<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 29, 1995
--------------
RAYTHEON COMPANY
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-2833 04-1760395
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) file number) identification No.)
141 Spring Street, Lexington, Massachusetts 02173
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (617)862-6600
-------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
(Page 1 of 28 Pages)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. The descriptions set forth in
this report do not purport to be complete and this report is qualified in its
entirety by reference to the documents described herein and attached as
exhibits hereto, which are hereby incorporated herein by this reference.
(a) On April 3, 1995, the tender offer (the "Offer") by RTN Acquisition
Corporation, a Delaware corporation (the "Purchaser") and a wholly-owned
subsidiary of Raytheon Company, a Delaware corporation (the "Parent") to
purchase all outstanding shares of Common Stock, par value $1.00 per share (the
"Shares") of E-Systems, Inc., a Delaware corporation (the "Company") at $64.00
per Share in cash commenced. The Offer expired at 12:00 midnight New York City
time, April 28, 1995 (the "Expiration Date"). There were validly tendered
32,966,254 Shares pursuant to the Offer representing approximately 96.27
percent of the Shares outstanding as of the Expiration Date. Pursuant to the
Offer, immediately after the Expiration Date, on April 29, 1995, the Purchaser
accepted for payment those Shares validly tendered according to the terms of
the Offer.
The Offer was made pursuant to an Agreement and Plan of Merger, dated
as of April 2, 1995 (the "Merger Agreement"), by and among the Company, the
Purchaser and the Parent. On May 8, 1995, and pursuant to the Merger
Agreement, the Parent caused the Purchaser to merge with and into the Company
(the "Merger"), with the Company continuing as the surviving corporation (the
"Surviving Corporation"). Because the Purchaser owned in excess of 90 percent
of the Shares outstanding, it consummated the Merger without a meeting of
stockholders of the Company pursuant to Section 253 of the General Corporation
Law of the State of Delaware. Under the terms of the Merger, each Share issued
and outstanding (other than Shares held by the Parent, the Purchaser or any
subsidiary of the Parent or the Purchaser or in the treasury of the Company,
all of which were cancelled) now represents solely (i) the right to receive
$64.00 per Share in cash, without interest, upon surrender of the certificate
formerly representing such Share or (ii) a right to dissent from the Merger and
obtain an appraisal of such Shares under applicable Delaware law.
The total amount of funds required by the Purchaser to consummate the
Offer and the Merger and for the settlement of options to purchase Shares is
approximately $2.3 billion. The funds used in the Purchaser's acquisition of
the Shares
(Page 2 of 28 Pages)
<PAGE>
were obtained by the Purchaser from the Parent. The Parent has obtained such
funds primarily through the sale of commercial paper.
Pursuant to the Merger Agreement, the Company's Board of Directors
(the "Board") reduced the number of Directors to seven and appointed the
following designees of the Parent as four of those seven Directors: Peter R.
D'Angelo, David S. Dwelley, Christoph L. Hoffmann and C. Dale Reis.
(b) As a result of the Merger, the separate corporate existence of the
Purchaser ceased and the Company, as the Surviving Corporation, became a
direct, wholly-owned subsidiary of the Parent. The following description of
the Company's business has been taken from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 filed with the Securities and
Exchange Commission:
The Company designs, develops and produces advanced electronic systems
and products, primarily for sale in defense related markets, and
provides various related technical services. The Company's largest
business segments are the design, development and production of
reconnaissance and surveillance systems and command, control and
communications systems which represented approximately 75% of the
Company's sales in 1994. The Company also designs, develops and
manufactures intelligence collection and processing systems, which
through reconnaissance and surveillance activities collect radio
frequency signals and images, process that data, correlate it with
other information ("fusion"), and communicate the information to users
including various decision makers, such as battlefield tactical
commanders and the National Command Authority. In addition, the Company
produces navigation and control systems, and performs aircraft
maintenance and modification and other services.
The Parent intends both to operate the Company as a separate corporate entity
and to continue to use the assets of the Company in substantially the same
manner as they are presently employed.
(Page 3 of 28 Pages)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS.
(a)(1) Financial Statements of E-Systems, Inc.
E-SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales.......................................................... $2,028,300 $2,097,114 $2,094,913
Other income -- net................................................ 5,053 10,775 3,753
---------- ---------- ----------
2,033,353 2,107,889 2,098,666
- ------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Contract and manufacturing costs................................... 1,691,677 1,759,533 1,776,037
Selling, general and administrative expenses....................... 173,080 161,870 152,493
Special charges -- Note M.......................................... 24,495 -- --
Interest expense................................................... 2,412 6,211 7,664
---------- ---------- ----------
1,891,664 1,927,614 1,936,194
---------- ---------- ----------
Income Before Federal Income Taxes and the Cumulative Effect of a
Change in Accounting Principle.................................. 141,689 180,275 162,472
- ------------------------------------------------------------------------------------------------------------------
Federal Income Taxes (Note E):
Current............................................................ 55,411 62,893 51,266
Deferred........................................................... (9,362) (4,484) 2,187
---------- ---------- ----------
46,049 58,409 53,453
---------- ---------- ----------
Income before the Cumulative Effect of a Change in Accounting
Principle....................................................... 95,640 121,866 109,019
- ------------------------------------------------------------------------------------------------------------------
Cumulative Effect of a Change in Accounting Principle (Note J):
Retiree health care and life insurance benefits -- net of tax
benefit of $91,960................................................ -- -- (178,510)
---------- ---------- ----------
Net Income (Loss)................................................ $ 95,640 $ 121,866 $ (69,491)
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Share (Note A):
Income before the cumulative effect of a change in accounting
principle......................................................... $ 2.79 $ 3.58 $ 3.31
Cumulative effect of a change in accounting principle.............. -- -- (5.42)
---------- ---------- ----------
Earnings (Loss) Per Share........................................ $ 2.79 $ 3.58 $ (2.11)
========== ========== ==========
</TABLE>
See "Notes to Consolidated Financial Statements."
(Page 4 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................................... $ 24,401 $ 32,638
Accounts receivable (Note B)........................................................ 438,205 426,404
Unreimbursed costs and fees under cost-plus-fee contracts (Note B).................. 186,855 207,519
Fixed-price contracts:
Fixed-priced contracts in progress (Note C)....................................... 83,903 54,644
Less progress and advance payments................................................ 11,802 21,580
---------- ----------
72,101 33,064
Raw materials and purchased parts................................................... 40,272 11,714
Prepaid expenses and other assets................................................... 18,877 38,623
---------- ----------
Total Current Assets.............................................................. 780,711 749,962
- ------------------------------------------------------------------------------------------------------------------
Other Assets:
Prepaid pension costs (Note I)...................................................... 34,485 36,489
Deferred charges and other (Note K)................................................. 69,022 56,653
Deferred federal income taxes (Note E).............................................. 72,160 65,544
Costs in excess of net assets acquired (Note A)..................................... 101,962 62,401
---------- ----------
277,629 221,087
- ------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment (Notes A and H):
Land................................................................................ 7,871 7,279
Buildings........................................................................... 100,244 94,731
Machinery and equipment............................................................. 334,156 306,915
Leasehold improvements -- net....................................................... 72,793 75,572
Construction in progress............................................................ 16,506 13,957
---------- ----------
531,570 498,454
Less allowances for depreciation.................................................... 215,743 190,330
---------- ----------
315,827 308,124
---------- ----------
$1,374,167 $1,279,173
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................................................... $ 95,316 $ 70,313
Accrued liabilities (Note F)........................................................ 92,065 73,495
Short-term obligations and current portion of long-term debt (Note D)............... 9,517 25,256
---------- ----------
Total Current Liabilities..................................................... 196,898 169,064
- ------------------------------------------------------------------------------------------------------------------
Long-Term Debt:
Long-term debt (Note D)............................................................. 3,769 738
Installment lease obligations (Note H).............................................. 6,346 7,135
---------- ----------
10,115 7,873
- ------------------------------------------------------------------------------------------------------------------
Deferred Items:
Retiree health care and life insurance benefits (Note J)............................ 284,227 290,795
Other deferred items................................................................ 46,298 41,445
---------- ----------
330,525 332,240
- ------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note G):
Common stock, par value $1.00....................................................... 34,071 33,885
Additional capital.................................................................. 178,810 172,300
Retained earnings................................................................... 623,748 563,811
---------- ----------
836,629 769,996
- ------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes H and L)
---------- ----------
$1,374,167 $1,279,173
========== ==========
</TABLE>
See "Notes to Consolidated Financial Statements."
(Page 5 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
------------ ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss)....................................................... $ 95,640 $ 121,866 $ (69,491)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of a change in accounting principle................. -- -- 178,510
Depreciation and amortization......................................... 54,674 54,858 53,583
(Benefit) provision for deferred income taxes......................... (9,362) (4,484) 2,187
Gain on sale of investment securities................................. (1,032) (2,205) (453)
Changes in operating assets and liabilities, net of effects from
Acquisitions:
Accounts receivable................................................... 98,069 84,794 20,813
Unreimbursed costs and fees under cost-plus-fee
contracts............................................................ 20,664 (21,448) (30,505)
Fixed-price contracts in progress..................................... (28,814) 17,002 5,340
Progress and advance payments......................................... (105,531) (91,600) (47,050)
Prepaid pension costs................................................. 2,004 (6,631) 8,995
Accounts payable...................................................... 18,631 (25,223) 16,937
Accrued liabilities................................................... 6,074 (9,596) (16,318)
Other assets and liabilities.......................................... (14,196) (21,520) 502
------------ ----------- -----------
Net Cash Provided By Operating Activities........................... 136,821 95,813 123,050
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of property, plant and equipment.............................. (43,547) (52,063) (90,837)
Proceeds from disposals of property, plant and equipment................ 1,560 942 992
Acquisitions, net of cash acquired...................................... (43,513) -- (9,959)
------------ ----------- -----------
Net Cash Used In Investing Activities............................... (85,500) (51,121) (99,804)
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net (payments) borrowings under short-term line-of-credit agreements.... (23) (19,533) 19,533
Principal payments on long-term debt and installment lease
obligations............................................................ (26,340) (51,693) (8,855)
Proceeds from exercise of stock options................................. 6,696 32,655 15,692
Dividends paid.......................................................... (39,891) (35,723) (30,445)
------------ ----------- -----------
Net Cash Used in Financing Activities............................... (59,558) (74,294) (4,075)
------------ ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents...................... (8,237) (29,602) 19,171
Cash and cash equivalents at beginning of year............................ 32,638 62,240 43,069
------------ ----------- -----------
Cash and Cash Equivalents at End of Year.................................. $ 24,401 $ 32,638 $ 62,240
============ =========== ===========
</TABLE>
See "Notes to Consolidated Financial Statements."
(Page 6 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- ------- -------- --------
<S> <C> <C> <C> <C>
Balance January 1, 1992...................................... 32,417,150 $32,417 $125,421 $592,225
Net loss..................................................... (69,491)
Exercise of stock options, net of stock tendered (including
tax benefit of $1,501)...................................... 474,965 475 15,217
Adjustment for minimum pension liability (net of tax effect
of $1,910).................................................. (3,708)
Cash dividends on common stock
($1.00 per share)........................................... (32,556)
---------- ------- -------- --------
Balance December 31, 1992.................................... 32,892,115 32,892 140,638 486,470
Net income................................................... 121,866
Exercise of stock options, net of stock tendered (including
tax effect of $5,850)....................................... 992,682 993 31,662
Adjustment for minimum pension liability (net of tax benefit
of $4,133).................................................. (7,676)
Cash dividends on common stock ($1.10 per share)............. (36,849)
---------- ------- -------- --------
Balance December 31, 1993.................................... 33,884,797 33,885 172,300 563,811
Net income................................................... 95,640
Exercise of stock options, net of stock tendered (including
tax benefit of $986)........................................ 186,316 186 6,510
Adjustment for minimum pension liability (net of tax effect
of $2,475).................................................. 4,597
Unrealized gain on available-for-sale securities reported at
market value (net of tax effect
of $151).................................................... 280
Foreign currency translation adjustment...................... 216
Cash dividends on common stock ($1.20 per share)............. (40,796)
---------- ------- -------- --------
Balance December 31, 1994................................ 34,071,113 $34,071 $178,810 $623,748
========== ======= ======== ========
</TABLE>
See "Notes to Consolidated Financial Statements."
(Page 7 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accounts of all subsidiaries have been
included in the consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated.
REVENUE AND PROFIT DETERMINATION -- Sales and costs of sales (including
general and administrative expenses) on long-term fixed-price contracts and
sales (costs and fees) on cost reimbursable contracts are generally recorded
under the percentage-of-completion method of accounting as costs are incurred.
Sales and costs of sales (including general and administrative expenses) on
fixed-price production contracts with substantial quantities are recorded when
units are delivered, based on the profit rates anticipated on the contracts at
completion. Profits expected to be realized on 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 made cumulative to the date of change.
Amounts in excess of agreed upon contract price for customer-caused delays,
errors in specification and design, unapproved change orders or other causes of
unanticipated additional costs are recognized in contract value if it is
probable that the claim will result in additional revenue and the amount can be
reasonably estimated (See Note C). Losses on contracts are recorded in full as
they are identified.
FIXED-PRICE CONTRACTS AND RAW MATERIALS -- Costs incurred in advance of
contractual coverage receive an allocated portion of general and administrative
expenses and are valued at the lower of cost incurred or market. Raw materials
and purchased parts are valued at average cost not in excess of market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at
cost. Capitalized leases are recorded at the present value of the net fixed
minimum lease commitments (See Note H). Provisions for depreciation are computed
on both accelerated and straight-line methods using rates calculated to amortize
the cost of the assets over their estimated useful lives and include
amortization of capitalized leases. Leasehold improvements are amortized over
the life of the lease and renewal options which are expected to be exercised.
The Company's policy is to remove the amounts related to fully-depreciated
assets from the financial records.
EARNINGS PER SHARE -- Earnings per share are computed based on the sum of
the average outstanding common shares and common equivalent shares (1994 --
34,335,000; 1993 -- 34,041,000; 1992 -- 32,941,000). Common equivalent shares
assume the exercise of all dilutive stock options. Primary and fully diluted
earnings per share are essentially the same.
STATEMENT OF CASH FLOWS -- All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
COSTS IN EXCESS OF NET ASSETS ACQUIRED -- The costs in excess of net assets
acquired (goodwill) are being amortized using the straight-line method over a
period of 10 to 40 years. The increase in costs in excess of net assets acquired
during 1994 was due to seven acquisitions during the year and to contingent
consideration made related to prior year acquisitions. Accumulated amortization
was $9,346,000 and $6,557,000 at December 31, 1994 and 1993, respectively.
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION -- Financial instruments which
potentially subject the Company to concentrations of credit risk consist of cash
equivalents, billed accounts receivable and unreimbursed costs and fees under
cost-plus-fee contracts. The Company's cash equivalents consist principally of
U.S. Government securities and Eurodollar accounts with high credit quality
financial institutions. Generally, the investments mature within 90 days and
therefore are subject to
(Page 8 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
minimal risk. Billed accounts receivable and unreimbursed costs and fees under
cost-plus-fee contracts result primarily from contracts with the U.S. Government
or prime contractors with the U.S. Government and some international customers
(principally governments). Contracts involving the U.S. Government do not
require collateral or other security. The Company conducts ongoing credit
evaluations of domestic non-U.S. Government customers and generally does not
require collateral or other security from these customers. Generally
international customers are required to furnish letters of credit or make
advance payments in amounts sufficient to limit the Company's credit risk to a
minimal level. Historically, no significant credit-related losses have been
incurred.
NOTE B -- RECEIVABLES
Accounts Receivable and Unreimbursed Costs and Fees Under Cost-Plus-Fee
Contracts by major classification are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993
- -------------- -------- --------
<S> <C> <C>
Accounts Receivable Billed:
U.S. Government............................................................. $ 98,420 $ 54,305
Commercial and International................................................ 25,169 20,169
Other....................................................................... 10,792 9,790
Accrued recoverable costs and profits
(primarily U.S. Government).................................................. 303,824 342,140
-------- --------
Total..................................................................... $438,205 $426,404
======== ========
Unreimbursed Costs and Fees Under Cost-Plus-Fee Contracts to the U.S.
Government:
Billed...................................................................... $ 66,261 $ 91,872
Accrued costs and fees (including fee retentions of $8,168 and $7,756,
respectively).............................................................. 120,594 115,647
-------- --------
Total..................................................................... $186,855 $207,519
======== ========
</TABLE>
Accrued recoverable costs and profits and accrued costs and fees under
customer contracts represent revenue earned under the percentage-of-completion
method but not yet billable under the terms of the contracts. These amounts are
billable based on the terms of the contract which include shipments of the
product, achievement of milestones or completion of the contract. Substantially
all of the accrued recoverable costs and profits and accrued costs and fees at
December 31, 1994 are to be billed during 1995.
Offset against accrued recoverable costs and profits are unliquidated
progress payments of $374,851,000 for 1994 and $470,604,000 for 1993.
(Page 9 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE C -- FIXED-PRICE CONTRACTS
Cost elements included in Fixed-Price Contracts in Progress are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993
- -------------- ------- -------
<S> <C> <C>
Production costs consisting of material, labor, and overhead:
Currently in process........................................................... $37,097 $31,002
Produced in advance of contractual coverage.................................... 7,732 497
Claim recovery recorded, requests for equitable adjustment and unnegotiated
change orders in dispute...................................................... 23,496 10,984
General and administrative costs............................................... 15,578 12,161
------- -------
$83,903 $54,644
======= =======
</TABLE>
Substantially all of the costs incurred in advance of negotiated contracts
at December 31, 1994 are expected to receive firm contractual coverage in 1995.
NOTE D -- DEBT
Long-term debt at December 31 is summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993
- -------------- ------- -------
<S> <C> <C>
Line of credit, at 78 percent of the bank's prime rate or 91 percent of the
bank's certificate of deposit rate at the Company's option...................... $ -- $24,000
Other............................................................................ 13,286 1,994
------- -------
Total.......................................................................... 13,286 25,994
Less current maturities.......................................................... 9,517 25,256
------- -------
$ 3,769 $ 738
======= =======
</TABLE>
As of December 31, 1994, the maturities of long-term debt were as follows:
<TABLE>
<S> <C>
1995............................................................... $ 9,517
1996............................................................... 704
1997............................................................... 679
1998............................................................... 323
1999............................................................... 323
Thereafter......................................................... 1,740
</TABLE>
The Company has one line of credit dated October 19, 1994, with total credit
available of $250 million. This credit agreement terminates October 19, 1998.
This agreement, with a group of seven banks, provides for a floating interest
rate based upon competitive bids from the member banks and repayment terms
negotiated at the time of each borrowing. The credit agreement provides for a
facility fee of .13 percent of the committed amount and requires that the
Company maintain a specified debt to equity ratio. The Company had no borrowings
under this line in 1994.
The Company has total lines of credit available under short-term borrowing
agreements of $110 million of which $9,195,000 and none were borrowed at
December 31, 1994 and 1993, respectively. The lines of credit provide for
interest at each bank's offered rate at the date of the advance. The short-term
average borrowing rate under these lines of credit was 4.9 percent and 6.5
percent in 1994 and 1993, respectively.
(Page 10 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE D -- DEBT (CONTINUED)
The Company made interest payments in 1994, 1993, and 1992, of $1,613,000,
$7,027,000, and $6,817,000, respectively.
NOTE E -- INCOME TAXES
A reconciliation of the provision for taxes on income to the U.S. statutory
rate follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
- -------------- ------------- ------------- -------------
<S> <C> <C> <C>
Federal income tax...................... $49,591 35% $63,096 35% $55,240 34%
ESOP dividends.......................... (1,847) (1) (1,695) (1) (1,512) (1)
Tax settlements......................... (2,804) (2) (1,532) (1) -- --
Effect of tax rate change on net
deferred tax
assets................................. -- -- (1,857) (1) -- --
Other................................... 1,109 1 397 -- (275) --
------- -- ------- -- ------- --
$46,049 33% $58,409 32% $53,453 33%
======= == ======= == ======= ==
</TABLE>
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at December 31, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
ASSETS 1994 1993
-------- --------
<S> <C> <C>
Retiree health care benefits............ $101,612 $103,077
Supplemental executive retirement
plan................................... 8,149 7,569
Pension plan minimum liabilities........ 5,095 7,571
Other................................... 10,799 5,954
-------- --------
Gross Deferred Tax Assets............... $125,655 $124,171
-------- --------
<CAPTION>
LIABILITIES
- -----------
<S> <C> <C>
Depreciation............................ $ 21,441 $ 21,489
Pension................................. 13,778 13,778
Safe harbor lease....................... 7,395 7,963
Other................................... 8,956 13,592
-------- --------
Gross Deferred Tax Liabilities.......... $ 51,570 $ 56,822
-------- --------
Net Asset............................... $ 74,085 $ 67,349
======== ========
</TABLE>
A valuation allowance has not been recorded for the deferred federal income
tax benefits as the Company believes it will generate sufficient taxable income
in the future to realize all of the recorded benefits.
Included in operating costs and expenses are state income and franchise
taxes of $6,595,000, $6,688,000, and $6,575,000 in 1994, 1993, and 1992,
respectively.
The Company made federal income tax payments in 1994, 1993, and 1992 of
$53,650,000, $55,450,000, and $62,027,000, respectively.
(Page 11 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE F -- ACCRUED LIABILITIES
(IN THOUSANDS) 1994 1993
- -------------- ------- -------
Accrued liabilities include the
following:
Compensation.......................... $27,679 $25,162
Advances from customers............... 7,451 1,088
Insurance............................. 9,436 8,559
Taxes, other than income.............. 7,776 8,511
Dividends............................. 10,171 9,269
Other accrued items................... 29,552 20,906
------- -------
$92,065 $73,495
======= =======
NOTE G -- STOCKHOLDERS' EQUITY
At December 31, 1994, there were 50,000,000 authorized shares of common
stock and 185,000 shares of authorized but undesignated preferred stock, par
value $20.
During 1994, the Board of Directors adopted a Stockholder Rights Plan to
distribute under certain circumstances, rights for each outstanding share of the
Company's common stock which entitles the shareholder to buy one one-thousandth
of a share of Series A Junior Participating Preferred Stock for $130, subject to
adjustment. The Rights will be exercisable if an acquiring person or group has
acquired 15 percent or more of the Company's common stock or commences a tender
offer which would result in beneficial ownership of 15 percent or more of the
Company's common stock.
The Rights expire on October 17, 2004 and may be redeemed by the Company for
$0.01 per right at any time until 10 days following a public announcement that a
15 percent position has been acquired.
If a person or group acquires 15 percent or more of the outstanding common
stock of the Company without the consent of the Board of Directors, the holder
of each Right not owned by the 15 percent or more shareholder would be entitled
to purchase, at the Right's then current exercise price, shares of the Company's
common stock having a value of twice the Right's then current exercise price.
The exercise price is the purchase price times the number of shares of common
stock associated with each Right (initially one).
In the event the Company is not the surviving corporation in a merger or
other business combination, or more than 50 percent of the Company's assets or
earnings power is sold or transferred, each holder of a Right will have the
right to receive upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right.
(Page 12 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE G -- STOCKHOLDERS' EQUITY (CONTINUED)
Stock option plans, which include both "nonqualified" and incentive stock
options, provide for options to be granted to key employees at prices equal to,
greater than or less than market value at the date of grant and for terms not to
exceed ten years. The options outstanding under the plans expire at various
dates through 2004. Information on stock options is as follows:
<TABLE>
<CAPTION>
1994 1993
---------------------------------------------------------------------------------------------
NUMBER NUMBER
OF AGGREGATE OF AGGREGATE
SHARES PRICES PER SHARE OPTION PRICES SHARES PRICES PER SHARE OPTION PRICES
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at be-
ginning of year.............. 2,649,890 $24.74 to $46.13 $95,248,300 3,133,152 $24.75 to $40.25 $99,670,400
Options granted............... 74,000 36.75 to 44.25 2,855,100 869,050 39.94 to 46.13 37,698,400
Options exercised............. (202,222) 24.75 to 45.44 (6,411,400) (1,336,949) 24.75 to 40.25 (41,568,000)
Options expired or
cancelled.................... (40,515) 33.57 to 43.38 (1,432,000) (15,363) 24.75 to 34.00 (552,500)
--------- ----------- --------- -----------
Options outstanding at end of
year......................... 2,481,153* $24.75 to $46.13 $90,260,000 2,649,890 $24.75 to $46.13 $95,248,300
========= =========== ========= ===========
Shares reserved for future op-
tions........................ 63,363*
=========
Shares exercisable at Decem-
ber 31, 1994................. 1,752,661
=========
<CAPTION>
1992
----------------------------------------------
NUMBER
OF AGGREGATE
SHARES PRICES PER SHARE OPTION PRICES
----------------------------------------------
<S> <C> <C> <C>
Options outstanding at be-
ginning of year.............. 3,629,432 $18.00 to $40.25 $114,403,800
Options granted............... 51,000 32.00 to 37.32 1,854,500
Options exercised............. (498,546) 18.00 to 34.63 (15,038,700)
Options expired or
cancelled.................... (48,734) 24.75 to 34.00 (1,549,200)
--------- ------------
Options outstanding at end of
year......................... 3,133,152 $24.75 to $40.25 $ 99,670,400
========= ============
Shares reserved for future op-
tions........................
Shares exercisable at Decem-
ber 31, 1994.................
</TABLE>
* Total common shares reserved for exercise of stock options at December 31,
1994 were 2,544,516.
NOTE H -- LEASE COMMITMENTS
Certain plant facilities are leased under agreements expiring at various
dates through 2017. Substantially all of the leases for plant facilities may be
renewed for up to seven years after the initial term of the lease. The
capitalized value of leases amounted to $15,140,000 and $17,461,000 at December
31, 1994 and 1993, respectively, and net book value amounted to approximately
$8,158,000 and $9,765,000 at December 31, 1994 and 1993, respectively.
Future minimum payments as of December 31, 1994 under the capital leases and
noncancelable operating leases with initial or remaining terms of one year or
more follow:
<TABLE>
<CAPTION>
CAPITAL OPERATING
(IN THOUSANDS) LEASES LEASES
- ------------- ------- --------
<S> <C> <C>
1995...................................................................................... $ 1,363 $ 18,890
1996...................................................................................... 1,215 15,722
1997...................................................................................... 1,245 12,593
1998...................................................................................... 1,165 9,982
1999...................................................................................... 1,205 9,292
Thereafter................................................................................ 3,583 44,502
------- --------
Total minimum lease payments.............................................................. 9,776 $110,981
========
Amounts representing interest............................................................. (2,607)
-------
Present value of net minimum lease payments............................................... $ 7,169
=======
</TABLE>
Lease expense on plant facilities, machinery and equipment amounted to
$18,380,000, $18,890,000, and $22,616,000 in 1994, 1993, and 1992, respectively.
(Page 13 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994
NOTE I -- EMPLOYEE BENEFITS
The Company has several noncontributory defined benefit pension plans
covering substantially all employees. Plans covering salaried and non-union
employees provide pension benefits that are based on the highest consecutive 60
months of an employee's compensation. Plans covering employees governed by
collective bargaining agreements generally provide pension benefits of stated
amounts for each year of service and provide for supplemental benefits for
employees who retire with 20 years of service before age 62. The Company's
funding policy for all plans is to make annual contributions generally equal to
the amounts accrued for pension expense, up to the maximum amount that can be
deducted for federal income tax purposes.
A summary of the components of net periodic expense for the Company's
defined benefit plans and Supplemental Executive Retirement Program (SERP),
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
- -------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during this period............................ $ 37,221 $ 31,985 $ 29,655
Interest cost on projected benefit obligation................................. 54,954 48,762 44,015
Actual loss (return) on plan assets........................................... 22,198 (19,027) (8,135)
Net amortization and deferral................................................. (66,598) (29,634) (42,644)
-------- -------- --------
Net periodic pension expense.................................................. $ 47,775 $ 32,086 $ 22,891
======== ======== ========
Assumptions used in the accounting for the plans were as follows:
- ------------------------------------------------------------------------------------------------------------------
Weighted-average discount rate................................................ 8.5% 7.45% 8.25%
Rates of increase in compensation levels -- defined benefit plans............. 5.0% 5.75% 5.75%
Rates of increase in compensation levels -- SERP.............................. 7.0% 7.0% 7.0%
Expected long-term rate of return on assets................................... 10.0% 10.0% 10.0%
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets for the Company's defined benefit pension plans,
excluding the SERP:
<TABLE>
<CAPTION>
1994 1993
--------------------------------- ---------------------------------
ACCUMULATED ASSETS EXCEED ACCUMULATED ASSETS EXCEED
BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED ACCUMULATED
(IN THOUSANDS) ASSETS BENEFITS ASSETS BENEFITS
- -------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation............... $(63,742) $(448,904) $(68,428) $(446,254)
======== ========= ======== =========
Accumulated benefit obligation.......... $(69,680) $(480,261) $(76,626) $(497,263)
======== ========= ======== =========
Projected benefit obligation............ $(71,066) $(576,217) $(81,133) $(644,950)
Plan assets at fair value................. 56,050 497,240 60,122 501,410
-------- --------- -------- ---------
Plan assets less than projected benefit
obligation............................... (15,016) (78,977) (21,011) (143,540)
Unrecognized net loss..................... 17,383 202,706 25,186 258,796
Prior service cost (credit) not yet
recognized in net periodic pension
cost..................................... 11,372 (22,908) 13,506 (1,556)
Unrecognized net asset at January 1, 1986,
net of amortization...................... (7,888) (66,336) (9,202) (77,211)
Adjustment to recognize minimum
liability................................ (20,132) -- (24,982) --
-------- --------- -------- ---------
(Accrued) Prepaid Pension Cost............ $(14,281) $ 34,485 $(16,503) $ 36,489
======== ========= ======== =========
</TABLE>
(Page 14 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE I -- EMPLOYEE BENEFITS (CONTINUED)
Approximately 53 percent of the defined benefit plans' assets at December
31, 1994 are invested in mutual funds, commercial paper, common stocks and other
assets, and 47 percent of the plans' assets are invested in real estate. The
market value of the Company's common stock held by the plans was $61,380,000 at
December 31, 1994.
The SERP, which is a nonqualified plan, provides certain officers with
defined pension benefits in excess of limits imposed by federal tax laws. See
Note K for discussion of the Trust established to fund pension benefits under
the SERP. The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheets for the Company's SERP:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993
- -------------- -------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................... $(15,284) $(17,767)
======== ========
Accumulated benefit obligation.............................. $(20,640) $(22,515)
======== ========
Projected benefit obligation................................ $(23,397) $(25,449)
Unrecognized net loss......................................... 4,131 8,578
Prior service cost not yet recognized in net periodic pension
cost......................................................... 520 318
Unrecognized net obligation at January 1, 1986, net of
amortization................................................. 2,153 2,512
Adjustment required to recognize minimum liability............ (4,047) (8,474)
-------- --------
Net pension liability of the SERP............................. $(20,640) $(22,515)
======== ========
</TABLE>
An Employee Stock Ownership Plan (ESOP), which includes substantially all
employees, provides for voluntary annual contributions in amounts determined by
the Board of Directors. The contributions may be in cash, common stock,
securities or other property. The annual contributions are to be at least
sufficient to discharge any current obligations of the Employee Stock Ownership
Trust. Contributions to the Trust are accrued quarterly and for 1994, 1993, and
1992 were $10,949,000, $11,709,000, and $13,045,000, respectively.
Certain subsidiaries sponsor separate 401(k) savings plans which provide for
voluntary annual contributions at the discretion of management. Contributions of
$6,250,000 $4,202,000, and $2,480,000 were made to the plans in 1994, 1993, and
1992, respectively.
During 1987, the Board of Directors approved a retirement policy for its
outside directors which provides for post retirement remuneration and death
benefits. The expense of the plan is being amortized over the anticipated
remaining terms of the directors.
NOTE J -- RETIREE HEALTH CARE AND LIFE INSURANCE BENEFITS
Certain health care and life insurance benefits are provided for retired
employees. Employees retiring between the ages of 55 and 65 with at least 10
years of service or who age vest under the E-Systems, Inc. Salaried Retirement
Plan are eligible for these benefits. Election to participate must be made as of
the date of retirement, and the retiree may elect to cover qualifying
dependents. If the retiree elects no medical coverage, it may not be added at a
later date.
Prior to 1992, the costs for providing retiree health care and life
insurance benefits were recognized as an expense as claims were paid. In 1992,
the company began to recognize the projected future
(Page 15 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE J -- RETIREE HEALTH CARE AND LIFE INSURANCE BENEFITS (CONTINUED)
cost of providing postretirement benefits, such as health care and life
insurance, as an expense during the employee's vesting service. Upon
implementation of this change, as of January 1, 1992, an accumulated
postretirement benefit obligation (APBO) of $270.5 million was recognized.
A summary of the components of net periodic retiree health care and life
insurance benefits cost follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
- -------------- ------- ------- -------
<S> <C> <C> <C>
Service cost......................................................... $ 7,665 $ 6,546 $ 6,962
Interest cost........................................................ 19,232 21,068 21,931
Actual loss (return) on plan assets.................................. 562 (1,930) --
Net amortization and deferral........................................ (4,499) 1,275 --
------- ------- -------
Net periodic postretirement benefits cost............................ $22,960 $26,959 $28,893
======= ======= =======
</TABLE>
In 1993, the Company began contributing to a Voluntary Employees'
Beneficiary Association trust and a 401(h) trust that will be used to partially
fund health care benefits for retirees. Benefits are funded to the extent
contributions are tax-deductible, which under current legislation is limited. In
general, retiree health care benefits are paid as covered expenses are incurred.
Plan assets consist of listed mutual funds, and the expected long-term rate of
return on plan assets is 9 percent. The funded status and amounts recognized in
the Consolidated Balance Sheets for the company's retiree health care and life
insurance plans are:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993
- -------------- -------- --------
<S> <C> <C>
Discount Rate.................................................. 8.5% 7.45%
Accumulated postretirement benefit obligation (APBO):
Retirees....................................................... $178,905 $164,354
Fully eligible active employees................................ 12,740 15,137
Active employees not yet eligible.............................. 74,606 86,655
Less fair value of plan assets................................. (27,605) (13,614)
-------- --------
Excess of APBO over assets..................................... 238,646 252,532
Unrecognized prior service cost................................ 12,547 13,383
Unrecognized net gain.......................................... 33,034 24,880
-------- --------
Accrued retiree health care and life insurance benefits
liability..................................................... $284,227 $290,795
======== ========
</TABLE>
The health care cost trend rates, used to calculate both net periodic cost
and the APBO, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31 COST TREND RATES
- ------------------------ ----------------
<S> <C>
1995-1996......................................................... 7.6%
1997-1998......................................................... 7.7%
1999.............................................................. 7.8%
2000 and beyond................................................... 5.8%
</TABLE>
(Page 16 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1994
NOTE J -- RETIREE HEALTH CARE AND LIFE INSURANCE BENEFITS (CONTINUED)
Increasing the assumed health care cost trend rates by one percentage point
in each year would increase the APBO as of December 31, 1994 by $25,352,000 and
the net periodic benefit cost for the year ended December 31, 1994 by
$3,042,000.
NOTE K -- INVESTMENTS
A trust was established to fund the payment of pension benefits under the
Supplemental Executive Retirement Program (SERP) (See Note I). Trust assets
totaled $45,000,000 and $42,134,000 at December 31, 1994 and 1993, respectively,
and are included in Deferred Charges and Other. The assets of the Trust are
invested at the discretion of the outside trustee, and at December 31, 1994,
consisted primarily of listed common stock, convertible securities, and fixed-
income investments. The Trust became irrevocable in 1988 subject only to the
claims of creditors in the event of insolvency of the Company.
In the first quarter of 1994, Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" was
adopted. This Statement defines the accounting treatment for marketable equity
and debt securities by their classification as either held-to-maturity, trading
or available-for-sale securities.
Trust investments are considered available-for-sale and are stated at fair
value, based on quoted market prices as determined by an outside trustee, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. In 1993, the marketable equity securities held by the
Trust were carried at the lower of cost or market. At December 31, 1993, the
outside trustee estimated the market value of the trust assets to be
$46,119,000. Interest, dividends and realized gains and losses of the Trust are
included in other income. The cost of securities sold is based on the average
cost method. The following is a summary of trust investments at December 31,
1994:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- -------------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. corporate securities............................... $ 3,532 $ 21 $ 314 $ 3,239
Other debt securities................................... 18,226 480 404 18,302
------- -------- ------- --------
Total debt securities............................... 21,758 501 718 21,541
Equity securities....................................... 22,811 2,244 1,596 23,459
------- -------- ------- --------
$44,569 $2,745 $2,314 $45,000
======= ======== ======= ========
</TABLE>
The gross realized gains on sales of available-for-sale securities totaled
$1,361,000 and gross realized losses totaled $329,000 for the year-ended
December 31, 1994.
(Page 17 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE K -- INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
(IN THOUSANDS) COST FAIR VALUE
- -------------- ------- -----------
<S> <C> <C>
Due in one to three years.............................................. $ 4,344 $ 4,342
Due after three years.................................................. 17,414 17,199
------- -------
21,758 21,541
Equity securities...................................................... 22,811 23,459
------- -------
$44,569 $45,000
======= =======
</TABLE>
NOTE L -- COMMITMENTS AND CONTINGENCIES
Changes to procurement regulations in recent years, as well as the
Government's drive against "fraud, waste and abuse" in defense procurement
systems have increased the complexity and cost of doing business with the
Government. Some of these changes have redefined the ability to recover various
standard business costs which the Government will not allow, in whole or in
part, as the cost of doing business on Government contracts. Other legal and
regulatory practices have increased the number of auditors, inspectors general
and investigators to the point that the Company, like every other major
Government contractor, is the constant subject of audits, investigations and
inquiries concerning various aspects of its business practices.
The Company regards charges of violation of government procurement
regulations as extremely serious and recognizes that such charges could have a
material adverse effect on the Company. If the Company is determined to be in
noncompliance with any of the applicable laws and regulations, the possibility
exists of penalties and debarment or suspension from receiving additional
Government contracts.
The Company has become aware through press reports of the filing of a civil
lawsuit, by a former employee, in the United States District Court for the
Southern District of Texas (Galveston), brought under the so-called QUI TAM
provisions of the False Claims Act, which permit an individual to bring suit in
the name of the Government and share in any recovery received by the Government.
This lawsuit is currently under seal while the Justice Department conducts an
investigation to determine whether it should intervene in the prosecution of the
case. The Company is cooperating in that investigation. Although the Company is
unaware of the specific nature of the allegations in the sealed lawsuit, the
Company is also unaware of any conduct which it believes would support a QUI TAM
recovery under the False Claims Act.
The Company is involved in other disagreements which are in the ordinary
course of the Company's business activities that are not expected to have a
material adverse effect on the Company's financial position. In addition, the
Company is involved in certain environmental investigation matters with
governmental agencies, and pending or threatened lawsuits and claims of current
and former employees alleging various age, race, sex and disability
discrimination or retaliatory discharge.
Management believes that if there is any impact of the foregoing matters on
the Company's financial condition it will not be material.
(Page 18 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE L -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the normal course of its business activities, the Company is required
under certain contracts to provide letters of credit which may be drawn down in
the event the Company fails to perform under the contracts. At December 31,
1994, letters of credit outstanding amounted to $55.6 million.
NOTE M -- SPECIAL CHARGES
Special charges reflect adjustments to the net realizable value of
investments in several nontraditional business areas such as mass storage,
medical technology and others. The charges of $24.5 million as they impacted
each business area are as follows: mass storage, $15.6 million; medical
technology, $7.1 million; and other areas, $1.8 million.
NOTE N -- OPERATIONS BY PRODUCT CATEGORY
The Company has five significant product segments. The Reconnaissance and
Surveillance category includes strategic systems for intelligence,
reconnaissance and surveillance applications and tactical systems relating to
electronic countermeasures and jamming and deception devices. The Command,
Control and Communications category includes communications equipment and
command and control systems which process data for ready analysis and decision
making. In the Navigation and Controls category, automatic control products for
aircraft, missile steering and tracking systems, and aircraft navigation aids
are developed and manufactured. The Company provides maintenance, repair and
modification services for aircraft of all types and other maintenance services
through its Aircraft Maintenance and Modification product segment. In 1994, a
determination was made to remove the Other Products and Services from the
Aircraft Maintenance and Modification segment; accordingly, the segment
information for 1993 and 1992 has been reclassified to conform to the 1994
presentation. Included in the Other Products and Services category is the mass
storage and retrieval product line (EMASS), medical technology capabilities,
data handling, depot maintenance and language processing capabilities. Also
included is the Company's transportation technology business which provides for
real-time location and status of mass transit vehicles. Product category
information is reported herein by product type since each category involves
several divisions. There are no sales between product categories.
Identifiable assets by product category include both assets specifically
identified with those operations and an allocable share of jointly used assets.
Corporate assets consist primarily of cash, deferred federal income taxes,
miscellaneous receivables, investments and fixed assets.
Sales to the United States Government from all categories amounted to
$1,848,326,000, $1,865,069,000, and $1,867,043,000, in 1994, 1993, and 1992,
respectively.
International sales which are primarily export sales to foreign governments
and from all categories are summarized by geographic area as follows:
(IN THOUSANDS) 1994 1993 1992
- -------------- -------- -------- --------
Middle East............................. $ 20,989 $ 63,610 $ 68,309
Europe.................................. 59,160 76,722 77,129
Australia and Pacific................... 20,156 19,436 22,921
Other regions........................... 28,023 18,990 12,371
-------- -------- --------
$128,328 $178,758 $180,730
======== ======== ========
(Page 19 of 28 Pages)
<PAGE>
E-SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE N -- OPERATIONS BY PRODUCT CATEGORY (CONTINUED)
Financial information by product category (in thousands) is summarized as
follows:
<TABLE>
<CAPTION>
UNAUDITED DEPRECIATION
------------------------ INCOME AND CAPITAL
1994 BOOKINGS BACKLOG NET SALES BEFORE TAX ASSETS AMORTIZATION EXPENDITURES
- ---- ---------- ---------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reconnaissance and
Surveillance.................... $1,060,557 $1,106,724 $1,125,025 $110,157 $ 630,844 $32,515 $26,587
Command, Control and
Communications.................. 548,993 593,227 385,599 37,005 152,092 8,653 6,397
Navigation and Controls.......... 22,117 82,856 55,000 9,138 40,889 1,966 2,256
Aircraft Maintenance &
Modification.................... 760,726 763,364 335,531 18,830 160,432 5,334 4,890
Other Products and Services...... 134,174 85,137 127,145 (21,659) 171,693 3,177 3,168
---------- ---------- ---------- --------- ---------- -------- --------
Total for Operating Segments... 2,526,567 2,631,308 2,028,300 153,471 1,155,950 51,645 43,298
Corporate........................ (9,370) 218,217 3,029 375
Interest expense................. (2,412)
---------- ---------- ---------- --------- ---------- -------- --------
Consolidated Total............. $2,526,567 $2,631,308 $2,028,300 $141,689 $1,374,167 $54,674 $43,673
========== ========== ========== ========= ========== ======== ========
<CAPTION>
1993
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Reconnaissance and
Surveillance.................... $ 996,875 $1,171,192 $1,259,651 $110,611 $ 648,277 $33,710 $33,085
Command, Control and
Communications.................. 344,001 429,833 389,852 32,805 160,408 9,992 8,619
Navigation and Controls.......... 30,202 115,739 63,518 14,093 27,344 2,431 1,958
Aircraft Maintenance &
Modification.................... 433,328 338,169 300,621 21,081 145,125 4,924 5,127
Other Products and Services...... 106,126 78,108 83,472 2,066 48,135 825 2,856
---------- ---------- ---------- --------- ---------- -------- --------
Total for Operating Segments... 1,910,532 2,133,041 2,097,114 180,656 1,029,289 51,882 51,645
Corporate........................ 5,830 249,884 2,976 441
Interest expense................. (6,211)
---------- ---------- ---------- --------- ---------- -------- --------
Consolidated Total............. $1,910,532 $2,133,041 $2,097,114 $180,275 $1,279,173 $54,858 $52,086
========== ========== ========== ========= ========== ======== ========
<CAPTION>
1992
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Reconnaissance and
Surveillance.................... $1,144,397 $1,433,968 $1,379,019 $114,339 $ 664,773 $34,889 $70,571
Command, Control and
Communications.................. 407,472 475,684 340,632 26,698 163,852 9,924 11,931
Navigation and Controls.......... 51,810 149,055 57,351 11,673 30,987 2,313 2,038
Aircraft Maintenance &
Modification.................... 224,525 205,462 252,841 14,704 117,625 3,683 5,220
Other Products and Services...... 77,115 55,454 65,070 3,322 36,444 223 319
---------- ---------- ---------- --------- ---------- -------- --------
Total for Operating Segments... 1,905,319 2,319,623 2,094,913 170,736 1,013,681 51,032 90,079
Corporate........................ (600) 239,892 2,551 911
Interest expense................. (7,664)
---------- ---------- ---------- --------- ---------- -------- --------
Consolidated Total............. $1,905,319 $2,319,623 $2,094,913 $162,472 $1,253,573 $53,583 $90,990
========== ========== ========== ========= ========== ======== ========
</TABLE>
(Page 20 of 28 Pages)
<PAGE>
(a)(2) Manually Signed Accountant's Report
REPORT OF INDEPENDENT AUDITORS
Stockholders and
Board of Directors of
E-Systems, Inc.
We have audited the consolidated balance sheets of E-Systems, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of E-Systems, Inc.
and subsidiaries at December 31, 1994 and 1993, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note J, in 1992 the method of accounting for retiree health
care and life insurance benefits was changed.
ERNST & YOUNG LLP
Dallas, Texas
January 26, 1995
(Page 21 of 28 Pages)
<PAGE>
(b)(1) Pro Forma Financial Information.
UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared by management of Raytheon Company (the "Corporation") from
its historical consolidated financial statements and from the historical
financial statements of E-Systems, Inc. The unaudited pro forma combined
condensed statement of earnings reflect adjustments as if the merger of RTN
Acquisition Corporation with and into E-Systems, Inc., with E-Systems, Inc.
continuing as a wholly-owned subsidiary of the Corporation (the "Transaction")
had occurred on January 1, 1994. The unaudited pro forma combined condensed
balance sheet reflects adjustments as if the Transaction had occurred on
December 31, 1994. See "Note 1 -- Basis of Presentation." The pro forma
adjustments described in the accompanying notes are based upon preliminary
estimates and certain assumptions that management of the Corporation believes
are reasonable in such circumstances.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the historical consolidated financial statements of the
Corporation and the related notes thereto. The unaudited pro forma combined
condensed financial statements should also be read in conjunction with the
historical financial statements of E-Systems, Inc. and the related notes
thereto.
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of what the financial position or results of operations
actually would have been if the Transaction had occurred on the applicable date
indicated. Moreover, they are not intended to be indicative of future results
of operations or financial position.
The combination of the Corporation and E-Systems, Inc. creates a company
with over $12 billion in annualized revenues. This combination is expected to
provide a small increase in the Corporation's earnings per share in 1995 based
on increased E-Systems, Inc. sales volume from its record order backlog at the
end of the first quarter of 1995 and growth synergies from the combination with
the Corporation, and an increasingly positive contribution to earnings per share
thereafter. The combination is consistent with the Corporation's strategy to
remain a strong diversified commercial company and a top tier competitor in
defense.
(Page 22 of 28 Pages)
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF EARNINGS
------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31, 1994
-------------------------------------------
Pro Forma Pro Forma
Raytheon E-Systems Adjustments Combined
-------- --------- ----------- ---------
(In millions, except per share data)
------------------------------------
<S> <C> <C> <C> <C>
Net Sales $10,013 $2,033 $ $12,046
Cost of Sales 7,753 1,637 (3) (2c) 9,368
Administration and selling expenses 912 173 (19) (2d) 1,085
Research and development expenses 269 55 324
Special Charge 24 24
Restructuring provision 250 250
------- ------ ----- -------
Operating Income 829 144 22 995
Interest expense, net 1 2 3
Acquisition interest expense 126 (2e) 126
Amortization of acquisition goodwill 42 (2f) 42
Other income 72 72
------- ------ ----- -------
Income before tax 900 142 (146) 896
Federal and foreign income taxes 303 46 (37) (2g) 312
------- ------ ----- -------
Net income $597 $96 $(183) $584
Earnings per common share
Outstanding shares $4.51 $4.41
Fully diluted $4.48 $4.38
Average common shares
Outstanding 132.4 132.4
Fully Diluted 133.2 133.2
</TABLE>
(Page 23 of 28 Pages)
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Raytheon E-Systems Adjustments Combined
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
In Millions
Assets
Current Assets:
Cash and marketable securities $202 $24 $(24) (2b) $202
Accounts receivable 976 976
Contracts in process 1,951 738 (124) (2d) 2,565
Inventories 1,499 1,499
Other 357 19 376
------ ------ ------ -------
Total Current Assets 4,985 781 (148) 5,618
Property, plant and equipment 3,691 532 (224) 3,999
Less accumulated depreciation 2,330 216 (216) 2,330
------ ------ ------ -------
1,361 316 (8) (2b) 1,669
Costs in excess of net assets acquired 725 102 (102) (2b) 2,426
1,701 (2b)
Other assets 324 175 (7) (2b) 538
(34) (2b)
80 (2b)
------ ------ ------ -------
Total Assets $7,395 $1,374 $1,482 $10,251
====== ====== ====== =======
Liabilities and stockholders equity
Current liabilities:
Notes payable and current portion of
long-term debt $1,033 $10 $700 (2b) $1,743
Advance payments 466 466
Accounts payable 895 95 990
Other 889 92 49 (2b) 1,030
------ ------ ------ -------
Total Current Liabilities 3,283 197 749 4,229
Long-term debt 25 4 1,531 (2b) 1,560
Other 159 336 84 (2b) 534
(45) (2b)
Stockholders equity:
Common stock at par 123 34 (34) 123
Additional pd in capital & other adj. 323 179 (179) 323
Retained earnings 3,482 624 (624) 3,482
------ ------ ------ -------
3,928 837 (837) 3,928
------ ------ ------ -------
$7,395 $1,374 $1,482 $10,251
====== ====== ====== =======
</TABLE>
(Page 24 of 28 Pages)
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma combined condensed statement of
earnings presents the historical results of operations of the Corporation and E-
Systems, Inc. for the year ended December 31, 1994, with pro forma adjustments
as if the Transaction had taken place on January 1, 1994. The unaudited pro
forma combined condensed balance sheet presents the historical balance sheets of
the Corporation and E-Systems, Inc. as of December 31, 1994, with pro forma
adjustments as if the Transaction had been consummated as of December 31, 1994,
in a transaction accounted for as a purchase in accordance with generally
accepted accounting principles.
Certain reclassifications have been made to the historical financial
statements of the Corporation and E-Systems, Inc. to conform to the pro forma
combined condensed financial statement presentation on a consistent basis.
2. PRO FORMA ADJUSTMENTS
The following adjustments give pro forma effect to the Transaction (Dollars
in Millions, except per share data):
(a) To record the Exchange Consideration at Closing:
(Assumed financing $700 million commercial paper,
$1,531 million medium and long term notes at a
blended rate of 5.5%)
Purchase Price $2,348
Less: Cash acquired with acquisition (24)
Cash received from exercise of stock options (93)
------
Net financing $2,231
(b) To adjust the assets and liabilities to their estimated
fair values:
Net assets of E-Systems, Inc. at December 31, 1994 $ 837
Cash used for financing (24)
Contracts in process valuation adjustments (124)
Writedown of real estate to fair market value (8)
Writedown of other assets to realizable value (7)
Establish pension liability (84)
Provision for the estimated costs of integrating operations (10)
Provision for legal contingencies (4)
Deferred tax benefits 80
(Page 25 of 28 Pages)
<PAGE>
Costs in excess of net assets of acquired business 1,701
Adjust liability for post retirement benefits other
than pensions 45
Eliminate prepaid pension expense (34)
Acquisition costs (35)
E-Systems, Inc. goodwill (102)
------
$2,231
(c) Adjustment to eliminate the amortization of intangible assets of E-
Systems, Inc. which would not have been incurred if the Transaction had
occurred on January 1, 1994
(d) Adjustment to reflect the effect on 1994 results relating to a net
reduction of accumulated contract costs resulting from valuing acquired
contracts in process at contract price, minus the estimated cost to
complete and an allowance for the Corporation's normal profit on its
efforts to complete such contracts, and other contract valuation
adjustments.
(e) Adjustments which represent additional estimated interest expense
resulting from the use of borrowings to finance the Transaction
(assumed blended borrowing rate: 5.5% based on 1994 historical rates).
(f) 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. The Corporation expects that any subsequent adjustment would
not materially affect the combined pro-forma results.
(g) The tax effect, using a 35% statutory rate, on the net pro forma
adjustments.
(Page 26 of 28 Pages)
<PAGE>
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of April 2, 1995, among the
Parent, the Purchaser and the Company is incorporated herein by
reference from Exhibit (c)(1) to the Tender Offer Statement on
Schedule 14D-1 dated April 3, 1995 and filed by the Parent and the
Purchaser with the Securities and Exchange Commission on April 3,
1995 (the "Schedule 14D-1").
2.2 Offer to Purchase dated April 3, 1995 by the Purchaser to purchase
all outstanding shares of Common Stock, par value $1.00 per share
(the "Shares") of the Company, and the associated Preferred Stock
Purchase Rights is incorporated herein by reference from Exhibit
(a)(1) to the Schedule 14D-1.
20 Press release issued by the Parent on May 1, 1995 announcing the
expiration of the Offer at 12:00 midnight New York City time, April
28, 1995, is incorporated herein by reference from Exhibit (a)(9) to
Amendment No. 4 dated May 1, 1995 to the Schedule 14D-1.
23 Consent of Ernst & Young LLP as Independent Auditors dated May 5,
1995.
(Page 27 of 28 Pages)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RAYTHEON COMPANY
Date: May 9, 1995 By:
--------------------------------
Name:
Title:
(Page 28 of 28 Pages)
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 23 -- Consent of Ernst & Young LLP as Independent Auditors
dated May 5, 1995
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 26, 1995, with respect to the
consolidated financial statements of E-Systems, Inc. and Subsidiaries as of
December 31, 1993 and December 31, 1994 and for the three years ended December
31, 1994, included or incorporated by reference in the Form 8-K of Raytheon
Company and Subsidiaries Consolidated.
We also consent to the use of our report dated January 26, 1995, with respect to
the consolidated financial statements of E-Systems, Inc. and Subsidiaries
incorporated by reference in the Registration Statements on Form S-8 (File Nos.
2-55841, 2-87308, 2-93903, 2-93871, 33-3720, 33-3723, 33-5650, 33-10811, 33-
14165, 33-15242, 33-15396, 33-15397, 33-15398, 33-21454, 33-21741, 33-22211, 33-
23449, 33-23751, 33-24695, 33-49041 and 33-49033) and on Form S-3 (File Nos. 33-
49045 and 33-49269) of Raytheon Company and Subsidiaries Consolidated.
Ernst & Young LLP
Dallas, Texas
May 5, 1995
