporated herein by reference).
10(b) Raytheon Company 1991 Stock Plan, as amended (filed as Ex-
hibit 10.2 to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, of Raytheon Company, and in-
corporated herein by reference).
10(c) Raytheon Company 1995 Stock Option Plan (filed as an ex-
hibit to the Registration Statement on Form S-8, File No.
33-60635, of Raytheon Company, and incorporated herein by
reference).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10(d) Raytheon Company Deferral Plan for Directors (filed as an
exhibit to the Registration Statement on Form S-8, File
No. 333-22969, of Raytheon Company, and incorporated
herein by reference).
10(e) Form of Raytheon Company Change in Control Severance
Agreement (filed as Exhibit 10.3 to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, of Ray-
theon Company, incorporated herein by reference). Raytheon
has entered into Change in Control Severance Agreements in
the form of Agreement filed as Exhibit 10(e) with each of
the following executives: Peter R. D'Angelo, Christoph L.
Hoffmann, A. Lowell Lawson, Charles Q. Miller, Dennis J.
Picard, William H. Swanson and Arthur E. Wegner. Such
agreements are designed to provide the executive with cer-
tain severance benefits following a termination, all as
more fully described in the form of Agreement. Raytheon
has entered into Change in Control Severance Agreements in
the form of Agreement filed as Exhibit 10(e) with eighteen
other executives, but which will be immaterial to New Ray-
theon. The agreements are designed to provide the execu-
tive with certain severance benefits following a termina-
tion, all as more fully described in the form of Agree-
ment.
10(f) Form of HE Holdings, Inc. Executive Change in Control Sev-
erance Agreement. HE Holdings has entered into Executive
Change in Control Severance Agreements in the form of
Agreement filed as Exhibit 10(f) with each of the follow-
ing executives: John C. Weaver, Barry L. Abrahams, Kenneth
C. Dahlberg, Gerald H. Putman, George E. Speake, William
C. Bowes, Louise L. Francesconi, Robert L. Horowitz, John
T. Kuelbs, Charles A. Leader, David L. McPherson, Charles
S. Ream, Terry Snyder, Donald R. Infante, Frederick C. Mc-
Nutt, David P. Molfenter and Jack O. Pearson. Such agree-
ments are designed to provide the executive with certain
severance benefits following a termination, all as more
fully described in the form of Agreement.*
10(g) Form of HE Holdings Executive Retention Agreement. HE
Holdings has entered into Executive Retention Agreements
in the form of Agreement filed as Exhibit 10(g) with each
of the following executives: John C. Weaver, Barry L.
Abrahams, Kenneth C. Dahlberg, Gerald H. Putman, George E.
Speake, William C. Bowes, Louise L. Francesconi, Robert L.
Horowitz, John T. Kuelbs, Charles A. Leader, David L. Mc-
Pherson, Charles S. Ream, Terry Snyder, Donald R. Infante,
Frederick C. McNutt, David P. Molfenter and Jack O.
Pearson. Such agreements are designed to provide the exec-
utive with certain payments if still employed by New Ray-
theon at the end of the second and third years after the
GM Spin-Off Merger Effective Time, all as more fully de-
scribed in the form of Agreement.*
10(h) Form of HE Holdings, Inc. Executive Retention Agreement.
HE Holdings has entered into Executive Retention Agree-
ments in the form of Agreement filed as Exhibit 10(h) with
86 other of its executives. The agreements are designed to
provide the executive with certain payments if still em-
ployed by New Raytheon at the end of the first and second
years after the GM Spin-Off Merger Effective Time, all as
more fully described in the form of Agreement.*
10(i) Restricted Unit Award Agreement between Raytheon Company
and Dennis J. Picard (filed as Exhibit 10.1 to the Quar-
terly Report on Form 10-Q for the quarter ended June 29,
1997, of Raytheon Company, incorporated herein by refer-
ence).
10(j) Raytheon Company 1997 Nonemployee Directors Restricted
Stock Plan (filed as an exhibit to the Registration State-
ment on Form S-8, File No. 333-28107, of Raytheon Company,
and incorporated herein by reference).
10(k) Raytheon Company Plan for Granting Stock Options in Sub-
stitution for Stock Options Granted by Texas Instruments
Incorporated (filed as an exhibit to the Registration
Statement on Form S-8, File No. 333-37421, of Raytheon
Company, and incorporated herein by reference).
21 Subsidiaries of HE Holdings, Inc. (giving effect to the
Hughes Reorganization).*
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
23(a) Consent of Deloitte & Touche LLP, independent auditors.**
23(b) Consent of Coopers & Lybrand L.L.P., independent audi-
tors.**
23(c) Consent of Ernst & Young LLP, independent auditors.**
23(d) Consent of Arthur Andersen LLP, independent auditors.**
23(e) Consent of Weil, Gotshal & Manges LLP (included in Exhibit
5 above).
23(f) Consent of Kirkland & Ellis (included in Exhibit 8(a)
above).
23(g) Consent of Weil, Gotshal & Manges LLP (included in Exhibit
8(b) above).
23(h) Consent of Merrill Lynch, Pierce, Fenner & Smith Incorpo-
rated.**
23(i) Consent of Salomon Brothers Inc.**
23(j) Consent of Goldman, Sachs & Co.**
23(k) Consent of Bear, Stearns & Co., Inc.**
23(l) Consent of Credit Suisse First Boston Corporation.**
99 Consents of Persons About to Become Directors.*
</TABLE>
--------
*Filed previously.
**Filed herewith.
FAIRNESS OPINIONS
Incorporated as Appendix B to the Solicitation Statement/Prospectus which
forms a part of this Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
1. That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
2. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
3. That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
4. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is assessed by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
5. To respond to requests for information that is incorporated by
reference into this Solicitation Statement/Prospectus pursuant to Items 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of this Registration
Statement through the date of responding to the request.
6. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this Registration Statement
when it became effective.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS
ANGELES, STATE OF CALIFORNIA, ON NOVEMBER 10, 1997.
HE Holdings, Inc.
/s/ John C. Weaver
By: _________________________________
John C. Weaver
President and Chief Operating
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON NOVEMBER
10, 1997 IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ John C. Weaver President and Chief Operating Officer
___________________________________________
(John C. Weaver)
/s/ Roxanne S. Austin Senior Vice President and Chief Financial
___________________________________________ Officer
(Roxanne S. Austin)
/s/ Charles S. Ream Vice President
___________________________________________
(Charles S. Ream)
/s/ Michael T. Smith Chairman of the Board of Directors
___________________________________________
(Michael T. Smith)
/s/ Charles H. Noski Director
___________________________________________
(Charles H. Noski)
</TABLE>
II-9
<PAGE>
Detach Consent Card Here
- -------------------------------------------------------------------------------
CONSENT TO ACTION OF STOCKHOLDERS WITHOUT A MEETING
REVOCABLE CONSENT SOLICITED ON BEHALF OF
GENERAL MOTORS CORPORATION
The undersigned, a common stockholder of General Motors Corporation
("General Motors" or "GM"), acting with respect to all of the shares of Common
Stock, par value $1 2/3 per share ("GM $1 2/3 Common Stock"), and/or GM Class
H Common Stock, par value $0.10 per share ("GM Class H Common Stock" and,
together with the GM $1 2/3 Common Stock, the "GM Common Stock"), as
applicable, held by the undersigned on October 15, 1997 (the "Record Date"),
hereby consents, withholds consent or abstains as specified on the reverse
side with respect to the taking of corporate action without a meeting pursuant
to Section 228 of the Delaware General Corporation Law. All capitalized terms
used but not defined herein shall have the meanings ascribed to such terms in
the Solicitation Statement/Prospectus (the "Solicitation
Statement/Prospectus") furnished herewith to stockholders of General Motors
who held shares of GM Common Stock on the Record Date.
FAILURE TO EXECUTE AND RETURN THIS CONSENT CARD WILL BE DEEMED TO BE A VOTE TO
ABSTAIN, AND A VOTE TO ABSTAIN WILL HAVE THE EFFECT OF A VOTE AGAINST THE
CORPORATE ACTION DESCRIBED ON THE REVERSE SIDE OF THIS CARD.
Stockholders wishing to approve the action set forth herein should mark the
"Consent" box on the reverse side of this consent card. Those opposing any
such action should register their position by marking the "Withhold Consent"
or "Abstain" box on the reverse side of this consent card or by not returning
this consent card. Unless you otherwise indicate on this consent card, this
consent card will be voted as set forth on the reverse side with respect to
all shares of both classes of GM Common Stock held by the undersigned on the
Record Date, and if no choice is indicated but this consent card is otherwise
completed, you will be deemed to have consented to the action set forth on the
reverse side of this consent card. By executing this card, the undersigned
hereby revokes any and all prior consents and hereby affirms that, as of the
Record Date, the undersigned had the power to deliver a consent for the number
of shares represented by this consent.
SIGNED BUT UNMARKED CARDS WILL BE DEEMED TO GIVE CONSENT TO THE ACTION SET
FORTH ON THE REVERSE SIDE OF THIS CARD.
Consummation of the Hughes Transactions is conditioned upon receiving the
consent of the holders of (1) a majority of the outstanding shares of GM $1
2/3 Common Stock, voting as a separate class, and (2) a majority of the
outstanding shares of GM Class H Common Stock, voting as a separate class.
Unless previously revoked, this consent will be effective when and if
delivered to General Motors along with consents representing the percentages
of shares indicated in the immediately preceding sentence (but no sooner than
20 business days following the mailing of the Solicitation
Statement/Prospectus to GM common stockholders).
PLEASE SIGN AND DATE ON REVERSE SIDE
C O N S E N T
<PAGE>
Detach Consent Card Here
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- -------------------------------------------------------------------------------
PLEASE MARK VOTES AS IN THIS EXAMPLE.
X
- -------------------------------------------------------------------------------
FAILURE TO EXECUTE AND RETURN THIS CONSENT CARD WILL BE DEEMED TO BE A VOTE TO
ABSTAIN, AND A VOTE TO ABSTAIN WILL HAVE THE EFFECT OF A VOTE AGAINST THE
CORPORATE ACTION DESCRIBED BELOW.
THE BOARD OF DIRECTORS OF GENERAL MOTORS CORPORATION RECOMMENDS STOCKHOLDERS
CONSENT TO THE PROPOSAL BELOW.
- -------------------------------------------------------------------------------
Consent [ ] Withhold [ ] Abstain [ ]
Consent
1. PROPOSAL: APPROVAL OF THE HUGHES TRANSACTIONS, INCLUDING THE HUGHES
REORGANIZATION, THE GM SPIN-OFF MERGER AGREEMENT AND RELATED TRANSACTIONS
The approval of the Hughes Transactions, including the Hughes Reorganization,
the GM Spin-Off Merger (including the Hughes Defense Spin-Off and the
recapitalization and conversion of GM Class H Common Stock into New GM Class
H Common Stock), the Master Separation Agreement and all of the other
agreements contemplated thereby and the consummation of the other
transactions and events contemplated by the GM Spin-Off Merger Agreement,
including the adoption of the GM Spin-Off Merger Agreement.
When shares are held by joint tenants, both must sign. When signing as
attorney-in-fact, executor, administrator, trustee, guardian, corporate
officer or partner, please give full title as such. If a corporation, please
sign in corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Signature ________________ Signature, if held jointly ________________
Title ________________ Dated: ________________
IN ORDER FOR THIS CONSENT CARD TO BE VALID, IT MUST BE DATED. PLEASE
DATE AND SIGN THIS CARD EXACTLY AS YOUR NAME APPEARS HEREON, AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE>
CONSENT TO ACTION OF STOCKHOLDERS WITHOUT A MEETING
REVOCABLE CONSENT SOLICITED ON BEHALF OF
GENERAL MOTORS CORPORATION COMMON
The undersigned, a common stockholder of General Motors Corporation ("General
Motors" or "GM"), acting with respect to all of the shares of Common Stock, par
value $1 2/3 per share ("GM $1 2/3 Common Stock"), held by the undersigned on
October 15, 1997 (the "Record Date"), hereby consents, withholds consent or
abstains as specified on the reverse side with respect to the taking of
corporate action without a meeting pursuant to Section 228 of the Delaware
General Corporation Law. All capitalized terms used but not defined herein
shall have the meanings ascribed to such terms in the Solicitation
Statement/Prospectus (the "Solicitation Statement/Prospectus") furnished
herewith to stockholders of General Motors who held shares of GM common stock
on the Record Date.
FAILURE TO EXECUTE AND RETURN THIS CONSENT CARD WILL BE DEEMED TO BE A VOTE TO
ABSTAIN, AND A VOTE TO ABSTAIN WILL HAVE THE EFFECT OF A VOTE AGAINST THE
CORPORATE ACTION DESCRIBED ON THE REVERSE SIDE OF THIS CARD.
Stockholders wishing to approve the actions set forth herein should mark the
"Consent" box on the reverse side of this consent card. Those opposing such
action should register their position by marking the "Withhold Consent" or
"Abstain" box on the reverse side of this consent card or by not returning this
consent card. Unless you otherwise indicate on this consent card, this consent
card will be voted as set forth on the reverse side with respect to all shares
of GM $1 2/3 Common Stock held by the undersigned on the Record Date, and if no
choice is indicated but this consent card is otherwise completed, you will be
deemed to have consented to the action set forth on the reverse side of this
consent card. By executing this card the undersigned hereby revokes any and all
prior consents and hereby affirms that, as of the Record Date, the undersigned
had the power to deliver a consent for the number of shares represented by this
consent.
SIGNED BUT UNMARKED CARDS WILL BE DEEMED TO GIVE CONSENT TO THE ACTION SET
FORTH ON THE REVERSE SIDE OF THIS CARD.
Consummation of the Hughes Transactions is conditioned upon receiving the
consent of the holders of (1) a majority of the outstanding shares of GM $1 2/3
Common Stock, voting as a separate class, and (2) a majority of the outstanding
shares of GM Class H Common Stock, voting as a separate class. Unless
previously revoked, this consent will be effective when and if delivered to
General Motors along with consents representing the percentages of shares
indicated in the immediately preceding sentence (but no sooner than 20 business
days following the mailing of the Solicitation Statement/Prospectus to GM
common stockholders).
PLEASE SIGN AND DATE ON REVERSE SIDE
- --------------------------------------------------------------------------------
COMMON
[x] PLEASE MARK VOTES AS IN THIS EXAMPLE.
FAILURE TO EXECUTE AND RETURN THIS CONSENT CARD WILL BE DEEMED TO BE A VOTE TO
ABSTAIN, AND A VOTE TO ABSTAIN WILL HAVE THE EFFECT OF A VOTE AGAINST THE
CORPORATE ACTION DESCRIBED BELOW.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS OF GENERAL MOTORS CORPORATION RECOMMENDS STOCKHOLDERS
CONSENT TO THE PROPOSAL BELOW.
- --------------------------------------------------------------------------------
PROPOSAL: APPROVAL OF THE HUGHES TRANSACTIONS, INCLUDING THE HUGHES
REORGANIZATION, THE GM SPIN-OFF MERGER AGREEMENT AND RELATED TRANSACTIONS
[_] CONSENT [_] WITHHOLD CONSENT [_]ABSTAIN
The approval of the Hughes Transactions, including the Hughes Reorganization,
the GM Spin-Off Merger (including the Hughes Defense Spin-Off and the
recapitalization and conversion of GM Class H Common Stock into New GM Class H
Common Stock), the Master Separation Agreement and all of the other agreements
contemplated thereby and the consummation of the other transactions and events
contemplated by the GM Spin-Off Merger Agreement, including the adoption of the
GM Spin-Off Merger Agreement.
When shares are held by joint tenants, both
must sign. When signing as attorney-in-fact,
executor, administrator, trustee, guardian,
corporate officer or partner, please give
full title as such. If a corporation, please
sign in corporate name by President or other
authorized officer. If a partnership, please
sign in partnership name by authorized
person.
Signature __________________ Dated: _________________
Signature __________________ Dated: _________________
<PAGE>
CONSENT TO ACTION OF STOCKHOLDERS WITHOUT A MEETING
REVOCABLE CONSENT SOLICITED ON BEHALF OF
GENERAL MOTORS CORPORATION CLASS H
The undersigned, a common stockholder of General Motors Corporation ("General
Motors" or "GM"), acting with respect to all of the shares of Class H Common
Stock, par value $0.10 per share ("GM Class H Common Stock"), held by the
undersigned on October 15, 1997 (the "Record Date"), hereby consents, withholds
consent or abstains as specified on the reverse side with respect to the taking
of corporate action without a meeting pursuant to Section 228 of the Delaware
General Corporation Law. All capitalized terms used but not defined herein
shall have the meanings ascribed to such terms in the Solicitation
Statement/Prospectus (the "Solicitation Statement/Prospectus") furnished
herewith to stockholders of General Motors who held shares of GM common stock
on the Record Date.
FAILURE TO EXECUTE AND RETURN THIS CONSENT CARD WILL BE DEEMED TO BE A VOTE TO
ABSTAIN, AND A VOTE TO ABSTAIN WILL HAVE THE EFFECT OF A VOTE AGAINST THE
CORPORATE ACTION DESCRIBED ON THE REVERSE SIDE OF THIS CARD.
Stockholders wishing to approve the action set forth herein should mark the
"Consent" box on the reverse side of this consent card. Those opposing such
action should register their position by marking the "Withhold Consent" or
"Abstain" box on the reverse side of this consent card or by not returning this
consent card. Unless you otherwise indicate on this consent card, this consent
card will be voted as set forth on the reverse side with respect to all shares
of GM Class H Common Stock held by the undersigned on the Record Date, and if
no choice is indicated but this consent card is otherwise completed, you will
be deemed to have consented to the action set forth on the reverse side of this
consent card. By executing this card the undersigned hereby revokes any and all
prior consents and hereby affirms that, as of the Record Date, the undersigned
had the power to deliver a consent for the number of shares represented by this
consent.
SIGNED BUT UNMARKED CARDS WILL BE DEEMED TO GIVE CONSENT TO THE ACTION SET
FORTH ON THE REVERSE SIDE OF THIS CARD.
Consummation of the Hughes Transactions is conditioned upon receiving the
consent of the holders of (1) a majority of the outstanding shares of GM $1 2/3
Common Stock, voting as a separate class, and (2) a majority of the outstanding
shares of GM Class H Common Stock, voting as a separate class. Unless
previously revoked, this consent will be effective when and if delivered to
General Motors along with consents representing the percentages of shares
indicated in the immediately preceding sentence (but no sooner than 20 business
days following the mailing of the Solicitation Statement/Prospectus to GM
common stockholders).
PLEASE SIGN AND DATE ON REVERSE SIDE
- --------------------------------------------------------------------------------
CLASS H
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE.
FAILURE TO EXECUTE AND RETURN THIS CONSENT CARD WILL BE DEEMED TO BE A VOTE TO
ABSTAIN, AND A VOTE TO ABSTAIN WILL HAVE THE EFFECT OF A VOTE AGAINST THE
CORPORATE ACTION DESCRIBED BELOW.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS OF GENERAL MOTORS CORPORATION RECOMMENDS STOCKHOLDERS
CONSENT TO THE PROPOSAL BELOW.
- --------------------------------------------------------------------------------
PROPOSAL: APPROVAL OF THE HUGHES TRANSACTIONS, INCLUDING THE HUGHES
REORGANIZATION, THE GM SPIN-OFF MERGER AGREEMENT AND RELATED TRANSACTIONS
[_] CONSENT [_] WITHHOLD CONSENT [_] ABSTAIN
The approval of the Hughes Transactions, including the Hughes Reorganization,
the GM Spin-Off Merger (including the Hughes Defense Spin-Off and the
recapitalization and conversion of GM Class H Common Stock into New GM Class H
Common Stock), the Master Separation Agreement and all of the other agreements
contemplated thereby and the consummation of the other transactions and events
contemplated by the GM Spin-Off Merger Agreement, including the adoption of the
GM Spin-Off Merger Agreement.
When shares are held by joint tenants, both
must sign. When signing as attorney-in-fact,
executor, administrator, trustee, guardian,
corporate officer or partner, please give
full title as such. If a corporation, please
sign in corporate name by President or other
authorized officer. If a partnership, please
sign in partnership name by authorized
person.
Signature __________________ Dated: _________________
Signature __________________ Dated: _________________
<PAGE>
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to: (a) the incorporation by reference in this Registration Statement
of HE Holdings, Inc. on Form S-4 of our reports dated January 28, 1997 on the
consolidated financial statements and financial statement schedule of General
Motors Corporation and subsidiaries and on the consolidated financial statements
of Hughes Electronics Corporation and subsidiaries appearing in the Annual
Report on Form 10-K of General Motors Corporation for the year ended December
31, 1996 and (b) the use of our report dated March 21, 1997 on the combined
financial statements of the Defense Business of Hughes Electronics Corporation,
our report dated October 3, 1997 on the combined financial statements of the
Delco Electronics Corporation and Related Entities, and our report dated October
3, 1997, except for Note 14, as to which the date is November 3, 1997, on the
combined financial statements of the Telecommunications and Space Business of
Hughes Electronics Corporation appearing in the Solicitation
Statement/Prospectus, which is part of this Registration Statement. We also
consent to the references to us under the headings "Introduction - Summary
Financial Information" "Hughes Defense Selected Combined Historical Financial
Data," "Delco Selected Combined Historical and Pro Forma Financial Data,"
"Hughes Telecom Selected Combined Historical and Pro Forma Financial Data" and
"Experts" in such Solicitation Statement/Prospectus.
Detroit, Michigan /s/ Deloitte & Touche
November 6, 1997
<PAGE>
Exhibit 23(b)
[LETTERHEAD OF COOPERS & LYBRAND]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
HE Holdings Inc. on Form S-4 of our report dated January 20, 1997, except as to
the information presented in note R for which the date is February 23, 1997 on
our audits of the consolidated financial statements and financial statement
schedule of Raytheon Company and Subsidiaries Consolidated. We also consent to
the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 10, 1997
<PAGE>
EXHIBIT 23(c)
We consent to the reference to our firm under the caption "Experts" in the
Solicitation Statement/Prospectus in the registration statement of HE Holdings,
Inc. relating to The Hughes Transactions and to the incorporation by reference
therein of our report dated February 18, 1997, with respect to financial
statements of the Defense Business of Texas Instruments Incorporated for the
years ended December 31, 1996, 1995, and 1994.
/s/ Ernst & Young LLP
Dallas, Texas
November 7, 1997
<PAGE>
Exhibit 23(d)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Solicitation Statement/Prospectus on Form S-4 (File No. 333-
37223) filed by HE Holdings, Inc. of our report dated January 27, 1997
accompanying the consolidated financial statements of PanAmSat Corporation and
subsidiaries and predecessor entity as of December 31, 1996 and 1995, and for
the years ended December 31, 1996, 1995 and 1994, included in or made a part of
the Proxy Statement on Schedule 14A filed on April 18, 1997, of PanAmSat
Corporation.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Stamford, Connecticut
November 7, 1997
<PAGE>
Exhibit 23(h)
Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
-------------------------------------------------------------
We hereby consent to the use of our opinion letter dated November 10, 1997
to the Board of Directors of General Motors Corporation included as part of
Appendix B to the Solicitation Statement/Prospectus which forms a part of the
Registration Statement on Form S-4 filed by HE Holdings, Inc. relating to a
series of transactions involving Hughes Electronics Corporation, a wholly owned
subsidiary of General Motors Corporation, and to the references to such opinion
and to our opinion, dated October 6, 1997 to the Board of Directors of General
Motors Corporation in such Solicitation Statement/Prospectus under the captions
"Introduction -- The Hughes Transactions", "The Hughes Transactions and the
Raytheon Merger -- Special Factors -- Background of the Hughes Transactions",
"The Hughes Tranactions and the Raytheon Merger -- Special Factors --
Recommendations of the Capital Stock Committee and the GM Board, Fairness of the
Hughes Transactions" and "The Hughes Transactions and the Raytheon Merger --
Special Factors -- Hughes Transactions Fairness Opinions: Merrill Lynch and
Salomon Brothers".
In giving such consent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder, nor do we thereby admit that we are experts with respect
to any part of such Registration Statement within the meaning of the term
"experts" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/ MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
November 10, 1997
<PAGE>
Exhibit 23(i)
CONSENT OF SALOMON BROTHERS INC
-------------------------------
We hereby consent to the use of our opinion letter, dated November 10, 1997
and our name and to the description of our opinion letter, dated October 6,
1997, under the captions "The Hughes Transactions--Hughes Transactions Fairness
Opinion: Merrill Lynch and Salomon Brothers" in Chapter 1, "Special Factors--
Background of the Hughes Transactions" in Chapter 3, "Special Factors--
Recommendation of the Capital Stock Committee and the GM Board; Fairness of the
Hughes Transactions" in Chapter 3 and "Special Factors--Hughes Transactions
Fairness Opinion: Merrill Lynch and Salomon Brothers" in Chapter 3, and to the
inclusion of such opinion letter as Appendix B to, the Solicitation
Statement/Prospectus of HE Holdings, Inc., which Solicitation
Statement/Prospectus is part of the Registration Statement on Form S-4 of HE
Holdings, Inc. By giving such consent we do not thereby admit that we are
experts with respect to any part of such Registration Statement within the
meaning of the term "expert" as used in, or that we come within the category of
persons whose consent is required under, the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
/s/SALOMON BROTHERS INC
New York, New York
November 10, 1997
<PAGE>
Exhibit 23(j)
November 10, 1997
Board of Directors
HE Holdings, Inc.
7200 Hughes Terrace
Los Angeles, CA 90045
Re: Amendment No. 4 to the Registration Statement of HE Holdings, Inc. relating
to Class A Common Stock, par value $0.01 per share, being registered in
connection with the spin-off of Hughes Electronics Corporation
Ladies and Gentlemen:
Reference is made to our opinion letter dated January 16, 1997 with respect to
the fairness to (i) HE Holdings, Inc., a Delaware corporation ("Hughes"), (ii)
Hughes Electronics Corporation, a Delaware corporation ("HEC"), and the holder
of the outstanding shares of Common Stock, par value $0.01 per share, of Hughes,
(iii) General Motors Corporation, a Delaware corporation and the parent of HEC
("GM"), (iv) the holders of GM's Common Stock, par value $1 2/3 per share, and
(v) the holders of GM's Class H Common Stock, par value $0.10 per share, of the
Aggregate Consideration (as defined in such opinion) as contemplated by the
Agreement and Plan of Merger dated as of January 16, 1997 by and between
Raytheon Company, a Delaware corporation, and Hughes and to our November 7, 1997
opinion letter confirming our opinion dated January 16, 1997.
The foregoing opinion letters are provided for the information and assistance of
the Board of Directors of HE Holdings, Inc. (the "Company") in connection with
its consideration of the transaction contemplated therein and is not to be used,
circulated, quoted or otherwise referred to for any other purpose, nor is it to
be filed with, included in or referred to in whole or in part in any
registration statement, proxy statement or any other document, except in
accordance with our prior written consent. We understand that the Company
<PAGE>
HE Holdings, Inc.
November 10, 1997
Page Two
has determined to include our opinion in the above-referenced Registration
Statement.
In that regard, we hereby consent to the reference to the opinion, dated January
16, 1997, of our Firm under the caption "Introduction--Raytheon Merger Fairness
Opinion: Goldman Sachs" and to the reference to both our opinion dated January
16, 1997 and our confirming opinion dated November 7, 1997 under the caption
"Description of the Raytheon Merger--Raytheon Merger Fairness Opinion: Goldman
Sachs" and to the inclusion of the foregoing opinions in the Solicitation
Statement included in the above-mentioned Registration Statement. In giving such
consent, we do not hereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933 or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Goldman, Sachs & Co.
- ------------------------
(GOLDMAN, SACHS & CO.)
<PAGE>
Exhibit 23(k)
Consent of Bear, Stearns & Co. Inc.
-----------------------------------
We hereby consent to (i) the incorporation by reference in the Solicitation
Statement/Prospectus of General Motors Corporation and HE Holdings, Inc.
relating to a series of transactions involving Hughes Electronics Corporation, a
wholly owned subsidiary of General Motors (the "GM/HE Holdings Solicitation
Statement/Prospectus"), of our opinion letter directed to the board of directors
of Raytheon and included as Appendix B-I to, and the references thereto under
the caption "THE MERGER--Bear Stearns Fairness Opinion" in the Solicitation
Statement/Prospectus of Raytheon Company and (ii) the reference to such opinion
letter in the GM/HE Holdings Solicitation Statement/Prospectus under the
captions "Introduction to the Hughes Transactions--Raytheon Information" in
Chapter 1, "Special Factors--Background of the Hughes Transactions" in Chapter
3, "Description of the Raytheon Merger--Raytheon Merger Fairness Opinion:
Goldman Sachs" in Chapter 3 and "Where You Can Find More Information" in Chapter
7 thereof. In giving such consent, we do not admit that we come within the
category of persons whose consent is required under, and we do not admit that we
are "experts" for the purposes of, the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
/s/ BEAR, STEARNS & CO. INC.
New York, New York
November 7, 1997
<PAGE>
Exhibit 23(l)
[Letterhead of Credit Suisse First Boston Corporation]
We hereby consent to (i) the incorporation by reference in the Solicitation
Statement/Prospectus of General Motors Corporation ("GM") and HE Holdings, Inc.
("HE Holdings") included in the Registration Statements of GM (File No. 333-
37215) and HE Holdings (File No. 333-37223) (the "GM/HE Holdings Solicitation
Statement/Prospectus"), which includes a description of the proposed merger of
Raytheon Company ("Raytheon") and HE Holdings, of our opinion letter as Appendix
B-II to, and the references thereto under the caption "THE MERGER--CSFB Fairness
Opinion" in, the Solicitation Statement/Prospectus of Raytheon and (ii) the
references to such opinion letter in the GM/HE Holdings Solicitation
Statement/Prospectus under the captions "Introduction to the Hughes
Transactions--Raytheon Information" in Chapter 1, "Special Factors--Background
of the Hughes Transactions" in Chapter 3, "Description of the Raytheon Merger--
Raytheon Merger Fairness Opinion: Goldman Sachs" in Chapter 3 and "Where You Can
Find More Information" in Chapter 7 thereof. In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under, and we do not admit that we are "experts" for the purposes of, the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder.
/s/ CREDIT SUISSE FIRST BOSTON CORPORATION
November 10, 1997
