<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Raytheon Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class B Common Stock, par value $0.01 per share
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
248,000,000
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$54.7188. Calculated pursuant to Rule 457(c), based on the average of
the high and low prices reported in the consolidated reporting system
for common stock, par value $1.00 per share of Raytheon Company on
October 27, 1997.
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$13,570,260,000.00
-------------------------------------------------------------------------
(5) Total fee paid:
$4,112,200.73
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$4,112,200.73
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
No. 333-39861
----------------------------------------------------------------------
(3) Filing Party:
HE HOLDINGS, INC.
----------------------------------------------------------------------
(4) Date Filed:
November 10, 1997
----------------------------------------------------------------------
Notes:
<PAGE>
SOLICITATION OF WRITTEN CONSENT OF
RAYTHEON RAYTHEON COMPANY COMMON STOCKHOLDERS
PROPOSAL TO APPROVE
THE MERGER OF
RAYTHEON WITH HUGHES DEFENSE
We propose to merge Raytheon with the defense electronics business of
Hughes Electronics Corporation. Following the merger, the combined company,
which will be called "Raytheon Company," will have two classes of common
stock: Class A and Class B. Raytheon common stockholders will receive one
share of Class B common stock in the combined company for each share of
Raytheon common stock which they own. The Class B common stock received by
Raytheon stockholders will initially have 70% of the equity value of the
combined company. Shareholders of General Motors, the parent company of
Hughes Electronics, will receive Class A common stock, which will initially
account for the remaining 30% of the equity value of the combined company.
With respect to all actions other than the election and removal of
directors, the Class A and Class B stockholders will have equal voting
rights. With respect to the election or removal of directors only, the Class
B stockholders will have 19.9% of the voting power and the Class A
stockholders will have the remaining 80.1%.
When we merge, the Hughes defense business will be permitted to have
between $3.9 and $4.9 billion in debt. (The exact amount depends on
Raytheon's stock price, and would be $4.1 billion if the transaction were
completed on November 6, 1997.) The proceeds of this debt will be
contributed to affiliates of Hughes Electronics prior to the merger, but the
obligation to repay this debt will be assumed by the combined company.
YOUR APPROVAL OF THE MERGER PROPOSAL IS VERY IMPORTANT. IN ORDER TO
APPROVE THE MERGER PROPOSAL, PLEASE SIGN, DATE AND RETURN THE CONSENT CARD
ENCLOSED WITH THIS SOLICITATION STATEMENT/PROSPECTUS. YOUR BOARD OF
DIRECTORS UNANIMOUSLY URGES YOU TO APPROVE THE MERGER PROPOSAL.
Do not send your Raytheon stock certificates with the consent card. You
will receive further correspondence with instructions for exchanging your
Raytheon shares after the merger has been completed.
This Solicitation Statement/Prospectus provides you with detailed
information about the merger proposal, and we encourage you to read this
entire document carefully. In addition, you may obtain information about
Raytheon, GM and Hughes Defense from documents filed with the Securities and
Exchange Commission.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE CLASS B COMMON STOCK TO BE ISSUED UNDER THIS
SOLICITATION STATEMENT/PROSPECTUS OR DETERMINED IF THIS SOLICITATION
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This Solicitation Statement/Prospectus is dated November 10, 1997,
and was mailed to Raytheon's common stockholders on November 17, 1997.
<PAGE>
UNTIL 25 DAYS AFTER THE DATE OF MAILING THIS SOLICITATION
STATEMENT/PROSPECTUS, ALL DEALERS EFFECTING TRANSACTIONS IN CLASS B 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>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q.WHAT IS THE MERGER PROPOSAL?
A. The merger proposal is a proposal to merge Raytheon with the defense
electronics business of Hughes Electronics Corporation, a subsidiary of
General Motors.
In the merger:
. The combined company will be renamed "Raytheon Company," which we refer
to in this document as "New Raytheon." New Raytheon will have two classes
of common stock--Class A and Class B.
. You will receive one share of Class B common stock in exchange for each
share of Raytheon common stock that you own at the effective time of the
merger.
. GM stockholders will receive shares of Class A common stock prior to the
merger in connection with the spin-off of HE Holdings from GM.
. The exchange of Raytheon shares for Class B shares of New Raytheon will
be generally tax-free to you for U.S. federal income tax purposes.
. New Raytheon does not expect to make any changes in its dividend policies
either before or after the merger.
The Raytheon Board unanimously recommends that you approve the merger
proposal.
Q. WHAT IS THE DIFFERENCE BETWEEN THE CLASS B COMMON STOCK THAT I WILL RECEIVE
AND THE CLASS A COMMON STOCK?
A. The Class B common stock represents 70% of the outstanding equity value of
New Raytheon. The Class A common stock represents the remaining 30%. With
respect to all actions other than the election or removal of directors, the
Class A and Class B stockholders have equal voting rights. With respect to
the election or removal of directors only, the Class B stockholders have
19.9% of the voting power. The Class A stockholders have the remaining
80.1% of the voting power. The dual-class voting structure will not have
any immediate effect on the membership of the New Raytheon Board.
Q. WHAT IS THE INDICATED VALUE OF THE MERGER?
A. At the time we entered into the merger agreement, the parties valued the
transaction at $9.5 billion. This valuation consisted of equity in the form
of Class A common stock and debt, which is to be incurred by HE Holdings
prior to the Merger and assumed by New Raytheon after the merger. The value
of the equity portion is based on the price of Raytheon Common Stock during
the period before the closing of the merger. The amount of debt is
calculated by subtracting the equity value from $9.5 billion.
The total value of the transaction will continue to be $9.5 billion as long
as Raytheon's stock price is between $44.42 and $54.29 per share. However,
if the stock price is below this price range (less than $44.42 per share),
the debt will remain fixed at $4.9 billion and the total deal will be worth
less than $9.5 billion. If the stock price is above the range (greater than
$54.29 per share), the debt will remain fixed at $3.9 billion and the deal
will be worth more than $9.5 billion.
Assuming each of the various stock prices below, the total value of the
transaction, as well as the distribution between debt and equity, would be
as follows:
<TABLE>
<S> <C> <C> <C> <C>
Stock Price
$40.42 $44.42 $54.29 $58.29
----------------------------------------------------------------------------------------
(in billions)
Debt $ 4.9 $ 4.9 $ 3.9 $ 3.9
Equity 4.2 4.6 5.6 6.0
------ ------ ------ ------
Total Value $ 9.1 $ 9.5 $ 9.5 $ 9.9
</TABLE>
Based on Raytheon's common stock price of $52.31 on November 6, 1997, the
total value of the transaction is approximately $9.5 billion, consisting of
$4.1 billion of indebtedness and approximately $5.4 billion in equity value
to the Class A stockholders.
Q.WHO WILL RUN NEW RAYTHEON?
A. Dennis J. Picard, the current Chairman and Chief Executive Officer of
Raytheon, will become Chairman and Chief Executive Officer of New Raytheon.
The New Raytheon Board will consist of 15 members, 12 of whom currently
serve as directors of Raytheon.
QUESTIONS AND ANSWERS ABOUT THE MERGER
<PAGE>
Q. WHY IS RAYTHEON MERGING WITH HUGHES DEFENSE? HOW WILL I BENEFIT?
A. This merger, in addition to Raytheon's recent acquisition of the defense
business of Texas Instruments, means that you will have a stake in the
nation's third largest defense company and one of the largest providers of
defense electronics in the world. The combined company will be able to
compete more effectively in the current marketplace because of its increased
size and will have the ability to offer a broader range of products and
services to customers. We believe that this merger will provide greater
opportunities for long-term growth and will allow us to provide greater
returns to our shareholders.
Q.WHAT DO I NEED TO DO NOW?
A. Just mail your signed consent card in the enclosed return envelope as soon
as possible. Failure to submit an executed consent approving the merger
proposal will have the effect of a vote against the merger proposal. The
Raytheon Board unanimously recommends voting in favor of the proposed
merger.
Q. CAN I REVOKE MY CONSENT AFTER I HAVE MAILED IN MY SIGNED CONSENT CARD?
A. You can revoke your consent at any time prior to the approval of the merger
proposal. Approval will occur as soon as consents, representing a majority
of the outstanding shares of Raytheon are delivered, provided that this is
at least 20 days from the date this document is mailed to stockholders.
Revocations can be made by filing a written notice with the Secretary of
Raytheon stating that you would like to revoke your consent. Written
notices should be sent to the Secretary of Raytheon at the following
address: Raytheon Company, 141 Spring Street, Lexington, Massachusetts
02173, Attention: Secretary.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. We are working towards completing the merger as quickly as possible. We
currently expect to complete the merger before December 31, 1997. However,
if the merger is not completed before that date, the parties have agreed not
to assert prior to January 16, 1998 a right that they would otherwise have
to terminate the merger agreement for failure to have completed the merger
before December 31, 1997.
Q. ARE THERE ANY SPECIAL FACTORS WHICH I SHOULD CONSIDER IN MAKING MY DECISION
TO CONSENT TO THE MERGER PROPOSAL?
A. Yes. For a description of these factors, see "Risk Factors."
Q. WHERE CAN I FIND MORE INFORMATION?
A. For additional information about the merger, including information about how
to complete and return your consent, please contact Raytheon's transfer
agent at 1-800-360-4519.
QUESTIONS AND ANSWERS ABOUT THE MERGER
<PAGE>
QUESTIONS AND ANSWERS ABOUT EXCHANGING YOUR RAYTHEON SHARES
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. After the merger is completed, your shares of Class B common stock will
be registered in book-entry form. You will receive written instructions and
a letter of transmittal for turning in your existing Raytheon stock
certificates for cancellation. Once your stock certificate is received, you
will be mailed an account statement reflecting your ownership of such
shares of Class B common stock. If you prefer, you may receive a stock
certificate.
Q. WHAT IS BOOK-ENTRY OWNERSHIP?
A. Book-entry ownership, through the Direct Registration System, is direct
stock ownership-- just like holding a physical certificate--without the
inconvenience and risk associated with safeguarding physical certificates.
This system is similar to that used with investments in a mutual fund. You
are still the direct owner of your shares and will receive all dividends
and communications directly from New Raytheon. New Raytheon's transfer
agent, which serves as the recordkeeper for all stockholders, will
periodically mail a statement to you reflecting the number of shares you
own.
Q. WHY IS RAYTHEON USING BOOK-ENTRY OWNERSHIP?
A. Book-entry ownership provides benefits to both stockholders and New
Raytheon. By implementing book-entry ownership, New Raytheon's transfer
agent will be able to process share transfers and sales electronically, and
thereby reduce costs associated with the issuance and delivery of physical
certificates.
Stockholders using book-entry ownership will no longer need to maintain a
secure place for stock certificates and will no longer bear the risk of
losing, and the cost associated with replacing, a certificate. Book-entry
ownership also eliminates the requirement for the physical movement of
certificates at time of sale and the associated potential for loss.
Q. CAN I GET A CERTIFICATE FOR MY NEW RAYTHEON SHARES?
A. Yes. When you turn in your existing Raytheon stock certificates, you will
have the option of requesting a physical stock certificate for your new
Class B shares. In addition, you may request a stock certificate at any
time from the transfer agent by calling toll free 1-800-360-4519.
Q. WHO WILL BE THE TRANSFER AGENT FOR NEW RAYTHEON?
A. State Street Bank and Trust Company, the transfer agent for Raytheon, will
serve as the transfer agent for New Raytheon. The mailing address and
telephone number for State Street are:
State Street Bank and Trust Company
P.O. Box 8038
Boston, MA 02266-8038
Telephone: 1-800-360-4519
QUESTIONS AND ANSWERS ABOUT EXCHANGING YOUR RAYTHEON SHARES
<PAGE>
[LOGO OF RAYTHEON APPEARS HERE]
Dear Stockholder:
We propose to merge with the defense electronics business of Hughes
Electronics Corporation, a wholly owned subsidiary of General Motors
Corporation. The combined company will be named "Raytheon Company."
YOUR BOARD OF DIRECTORS UNANIMOUSLY URGES YOU TO APPROVE THE MERGER.
We want to merge with Hughes' defense business now because we think
it will help us to remain competitive in the U.S. defense industry. The
marked decline since the end of the Cold War in the U.S. defense
procurement budget and, at best, level defense spending projections for
the next several years has already spurred many of our competitors to
merge. These budget reductions have significantly altered the
competitive landscape. As a result, industry participants have been
forced to increase economies of scale and operating efficiencies in
order to remain cost-competitive and technologically innovative.
We believe that after the merger is completed, Raytheon will be able
to compete more successfully in this changing environment and maintain
its position as a leading contractor in what we strongly believe is the
best segment of the defense business for us--defense electronics. We
also believe that the merger will provide greater opportunities for
long-term growth and will allow us to provide greater returns to our
stockholders.
As a result of the merger and our recent acquisition of the defense
business of Texas Instruments, you will have a stake in the nation's
third largest defense contractor. The combined company will also be a
multi-industry, global enterprise with established commercial
businesses in aircraft, engineering and construction and commercial
electronics. In addition, Raytheon has the proven ability to apply
defense technologies in non-defense areas such as air traffic control,
wireless communications and environmental monitoring.
The merger is an exciting opportunity for our company and an
important step toward enabling us to compete most effectively in the
21st century. We look forward to the challenges ahead.
Sincerely,
/s/ Dennis J. Picard
Dennis J. Picard
Chairman and Chief Executive Officer
<PAGE>
To find any one of the principal 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
SUMMARY
RISK FACTORS
THE MERGER
FINANCIAL AND BUSINESS INFORMATION
NEW RAYTHEON
CAPITAL STOCK
CONSENT SOLICITATION
ADDITIONAL BACKGROUND INFORMATION
CERTAIN OTHER MATTERS
GLOSSARY
APPENDICES
<PAGE>
TABLE OF CONTENTS
SUMMARY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 1
The Companies........................................................... 1
The Merger and Related Transactions..................................... 1
Fairness Opinions....................................................... 1
Our Recommendation to Stockholders...................................... 1
Vote Required for Approval of the Merger................................ 1
No Appraisal Rights..................................................... 2
What Raytheon Stockholders Will Receive................................. 2
Stock Exchange Listing of New Raytheon Common Stock..................... 2
The Merger Agreement.................................................... 2
Certain U.S. Federal Income Tax Considerations.......................... 2
Certain Regulatory Matters.............................................. 2
Accounting Treatment.................................................... 2
Stock Ownership of Directors, Executive Officers and Five Percent
Stockholders........................................................... 3
Risk Factors............................................................ 3
Certain Historical and Pro Forma Per Share Data......................... 4
Summary Financial Data.................................................. 6
Summary Pro Forma Financial Data........................................ 9
RISK FACTORS
Risk Factors.............................................................. 11
No Assurance as to Market Price of Class B Common Stock; Dual-Class
Capital Structure...................................................... 11
Ability to Achieve Synergies from the Merger and the TI Acquisition..... 11
Certain Limitations on Changes in Control of New Raytheon; New
Raytheon's Ability to Participate in Future Defense Industry
Consolidation.......................................................... 11
THE MERGER
Background................................................................ 15
Reasons for the Merger.................................................. 15
Background of the Merger................................................ 15
Recommendation of the Raytheon Board.................................... 20
Fairness Opinions....................................................... 20
Additional Background Information....................................... 31
Certain Material U.S. Federal Income Tax Consequences................... 31
Certain Regulatory Requirements......................................... 32
Accounting Treatment.................................................... 33
No Appraisal Rights..................................................... 33
Description of the Pre-Merger Transactions................................ 34
General................................................................. 34
Hughes Reorganization................................................... 36
Hughes Defense Recapitalization......................................... 36
Hughes Defense Spin-Off................................................. 36
</TABLE>
i
TABLE OF CONTENTS
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Merger................................................. 37
General................................................................. 37
The Merger Agreement.................................................... 38
The Implementation Agreement............................................ 48
Separation and Transition Agreements...................................... 52
Introduction............................................................ 52
Summary of Master Separation Agreement.................................. 52
Summary of Hughes Separation Agreement.................................. 54
Summary of Tax Sharing Agreement........................................ 56
Summary of Other Agreements Contemplated by the Master Separation
Agreement.............................................................. 57
FINANCIAL AND BUSINESS INFORMATION
Recent Developments....................................................... 62
Sale of Portions of the Appliances Business............................. 62
TI Acquisition.......................................................... 62
Comparative Per Share Market Price and Dividend Information............... 63
Raytheon Selected Historical Financial Data............................... 64
Raytheon Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 65
Comparison: Third Quarter 1997 Versus 1996.............................. 65
Comparison: Nine Months 1997 Versus 1996................................ 67
Comparison: Fiscal 1996 To Fiscal 1995.................................. 69
Comparison: Fiscal 1995 To Fiscal 1994.................................. 75
Business of Raytheon...................................................... 79
Electronics............................................................. 79
Engineering and Construction............................................ 79
Aircraft................................................................ 80
Appliances.............................................................. 80
Hughes Defense Selected Combined Historical Financial Data................ 81
Hughes Defense Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 82
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996..................................................... 82
1996 Compared to 1995................................................... 83
1995 Compared to 1994................................................... 84
Business of Hughes Defense................................................ 86
Introduction............................................................ 86
Sensors & Communications Systems........................................ 87
Weapons Systems......................................................... 89
Information Systems..................................................... 91
Defense Systems......................................................... 93
U.S. Government Contracts............................................... 93
NEW RAYTHEON
New Raytheon Pro Forma Combined Condensed Financial Statements............ 95
Overview of New Raytheon Business......................................... 102
</TABLE>
ii
TABLE OF CONTENTS
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Directors and Management of New Raytheon Following the Merger............. 104
Directors and Executive Officers........................................ 104
Director and Executive Compensation..................................... 107
Treatment of Raytheon Stock Options..................................... 107
Stock Ownership of Directors, Executive Officers and Five Percent
Stockholders........................................................... 107
Change in Control Employment Agreements................................. 107
CAPITAL STOCK
New Raytheon Capital Stock................................................ 110
Introduction............................................................ 110
Common Stock............................................................ 110
Preferred Stock......................................................... 111
New Raytheon Rights Agreement........................................... 112
Limitation on New Raytheon Directors' Liability......................... 115
Section 203 of the Delaware General Corporation Law..................... 115
Limitations on Changes in Control....................................... 116
Stock Exchange Listing.................................................. 117
New Raytheon Transfer Agent............................................. 117
Comparison of Rights of Stockholders of Raytheon and New Raytheon......... 118
Size and Classification of the Board of Directors....................... 118
Voting Rights........................................................... 118
Cumulative Voting....................................................... 118
Dividends............................................................... 119
Advance Notice of Nominations........................................... 119
Actions by Stockholders................................................. 119
Special Meetings........................................................ 119
Removal of Directors.................................................... 120
Limitation on Directors' Liability...................................... 120
Indemnification of Directors............................................ 120
Rights Plan............................................................. 121
Transferability of Shares............................................... 121
Fair Price Provision.................................................... 121
Preferred Stock......................................................... 122
Subscription Rights..................................................... 122
Amendment of Certificate of Incorporation............................... 122
Amendment of By-Laws.................................................... 122
CONSENT SOLICITATION
Solicitation of Written Consent of Raytheon Common Stockholders........... 125
Matter to be Considered................................................. 125
Action by Written Consent............................................... 125
Record Date............................................................. 125
Consents; Revocation of Consents........................................ 125
Costs of Solicitation of Consents....................................... 126
Certain Plans........................................................... 126
</TABLE>
iii
TABLE OF CONTENTS
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
ADDITIONAL BACKGROUND INFORMATION
<S> <C>
Introduction............................................................... 128
Approvals by the Capital Stock Committee and the GM Board; Fairness of the
Raytheon Merger........................................................... 128
Raytheon Merger Fairness Opinion:
Goldman Sachs............................................................. 128
CERTAIN OTHER MATTERS
Cautionary Statement Concerning Forward-Looking Statements................. 135
Legal Matters.............................................................. 135
Experts.................................................................... 135
Stockholder Proposals...................................................... 136
Where You Can Find More Information........................................ 136
Glossary................................................................... 138
APPENDICES
APPENDIX A Merger Agreement............................................ A-1
APPENDIX B Fairness Opinions
Appendix B-I--Bear Stearns Fairness Opinion............ B-I-1
Appendix B-II--CSFB Fairness Opinion................... B-II-1
APPENDIX C Raytheon Consolidated Financial Statements.................. C-1
APPENDIX D Hughes Defense Combined Financial Statements................ D-1
APPENDIX E TI Defense Financial Statements............................. E-1
</TABLE>
* * * *
iv
TABLE OF CONTENTS
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you.
We have provided the definitions for capitalized terms used throughout this
document in the Glossary, which is printed on green paper to help you locate it
quickly.
THE COMPANIES
RAYTHEON COMPANY
141 Spring Street
Lexington, Massachusetts 02173
Raytheon is an international, high technology company which operates in the
following principal businesses: commercial and defense electronics; engineering
and construction; and aircraft.
HE HOLDINGS, INC.
7200 Hughes Terrace
Los Angeles, California 90045-0066
HE Holdings is a premier supplier of advanced defense electronics systems and
services, principally in airborne and ground-based radars, ground, air and
ship-launched missiles, tactical communications, training simulators and
services and naval systems.
When Raytheon and HE Holdings merge, HE Holdings will consist of the defense
electronics business of Hughes Electronics Corporation, which we refer to as
"Hughes Defense."
THE MERGER AND RELATED TRANSACTIONS
Raytheon has agreed to merge with Hughes Defense. Since Hughes Defense is
only one of numerous businesses conducted by HEC, a number of transactions,
described further herein, are required to separate Hughes Defense from HEC's
other businesses. Immediately following the completion of these transactions,
Raytheon will merge with Hughes Defense, with the combined company renamed
"Raytheon Company."
FAIRNESS OPINIONS
Bear Stearns, financial advisor to Raytheon, has rendered its written opinion
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 is fair to Raytheon
stockholders from a financial point of view. The opinion of Bear Stearns does
not address any other aspect of the proposed merger or any related transactions
and does not constitute a recommendation to any stockholder as to whether such
stockholder should consent to the approval of the merger proposal.
Credit Suisse First Boston Corporation (CSFB), financial advisor to Raytheon,
has rendered its written opinion to the effect that, as of the date of the
opinion and based upon and subject to certain matters stated in the opinion,
the consideration to be received in the merger (i.e., the Class B shares) was
fair to the holders of Raytheon common stock from a financial point of view.
The opinion of CSFB does not address any other aspect of the proposed merger or
any related transactions and does not constitute a recommendation to any
stockholder as to whether such stockholder should consent to the approval of
the merger proposal.
Copies of the opinions of Bear Stearns and CSFB are attached as Appendices B-
I and B-II and should be read carefully as to the procedures followed,
assumptions made, matters considered and limitations on the review undertaken
in connection with such opinions.
OUR RECOMMENDATION TO STOCKHOLDERS
The Raytheon Board believes that the merger is in your best interest and in
Raytheon's best interest and unanimously recommends that you APPROVE the merger
proposal.
VOTE REQUIRED FOR APPROVAL OF THE MERGER
In order to complete the merger, Raytheon must obtain the consent of the
holders of a
1
SUMMARY
<PAGE>
majority of the outstanding shares of Raytheon common stock.
NO APPRAISAL RIGHTS
You will not be entitled to appraisal rights in connection with the merger.
WHAT RAYTHEON STOCKHOLDERS WILL RECEIVE
You will receive one share of the Class B common stock of New Raytheon for
each share of Raytheon common stock which you own as of the record date.
STOCK EXCHANGE LISTING OF NEW RAYTHEON COMMON STOCK
New Raytheon will apply to list the shares of both the Class A common stock
and the Class B common stock on the NYSE, the CSE and the PSE. We expect the
trading symbols will be RTNA and RTNB.
THE MERGER AGREEMENT
The merger agreement is an agreement between HE Holdings and Raytheon
providing for the merger of Raytheon with HE Holdings, with HE Holdings as the
surviving corporation. As a result of the merger, the separate corporate
existence of Raytheon will cease and HE Holdings will continue its existence
under the laws of the State of Delaware and its name will be changed to
"Raytheon Company."
The closing under the merger agreement will occur as soon as practicable
after the satisfaction or waiver of all of the conditions specified in the
merger agreement.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
We expect the merger to be a tax-free reorganization in which no gain or loss
will be recognized by Raytheon or you. One condition to the completion of the
merger is that Raytheon receive an opinion of counsel to the effect that the
merger will constitute a tax-free reorganization. Subject to the limitations
and qualifications referred to in its opinion, Wachtell, Lipton, Rosen & Katz,
counsel to Raytheon, is of the opinion that the merger will qualify as a tax-
free reorganization and, as a result, no gain or loss will be recognized by
Raytheon or you as a result of the merger.
CERTAIN REGULATORY MATTERS
In order to complete the merger, we, GM and HE Holdings must make certain
filings and receive certain authorizations from various governmental agencies,
both in the United States and internationally. These filings, notifications and
authorizations relate primarily to competition and securities law issues.
The merger is subject to the requirements of the Hart-Scott-Rodino Act. Under
the Hart-Scott-Rodino Act, we cannot consummate the merger until certain
required information and materials have been furnished to the Department of
Justice and the requisite waiting period has expired or is terminated. On
October 16, 1997, Raytheon, GM and HE Holdings entered into an agreement with
the Department of Justice regarding the basis on which the merger can proceed.
The agreement requires certain divestitures by Raytheon and imposes certain
other restrictions of Raytheon's businesses, none of which is expected to have
a material effect on Raytheon. On October 24, 1997, the United States District
Court for the District of Columbia entered an order requiring the parties to
abide by the terms of the agreement, thereby permitting us to complete the
merger.
We believe that, other than the foregoing, 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 complete the
merger.
ACCOUNTING TREATMENT
The merger will be accounted for as a purchase by Raytheon of HE Holdings.
New Raytheon will record as goodwill the excess, if any, of the value of the
consideration to be
2
SUMMARY
<PAGE>
received by General Motors, and its common stockholders in the merger,
including the costs of the merger, over the fair values of the HE Holdings
assets and liabilities.
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND FIVE PERCENT STOCKHOLDERS
No director or executive officer is expected to own more than 1% of the
outstanding shares of New Raytheon. The directors and executive officers of New
Raytheon as a group are expected to beneficially own less than 5% of the
outstanding shares of New Raytheon. No person is expected to beneficially own
more than 10% of the outstanding shares of New Raytheon (based upon publicly
available information).
RISK FACTORS
For a description of certain things which you should consider in connection
with the merger in addition to the other information set forth in this
document, see "Risk Factors."
3
SUMMARY
<PAGE>
CERTAIN HISTORICAL AND PRO FORMA PER SHARE DATA
The following tables present certain historical per share data for Raytheon
Common Stock and certain pro forma per share data for both classes of New
Raytheon Common Stock. These historical per share data as of and for the year
ended December 31, 1996 have been derived from Raytheon's financial statements
and should be read in conjunction with such financial statements (including the
notes thereto) and Raytheon Management's Discussion and Analysis of Financial
Condition and Results of Operations. The historical per share data for Raytheon
Common Stock as of and for the nine months ended September 28, 1997 have been
derived from Raytheon's unaudited consolidated financial statements for such
period, which in the opinion of Raytheon management, reflect all adjustments
(consisting of only normal recurring items) that are necessary to fairly
present the historical per share data for such period.
The pro forma per share data for both classes of New Raytheon Common Stock as
of and for the nine months ended September 28, 1997 and as of and for the year
ended December 31, 1996 give effect to the Merger and the TI Acquisition. The
pro forma earnings per share data for both classes of New Raytheon Common Stock
have been derived from, and should be read in conjunction with, the financial
data set forth under "New Raytheon Unaudited Pro Forma Combined Condensed
Financial Statements." 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. The pro forma per share data for both classes of New Raytheon
Common Stock are not necessarily indicative of future operating results.
4
SUMMARY
<PAGE>
RAYTHEON COMMON STOCK HISTORICAL PER SHARE DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE MONTHS AS OF AND FOR THE YEAR ENDED
ENDED SEPTEMBER 28, 1997 DECEMBER 31, 1996
----------------------------- ----------------------------
<S> <C> <C>
Book value per share.... $21.22 $19.46
Cash dividends per
share.................. .60 .80
Earnings per share...... 2.56 3.21
</TABLE>
NEW RAYTHEON CLASS B COMMON STOCK PRO FORMA PER SHARE DATA (a)
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE MONTHS AS OF AND FOR THE YEAR ENDED
ENDED SEPTEMBER 28, 1997 DECEMBER 31, 1996
----------------------------- ----------------------------
<S> <C> <C>
Book value per share
(b).................... $29.73 $28.42
Cash dividends per
share.................. .60 .80
Earnings per share...... 2.06 2.65
</TABLE>
NEW RAYTHEON CLASS A COMMON STOCK PRO FORMA PER SHARE DATA (a)
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE MONTHS AS OF AND FOR THE YEAR ENDED
ENDED SEPTEMBER 28, 1997 DECEMBER 31, 1996
----------------------------- ----------------------------
<S> <C> <C>
Book value per share
(b).................... $29.73 $28.42
Cash dividends per
share.................. .60 .80
Earnings per share...... 2.06 2.65
</TABLE>
- ------
(a) Pro forma amounts include adjustments to reflect the impact of the Hughes
Defense Spin-Off, the Merger and the TI Acquisition.
(b) Calculated 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 the consummation of the Hughes Defense Spin-Off and the
Merger.
On January 16, 1997, the day on which Raytheon announced that it had entered
into the agreements relating to the Merger, the closing price of Raytheon
Common Stock, as reported on the NYSE Composite Tape, was $48.50, and the
aggregate market value of the outstanding Raytheon Common Stock was
approximately $11.5 billion.
On November 6, 1997, the most recent practicable date prior to the printing
of this Solicitation Statement/Prospectus, the closing price of the Raytheon
Common Stock, as reported on the NYSE Composite Tape, was $52.31, and the
aggregate market value of the outstanding Raytheon Common Stock was
approximately $12.4 billion.
5
SUMMARY
<PAGE>
SUMMARY FINANCIAL DATA
The following tables present financial data for Raytheon, Raytheon TI Systems
and Hughes Defense. The September 28, 1997 data have been derived from the
books and records of each company and are unaudited. The summary financial data
for Raytheon for the nine months ended September 28, 1997 includes the
financial results for Raytheon TI Systems from July 11, 1997. The Raytheon TI
Systems summary financial data includes financial results for the six month
period ending June 29, 1997. The Raytheon TI Systems financial results for the
period from June 30, 1997 to July 10, 1997 were not material. In the opinion of
management, the unaudited consolidated interim financial data 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 fiscal year-end financial data have been derived from the audited
financial statements of Raytheon, Hughes Defense and Raytheon TI Systems
attached as Appendices C, D and E, respectively, and should be read in
conjunction with such financial statements and notes thereto.
RAYTHEON SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FISCAL YEAR ENDED
SEPTEMBER 28, DECEMBER 31,
------------- -------------------------
1997 1996 1995 1994
------------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Net sales........................ $ 9,669 $12,331 $11,804 $10,098
Operating income................. 1,141 1,198 1,118 896
Interest expense................. (263) (256) (197) (49)
Net income....................... 604 762 793 597
OTHER DATA:
EBITDA (a)....................... $ 1,478 $ 1,607 $ 1,733 $ 1,233
Depreciation and amortization.... 325 369 371 304
Capital expenditures............. 305 406 329 267
Net cash provided by (used in):
Operating activities........... 294 291 1,175 1,158
Investing activities........... (2,896) (937) (2,323) (343)
Financing activities........... 2,735 575 1,155 (804)
<CAPTION>
AS OF
SEPTEMBER 28, AS OF DECEMBER 31,
------------- -------------------------
1997 1996 1995 1994
------------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net working capital.............. $ 1,209 $ 912 $ 1,585 $ 1,702
Total assets..................... 15,256 11,126 9,841 7,395
Notes payable and current portion
of long-term debt............... 2,175 2,227 1,216 1,033
Long-term debt and capitalized
leases.......................... 4,386 1,501 1,488 25
Stockholders' equity............. 5,015 4,598 4,292 3,928
</TABLE>
- ------
(a) "EBITDA" represents income before interest, income taxes, depreciation
(including certain amounts allocated to corporate overhead that are
included in general and administrative expenses) and amortization. EBITDA
is not intended to represent cash flow or any other measure of performance
reported in accordance with generally accepted accounting principles. The
Company has included EBITDA as it understands that EBITDA is used by
certain investors as one measure of a company's ability to service debt.
6
SUMMARY
<PAGE>
RAYTHEON TI SYSTEMS SUMMARY HISTORICAL FINANCIAL DATA (a)
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR ENDED
ENDED JUNE 29, DECEMBER 31,
-------------- -----------------------
1997 1996 1995 1994
-------------- ------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................. $824 $1,800 $1,739 $1,725
Operating income...................... 87 178 155 157
Interest expense...................... -- -- -- --
Net income............................ 53 109 92 99
OTHER DATA:
EBITDA................................ $130 $ 262 $ 226 $ 241
Depreciation and amortization......... 45 87 77 86
Capital expenditures.................. 16 80 89 56
NET CASH PROVIDED BY (USED IN):
Operating activities.................. $ 90 $ 86 $ 31 $ 249
Investing activities.................. (16) (80) (146) (56)
Financing activities.................. (74) (6) 115 (193)
<CAPTION>
AS OF JUNE 29, AS OF DECEMBER 31,
-------------- -----------------------
1997 1996 1995 1994(b)
-------------- ------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net working capital................... $183 $ 220 $ 96 --
Total assets.......................... 806 837 737 --
Notes payable and current portion of
long-term debt....................... -- -- -- --
Long-term debt and capitalized leases. -- -- -- --
Net assets............................ 354 384 278 --
</TABLE>
- ------
(a)Formerly TI Defense.
(b)Not available.
7
SUMMARY
<PAGE>
HUGHES DEFENSE SUMMARY COMBINED HISTORICAL FINANCIAL DATA
The financial statements of Hughes Defense included as Appendix D to this
document have been prepared in accordance with generally accepted accounting
principles and reflect the businesses to be included in HE Holdings after
giving effect to the Hughes Reorganization and immediately prior to the Merger.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- -----------------------
1997 1996 1995 1994
------------------- ------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Net sales.................... $5,157 $6,383 $5,922 $5,896
Operating income............. 446 603 587 545
Interest expense............. 72 92 76 65
Net income................... 207 281 319 269
OTHER DATA:
EBITDA....................... $ 648 $ 859 $ 870 $ 833
Depreciation and
amortization................ 192 247 241 266
Capital expenditures......... 96 178 99 174
NET CASH PROVIDED BY (USED IN):
Operating activities......... (32.3) 353 333 464
Investing activities......... (219.9) (168) (560) (83)
Financing activities......... 265.4 (141) 183 (324)
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
------------------- -----------------------
1997 1996 1995 1994(A)
------------------- ------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net working capital.......... $1,512 $1,019 $ 920 --
Total assets................. 7,162 7,028 7,026 --
Notes payable and current
portion of long-term debt... 119 94 84 --
Long-term debt and
capitalized leases.......... 32 34 50 --
Parent company's net
investment.................. 5,266 4,823 4,680 --
</TABLE>
- ------
(a) Not available.
8
SUMMARY
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following tables set forth a summary of the unaudited pro forma financial
data of New Raytheon, which data were derived from the New Raytheon pro forma
combined condensed financial statements and the notes thereto. The pro forma
statement of earnings data give effect to the TI Acquisition and the Merger as
if each had occurred on January 1, 1996. The balance sheet data for Raytheon
includes Raytheon TI Systems data for the period ending September 28, 1997. The
pro forma balance sheet data give effect to the Merger as if it had occurred on
September 28, 1997.
The information below should be read in conjunction with the New Raytheon pro
forma combined condensed financial statements and the notes thereto. The pro
forma financial data are not necessarily indicative of what Raytheon's actual
financial position or results of operations would have been if the transactions
had occurred on the applicable date indicated. Moreover, they are not intended
to be indicative of future results of operations or financial position. See
"New Raytheon--New Raytheon Pro Forma Combined Condensed Financial Statements."
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA COMBINED PRO FORMA COMBINED
RAYTHEON- RAYTHEON-
RAYTHEON TI RAYTHEON TI SYSTEMS-
RAYTHEON SYSTEMS HUGHES DEFENSE
-------- ------------------ --------------------
(IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales(a)................ $12,331 $14,131 $20,514
Operating income............ 1,198 1,377 2,006
Income before tax........... 1,084 1,062 1,400
Net income(a)............... 762 743 901
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
<TABLE>
<CAPTION>
PRO FORMA COMBINED PRO FORMA COMBINED
RAYTHEON- RAYTHEON-
RAYTHEON TI RAYTHEON TI SYSTEMS-
RAYTHEON SYSTEMS HUGHES DEFENSE
-------- ------------------ --------------------
(IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF EARNINGS
DATA:
Net sales(a)........... $ 9,669 $10,493 $15,650
Operating income....... 1,141 1,213 1,683
Income before tax...... 914 874 1,129
Net income(a).......... 604 576 697
BALANCE SHEET DATA (END
OF PERIOD):
Total assets........... $15,256 $15,256 $28,059
Total debt............. 6,561 6,561 11,152
Stockholders' equity... 5,015 5,015 10,080
</TABLE>
- ------
(a) The pro forma net sales and net income data do not include any synergies
which may be realized as a result of the Merger.
9
SUMMARY
<PAGE>
RISK FACTORS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RISK FACTORS........................................................... 11
No Assurance as to Market Price of Class B Common Stock;
Dual-Class Capital Structure........................................ 11
Ability to Achieve Synergies from the Merger and the TI Acquisition.. 11
Certain Limitations on Changes in Control of New Raytheon; New
Raytheon's Ability to Participate in Future Defense Industry
Consolidation....................................................... 11
</TABLE>
10
RISK FACTORS
<PAGE>
RISK FACTORS
NO ASSURANCE AS TO MARKET PRICE OF CLASS B COMMON STOCK; DUAL-CLASS CAPITAL
STRUCTURE
Before consummation of the Merger, there will be no trading market for the
Class B Common Stock to be distributed to you, and we cannot make any assurance
as to the trading prices of the Class B Common Stock after completion of the
Merger. Trading prices of the Class B Common Stock may be volatile while the
securities are being fully distributed and while an orderly market is
developing and we cannot assure you that such a market will develop. A number
of factors may influence the price of the Class B Common Stock in the
marketplace, one of which is the dual-class capital structure of New Raytheon.
The dual-class capitalization of New Raytheon is designed, among other
things, to allow the spin-off of HE Holdings from GM and the Merger to be
consummated as tax-free transactions for U.S. federal income tax purposes.
However, the dual-class capitalization may have certain adverse consequences.
In particular, the disparity between the voting power of Class A Common Stock
and Class B Common Stock may have a depressive effect on the market price of
your Class B Common Stock. Furthermore, while we expect the shares of 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 we cannot make any assurance that such policies will allow for the
continued listing of the Class B Common Stock, nor can we make any assurance as
to the trading prices or volatility of the Class B Common Stock if traded on
the NYSE.
ABILITY TO ACHIEVE SYNERGIES FROM THE MERGER AND THE TI ACQUISITION
The Merger involves the integration of two previously independent companies
with separate operations and management. As a result of the TI Acquisition, the
operations of Raytheon TI Systems also must be integrated. 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 Merger and the TI Acquisition will require,
among other things, integration of the Hughes Defense and Raytheon TI Systems
organizations, business infrastructure and products with those of Raytheon 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 anticipates that such integration will result
in New Raytheon taking a restructuring charge in 1997, although such amount is
not currently determinable.
CERTAIN LIMITATIONS ON CHANGES IN CONTROL OF NEW RAYTHEON; NEW RAYTHEON'S
ABILITY TO PARTICIPATE IN FUTURE DEFENSE INDUSTRY CONSOLIDATION
The New Raytheon Certificate 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. 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
acquirers 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 could have the same effect. See "Capital Stock--New Raytheon Capital
Stock" and "--Comparison of Rights of Stockholders of Raytheon and New
Raytheon."
Furthermore, in order to preserve the tax-free status of the Hughes Defense
Spin-Off, the Hughes Telecom Spin-Off and the Merger, New Raytheon will be
subject to certain covenants under the Hughes Separation
11
RISK FACTORS
<PAGE>
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 GM 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 Merger) determined that such transactions and activities would
not jeopardize the tax-free status of any of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off and the Merger. Such actions and activities include (i)
certain acquisition transactions, stock issuance transactions and stock buyback
transactions for two years following the Merger; (ii) certain
recapitalizations, reincorporations and similar transactions affecting the
rights and privileges of New Raytheon Common Stock; and (iii) certain
amendments or changes to the New Raytheon Certificate or the New Raytheon By-
Laws for three years following the Merger. Such prohibitions, to which Raytheon
is not currently 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 "The Merger--
Separation and Transition Arrangements--Summary of Hughes Separation
Agreement."
12
RISK FACTORS
<PAGE>
THE MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BACKGROUND............................................................. 15
Reasons for the Merger............................................... 15
Background of the Merger............................................. 15
Raytheon's Historical Focus on Maintaining a Strong Defense
Business.......................................................... 15
Raytheon's Review of Strategic Alternatives Including the Merger... 15
Development of the Merger.......................................... 16
Recommendation of the Raytheon Board................................. 20
Fairness Opinions.................................................... 20
Bear Stearns Fairness Opinion...................................... 20
CSFB Fairness Opinion.............................................. 26
Additional Background Information.................................... 31
Certain Material U.S. Federal Income Tax Consequences................ 31
To Raytheon Stockholders........................................... 31
To New Raytheon.................................................... 32
Certain Regulatory Requirements...................................... 32
Accounting Treatment................................................. 33
No Appraisal Rights.................................................. 33
DESCRIPTION OF THE PRE-MERGER TRANSACTIONS............................. 34
General.............................................................. 34
Hughes Reorganization................................................ 36
Hughes Defense Recapitalization...................................... 36
Hughes Defense Spin-Off.............................................. 36
DESCRIPTION OF THE MERGER.............................................. 37
General.............................................................. 37
Overview........................................................... 37
Indicated Value of the Merger to Raytheon and Raytheon Common
Stockholders...................................................... 37
Post-Closing Adjustment............................................ 38
The Merger Agreement................................................. 38
General............................................................ 38
Consideration to be Received in the Merger......................... 38
Boards, Committees and Officers.................................... 39
Certain Covenants.................................................. 39
Conditions......................................................... 42
Representations and Warranties; No Survival........................ 44
Waiver and Amendment............................................... 44
Termination........................................................ 44
Effect of Termination; Termination Fees............................ 45
Indemnification.................................................... 47
The Implementation Agreement......................................... 48
General............................................................ 48
The Pre-Merger Transactions........................................ 48
Covenants of GM.................................................... 48
Certain Other Covenants............................................ 49
Representations and Warranties; No Survival........................ 49
Waiver and Amendment............................................... 50
Termination of the Implementation Agreement........................ 50
Effect of Termination.............................................. 51
</TABLE>
13
THE MERGER
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SEPARATION AND TRANSITION ARRANGEMENTS................................. 52
Introduction......................................................... 52
Summary of Master Separation Agreement............................... 52
General............................................................ 52
Asset and Liability Transfers...................................... 53
Indemnification.................................................... 53
Post-Closing Adjustment............................................ 54
Summary of Hughes Separation Agreement............................... 54
General............................................................ 54
Indemnification.................................................... 55
Summary of Tax Sharing Agreement..................................... 56
Summary of Other Agreements Contemplated by the Master Separation
Agreement........................................................... 57
Intellectual Property.............................................. 57
Hughes Research Labs............................................... 58
Real Estate and Environmental Matters.............................. 58
Employee Matters; Pension Plan Litigation.......................... 59
Stock Options...................................................... 60
Insurance.......................................................... 60
Supply Arrangements................................................ 60
Transition Services................................................ 60
Corporate Purchasing............................................... 60
</TABLE>
14
THE MERGER
<PAGE>
BACKGROUND
REASONS FOR THE MERGER
The Merger is designed to address certain strategic challenges facing
Raytheon and to enhance the long-term value to its common stockholders.
Although the Raytheon Board considered and evaluated a number of alternatives
which would have focused on businesses of Raytheon other than the defense
electronics business, the Raytheon Board concluded that the financial,
investment and operating characteristics of the defense industry as a whole,
and the defense electronics segment in particular, offer the best opportunity
for long-term growth, and, further, that this potential growth could only be
realized through the consummation of a major strategic acquisition.
The immediate impetus for the timing of the Merger is the major consolidation
that has taken place in the U.S. defense industry and the significant
opportunities for Raytheon presented by the Merger with Hughes Defense. This
industry consolidation is the result of a continued and marked decline since
1986 in the U.S. defense budget and, at best, level 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
Raytheon's defense electronics business, has declined steadily from
approximately $120.0 billion (1996 dollars) in 1986 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. As a result,
industry participants have been forced to increase economies of scale and
operating efficiencies in order to remain cost-competitive.
Further, the market rationalizations have resulted not only in fewer programs
but also significantly reduced production rates on the programs which remain.
As a result, participants have found it necessary to grow by combination
(merger, purchase, etc.) in order to have a business mix of sufficient breadth
to sustain the technical, managerial and business functions necessary for the
conduct of a successful ongoing business. The Raytheon Board's decision to
pursue the Merger reflects its belief that Raytheon would potentially be
disadvantaged if it did not participate in this industry consolidation, as well
as the recognition that continuing consolidation will increasingly limit the
opportunities for future combinations with companies offering the same level of
strategic potential. The Merger is therefore intended to allow Raytheon to
compete successfully in this changing environment and to maintain its position
as a leading U.S. defense industry contractor. The Raytheon Board believes that
the combined business of Raytheon and Hughes Defense represents 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 Merger, see "--Description of the
Merger."
BACKGROUND OF THE MERGER
RAYTHEON'S HISTORICAL FOCUS ON MAINTAINING A STRONG DEFENSE BUSINESS
Over the last few years, Raytheon has responded to the changes in the defense
industry described above by consolidating its defense operations, by acquiring
E-Systems, Inc., a premier defense electronics defense business, by purchasing
the aircraft modification and defense electronics business of Chrysler
Technologies and, most recently, by acquiring TI Defense. These acquisitions
have broadened Raytheon's position in defense electronics and have helped it
remain competitive; however, the continuing consolidation within the defense
industry has further increased the threshold required to compete effectively.
RAYTHEON'S REVIEW OF STRATEGIC ALTERNATIVES INCLUDING THE MERGER
The Merger arises out of the strategic review of several alternatives
available to Raytheon regarding each of its core businesses which were viewed
by management as viable approaches to the then-current business environment and
were designed to achieve and enhance the long-term value of Raytheon's entire
business for its common stockholders. However, the immediate impetus for the
timing of the Merger was the major consolidation taking place in the U.S.
defense industry and the significant opportunities for Raytheon presented by
the Merger.
15
THE MERGER
<PAGE>
During the past few years, Raytheon approached a number of other major
defense companies and from time to time engaged in preliminary discussions
regarding possible strategic transactions. However, as the trend toward
consolidation in the defense industry intensified due to the forces described
above, Raytheon began a more formal strategic assessment of existing and
potential growth opportunities for Raytheon's various businesses, including a
particular focus on the defense electronics business. In connection with this
process, Raytheon assembled a management team and enlisted the support of
financial, legal, tax, accounting and other advisors to identify and evaluate
the merits of various possible strategies to promote the growth of Raytheon as
a whole and enhance stockholder value. As a result of this process, management
identified and considered the following strategic alternatives relating to the
defense electronics business:
. Continue existing business strategy, including acquisitions of smaller
defense businesses.
. Proactively pursue a merger or other significant business combination.
. Exit the defense electronics business and focus on Raytheon's other core
businesses.
With respect to the first alternative, the Raytheon Board determined that
continuing the existing business strategy was no longer a viable option in that
it would likely have relegated Raytheon to a second tier position within the
defense industry and made it difficult for Raytheon to compete for and win the
reduced number of defense programs. Likewise, the Raytheon Board determined
that the third alternative, selling Raytheon's defense business, was not an
option because the defense business is and will continue to be Raytheon's core
business. Accordingly, after careful consideration of each of these
alternatives, Raytheon determined that a strategy of proactively pursuing a
combination of Raytheon with the defense business of another significant
industry participant represented the best alternative to maximize Raytheon
stockholder value. In addition, Raytheon determined to continue to pursue
selective acquisitions of smaller defense businesses.
In reaching this conclusion, Raytheon determined that there would be an
ongoing need for defense electronics to provide a complete picture of future
battlefields in real time and to provide our armed forces with improved
surveillance, reconnaissance and intelligence systems. Raytheon further
determined that there would also be an ongoing need to upgrade existing
platforms with advanced electronics--as a cost effective way to provide greater
performance to meet evolving threats. Given these needs and Raytheon's
experience and capabilities in defense electronics, it was the Raytheon Board's
view that Raytheon should seek to remain competitive in what it believes to be
the best segment of the defense business--defense electronics.
DEVELOPMENT OF THE MERGER
Beginning in 1994, Raytheon began to consider and assess various alternative
structures for a transaction or series of transactions involving its defense
electronics business. In the spring of 1995, Raytheon announced the $2.3
billion acquisition of E-Systems to increase its market position in defense
electronics. Raytheon continued its strategic assessment of the defense
industry during 1995. In June 1996, Raytheon acquired Chrysler Technologies in
an effort to further augment the aircraft modification and defense electronics
capabilities of Raytheon E-Systems.
During 1995, HEC 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 HEC 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,
HEC 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. HEC management
determined that a strategic combination with a significant industry participant
was required because Lockheed
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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.
In early 1996, Raytheon and HEC initiated discussions regarding a combination
of Raytheon's defense business with Hughes Defense. In March of 1996 these
discussions ended when the parties could not reach agreement on the 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. In June and July of 1996, Raytheon
held discussions with McDonnell Douglas Corporation ("MCDONNELL DOUGLAS")
regarding a possible merger of all of Raytheon with McDonnell Douglas. These
discussions ended when the parties could not reach agreement on the material
terms of the transaction in August 1996.
In late July 1996, Raytheon and HEC recommenced discussions regarding a
possible combination of Raytheon's defense business with Hughes Defense.
Negotiations continued through November 20, 1996, but the parties could not
come to agreement. Both parties then agreed to terminate such negotiations and
pursue other alternatives. Following the termination of discussions with
Raytheon in November 1996, General Motors and HEC initiated preliminary
discussions with Northrop Grumman regarding a possible transaction involving
Hughes Defense.
In October 1996, Raytheon began to participate in the auction process for TI
Defense. The process culminated on January 6, 1997, when Raytheon announced its
agreement to acquire TI Defense for approximately $2.95 billion in cash.
On November 23, 1996, Raytheon made a proposal, on an unsolicited basis, for
a strategic transaction with Hughes Defense. Pursuant to the proposal, Raytheon
would (in its entirety) merge with Hughes Defense. Raytheon's new proposal was
discussed by HEC management and GM management and their respective advisors.
Although GM/HEC's financial advisors participated in these discussions, these
financial advisors did not at this time provide any reports or render any
advice materially related to the Pre-Merger 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 HEC management determined to recommend to the GM
Board a process for soliciting appropriate merger proposals for Hughes Defense,
including from Raytheon and Northrop Grumman.
November 26, 1996 Raytheon Board Meeting. At the November 26, 1996 meeting of
the Raytheon Board, Raytheon management presented an update of recent
developments in connection with various discussions regarding the possible
combination of Raytheon with other defense industry participants, including
Hughes Defense. The Raytheon Board considered and ratified the proposal
submitted by management to HEC and GM on November 23, 1996 and authorized its
management team to continue to pursue the proposal. The management team was
assisted in this process by Raytheon's financial and legal advisors, Bear
Stearns and Wachtell, Lipton, Rosen & Katz, who had been previously engaged on
behalf of Raytheon in connection with the prior discussions with HEC regarding
Hughes Defense. The management team was also advised by CSFB and received
assistance from Coopers & Lybrand L.L.P. on accounting issues and due diligence
analyses of Hughes Defense.
December 1, 1996 HEC Board Meeting. At the December 1, 1996 meeting of the
HEC Board, HEC 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 HEC 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 HEC Board and the GM Board. As noted above,
HEC 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 HEC businesses.
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Soliciting a Merger Partner for Hughes Defense. In connection with the
process of soliciting a merger partner for Hughes Defense, the GM/HEC 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 HEC in connection with the prior discussions with Raytheon.
The GM/HEC joint management team also received support from the financial,
legal and tax staffs of General Motors and HEC 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 GM/HEC joint management team received assistance from Deloitte &
Touche LLP on accounting issues and due diligence analyses of prospective
merger partners.
The GM/HEC 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, 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. 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.
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 GM/HEC 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
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<PAGE>
structure of the relevant portions of the Pre-Merger Transactions and the
Merger 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 GM/HEC 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.
On January 8, 1997, the Raytheon Board met to consider Raytheon's final offer
for Hughes Defense. After due consideration, Raytheon's Board authorized the
submission of a final proposal to GM and HEC for Raytheon to acquire Hughes
Defense.
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 combined
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 GM/HEC 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 GM/HEC 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 GM/HEC 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.
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. At such
meeting, the GM/HEC joint management team presented its recommendation that
Raytheon be selected as the merger partner for Hughes Defense.
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 the Hughes Defense Spin-Off
Committee authorized the GM/HEC joint 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.
On January 10, 1997, the GM/HEC joint management team received a
communication from Raytheon clarifying the remaining open items with respect to
its proposal. Thereafter, the GM/HEC joint management team
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<PAGE>
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 GM Board Meeting. At the January 16, 1997 meeting of the GM
Board, the Hughes Defense Spin-Off Committee, the HEC Board, the Capital Stock
Committee, HEC management and GM management each recommended that the GM Board
approve and authorize both the Pre-Merger Transactions, subject to the GM
Board's subsequent determination of the Distribution Ratio, and the Merger.
After considering these matters, the GM Board approved and authorized the Pre-
Merger Transactions, subject to the GM Board's subsequent approval of the
definitive terms of the transactions and determination of a Distribution Ratio
that satisfies certain conditions established by the GM Board. The GM Board
also approved the selection of Raytheon as the merger partner for Hughes
Defense and approved the Merger.
On January 16, 1997, pursuant to the authority of the Raytheon Board granted
on January 8, Raytheon management entered into the Merger Agreement and the
Implementation Agreement.
RECOMMENDATION OF THE RAYTHEON BOARD
In determining the fairness of the Merger, the Raytheon Board considered the
process by which the definitive terms were developed and that the Merger would
be submitted for the approval of the holders of a majority of the outstanding
shares of Raytheon Common Stock. The Raytheon Board also considered
recommendations of the management team with respect to the Merger. In addition
to and without limiting the foregoing, in determining the fairness of the
definitive terms of the Merger to Raytheon Common Stockholders, the Raytheon
Board considered, (1) the presentations by representatives of Bear Stearns as
to the fairness of the Merger from a financial point of view to Raytheon Common
Stockholders; (2) the CSFB Fairness Opinion, (3) the information previously
reviewed with and the deliberations conducted by the Raytheon Board, relating
to both the material terms of the Transaction Agreements and the Raytheon
Board's belief that current Raytheon Common Stockholders would benefit from
participation in a stronger defense company, even if such participation meant a
reduced equity position in the combined company, (4) current industry, economic
and market trends, in particular the major consolidation within the U.S.
defense industry, that has resulted from defense budget reductions, fewer
defense programs and significantly reduced production rates on the programs
which remain and (5) the importance of market position, significant scale and
scope and financial resources to compete in the consolidating defense industry
and particularly the need to grow by combination in order to have a business
mix of sufficient breadth to sustain the technical, managerial and business
functions necessary for the conduct of a successful ongoing business.
THE RAYTHEON BOARD HAS DETERMINED THAT THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO AND IN THE BEST INTERESTS OF
RAYTHEON AND RAYTHEON COMMON STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE TO
APPROVE THE MERGER PROPOSAL.
FAIRNESS OPINIONS
BEAR STEARNS FAIRNESS OPINION
Raytheon retained Bear Stearns as a financial advisor in connection with
Raytheon's proposed merger with HE Holdings in accordance with the terms of an
engagement letter between Raytheon and Bear Stearns (the "BEAR STEARNS
ENGAGEMENT LETTER"). Raytheon selected Bear Stearns to act as one of its
financial advisors and to render its opinion in connection with the Merger
based on Bear Stearns' qualifications, expertise and reputation in providing
advice to companies in the aerospace and defense electronics industries as well
as its prior investment banking relationship and familiarity with Raytheon.
At the January 16, 1997 meeting of the Raytheon Board, Bear Stearns delivered
its opinion to the effect that, as of the date of such opinion and based upon
and subject to the various conditions set forth therein, the Merger was fair,
from a financial point of view, to Raytheon Common Stockholders. Bear Stearns
has confirmed its prior opinion by delivery of a written opinion dated the date
of this Solicitation Statement/Prospectus. In
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<PAGE>
connection with its opinion dated the date of this Solicitation
Statement/Prospectus, Bear Stearns updated certain of the analyses performed in
connection with its earlier opinion and reviewed the assumptions on which such
analyses were based and the factors considered in connection therewith. The
updated analyses included in the Bear Stearns Fairness Opinion do not differ in
any material respect from the analyses conducted with respect to the opinion
provided by Bear Stearns to the Raytheon Board on January 16, 1997.
THE FULL TEXT OF THE BEAR STEARNS FAIRNESS OPINION, DATED THE DATE OF THIS
SOLICITATION STATEMENT/PROSPECTUS, IS ATTACHED AS APPENDIX B-I HERETO. RAYTHEON
COMMON STOCKHOLDERS ARE URGED TO READ THE BEAR STEARNS FAIRNESS OPINION IN ITS
ENTIRETY FOR ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY
BEAR STEARNS IN ARRIVING AT ITS OPINION. THE BEAR STEARNS FAIRNESS OPINION IS
DIRECTED TO THE RAYTHEON BOARD AND RELATES ONLY TO THE FAIRNESS OF THE MERGER,
FROM A FINANCIAL POINT OF VIEW, TO RAYTHEON COMMON STOCKHOLDERS, DOES NOT
ADDRESS ANY OTHER ASPECT OF THE PROPOSED MERGER OR ANY RELATED TRANSACTIONS AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO WHETHER SUCH
STOCKHOLDER SHOULD CONSENT TO THE APPROVAL OF THE MERGER PROPOSAL. THE SUMMARY
OF THE BEAR STEARNS FAIRNESS OPINION SET FORTH IN THIS SOLICITATION
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
No limitations were imposed by Raytheon on Bear Stearns with respect to the
investigations made or the procedures followed by Bear Stearns in rendering its
opinion. The Bear Stearns Fairness Opinion is directed to the Raytheon Board
and addresses only the fairness of the Merger, from a financial point of view,
to the Raytheon Common Stockholders and does not constitute a recommendation to
any Raytheon Common Stockholder as to whether such stockholder should consent
to approval of the Merger Proposal. The Bear Stearns Fairness Opinion is
necessarily based upon the economic, market and other conditions as in effect
on, and the information made available to it as of, the date of its opinion.
The consideration per share to be received by Raytheon Common Stockholders in
the Merger (the "EXCHANGE RATIO") was determined by arm's length negotiation
between Raytheon and HE Holdings after consultation by each of such parties
with their respective financial advisors and was not based on a recommendation
by Bear Stearns, although Bear Stearns evaluated the financial terms of the
Merger and participated in discussions concerning the Exchange Ratio.
In connection with rendering its opinion, Bear Stearns, among other things:
(i) reviewed the Merger Agreement, and other Transaction Agreements, in
substantially final form; (ii) reviewed the structure of the Pre-Merger
Transactions and related entities as set forth in the Transaction Agreements;
(iii) reviewed GM's Annual Report to Shareholders and Annual Report on Form 10-
K for the year ended December 31, 1996, its Quarterly Reports on Form 10-Q for
the periods ended March 31, 1997 and June 30, 1997, its Annual Report to
Shareholders and Annual Report on Form 10-K for the year ended December 31,
1995 and its Quarterly Reports on Form 10-Q for the periods ended March 31,
1996, June 30, 1996 and September 30, 1996; (iv) reviewed unaudited financial
statements for the fiscal years ended December 31, 1995 and 1994 for HE
Holdings and its subsidiaries and reviewed certain other operating and
financial information provided to them by the managements of Raytheon, GM and
HE Holdings relating to such businesses, including internal projections of
future financial results; (v) met with certain members of Raytheon's senior
management to discuss Raytheon's operations, historical financial statements
and future prospects, including Raytheon's industry outlook and stated
objective to improve its competitive position in the rapidly changing defense
electronics sector, as well as their views with respect to the operations,
historical financial statements and future prospects of HE Holdings, and their
views of the business, operational and strategic benefits, potential synergies
and tax and other implications of the Merger (the "PROJECTIONS"); (vi) reviewed
certain estimates of cost savings and other combination benefits (collectively,
the "PROJECTED BENEFITS") expected to result from the Merger, prepared and
provided to them by the management of Raytheon; (vii) met with certain members
of GM's and HE Holdings' senior management to discuss HE Holdings' operations,
historical financial statements and future prospects, as well as their views of
the business and assets of HE Holdings, operational and strategic benefits,
potential synergies and tax and other implications of the Merger; (viii)
reviewed the pro forma financial impact of the Merger on New Raytheon,
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including its earnings, cash flow, financial ratios and earnings per share;
(ix) discussed with certain members of senior management the potential
implications of not consummating the Merger; (x) reviewed and compared with HE
Holdings certain publicly available financial information and stock market
performance data of publicly held companies which they deemed generally
comparable to HE Holdings; (xi) reviewed and compared with the Merger the
financial terms of certain other recent acquisitions of companies which they
deemed generally comparable to HE Holdings; (xii) reviewed discounted cash flow
analyses of HE Holdings and Raytheon; (xiii) reviewed the historical market
prices and trading activity for the GM Class H Common Stock, the GM $1 2/3
Common Stock and the Raytheon Common Stock; (xiv) conducted such other studies,
analyses, inquiries and investigations as appropriate; and (xv) conducted the
above studies and analyses, where relevant, in the context of consummating the
Merger on a pro forma basis both with and without giving effect to the pending
TI Acquisition.
In the course of its review, Bear Stearns relied upon and assumed, without
independent verification, the accuracy and completeness of all of the financial
and other information provided to it and reviewed for it by Raytheon and HE
Holdings and the reasonableness of the assumptions made by the management of
Raytheon with respect to the Projections. Bear Stearns did not assume any
responsibility for independent verification of the information provided by
Raytheon and HE Holdings and further relied upon the assurances of the
managements of Raytheon and HE Holdings that such managements were not aware of
any facts that would make the information provided to Bear Stearns incomplete
or misleading. In arriving at its opinion, Bear Stearns did not perform or
obtain any independent appraisal of the assets of Raytheon or HE Holdings nor
was it furnished with any such appraisals.
In arriving at its opinion, Bear Stearns performed a variety of financial
analyses both before and after giving effect to the TI Acquisition. The summary
of certain of these analyses set forth below does not purport to be a complete
description of the analyses underlying the Bear Stearns Fairness Opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to summary description. Bear Stearns believes that all of its
analyses must be considered together, and that selecting any one valuation
analysis could create an incomplete view of the processes underlying Bear
Stearns' opinion. Moreover, the estimates contained in such 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. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Furthermore, no opinion is
being expressed as to the prices at which shares of Raytheon Common Stock may
trade at any future time.
In interpreting the results of the various financial analyses it performed in
order to render its opinion, Bear Stearns considered the general pricing trends
in the aerospace/defense industry and the growing scarcity of potential
attractive acquisition candidates. The defense industry has been characterized
over the last several years by stagnating markets due to declining procurement
budgets, resulting in a downsizing of the industry, both in terms of capacity
and number of participants. In an attempt to survive and ultimately prosper in
the consolidation, companies have been building scale through acquisitions,
expanding depth and breadth of programs and streamlining operations to reduce
costs. As long-term survivors are emerging, budgets are stabilizing and cash
flows are increasing. Bear Stearns observed that the industry appears to be
undergoing a revaluation as evidenced by pricing trends in both the public and
M&A markets for defense companies. Bear Stearns observed the following factors:
(i) trading multiples are increasing as investors are rewarding those companies
that are leading the aerospace/defense rationalization; (ii) potential
attractive acquisition candidates are becoming increasingly scarce as defense
electronics properties are traded into more permanent hands and as the number
of companies that participate in the defense industry, but for which defense is
not a core business, has declined; and (iii) the pace of consolidation in the
defense sector has been increasing at an increasing rate as companies scramble
to merge or acquire the businesses that remain.
The following is a brief summary of certain of the analyses performed by Bear
Stearns in connection with the Bear Stearns Fairness Opinion.
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Comparable Company Analysis. Bear Stearns reviewed and compared certain
actual and estimated financial, operating and market information of Raytheon
with that of three selected publicly traded companies in the aerospace and
defense electronics industries (Litton Industries, Inc., Lockheed Martin
Corporation and Northrop Grumman Corporation) referred to herein as the
"COMPARABLE COMPANIES" that Bear Stearns believed to be comparable in certain
relevant aspects (including, but not limited to, size, customer base, product
portfolio and industry niche) to Raytheon. Bear Stearns calculated certain
financial multiples for each of the Comparable Companies, including stock price
to earnings per share ("P/E") multiples based on 1996 and 1997 EPS estimates
(based on published research reports) and enterprise value as a multiple of
each of 1997 estimated ("1997E") revenues, 1997E EBITDA and 1997E EBIT. This
analysis resulted in (i) harmonic means for P/E multiples for 1996 and 1997E of
15.6x and 14.0x, respectively for the Comparable Companies compared to 14.5x
and 13.4x for Raytheon based on 1996 and 1997E net income, respectively, and
(ii) harmonic mean multiples of enterprise value to 1997E revenue, 1997E EBITDA
and 1997E EBIT of 0.84x, 6.4x and 9.4x, respectively for the Comparable
Companies compared with 1.16x, 8.0x and 10.2x for Raytheon. The harmonic mean
is calculated by using the reciprocal value of the multiples. The harmonic mean
measurement gives weight to equal dollar investments in the securities whose
ratios have been averaged. This analysis also resulted in a range of (i) P/E
multiples for 1996 and 1997E of 14.5x to 16.9x and 13.4x to 14.6x,
respectively, for the Comparable Companies, and (ii) enterprise value to 1997E
revenues, 1997E EBITDA and 1997E EBIT of 0.64x to 1.03x, 6.1x to 6.7x and 8.8x
to 9.9x, respectively, for the Comparable Companies. Bear Stearns observed that
the foregoing multiples for Raytheon were within the corresponding range of
multiples for the Comparable Companies and, consequently, concluded that
Raytheon's stock appeared to be fairly valued in the market.
Selected Acquisition Analysis. Bear Stearns reviewed other transactions
involving the acquisition or proposed acquisition of all or part of certain
companies in the aerospace/defense industry (the "SELECTED ACQUISITIONS"). The
Selected Acquisitions were comprised of Raytheon/TI Defense, The Boeing
Company/McDonnell Douglas Corporation, The Boeing Company/Rockwell
International Corporation's A&D Business, Raytheon/Chrysler Technologies,
Lockheed Martin Corporation/Loral Corporation, Northrop Grumman
Corporation/Westinghouse Electric Corporation, Hughes Electronics
Corporation/Magnavox and Raytheon/E-Systems, Inc. and were selected from a
universe of over 35 acquisitions in the aerospace/defense industry. Bear
Stearns believed the Selected Acquisitions were the most comparable to the
proposed transaction on the basis of customer base, product portfolio and other
market-related considerations. The Selected Acquisitions dated from 1995 or
later. Bear Stearns calculated certain financial multiples for each of the
Selected Acquisitions, including equity value as a multiple of 1997E net income
(25.5x for the Merger before giving effect to synergies and, 15.4x for the
Merger after giving effect to synergies, versus 18.9x, 17.5x, 16.1x, 15.4x,
17.9x, 19.1x, 15.9x and 16.5x, respectively, for the Selected Acquisitions) and
implied enterprise value as a multiple of 1997E revenues (1.43x for the Merger
before giving effect to synergies and 1.41x for the Merger after giving effect
to synergies, versus 1.66x, 1.05x, 0.97x, 0.87x, 1.40x, 1.30x, 0.92x, and
0.99x, respectively, for the Selected Acquisitions), 1997E EBITDA (10.8x for
the Merger before giving effect to synergies and 8.8x for the Merger after
giving effect to synergies, versus 9.8x, 8.1x, 8.8x, 6.8x, 8.9x, 9.3x, 7.1x and
8.3x, respectively, for the Selected Acquisitions) and 1997E EBIT (14.2x for
the Merger before giving effect to synergies and 11.0x for the Merger after
giving effect to synergies, versus 12.9x, 9.6x, 12.9x, 9.3x, 12.2x, 11.9x, 9.5x
and 10.4x, respectively, for the Selected Acquisitions), in each case, as of
the time of the announcement of the transaction, and compared the resulting
multiples to the implied multiples of the Merger.
Bear Stearns observed that before giving effect to synergies, the multiples
of revenues, EBITDA, EBIT and net income for the Merger are higher than the
multiples of revenues, EBITDA, EBIT and net income for the Selected
Acquisitions. Bear Stearns also noted that after giving effect to synergies,
the multiples of revenues, EBITDA, EBIT and net income for the Merger are
within the range of the multiples of revenues, EBITDA, EBIT and net income for
the Selected Acquisitions.
Bear Stearns noted that no company used in the comparable company analysis
summarized above is identical to HE Holdings and no transaction utilized in the
above selected acquisition analysis summarized above is identical to the
Merger. Accordingly, any such analysis of the fairness of the Merger involves
complex
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considerations and judgments concerning differences in financial and operating
characteristics of the Comparable Companies and the Selected Acquisitions and
other factors that could affect the public trading and acquisition values.
Relative Contribution Analysis. Bear Stearns compared the respective
projected contributions of each of Raytheon and HE Holdings to, among other
financial measures, the pro forma combined revenues, EBITDA and EBIT of the two
companies based on the Projections provided by Raytheon (excluding synergies)
for fiscal years 1997 and 1998 assuming completion of the Merger on December
31, 1996. Such analysis indicated that HE Holdings would contribute
approximately 28.4%, 27.0% and 27.1%, respectively, to the estimated pro forma
revenues, EBITDA and EBIT of the combined entity after the Merger for fiscal
year 1997 and approximately 27.6%, 25.7% and 25.4%, respectively, to the
estimated pro forma revenues, EBITDA and EBIT of the combined entity after the
Merger for fiscal year 1998. After giving effect to synergies anticipated by
the management of Raytheon to result from the Merger and assuming that the
synergies are not achievable in the absence of the Merger, such analysis
indicated that HE Holdings would contribute approximately 28.7%, 31.2% and
32.6% of estimated combined revenues, EBITDA and EBIT in fiscal 1997, and
approximately 28.7%, 34.0%, and 36.0% of estimated combined revenues, EBITDA
and EBIT in fiscal 1998.
In all cases, Bear Stearns compared HE Holdings' relative contribution to pro
forma revenues, EBITDA and EBIT to the post-merger entity, to HE Holdings and
Raytheon's pro forma ownership of the combined company based on the Exchange
Ratio, which implied ownership levels for Raytheon and HE Holdings of 70.0% and
30.0%, respectively. Bear Stearns noted that Raytheon's pro forma ownership of
the combined company was slightly less than its relative contribution to pro
forma revenues, EBITDA and EBIT before giving effect to synergies. Bear Stearns
also noted that Raytheon's pro forma ownership of the combined company was
greater than Raytheon's relative contribution to pro forma EBITDA and EBIT
after giving effect to expected synergies.
Synergies Analysis. Bear Stearns estimated the net present value of a future
stream of cash flows from fiscal 1997 to fiscal 2001 generated by the net cost
savings and incremental revenue that the management of Raytheon estimated could
result from the Merger after giving effect to the TI Acquisition. Utilizing
discount rates of 10.0% to 11.0%, this analysis resulted in a synergy value of
approximately $1.1 billion.
Pro Forma Merger Analysis. Bear Stearns also analyzed certain pro forma
effects of the Merger on the combined entity's estimated EPS for each of the
fiscal years from 1997 through 2001 utilizing the Projections and certain pro
forma assumptions provided by the management of Raytheon. The pro forma
assumptions provided by the management of Raytheon assumed that the Merger
would result in immediate revenue enhancements which would increase over time
and cost savings which would be realized as the integration of Raytheon's and
HE Holdings' operations is implemented. Bear Stearns' analysis indicated that
the Merger would be slightly dilutive in 1997 and increasingly accretive
thereafter. Based on the fact that the Merger is additive to earnings in each
year beginning in 1998, Bear Stearns concluded that the foregoing analysis
supports the conclusion that the Merger is fair, from a financial point of
view, to the stockholders of Raytheon.
Other Analysis. In the course of its analysis for rendering its opinion, Bear
Stearns conducted such other studies, analyses, inquiries and investigations as
it deemed appropriate.
December 13, 1996 Bear Stearns Presentation to the Raytheon Board. Prior to,
and not in connection with the preparation of the Bear Stearns Fairness
Opinion, Bear Stearns made a presentation (the "DECEMBER 13TH PRESENTATION") to
the Raytheon Board as to certain matters relevant to potential transactions
between Raytheon and Hughes Defense. However, Bear Stearns did not make any
formal recommendation or give any opinion as to the fairness to Raytheon Common
Stockholders of any potential transaction in connection with the December 13th
Presentation.
In connection with the December 13th presentation, Bear Stearns considered
and reported to the Board as to a variety of non-financial matters related to
Bear Stearns' assessment of the business and strategic rationale for the
combination of Raytheon and Hughes Defense. Among other things, Bear Stearns
noted that (i) the
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combination of Hughes Defense and Raytheon would strengthen Raytheon's position
in the defense industry by providing additional size required to create
economies of scale and to reduce the overall exposure of the company to any one
defense platform or program, (ii) the increased size of a combined Raytheon-
Hughes Defense would allow it to compete better with other large industry
participants such as Lockheed Martin, and (iii) maintenance of the status quo
might hinder Raytheon's long-term market position and ability to remain cost-
competitive with other defense contractors.
Bear Stearns also presented certain qualitative information regarding the
market impact a Raytheon-Hughes Defense transaction was likely to generate on
the trading price of the combined company's common stock. Bear Stearns
suggested that, based on publicly available information, relevant peer group
trading multiples, the relative business make-up of Raytheon-Hughes Defense in
relation to other industry participants, and assuming a favorable market
reaction to the strategic rationale of the transaction, it would be reasonable
to expect the combined company to trade at a higher multiple within its peer
group trading range than Raytheon traded as a stand-alone company. Bear Stearns
also noted that other companies which have demonstrated the ability to
rationalize defense/aerospace operations have been rewarded with higher trading
multiples and that a combined Raytheon-Hughes Defense would be positioned to
recognize similar rewards. Finally, Bear Stearns observed that, due to the
limited number of significant defense industry participants which remained as a
result of the defense industry's consolidation, Raytheon-Hughes Defense would
possess characteristics which would make it an attractive portfolio company for
investors.
At the time of the December 13th Presentation, Raytheon was considering
numerous possible alternative structures for a combination with Hughes Defense,
including a cash purchase of Hughes Defense. As a result, Bear Stearns provided
certain financial analyses and valuations reflecting the various potential
transactions and transaction structures being considered. The facts,
assumptions and analyses presented in connection with the December 13th
Presentation were substantially the same as those used in connection with the
preparation of the Bear Stearns Fairness Opinion, which are discussed in detail
above.
The only significant difference between the materials used in the December
13th Presentation and those used in the preparation of the Bear Stearns
Fairness Opinion was the use in the December 13th Presentation of a valuation
of Hughes Defense using a Discounted Cash Flow ("DCF") methodology. DCF
analysis values an entity by estimating the present value of future free cash
flows available to debt and equity holders in the event the entity performs in
accordance with management estimates on a stand-alone basis, and without giving
effect to any potential synergies. DCF analysis provides an absolute valuation
of an entity and is generally utilized in the context of a cash transaction.
Based on this analysis, using information available at the time, and without
taking into consideration the potential synergies of a transaction, Bear
Stearns concluded that, on a DCF basis, Hughes Defense had a value of between
$8.5 billion and $9.0 billion. Bear Stearns did not utilize a DCF analysis in
connection with the preparation of the Bear Stearns Fairness Opinion because of
the fact that the transaction had been structured as a stock-for-stock merger
and, accordingly, relative, rather than absolute valuations were more
important. As a result, absolute valuation methodologies such as DCF were
deemed to be not as relevant as certain other measures of relative valuation
such as those summarized above.
The DCF analysis, as well as certain other analyses undertaken by Bear
Stearns including a Comparable Company Analysis and a Selected Acquisition
Analysis, led Bear Stearns to establish a valuation reference range of $8.5
billion to $9.0 billion based on the information available as of December 13,
1996. Such analyses were considered accurate at the time based on the
information provided to Bear Stearns. However, due to (i) the preliminary
nature of the negotiations between Raytheon and GM, (ii) the limited due
diligence which had been completed, in particular, with respect to the
potential synergies resulting from a transaction with Hughes Defense and (iii)
changes in publicly available information, in particular, information related
to the companies and transactions forming the basis for the analyses, the
reference range utilized was a snapshot of appropriate valuation for such time,
and was therefore subject to change and adjustment, as was in fact the case in
connection with the actual transaction agreed upon between Raytheon and HE
Holdings and the Bear Stearns Fairness Opinion.
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Pursuant to the Bear Stearns Engagement Letter, Raytheon agreed to pay Bear
Stearns a fee of $7.5 million for rendering its opinion in connection with the
Merger, payable at the time Bear Stearns indicated it was prepared to render
such opinion. Raytheon has also agreed to pay Bear Stearns an additional fee,
payable upon announcement of the Merger, of $12.5 million and an additional
fee, payable upon consummation of the Merger, of $15.0 million. Raytheon has
also agreed to reimburse Bear Stearns for its reasonable out-of-pocket
expenses, including the reasonable fees and expenses of its counsel, and to
indemnify Bear Stearns and certain related persons against certain liabilities
in connection with its engagement, including certain liabilities under the
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.
Bear Stearns has in the past performed certain investment banking services
for Raytheon, HEC and GM, for which services Bear Stearns has received
compensation. As part of its investment banking business, Bear Stearns
regularly is engaged in the valuation of businesses and 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.
In the ordinary course of its business, Bear Stearns may actively trade the
equity securities of Raytheon and GM 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.
CSFB FAIRNESS OPINION
CSFB has acted as financial advisor to Raytheon in connection with the Merger
and the related transactions. CSFB was selected by Raytheon based on CSFB's
experience, expertise and familiarity with Raytheon and its business. CSFB is
an internationally recognized investment banking firm and is regularly engaged
in the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
On January 16, 1997, the date on which the Merger Agreement was executed,
CSFB rendered to the Raytheon Board its written opinion to the effect that, as
of such date and based upon and subject to certain matters stated in such
opinion, the Merger Consideration (as defined therein) was fair from a
financial point of view to Raytheon Common Stockholders. CSFB has confirmed its
earlier opinion by delivery of a written opinion dated the date of this
Solicitation Statement/Prospectus. In connection with its opinion dated the
date of this Solicitation Statement/Prospectus, CSFB updated certain of the
analyses performed in connection with its earlier opinion and reviewed the
assumptions on which such analyses were based and the factors considered in
connection therewith. The updated analyses included in the CSFB Fairness
Opinion do not differ in any material respect from the analyses conducted with
respect to the opinion provided by CSFB to the Raytheon Board on January 16,
1997.
THE FULL TEXT OF THE CSFB FAIRNESS OPINION TO THE RAYTHEON BOARD DATED THE
DATE OF THIS SOLICITATION STATEMENT/PROSPECTUS, WHICH SETS FORTH THE PROCEDURES
FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS APPENDIX B-II TO THIS SOLICITATION
STATEMENT/PROSPECTUS. HOLDERS OF RAYTHEON COMMON STOCK ARE URGED TO READ THIS
OPINION CAREFULLY IN ITS ENTIRETY. THE CSFB FAIRNESS OPINION IS DIRECTED TO THE
RAYTHEON BOARD AND RELATES ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION
FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE
PROPOSED MERGER OR ANY RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO WHETHER SUCH STOCKHOLDER SHOULD CONSENT
TO THE APPROVAL OF THE MERGER PROPOSAL. THE SUMMARY OF THE CSFB FAIRNESS
OPINION SET FORTH IN THIS SOLICITATION STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, CSFB reviewed the Merger Agreement and certain
related documents, this Solicitation Statement/Prospectus and certain publicly
available business and financial information relating to Raytheon and HE
Holdings after giving effect to the Hughes Reorganization. CSFB also reviewed
certain other
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information provided to it by Raytheon and HEC, including financial forecasts
relating to Raytheon (including forecasts pertaining to Raytheon TI Systems and
the financial effect of the TI Acquisition) and HE Holdings, and met with the
managements of Raytheon and HEC to discuss the operations and prospects of
Raytheon and HE Holdings. CSFB also considered certain financial and stock
market data of Raytheon and HEC and compared certain financial and stock market
data for HE Holdings with similar data for other publicly held companies in
businesses similar to that of HE Holdings and considered, to the extent
publicly available, the financial terms of certain other business combinations
and other transactions recently effected. CSFB also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which CSFB deemed relevant.
In connection with its review, CSFB did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by CSFB (including information as contained in this Solicitation
Statement/Prospectus) and relied on such information being complete and
accurate in all material respects. With respect to the financial forecasts,
CSFB assumed that such forecasts were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the managements of
Raytheon and HEC as to the future financial performance of Raytheon and HE
Holdings and the best currently available estimates and judgments of the
management of Raytheon as to the cost savings and other potential synergies
(including the timing, amount and achievability thereof) anticipated to result
from the Merger and the related transactions (including and excluding the
effect of the TI Acquisition on such cost savings and other potential
synergies). In addition, CSFB was not requested to make and did not make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Raytheon or HEC, nor was CSFB furnished with any such evaluations
or appraisals. CSFB's opinion was necessarily based upon information available
to CSFB, and financial, economic, market and other conditions as they existed
and could be evaluated, on the date of its opinion. CSFB did not express any
opinion as to what the value of the Class A Common Stock or Class B Common
Stock actually will be when issued pursuant to the Merger and the related
transactions or the prices at which the Class A Common Stock or the Class B
Common Stock will trade subsequent to the Merger. Although CSFB evaluated the
Merger Consideration from a financial point of view, CSFB was not requested to,
and did not, recommend the specific consideration payable in the Merger, which
consideration was determined through negotiation between Raytheon and HEC. CSFB
was not requested to, and did not, make a formal presentation to the Raytheon
Board of the financial analyses performed by CSFB in connection with the CSFB
Fairness Opinion. No other limitations were imposed by Raytheon on CSFB with
respect to the investigations made or procedures followed by CSFB in rendering
its opinion.
In preparing the CSFB Fairness Opinion, CSFB performed a variety of financial
and comparative analyses, including those described below. The summary of
CSFB's analyses set forth below does not purport to be a complete description
of the analyses underlying CSFB's opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. In arriving
at its opinion, CSFB made qualitative judgments as to the significance and
relevance of each analysis and factor considered by it. Accordingly, CSFB
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, CSFB made numerous
assumptions with respect to Raytheon, HEC, industry performance, regulatory,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Raytheon and HEC. No company,
transaction or business used in such analyses as a comparison is identical to
Raytheon or HEC or the Merger and the related transactions, nor is an
evaluation of the results of such analyses entirely mathematical; rather, such
analyses involve complex considerations and judgments concerning financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the companies, business segments or
transactions being analyzed. The estimates contained in such analyses and the
ranges of valuations resulting from any particular analysis 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. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
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businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. The CSFB Fairness
Opinion was only one of many factors considered by the Raytheon Board in its
evaluation of the proposed Merger and the related transactions and should not
be viewed as determinative of the views of the Raytheon Board or management
with respect to the Merger Consideration or the proposed Merger and the related
transactions.
The following is a summary of the material analyses performed by CSFB in
connection with its opinion dated January 16, 1997:
Discounted Cash Flow Analysis. CSFB calculated an enterprise reference range
for HE Holdings based upon the present value of HE Holding's five-year stream
of unlevered free cash flows and fiscal year 2001 terminal value, based on
internal estimates of the management of HE Holdings. The fiscal year 2001
terminal value of HE Holdings was calculated by applying terminal multiples
ranging from 9.0x to 10.0x to HE Holdings' fiscal year 2001 EBITDA. Unlevered
free cash flows and terminal value estimates were then discounted to January 1,
1997 using discount rates of 10.5% to 11.0%. The discount rates utilized in
such analysis were based on a number of factors, including the weighted average
cost of capital of the Selected Defense Companies. This analysis resulted in an
enterprise reference range for HE Holdings of approximately $8.6 billion to
$9.5 billion.
Selected Companies Analysis. CSFB compared certain financial and operating
information of HE Holdings to corresponding data of the following selected
publicly traded companies in the defense electronics and aerospace industry:
Lockheed Martin Corporation, McDonnell Douglas Corporation, Northrop Grumman
Corporation and Litton Industries, Inc. (collectively, the "SELECTED DEFENSE
COMPANIES"). CSFB compared enterprise values of the Selected Defense Companies
as multiples of estimated fiscal 1997 sales, EBITDA and EBIT, and compared
equity values as a multiple of estimated fiscal 1997 and 1998 net income.
Estimated financial data for the Selected Defense Companies was based on
estimates of selected investment banking firms. All multiples were based on
closing stock prices on January 9, 1997. This analysis indicated a range of
multiples for the Selected Defense Companies of estimated fiscal 1997 sales,
EBITDA and EBIT of 0.7x to 1.0x (with a mean of 0.9x), 6.3x to 9.0x (with a
mean of 7.1x) and 8.8x to 9.8x (with a mean of 9.4x), respectively, and
estimated fiscal 1997 and 1998 net income of 12.8x to 15.4x (with a mean of
14.0x) and 11.4x to 13.5x (with a mean of 12.5x), respectively. Applying a
range of selected multiples for the Selected Defense Companies of estimated
fiscal 1997 sales, EBITDA and EBIT and estimated fiscal 1997 and 1998 net
income of 1.0x to 1.1x, 7.0x to 8.0x, 9.5x to 10.5x, 14.0x to 15.0x and 13.0x
to 14.0x, respectively, to corresponding financial data of HE Holdings resulted
in an enterprise reference range for HE Holdings of approximately $6.0 billion
to $7.0 billion. CSFB applied these same multiples to corresponding financial
data of Raytheon's defense business, both before and after giving effect to the
TI Acquisition. The resulting enterprise reference range of Raytheon's defense
business was approximately $10.0 billion to $11.5 billion (after giving effect
to the TI Acquisition) and approximately $7.5 billion to $8.5 billion (before
giving effect to the TI Acquisition).
CSFB also compared certain financial and operating information of Raytheon's
commercial businesses to corresponding data of selected publicly traded
companies in similar industries, including: (i) engineering and construction
companies: Fluor Corporation, Foster Wheeler Corporation, and Jacobs
Engineering Group, Inc.; (ii) appliances companies: Maytag Corporation, and
Whirlpool Corporation; (iii) Aircraft Companies: Gulfstream Aerospace
Corporation; and (iv) diversified companies: Allied Signal Inc., United
Technologies Corporation, and Honeywell Inc. (collectively, the "SELECTED
COMMERCIAL COMPANIES"). CSFB compared enterprise values of the Selected
Commercial Companies as a multiple of estimated fiscal 1997 EBITDA, and
compared equity values as a multiple of estimated fiscal 1997 net income.
Estimated financial data for the Selected Commercial Companies was based on
estimates of selected investment banking firms. All multiples were based on
closing stock prices on January 9, 1997. This analysis indicated a range of
multiples for the Selected Commercial Companies of estimated fiscal 1997 EBITDA
and net income of 5.9x to 8.9x (with a mean of 7.6x) and 11.0x to 18.0x (with a
mean of 15.4x), respectively. Applying a range of selected multiples for the
Selected Commercial Companies of estimated fiscal 1997 EBITDA and net income of
7.5x to 8.0x and 15.0x to 16.0x, respectively, to corresponding financial data
of Raytheon's commercial businesses resulted in an enterprise reference range
for such commercial businesses of approximately $6.6 billion to $7.1 billion.
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The selected multiples utilized by CSFB in its "Selected Companies Analysis"
were based on, among other things, the size, product mix and competitive
positioning of the operations of the Selected Companies relative to HE Holdings
and Raytheon.
Selected Transactions Analysis. CSFB analyzed the purchase prices and implied
transaction multiples paid or proposed to be paid in selected merger and
acquisition transactions involving companies in the defense electronics and
aerospace sectors, consisting of the following (acquiror/target): Raytheon/TI
Defense, The Boeing Company/McDonnell Douglas Corporation, The Boeing
Company/Rockwell A&D Business, Northrop Grumman/Westinghouse Electric
Corporation, Lockheed Martin Corporation/Loral Corporation,Raytheon/E-Systems,
Inc., Martin Marietta/General Dynamics Corporation's Space Systems Division,
Loral Corporation/LTV Aerospace and Defense Company's Missile Business, HE
Holdings/General Dynamics Corporation Missile System Business, Martin Marietta
Corporation/Lockheed Martin Corporation, Northrop Corporation/Grumman
Corporation, Lockheed Martin Corporation/General Dynamics Military Aircraft,
Rolls-Royce plc/Allison Corporation, and Deutsche Aerospace AG/Fokker NV
(collectively, the "SELECTED TRANSACTIONS"). CSFB compared enterprise values of
the Selected Transactions as multiples of latest 12 months sales, EBITDA and
EBIT, and compared equity values as a multiple of latest 12 months net income.
All multiples were based on historical financial information available at the
time of announcement of the transaction. Applying a range of selected multiples
for the Selected Transactions of latest 12 months sales, EBITDA, EBIT and net
income of 1.3x to 1.5x, 10.5x to 11.5x, 14.0x to 16.0x and 23.0x to 26.0x,
respectively, to corresponding financial data of HE Holdings resulted in an
enterprise reference range for HE Holdings of approximately $8.6 billion to
$9.6 billion. Applying these same multiples to corresponding financial data of
Raytheon's defense business resulted in an enterprise reference range for
Raytheon's defense business of approximately $12.5 billion to $14.0 billion
(after giving effect to the TI Acquisition) and approximately $10.0 billion to
$11.5 billion (before giving effect to the TI Acquisition).
Synergies Analysis. CSFB estimated the present value of a range of future
stream of cash flows from fiscal 1997 to 2001 generated by the net cost savings
and incremental earnings that the management of Raytheon estimated could result
from the Merger and related transactions, both before and after giving effect
to the TI Acquisition. Utilizing discount rates of 10.5% to 11.0%, this
analysis resulted in a synergy value of approximately $1.1 billion (after
giving effect to the TI Acquisition) and approximately $0.8 billion (before
giving effect to the TI Acquisition).
Aggregate Reference Ranges. On the basis of the valuation methodologies
described above (with particular focus on the "Discounted Cash Flow Analysis"
described above), CSFB derived an aggregate enterprise reference range for HE
Holdings of approximately $8.6 billion to $9.5 billion, before giving effect to
synergies anticipated by the management of Raytheon to result from the Merger
and related transactions and the TI Acquisition. Adding the present value of
synergies from both the Merger and related transactions and the TI Acquisition
resulted in an aggregate enterprise reference range for HE Holdings of
approximately $9.8 billion to $10.7 billion. Adding the present value of
synergies from the Merger and related transactions without giving effect to the
TI Acquisition resulted in an aggregate enterprise reference range for HE
Holdings of approximately $9.4 billion to $10.3 billion.
CSFB also derived an aggregate enterprise reference range for Raytheon based
upon the valuation methodologies described above (with particular focus on the
"Selected Companies Analysis" and the "Selected Transactions Analysis"
described above), after giving effect to the TI Acquisition, of approximately
$17.6 billion to $20.1 billion or approximately $47.35 to $57.76 per fully
diluted share. Excluding the TI Acquisition, CSFB derived an aggregate
enterprise reference range for Raytheon of approximately $14.6 billion to $17.1
billion or approximately $47.14 to $57.55 per share. These implied per share
values compared to Raytheon's trailing 30-day average stock price as of January
6, 1997 of $49.35.
Relative Contribution Analysis. CSFB analyzed the relative contributions of
Raytheon, both before and after giving effect to the TI Acquisition, and HE
Holdings to the estimated fiscal 1997 and 1998 sales, EBITDA and EBIT,
estimated 1996 year-end assets and estimated enterprise value, of the pro forma
combined company.
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This analysis indicated that Raytheon would contribute approximately 71.6%,
73.0% and 70.8% of estimated combined sales, EBITDA and EBIT in fiscal 1997,
and approximately 72.4%, 74.4% and 72.7% of estimated combined sales, EBITDA
and EBIT in fiscal 1998, after giving effect to the TI Acquisition and before
giving effect to synergies anticipated by the management of Raytheon to result
from the Merger and related transactions. After giving effect to such synergies
and assuming that Raytheon and HE Holdings each contributed equally to these
synergies, such analysis indicated that Raytheon would contribute approximately
71.5%, 71.5% and 69.0% of estimated combined sales, EBITDA and EBIT in fiscal
1997, and approximately 72.0%, 71.2% and 69.1% of estimated combined sales,
EBITDA and EBIT in fiscal 1998. Assuming consummation of the TI Acquisition,
this analysis indicated that, in fiscal year 1997, Raytheon's relative
contribution based on combined assets estimated at year-end 1996 and combined
enterprise value was approximately 64.0% and 65.9%, respectively.
Excluding the TI Acquisition, the contribution analysis indicated that
Raytheon would contribute approximately 69.2%, 69.4% and 67.5% to the estimated
combined sales, EBITDA and EBIT in fiscal 1997, and approximately 70.2%, 71.0%
and 69.6% of estimated combined sales, EBITDA and EBIT in fiscal 1998, before
giving effect to synergies anticipated by the management of Raytheon to result
from the Merger and related transactions. After giving effect to such synergies
and assuming that Raytheon and HE Holdings each contributed equally to these
synergies, such analysis indicated that Raytheon would contribute approximately
69.2%, 67.6% and 66.3% of the estimated combined sales, EBITDA and EBIT in
fiscal 1998. Excluding the TI Acquisition, Raytheon's relative contribution
based on combined assets estimated at year-end 1996 and combined enterprise
value was approximately 57.8% and 61.9%, respectively.
As contemplated by the terms of the Merger and related transactions, current
common stockholders of Raytheon and HEC would own approximately 70% and 30%,
respectively, of the combined company's equity upon consummation of the Merger.
Pro Forma Merger Analysis. CSFB analyzed the potential pro forma effect of
the Merger and related transactions on Raytheon's EPS for fiscal years 1997
through 2001, based on internal estimates of Raytheon's management, both before
and after giving effect to the TI Acquisition and after giving effect to
synergies anticipated by the management of Raytheon to result from the Merger
and related transactions. After giving effect to such synergies and the TI
Acquisition, this analysis indicated that the Merger could be dilutive to
Raytheon's EPS on a fully diluted basis in fiscal 1997 and accretive in fiscal
years 1998 through 2001. After giving effect to such synergies but excluding
the TI Acquisition, this analysis indicated that the Merger could be dilutive
to Raytheon's EPS on a fully diluted basis in fiscal 1997 and 1998, neutral in
fiscal 1999, accretive in fiscal 2000 and dilutive in fiscal 2001. The actual
results achieved by the combined company may vary from projected results and
the variations may be material.
Certain Other Analyses. CSFB evaluated the incremental value created by the
Merger and related transactions for Raytheon, both before and after giving
effect to the TI Acquisition, utilizing both a net income multiple methodology
and a discounted cash flow approach with respect to valuing the pro forma
combined company. On the basis of estimated fiscal 1998 combined net income, a
price-to-earnings ratio of 13.0x to 14.0x and Raytheon Common Stockholders'
fully diluted equity ownership of 69.7% in the combined company, the net income
multiple methodology resulted in an implied equity reference range for Raytheon
of approximately $54.15 to $58.31 per share (after giving effect to the TI
Acquisition) or approximately $50.32 to $54.20 per share (before giving effect
to the TI Acquisition). These implied per share values compared to Raytheon's
trailing 30-day average stock price as of January 6, 1997 of $49.35. Utilizing
discount rates of 10.5% to 11.0% and estimated terminal values of 9.0x to 10.0x
fiscal 2001 estimated EBITDA for the combined company (excluding consolidation
synergies), on the basis of Raytheon Common Stockholders' fully diluted equity
ownership of 69.7% of the combined company, the discounted cash flow
methodology resulted in an implied equity reference range for Raytheon of
approximately $67.31 to $77.70 per share (after giving effect to the TI
Acquisition) or $65.05 to $74.46 per share (before giving effect to the TI
Acquisition). These implied per share values compared to Raytheon's trailing
30-day average stock price as of January 6, 1997 of $49.35.
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Miscellaneous. Pursuant to the terms of CSFB's engagement, Raytheon has
agreed to pay CSFB for its services in connection with the proposed Merger and
the related transactions an aggregate financial advisory fee of $4.5 million.
Raytheon also has agreed to reimburse CSFB for out-of-pocket expenses incurred
by CSFB in performing its services, including reasonable fees and expenses of
legal counsel and any other advisor retained by CSFB, and to indemnify CSFB and
certain related persons and entities against certain liabilities, including
liabilities under the U.S. federal securities laws, arising out of CSFB's
engagement.
CSFB has in the past performed certain investment banking services for
Raytheon, HEC and GM, for which services CSFB has received compensation. In the
ordinary course of its business, CSFB and its affiliates may actively trade the
debt and equity securities of Raytheon, HEC and GM for their own accounts and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
ADDITIONAL BACKGROUND INFORMATION
ADDITIONAL INFORMATION RELATING TO THE PRE-MERGER TRANSACTIONS AND THE MERGER
WHICH HAS BEEN PROVIDED BY GM IS INCLUDED IN THIS DOCUMENT UNDER THE CAPTION
"ADDITIONAL BACKGROUND INFORMATION." THE INFORMATION INCLUDES INFORMATION
REGARDING THE FACTORS CONSIDERED BY THE CAPITAL STOCK COMMITTEE OF THE GM BOARD
AND THE GM BOARD IN DECIDING TO RECOMMEND THE APPROVAL OF THE MERGER AS WELL AS
A SUMMARY OF THE ANALYSES AND OPINION OF GOLDMAN SACHS RELATING TO THE MERGER.
BECAUSE THIS INFORMATION HAS BEEN REPRODUCED FROM THE GM SOLICITATION
STATEMENT/PROSPECTUS, CERTAIN DEFINED TERMS ARE DIFFERENT THAN THOSE USED IN
THIS DOCUMENT AND CERTAIN CROSS-REFERENCES REFER YOU TO OTHER SECTIONS AND
CAPTIONS OF THE GM SOLICITATION STATEMENT/PROSPECTUS NOT REPRODUCED HERE. WE
REFER YOU TO THE HUGHES DEFENSE REGISTRATION STATEMENT FOR COMPLETE DEFINITIONS
OF THESE TERMS AND DISCLOSURES OF THE SECTIONS CROSS-REFERENCED BELOW. IN
ADDITION, A COPY OF THE WRITTEN PRESENTATION BY GOLDMAN SACHS TO THE GM BOARD
IN JANUARY 1997, HAS BEEN FILED AS AN EXHIBIT TO GM'S SCHEDULE 13E-3
TRANSACTION STATEMENT, FILED WITH THE SEC AND AVAILABLE TO THE PUBLIC. YOU
SHOULD NOTE, HOWEVER, THAT THESE MATERIALS WERE PREPARED FOR THE BOARDS OF
DIRECTORS OF GM, HEC AND HE HOLDINGS IN CONNECTION WITH SUCH BOARDS'
CONSIDERATION OF THE PRE-MERGER TRANSACTIONS AND WERE NOT PREPARED WITH A VIEW
TOWARD THE INTERESTS OF RAYTHEON, THE RAYTHEON BOARD OR RAYTHEON COMMON
STOCKHOLDERS.
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
TO RAYTHEON STOCKHOLDERS
The following general discussion summarizes the material U.S. federal income
tax consequences of the Merger and is based on the Code, the regulations
promulgated thereunder, existing administrative interpretations and court
decisions. Future legislation, regulations, administrative interpretations or
court decisions could significantly change such authorities either
prospectively or retroactively. We do not address all aspects of U.S. federal
income taxation that may be important to you in light of your particular
circumstances or to stockholders subject to special rules, such as those who
are not citizens or residents of the United States, financial institutions,
tax-exempt organizations, insurance companies, dealers in securities or
shareholders who acquired their Raytheon shares pursuant to the exercise of
options or similar derivative securities or otherwise as compensation. This
discussion assumes that you hold your shares of stock as capital assets within
the meaning of Code Section 1221.
The Merger is conditioned on receipt by Raytheon and HE Holdings of opinions
of Wachtell, Lipton, Rosen & Katz, counsel to Raytheon, and Weil, Gotshal &
Manges LLP, counsel to HE Holdings, that the Merger qualifies as a tax-free
reorganization under Code Section 368(a).
Based upon the foregoing opinion of Wachtell, Lipton, Rosen & Katz:
. you should not recognize either gain or loss upon the receipt of shares of
Class B Common Stock exchanged in the Merger for your shares of Raytheon
Common Stock,
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. the tax basis of your shares of Class B Common Stock received in the
Merger will be the same as your tax basis in the shares of Raytheon Common
Stock that you surrendered in exchange, and
. the holding period, if any, for shares of Class B Common Stock you receive
in the Merger will include the holding period of shares of Raytheon Common
Stock that you surrendered in exchange.
You should be aware that opinions of counsel are not binding on the IRS or
the courts. Further, the opinions of Wachtell, Lipton, Rosen & Katz and Weil,
Gotshal & Manges LLP will be based on current law and on certain
representations as to factual matters made by, among others, Raytheon and HE
Holdings, which, if incorrect in certain material respects, would jeopardize
the conclusions reached by such counsel in their opinion. Neither Raytheon nor
HE Holdings is currently aware of any facts or circumstances which would cause
any such representations to Wachtell, Lipton, Rosen & Katz or Weil, Gotshal &
Manges LLP to be untrue or incorrect in any material respect.
Raytheon and HE Holdings expect to receive the opinions of Wachtell, Lipton,
Rosen & Katz and Weil, Gotshal & Manges LLP described above prior to the
Effective Time. Although the condition regarding receipt of the opinions
described above is waivable by the parties to the Merger Agreement, Raytheon
does not intend to waive such condition to consummation of the Merger.
If the Merger fails to qualify as a reorganization under Code Section 368,
each Raytheon Common Stockholder who receives shares of Class B Common Stock
would recognize gain or loss equal to the difference between the fair market
value of Class B Common Stock received and such stockholder's tax basis in the
shares of Raytheon Common Stock surrendered. Failure of the Merger to qualify
as a tax-free reorganization could jeopardize the tax-free treatment of the
distribution of Class A Common Stock and the Hughes Telecom Spin-Off under Code
Sections 355 and 368(a)(1)(D).
This discussion does not address the tax consequences of any transaction
other than the Merger. ACCORDINGLY, YOU ARE STRONGLY URGED TO CONSULT WITH YOUR
TAX ADVISOR TO DETERMINE THE PARTICULAR U.S. FEDERAL, STATE, LOCAL OR FOREIGN
INCOME OR OTHER TAX CONSEQUENCES TO YOU OF THE MERGER.
TO NEW RAYTHEON
GM has received the IRS Ruling as to certain U.S. federal income tax
consequences of the Pre-Merger Transactions. Specifically, the IRS Ruling
provides that each of (i) 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 Spin-Off Merger Agreement and (ii) the Hughes Telecom Spin-
Off will constitute a tax-free distribution under Code Sections 355 and
368(a)(1)(D). In addition, GM has received the IRS Supplemental Ruling as
required by the Spin-Off Merger Agreement to the effect that the consummation
of the Merger and the related transactions will not jeopardize the tax-free
status of the EDS Split-Off. Consummation of the Merger is conditioned upon the
continued effectiveness of both the IRS Ruling and the IRS Supplemental Ruling.
New Raytheon has agreed in the Hughes Separation Agreement to certain
covenants restricting its actions for certain periods following the Merger to
provide further assurances that the Merger and the Pre-Merger Transactions will
be tax-free for U.S. federal income tax purposes. See "Summary of Hughes
Separation Agreement."
CERTAIN REGULATORY REQUIREMENTS
In order to consummate the Merger, we, GM and HE Holdings must make certain
filings and receive certain authorizations from various governmental agencies,
both in the United States and internationally. These filings, notifications and
authorizations relate primarily to competition and securities law issues.
The 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 Antitrust
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Division and the FTC and the requisite waiting period has expired or is
terminated. On October 2, 1997, Raytheon, GM and HE Holdings entered into an
agreement with the Antitrust Division regarding the basis on which the Merger
could proceed. The agreement requires that Raytheon divest two defense
electronics businesses and impose certain operating and informational
restrictions between other businesses in order to preserve competition. Under
the terms of the agreement, these two businesses will be preserved as separate
entities until they are sold. Any sale of these businesses must be approved by
the Antitrust Division and the Department of Defense. However, such
divestitures are not required to be completed prior to the consummation of the
Merger. The agreement and related papers were filed with the United States
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 a 60-day statutory
notice and comment period and entry of final judgment, thereby permitting the
parties to consummate the Merger.
We believe that, other than the foregoing, 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
Merger.
ACCOUNTING TREATMENT
The 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 HE Holdings 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 HE Holdings based upon the fair values
thereof and the value of the consideration deemed to be provided to General
Motors, its subsidiaries and its common shareholders in connection with the
Merger, including the costs of the 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 Solicitation Statement/Prospectus 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 HE Holdings' 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 HE
Holdings will be included in New Raytheon's consolidated statement of income
following the Effective Time. New Raytheon's financial statements for prior
periods will not be restated as a result of the Merger or related transactions.
See "New Raytheon--New Raytheon Pro Forma Combined Condensed Financial
Statements."
NO APPRAISAL RIGHTS
The DGCL does not provide appraisal rights to Raytheon Common Stockholders in
connection with the Merger because, among other things, Raytheon Common Stock
is, and Class B Common Stock will be, listed on the NYSE. Under Section 262 of
the DGCL, appraisal rights are not available to the stockholders of a
corporation that is a party to a merger if the corporation's stock is listed on
a national securities exchange where the consideration to be received by such
stockholders in the merger consists of shares of the capital stock of the
surviving corporation in the merger.
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DESCRIPTION OF THE PRE-MERGER TRANSACTIONS
GENERAL
As Raytheon Common Stockholders, you are not being asked to approve the Pre-
Merger Transactions. These transactions may be material to your decision to
submit your written consent in favor of the Merger Proposal, however, because
the transactions provide for the creation of HE Holdings in the form which will
be merged with Raytheon in the Merger.
There are three steps to the Pre-Merger Transactions: the Hughes
Reorganization, the Hughes Defense Recapitalization and the Spin-Off Merger.
The discussion below concerns those aspects of the Pre-Merger Transactions
which may be material to you, as a Raytheon stockholder.
The principal effects of the Pre-Merger Transactions are as follows:
. HE Holdings will become an independent, wholly owned subsidiary of GM
consisting only of Hughes Defense.
. Class A Common Stock will be distributed by GM to GM Common Stockholders.
ORGANIZATIONAL CHARTS BEFORE AND AFTER THE PRE-MERGER TRANSACTIONS AND THE
MERGER
The following charts present in simplified form the organizational structure
of GM and HEC before the Pre-Merger Transactions, after the completion of the
Pre-Merger Transactions and after the Merger. The transactions are described in
greater detail after the charts.
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- --------------------------------------------------------------------------------
Charts depict corporate Structure and stock ownership of GM and its
subsidiaries, before the Pre-Merger Transactions, GM and its subsidiaries after
the Pre-Merger Transactions and New Raythem after the Merger.
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THE MERGER
<PAGE>
HUGHES REORGANIZATION
The Hughes Reorganization includes a number of preliminary transactions
necessary to separate Hughes Defense from the other businesses of HEC and to
make HE Holdings (consisting of Hughes Defense) a direct, wholly owned
subsidiary of GM, thereby preparing HE Holdings to be spun off to GM Common
Stockholders in the Hughes Defense Spin-Off. The Hughes Reorganization will
separate the businesses of Hughes Defense, Delco and Hughes Telecom. As a
result of the Hughes Reorganization, (i) HE Holdings will become a direct,
wholly owned subsidiary of GM whose only assets relate to Hughes Defense, (ii)
Hughes Network Systems will become a direct, wholly owned subsidiary of GM that
holds all of the assets of Hughes Telecom and (iii) direct legal ownership of
Delco will be transferred from HEC to GM.
The Hughes Reorganization will be effected pursuant to certain transactions
described in the Master Separation Agreement and the agreements contemplated
thereby. See "--Separation and Transition Arrangements." The following is a
description of significant aspects of the Hughes Reorganization:
. HE Holdings will contribute to Hughes Network Systems certain assets
currently owned by HE Holdings that are used primarily in or held primarily
for use in the operations of Hughes Telecom. HE Holdings also will
contribute to Hughes Network Systems or its affiliates cash in an amount
ranging from $3.9 to $4.9 billion based on the price of Raytheon Common
Stock. This will include the cash that HE Holdings will borrow from
unrelated third-party lenders immediately prior to the Merger as
contemplated by the Merger Agreement. See "--Description of the Merger--The
Merger Agreement--Certain Covenants."
. the subsidiary of HE Holdings that principally operates Hughes Defense
will be merged with and into HE Holdings.
. HE Holdings will distribute 100% of the stock of Hughes Network Systems to
GM in a tax-free transaction. This distribution of Hughes Network Systems
stock constitutes the Hughes Telecom Spin-Off. In connection with the
Hughes Telecom Spin-Off, Hughes Network Systems, which will then hold all
of the assets of Hughes Telecom, will be renamed "Hughes Electronics
Corporation."
After the completion of the Hughes Reorganization, Hughes Defense (i.e., HE
Holdings), Delco and Hughes Telecom (i.e., Hughes Network Systems, which will
be renamed Hughes Electronics Corporation) will each be direct, wholly owned
subsidiaries of GM. HE Holdings will hold all of the assets of Hughes Defense,
Delco will hold all of the assets of the automotive electronics business of HEC
and Hughes Network Systems (renamed Hughes Electronics Corporation) will hold
all of the assets of Hughes Telecom.
HUGHES DEFENSE RECAPITALIZATION
Following the Hughes Reorganization but prior to the Hughes Defense Spin-Off,
HE Holdings will recapitalize its capital stock, all of which will then be held
by GM, into Class A Common Stock, Class B Common Stock and Preferred Stock.
These three classes of stock will represent all of the authorized capital stock
of New Raytheon following the Merger. Initially, only the Class A Common Stock
will be outstanding (all of which will be held by GM and which will be
distributed by GM to GM Common Stockholders in the Hughes Defense Spin-Off ).
HUGHES DEFENSE SPIN-OFF
Subject to the terms and conditions of the Spin-Off Merger Agreement, GM will
form a wholly owned subsidiary--Merger Sub--in order to effect the Hughes
Defense Spin-Off. Merger Sub will merge with and into GM, the principal effect
of which will be to distribute shares of Class A Common Stock to GM Common
Stockholders. The number of shares of Class A Common Stock received by holders
of each class of GM Common Stock will be determined based on the Distribution
Ratio.
As a result of the Hughes Defense Spin-Off, Hughes Defense will become an
independent, publicly held company. Application will be made to list the Class
A Common Stock on the NYSE, the PSE and the CSE. The GM Common Stockholders
will become holders of an aggregate of approximately 103 million shares of
Class A Common Stock, which will represent all of the outstanding capital stock
of HE Holdings immediately after the Hughes Defense Spin-Off. Immediately
thereafter, Hughes Defense and Raytheon will merge.
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DESCRIPTION OF THE MERGER
GENERAL
OVERVIEW
Immediately after the Hughes Defense Spin-Off, Raytheon and HE Holdings will
consummate the Merger. Pursuant to the Merger Agreement, among other things,
. Raytheon will be merged with and into HE Holdings, with HE Holdings as the
surviving corporation (which will be renamed Raytheon Company);
. each outstanding share of Raytheon Common Stock will be converted
automatically into one share of Class B Common Stock;
. 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 after the Merger; and
. each fractional share of Class A Common Stock resulting from the Hughes
Defense Spin-Off will be converted into and represent an equivalent number
of fractional shares of Class B Common Stock, which will then be sold by
the Exchange Agent and the proceeds distributed to the owners of such
fractional shares.
See "--The Merger Agreement."
Immediately following the Merger, the Class B Common Stock which you, as a
Raytheon Common Stockholder, will receive will represent approximately 70% of
the aggregate equity value of New Raytheon and the Class A Common Stock will
represent approximately 30% of the equity of New Raytheon. With respect to the
election and removal of directors only, the Class B Common Stockholders will be
entitled to 19.9% of the total voting power of New Raytheon and the Class A
Common Stockholders will be entitled to the remaining 80.1%. With respect to
all other matters, separate class approvals of the Class B Common Stockholders
and the Class A Common Stockholders will be required. See "Capital Stock--New
Raytheon Capital Stock."
The Merger was structured to create two classes of common stock with unequal
voting rights solely because such structure was required in order to allow the
IRS to rule that the spin-off can be completed on a tax-free basis for U.S.
federal income tax purposes. The Class A Common Stock and Class B Common Stock
have unequal equity ownership as a result of arm's-length negotiations. Such
difference is meant to reflect the relative values of Raytheon, on the one
hand, and HE Holdings, on the other.
INDICATED VALUE OF THE MERGER TO RAYTHEON AND RAYTHEON COMMON STOCKHOLDERS
Based on the terms of the Merger Agreement, and assuming the market price of
Raytheon Common Stock remains within the range of $44.42 to $54.29 per share,
the Merger has a total indicated value of $9.5 billion to GM and GM Common
Stockholders.
This transaction value consists of a combination of:
. the Class A Common Stock to be distributed to GM Common Stockholders in
the Hughes Defense Spin-Off, which will have an indicated value of $4.6 to
$5.6 billion (so long as the market price of Raytheon Common Stock is
within the range described above); and
. the debt obligations of HE Holdings (including new debt which HE Holdings
will incur prior to the Hughes Defense Spin-Off) as of immediately prior to
the Effective Time, which will total approximately $3.9 to $4.9 billion and
which will remain with New Raytheon after the Merger and not constitute
obligations of GM, HEC or their respective subsidiaries.
The actual amount of new debt to be incurred by HE Holdings prior to the
Hughes Defense Spin-Off will be determined by subtracting from $9.5 billion any
other outstanding debt of HE Holdings as of the Effective
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Time and also subtracting the product of (i) the total number of shares of
Class A Common Stock to be distributed to GM Common Stockholders (i.e.,
102,630,503 shares) and (ii) the average closing market price of Raytheon
Common Stock during the 30-day period ending on the fifth day prior to
consummation of the 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. If the Merger were
consummated on November 6, 1997, the indicated value of the transaction would
be $9.5 billion consisting of Class A Common Stock to be issued to GM Common
Stockholders in the Hughes Defense Spin-Off with an indicated value of
approximately $5.4 billion and approximately $4.1 billion in HE Holdings debt,
which debt would become a liability of New Raytheon upon consummation of the
Merger.
POST-CLOSING ADJUSTMENT
Within approximately four months after completion of the Merger, Hughes
Telecom (which will have been renamed Hughes Electronics Corporation by such
time) will prepare and deliver to New Raytheon a final balance sheet for HE
Holdings and its subsidiaries as of immediately prior to the Merger (but giving
effect to the Hughes Defense Spin-Off) and a related report from Hughes
Telecom's auditors. Within 30 business days after its receipt of this final
balance sheet and related auditors' report, New Raytheon will notify Hughes
Telecom of any objections to the balance sheet and report. Hughes Telecom 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.
To the extent that this final balance sheet reflects an adjusted net worth of
HE Holdings (calculated as described in the Master Separation Agreement) that
deviates more than $50 million from the Target, a payment will be made from
Hughes Telecom to New Raytheon, or from New Raytheon to Hughes Telecom, as
appropriate, to compensate for the amount of such difference (plus interest
thereon from the Effective Time to the date of payment). See "--Separation and
Transition Arrangements--Master Separation Agreement--Post-Closing Adjustment."
THE DESCRIPTIONS OF THE MERGER AGREEMENT AND THE IMPLEMENTATION AGREEMENT SET
FORTH BELOW, WHICH SUMMARIZE THE MATERIAL PROVISIONS OF SUCH AGREEMENTS, DO NOT
PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS
SOLICITATION STATEMENT/PROSPECTUS, AND TO THE IMPLEMENTATION AGREEMENT, A COPY
OF WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT AND EACH OF
WHICH IS INCORPORATED HEREIN BY REFERENCE.
THE MERGER AGREEMENT
GENERAL
The Merger Agreement provides for the merger of Raytheon with and into HE
Holdings, with HE Holdings surviving the Merger. As a result of the Merger,
Raytheon's separate corporate existence will cease and HE Holdings will
continue its existence under the laws of the State of Delaware, except that
immediately after the Merger, we intend to change the name of the surviving
corporation to Raytheon Company. The Merger will become effective at the
Effective Time and in accordance with a Certificate of Merger filed with the
Secretary of State of the State of Delaware. We anticipate that such filing
will be made immediately after the Closing, which Closing, in turn, should
occur as soon as practicable after the satisfaction or waiver of all of the
conditions specified in the Merger Agreement. The Merger Agreement provides
that, at or prior to the Effective Time, HE Holdings will adopt the HE Holdings
Certificate and the HE Holdings By-Laws, which will continue, and be referred
to herein, as the New Raytheon Certificate and the New Raytheon By-Laws,
respectively.
CONSIDERATION TO BE RECEIVED IN THE MERGER
The Merger Agreement provides that, at the 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
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share of Class B Common Stock of New Raytheon. 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 with
respect to such share.
Each unexpired and unexercised option under stock option plans of Raytheon in
effect at the Effective Time which has been granted to current or former
directors, officers, employees, consultants or independent contractors of
Raytheon or its subsidiaries or to any other persons by Raytheon (each, a
"RAYTHEON OPTION") will be automatically converted, at the 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 Effective Time (except for any
changes in vesting rights or permitted time of exercise which result from the
occurrence of the Merger).
Each whole share of Class A Common Stock of New Raytheon that is issued and
outstanding immediately prior to the Effective Time (but after giving effect to
the Hughes Defense Recapitalization) will remain outstanding and will be
unchanged after the Merger. Each fractional share of Class A Common Stock that
is issued and outstanding immediately prior to the Effective Time will be
converted into and represent an equivalent number of fractional shares of Class
B Common Stock, which will be treated as described under "--Manner of Effecting
the Exchange."
BOARDS, COMMITTEES AND OFFICERS
The Merger Agreement provides for the composition of the New Raytheon Board,
as well as for the composition of various committees of the New Raytheon Board
and certain other committees. The Merger Agreement also provides that the
officers of Raytheon immediately prior to the Effective Time will be the
officers of New Raytheon immediately following the Effective Time. See "New
Raytheon--Directors and Management of New Raytheon--Directors and Executive
Officers."
CERTAIN COVENANTS
The Merger Agreement includes certain provisions which govern the manner in
which Raytheon and HE Holdings must conduct their respective businesses between
the date of the Merger Agreement and the Closing. The purpose of these
provisions is to ensure that at Closing each company represents approximately
the same assets, liabilities and businesses as existed when the Merger
Agreement was executed.
Conduct of Raytheon's Operations. The Merger Agreement provides that, from
the date of the Merger Agreement to the Effective Time, Raytheon 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, to retain the services of
its officers and key employees, and to 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.
By way of amplification and without limiting the foregoing, the Merger
Agreement places restrictions on the ability of Raytheon to,
. with respect to its securities:
(i) adjust, split, combine, recapitalize or reclassify its capital stock,
(ii) make, declare or pay any dividend (other than regular quarterly cash
dividends made consistent with past practice) or any distribution on,
or repurchase or redeem its capital stock or related securities,
subject to certain limited exceptions set forth in the Merger
Agreement,
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(iii) grant any right or option to acquire any shares of its capital stock
subject to certain limited exceptions set forth in the Merger
Agreement,
(iv) issue or sell capital stock or related securities subject to certain
limited exceptions set forth in the Merger Agreement,
(v) enter into any agreement with respect to the sale or voting of its
capital stock;
. change its accounting principles;
. take any action that would reasonably be expected to result in the
representations and warranties set forth in the Merger Agreement becoming
false or inaccurate;
. take any action which could reasonably be expected to adversely affect or
delay the ability of any party thereto to obtain any approval of any
governmental authority required to consummate the transactions contemplated
by the Merger Agreement; or
. permit or cause any subsidiary to do any of the foregoing or agree or
commit to do any of the foregoing.
Conduct of HE Holdings' Operations. The Merger Agreement provides that,
except in certain circumstances, from the date of the Merger Agreement until
the Effective Time, HE Holdings (after giving effect to the consummation of the
Hughes Reorganization), 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,
to retain the services of its officers and key employees, and to 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.
By way of amplification and without limiting the foregoing, the Merger
Agreement places restrictions on the ability of HE Holdings (after giving
effect to the consummation of the Hughes Reorganization) to,
. with respect to its securities:
(i) grant any right or option to acquire any shares of its capital stock
or enter into any agreement with respect to the purchase, sale or
voting of its capital stock,
(ii) issue any instrument convertible into or exchangeable for such
capital stock,
(iii) 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;
. amend its charter or bylaws;
. merge or consolidate with any other person 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 HE Holdings and which are
not, directly or indirectly, wholly owned by HE Holdings;
. 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 increase the compensation, benefits or
severance of directors, employees, or consultants;
. change its accounting principles;
. take any action that would reasonably be expected to result in the
representations and warranties set forth in the Merger Agreement becoming
false or inaccurate;
40
THE MERGER
<PAGE>
. enter into or carry out any other transaction which is material to HE
Holdings 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 party thereto to obtain any approval of any
governmental authority required to consummate the transaction contemplated
by the Merger Agreement;
. enter into any settlement which includes 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.
Indebtedness. The Merger Agreement also provides that, as of or prior to the
Effective Time, HE Holdings will incur new debt for borrowed money in an amount
equal to the Intercompany Payment Amount and will use the proceeds of this debt
to make the Intercompany Payment to one or more affiliates of HE Holdings as of
or prior to the Effective Time. The Intercompany Payment Amount will be
adjusted to reflect (i) variations in the market price of Raytheon Common
Stock, subject to specified limits, and (ii) the amount of other debt of HE
Holdings outstanding as of the Effective Time, such that the "INTERCOMPANY
PAYMENT AMOUNT" will be equal to $9.5 billion minus the Class A Common Stock
Amount and minus all other debt of HE Holdings. The "CLASS A COMMON STOCK
AMOUNT" is equal to 102,630,503 multiplied by the average closing price of
Raytheon Common Stock on the NYSE during the 30-day period ending five days
prior to the Effective Time, provided 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.
For purposes of illustration only, we will assume that during the 30-day
period ending five days before the Effective Time, the average closing price of
Raytheon Common Stock on the NYSE is equal to $49.36 (the midpoint of the
collar range described in the preceding paragraph). In this case, the Class A
Common Stock Amount would be equal to $5,065,841,628 ($49.36 x $102,630,503).
If we assume that, at the Effective Time, HE Holdings has no other debt
outstanding, then the Intercompany Payment Amount would be equal to
$4,434,158,372 ($9,500,000,000 minus $5,065,841,628).
Competing Transactions. Under the terms of the Merger Agreement, neither
party will authorize or permit any of its subsidiaries or any of its or its
subsidiaries' directors, officers, employees, agents or representatives,
directly or indirectly, to take any action with respect to a Competing
Transaction, or to enter into any agreement, arrangement or understanding
requiring them to abandon, terminate or fail to consummate the Merger without
the consent of the other party.
This prohibition does not apply (i) to HE Holdings with respect to Competing
Transactions that do not include Hughes Defense or the consummation of which
would not otherwise result in the termination or material breach of any of the
Transaction Agreements, or (ii) 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 Competing Transactions (i) that are superior to the
transactions contemplated by the Merger Agreement, (ii) in which the offeror
has demonstrated that the consideration necessary for the Competing Transaction
is reasonably likely to be available and (iii) that the Raytheon Board or the
HE Holdings Board, as the case may be, concludes that it should consider in
order to fulfill its fiduciary duties to stockholders of Raytheon or HE
Holdings.
In the event that either the Raytheon Board or the HE Holdings Board
concludes in good faith, after considering state law and after seeking to
adjust the terms and conditions of the Merger Agreement to enable such party to
proceed with the Merger and related transactions, that it must accept such
Competing Transaction in order to comply with its fiduciary duties under
applicable law, then Raytheon or HE Holdings, as the case
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THE MERGER
<PAGE>
may be, will pay (i) the expenses incurred by the other party and its
affiliates in connection with pursuing the Merger and the transactions
contemplated by the Merger Agreement, which amount will not exceed $20.0
million, and (ii) a Termination Fee of $200.0 million. See "--Termination" and
"--Effect of Termination; Termination Fees."
Adoption of Rights Plan. The Merger Agreement provides that HE Holdings will
take all action necessary to adopt a shareholder rights plan as of the
Effective Time. See "Capital Stock--New Raytheon Capital Stock-- New Raytheon
Rights Agreement."
Other Actions; Notification of Certain Matters. The Merger Agreement provides
that, among other things: (i) during the period from and after the date of the
Merger Agreement, each of the parties will use all commercially reasonable
efforts to (a) consummate the Merger and the transactions contemplated by the
Merger Agreement, (b) cause the conditions to the Merger for which they are
responsible to be satisfied as soon as practicable, (c) cause the shares of
Class A Common Stock and Class B Common Stock to be approved for listing on the
NYSE, subject to official notice of issuance, prior to the Closing Date, and
(d) cause comfort letters to be delivered from each party's independent public
accountants; (ii) the parties will use their best efforts to obtain all
material approvals and make all material filings under the Hart-Scott-Rodino
Act; and (iii) neither party nor its affiliates will take any action that would
cause the Merger not to qualify as a reorganization or that would cause the
Hughes Defense Spin-Off or the Hughes Telecom Spin-Off not to qualify as tax-
free spin-offs. The parties also made certain covenants with respect to public
announcements, access to each other's books and records, expenses, preparation
of SEC documents, additional agreements and blue sky issues.
Raytheon and HE Holdings have agreed that each will promptly notify the other
party of (i) the occurrence or non-occurrence of any event which would cause
any representation or warranty made by it contained in the Merger Agreement to
be untrue or inaccurate in any material respect at or prior to the Effective
Time and (ii) any material failure by it to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that no such notification will limit or otherwise
affect the remedies of the parties available hereunder.
CONDITIONS
Each party's obligation to effect the 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
Merger.
Mutual Conditions. The respective obligations of Raytheon and HE Holdings to
consummate the Merger are subject to satisfaction or waiver of each of the
following conditions:
. no temporary restraining order, preliminary or permanent injunction or
other order or decree which prevents the consummation of the 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 Merger;
. expiration or termination of the waiting period applicable to the Merger
under the Hart-Scott-Rodino Act;
. all required approvals of, or filings with, any governmental authority
will have been obtained or made, except where failure to do so would not
have a 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;
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THE MERGER
<PAGE>
. approval of the Merger by Raytheon's stockholders;
. the effectiveness of the Registration Statement and the GM Registration
Statement and no stop order or similar restraining order being initiated or
threatened;
. consummation of the Pre-Merger Transactions;
. authorization for listing on the NYSE, subject to official notice of
issuance, of the shares of Class B Common Stock to be issued pursuant to
the Merger is received;
. the Goldman Sachs Fairness Opinion shall not have been withdrawn, revoked
or modified in an adverse manner;
. neither the Bear Stearns Fairness Opinion nor the CSFB Fairness Opinion
shall have been withdrawn, revoked or modified in an adverse manner;
. receipt by Raytheon and HE Holdings of the tax opinions of Wachtell,
Lipton, Rosen & Katz, special counsel to Raytheon, and Weil, Gotshal &
Manges LLP, special counsel to HE Holdings, respectively, in each case, to
the effect that the 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.
Conditions to the Obligations of Raytheon. The obligations of Raytheon to
consummate the Merger and the transactions contemplated by the Merger Agreement
are also subject to the fulfillment or waiver of the following conditions:
. certain representations and warranties of HE Holdings being true and
correct on the date of Merger Agreement and on and as of the Closing Date
as though made on and as of the Closing Date, except, in some
circumstances, for such inaccuracies which would not reasonably be expected
to have a material adverse effect on HE Holdings or New Raytheon;
. HE Holdings 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 Merger Agreement at or
prior to the Effective Time; and
. except to the extent contemplated by the Merger Agreement, there shall not
have been any material adverse change in the assets, liabilities, results
of operations, business or financial condition of HE Holdings and its
subsidiaries taken as a whole or any material adverse effect on the ability
of HE Holdings to consummate the transactions contemplated by the Merger
Agreement.
Conditions to the Obligations of HE Holdings. The obligations of HE Holdings
to consummate the Merger and the other transactions contemplated by the Merger
Agreement are subject to the fulfillment or waiver of the following conditions:
. certain representations and warranties of Raytheon being true and correct
on the date of Merger Agreement and on and as of the Closing Date as though
made on and as of the Closing Date, except, in certain circumstances, 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 Merger Agreement at or
prior to the Effective Time;
. except to the extent contemplated by the Merger Agreement, there will not
have been any material adverse change in the assets, liabilities, results
of operations, business or financial condition of Raytheon and its
subsidiaries taken as a whole or any material adverse effect on the ability
of Raytheon to consummate the transactions contemplated by the Merger
Agreement; and
. the Intercompany Payment will have been duly made in full.
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THE MERGER
<PAGE>
REPRESENTATIONS AND WARRANTIES; NO SURVIVAL
The Merger Agreement contains various representations and warranties of
Raytheon and HE Holdings. It is a condition of each party's obligation to
effect the Merger that these representations and warranties be true and correct
both as of the date of the Merger Agreement and as of the Closing Date (except
where such representations and warranties are specifically limited as to date
or materiality).
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, and
certain contracts or laws; required filings with and consents and approvals of
governmental authorities; board of directors 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,
including this Solicitation Statement/Prospectus and the accuracy of
information, including financial statements, contained therein; 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 HE Holdings relate generally to: due
corporate organization and qualification; corporate authority; absence of
violations of, among other things, certificates of incorporation, by-laws, and
certain contracts or laws; required filings with and consents and approvals of
governmental authorities; the capital structure of HE Holdings; board of
directors and stockholder approvals; subsidiaries of HE Holdings and other
equity or ownership interests of HE Holdings; information filed with the SEC as
part of this Solicitation Statement/Prospectus and the accuracy of information
contained therein; 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 Merger Agreement by Raytheon
and HE Holdings will not survive the Effective Time.
WAIVER AND AMENDMENT
The Merger Agreement provides that, subject to applicable law, the parties
may: (i) extend the time for the performance of any of the obligations or other
acts of the other party; (ii) waive any inaccuracies in the representations and
warranties contained in the Merger Agreement or in any document delivered
pursuant thereto; or (iii) waive compliance with any of the agreements or
conditions contained therein, 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 Merger Agreement
may amend the Merger Agreement by action of their respective boards of
directors, at any time; provided that, after adoption of the Merger Agreement
by Raytheon Common Stockholders or approval of the Pre-Merger Transactions by
GM Common Stockholders, amendments which by law require further approval or
authorization by the stockholders of Raytheon or GM, as the case may be, may
not be made without such further approval or authorization. In either case, the
Merger Agreement, may not be amended except by a written instrument signed by
each party.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time by mutual written consent of Raytheon and HE Holdings or, by either
Raytheon or HE Holdings:
. if any permanent injunction or other order of a court or other competent
governmental authority preventing the consummation of the Merger or the
Pre-Merger Transactions has become final and nonappealable;
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THE MERGER
<PAGE>
. 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 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 Merger is not consummated before December 31, 1997, unless extended
by the boards of directors of both Raytheon and HE Holdings (provided that
the terminating party or its affiliates have not failed to perform any
material covenant or obligation under the Merger Agreement or under the
Implementation Agreement, which failure has been the cause of or resulted
in the failure of the Merger to occur on or before such date);
. if the requisite number of written consents of Raytheon Common
Stockholders required to approve the Merger and the transactions
contemplated hereby, including adoption of the Merger Agreement, are not
obtained;
. if the requisite vote of each class of stock of GM to approve the Pre-
Merger Transactions is not obtained;
. upon the occurrence of any event or effect not contemplated by the Merger
Agreement that has resulted in a material adverse change after the date of
the Merger Agreement in the assets, 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 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 (i) withdraws or modifies in any adverse
manner its approval or recommendation of the Merger Agreement or the
Merger, (ii) fails to reaffirm such approval or recommendation upon such
party's request, (iii) 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 Merger
Agreement or an affiliate thereof, or (iv) resolves to take any of the
actions specified in clause (i);
. under the circumstances described above under "--Competing Transactions;"
or
. if the Implementation Agreement has been terminated pursuant to its terms.
Each of Raytheon and HE Holdings has agreed that, in the event that the
Merger is not consummated before December 31, 1997, it will not assert prior to
January 16, 1998 its right to terminate the Merger Agreement pursuant to the
terms of the Merger Agreement because of the failure to have consummated the
Merger before December 31, 1997.
In the event of the termination of the Merger Agreement pursuant to its
terms, the Merger Agreement will become void and have no effect, and none of
the parties or their directors, officers or stockholders will incur any
liability, except (i) with respect to certain covenants which survive such
termination, (ii) with respect to payment of the expenses of the other party
and payment of the Termination Fee in certain circumstances, as described in
"--Effect of Termination; Termination Fees," and (iii) that nothing in the
Merger Agreement will relieve any party of liability for a willful breach of
any provision of the Merger Agreement or invalidate the provisions of the
confidentiality agreement between Raytheon and HEC.
EFFECT OF TERMINATION; TERMINATION FEES
Termination Fees Payable By HE Holdings. The Merger Agreement obligates HE
Holdings to pay all Raytheon Expenses if the Merger Agreement is terminated
under any of the following circumstances:
. by Raytheon, in response to any resolution or action by the HE Holdings
Board (i) to withdraw, modify in any adverse manner, or decline to reaffirm
its approval or recommendation of the Merger Agreement or the Merger or
(ii) to approve or recommend any acquisition of HE Holdings or a material
portion of its assets or any tender offer for shares of its capital stock;
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THE MERGER
<PAGE>
. by HE Holdings, if the HE Holdings Board 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;
. by either Raytheon or HE Holdings, if the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders fail to approve the Pre-Merger
Transactions;
. by either Raytheon or HE Holdings, in the event that the Implementation
Agreement has been terminated for any of the following reasons:
<TABLE>
<C> <S>
(i) by GM, in the event that the GM Board has concluded that, consistent
with its fiduciary obligations, it must revoke or withdraw a
recommendation in favor of the Pre-Merger Transactions in the GM
Solicitation Statement/Prospectus, and such conclusion cannot
reasonably be avoided by adjusting the Distribution Ratio;
(ii) by Raytheon, in the event that the GM Board has made a determination
described immediately above and GM has not terminated the Merger
Agreement within 10 business days thereof;
(iii) by Raytheon, in the event that GM revokes, withdraws, modifies in an
adverse manner or fails to reaffirm the recommendation of the GM
Board in favor of the Pre-Merger Transactions in the GM Solicitation
Statement/Prospectus; or
(iv) by either GM or Raytheon, at any time following the termination of
the Spin-Off Merger Agreement, in the event that (a) the GM Board
determines (and such determination cannot reasonably be avoided by
adjusting the Distribution Ratio) that consummation of the Pre-
Merger Transactions would not be both in the best interests of GM
and the GM Common Stockholders
and fair to the GM $1 2/3 Common Stockholders and the GM Class H
Common Stockholders; (b) certain opinions or confirmations of the GM
Financial Advisors or Goldman Sachs are withdrawn or revoked (other
than in certain limited circumstances); or (c) the Pre-Merger
Transactions fail to receive the requisite shareholder approval of
GM Common Stockholders; or
</TABLE>
. by either Raytheon or HE Holdings, if the Merger is not consummated before
December 31, 1997, unless extended by the Raytheon Board and the HE
Holdings Board, and the failure to consummate the Merger is based on the
failure of GM to satisfy certain conditions of the Transaction Agreements.
In addition, HE Holdings will be obligated to pay Raytheon $200.0 million
(the "TERMINATION FEE") in the event that the Merger Agreement is terminated as
described above, and (a) following the date of the Merger Agreement but prior
to the time of such termination, a Competing Transaction involving Hughes
Defense has been commenced, publicly proposed, publicly disclosed or
communicated to the HE Holdings Board or (b) at any time within three months
following such termination any agreement with respect to a Competing
Transaction involving Hughes Defense has been entered into or any such
Competing Transaction has been 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
Merger Agreement, including legal, accounting and investment banking fees, up
to but not in excess of $20 million.
Termination Fees Payable By Raytheon. The Merger Agreement obligates Raytheon
to pay all HE Holdings Expenses if the Merger Agreement is terminated:
. by HE Holdings if (i) the requisite vote of Raytheon Common Stockholders
to approve the Merger Proposal is not obtained; or (ii) if the Raytheon
Board or any committee of the Raytheon Board (a) withdraws or modifies in
any adverse manner its approval or recommendation of the Merger Agreement
or the Merger (or resolves to take such action), (b) fails to reaffirm such
approval or recommendation
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<PAGE>
upon such party's request, or (c) approves or recommends any acquisition of
Raytheon or a material portion of its assets or any tender offer for shares
of its capital stock, in each case, other than by HE Holdings or its
affiliates;
. by Raytheon (i) if the requisite vote of Raytheon Common Stockholders to
approve the Merger and the transactions contemplated hereby is not
obtained; or (ii) if, as a result of any offer, inquiry, solicitation or
proposal with respect to any Competing Transaction received by Raytheon
after the date hereof from a person other than HE Holdings or any of its
affiliates, the Raytheon Board concludes in good faith, after considering
applicable provisions of state law and after giving effect to all
adjustments which may be offered by HE Holdings, that termination of the
Merger Agreement is necessary for the Raytheon Board to comply with its
fiduciary duties under applicable law; or
. by Raytheon or HE Holdings, if the Merger shall not have been consummated
before December 31, 1997, unless extended by the Raytheon Board and the HE
Holdings Board, and the failure to consummate the Merger is based on the
failure of Raytheon to satisfy certain conditions of the Merger Agreement.
In addition, Raytheon will be obligated to pay HE Holdings the Termination
Fee in the event that the Merger Agreement is terminated as described above,
and (i) following the date of the Merger Agreement but prior to the time of
such termination, a Competing Transaction involving Raytheon has been
commenced, publicly proposed, publicly disclosed or communicated to the
Raytheon Board, or (ii) at any time within three months following such
termination, any agreement with respect to a Competing Transaction involving
Raytheon has been entered into or any such Competing Transaction has been
consummated.
"HE HOLDINGS EXPENSES" means an amount in cash equal to the aggregate amount
of HE Holdings' and its affiliates' actual documented out-of-pocket expenses
incurred in connection with pursuing the transactions contemplated by the
Merger Agreement, including legal, accounting and investment banking fees, up
to but not in excess of $20 million.
INDEMNIFICATION
The Merger Agreement provides that from and after the Effective Time, New
Raytheon will indemnify, defend and hold harmless each individual who was, at
any time prior to the Effective Time, an officer or director of Raytheon or HE
Holdings or any of their respective subsidiaries (the "INDEMNIFIED PARTIES")
against all liabilities, including expenses, arising out of or in connection
with any claims or actions based on (i) the fact that such person is or was a
director or officer of Raytheon or HE Holdings or their respective
subsidiaries, as the case may be (but, in the case of HE Holdings, only insofar
as relating to Hughes Defense) and (ii) the Merger Agreement or the
transactions contemplated thereby, in each case to the full extent Raytheon or
HE Holdings, 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 DGCL. 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 Effective Time), after the Effective Time, New
Raytheon (i) will pay all reasonable fees and expenses of any counsel retained
by any Indemnified Parties promptly as statements therefor are received, and
(ii) 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 Merger Agreement, any Indemnified Party wishing to claim indemnification,
upon learning of any such claim, action, suit, proceeding or investigation,
will notify New Raytheon, and will deliver to New Raytheon the undertaking, if
any, contemplated by Section 145(e) of the DGCL. Under the terms of the 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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THE IMPLEMENTATION AGREEMENT
GENERAL
The Implementation Agreement is an agreement by and between GM and Raytheon,
pursuant to which, subject to certain conditions, GM has committed to Raytheon
that it will take certain actions to effectuate the Pre-Merger Transactions.
THE PRE-MERGER TRANSACTIONS
Determination of the Distribution Ratio. The Implementation Agreement
provides that, subject to the fiduciary duties of the GM Board and subject to
the terms and provisions of the Implementation Agreement, the GM Board will use
all commercially reasonable efforts (i) to determine, in consultation with the
GM Financial Advisors, a Distribution Ratio that will (a) enable the GM Board
to conclude that, as of the date of such determination, the Pre-Merger
Transactions, taken as a whole, are in the best interests of GM and GM Common
Stockholders and fair to the GM $1 2/3 Common Stockholders and GM Class H
Common Stockholders and (b) enable Merrill Lynch to provide the Merrill Lynch
Fairness Opinion and Salomon Brothers to provide the Salomon Brothers Fairness
Opinion; and (ii) to consummate the Pre-Merger Transactions. Approval of the
formula for determining the Distribution Ratio was given by the GM Board on,
and these opinions were delivered on, October 6, 1997.
Execution of the Spin-Off Merger Agreement. The Implementation Agreement also
provides that, after (i) GM has determined a Distribution Ratio as discussed
above and (ii) Merrill Lynch has rendered the Merrill Lynch Fairness Opinion
and Salomon Brothers has rendered the Salomon Brothers Fairness Opinion, GM and
Merger Sub will enter into the Spin-Off Merger Agreement, which will include
the Distribution Ratio as so determined. Following such time, if any, as (i) an
adjusted Distribution Ratio has been determined as contemplated in the
Implementation Agreement or the Spin-Off Merger Agreement and (ii) GM has
received each of the Merrill Lynch Fairness Opinion and the Salomon Brothers
Fairness Opinion with respect to the adjusted Distribution Ratio, GM will, and
will cause Merger Sub to, amend the Spin-Off Merger Agreement to reflect the
Distribution Ratio as so adjusted.
GM Stockholder Approval Process. The Implementation Agreement also provides
that, following the execution of the Spin-Off Merger Agreement and provided
that none of the Merrill Lynch Fairness Opinion, the Salomon Brothers Fairness
Opinion and the Goldman Sachs Fairness Opinion has been withdrawn, revoked or
modified in a manner adverse to GM or to the GM Board or to either class of GM
Common Stockholders, and provided that GM has received the requisite consents
authorizing the inclusion of such opinions in the GM Solicitation
Statement/Prospectus, GM will (i) take all commercially reasonable action in
accordance with the U.S. federal securities laws, the DGCL, the GM Certificate
and the GM By-Laws necessary to present the Pre-Merger Transactions to the GM
Common Stockholders for their consideration and approval, (ii) include in the
GM Solicitation Statement/Prospectus the recommendation of the GM Board in
favor of the Pre-Merger Transactions and (iii) use all commercially reasonable
efforts to solicit from the GM Common Stockholders entitled to vote thereon
consents with respect to the Pre-Merger Transactions. Each of these obligations
is subject to the fiduciary duties of the GM Board under applicable law.
COVENANTS OF GM
No Solicitation. The Implementation Agreement provides that, from the date of
the Implementation Agreement to the Effective Time, except in certain
circumstances, GM will not take any of the following actions without the prior
written consent of Raytheon:
. 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 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
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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 Merger.
Transaction Agreements. The Implementation Agreement also provides that:
. GM will enter into, and will cause its subsidiaries to enter into, the
Transaction Agreements, as and when contemplated by the Implementation
Agreement and the other Transaction Agreements;
. GM will consult with Raytheon regarding any changes, amendments or
additions that are proposed to be made to the Transaction Agreements prior
to the Effective Time, whether before or after any such agreement is
entered into by the respective parties thereto;
. GM will not permit (except for any amendment to the Spin-Off Merger
Agreement to reflect the determination of the Distribution Ratio or the
terms of the New GM Class H Common Stock and except for any amendment to
the Spin-Off Merger Agreement to adjust the Distribution Ratio under
certain circumstances) any such change, amendment or addition to be made
prior to the 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, amendment or
addition could not reasonably be foreseen (i) to have an adverse effect on
the business, assets, liabilities or financial condition of HE Holdings
(after giving effect to the consummation of the Hughes Reorganization) or,
following the Effective Time, New Raytheon or (ii) to delay materially the
consummation of the Merger on the terms and subject to the conditions of
the Implementation Agreement and the other Transaction Agreements;
. GM 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
. GM will not permit HE Holdings to make, prior to the Effective Time, any
formal election expressly referenced in the Master Separation Agreement to
be made by HE Holdings unless such election is acceptable to Raytheon.
CERTAIN OTHER COVENANTS
The Implementation Agreement provides that, among other things, each of the
parties will, and will cause its subsidiaries to, use all commercially
reasonable efforts to consummate the Pre-Merger Transactions and the Merger.
The Implementation Agreement provides that GM and Raytheon will promptly
notify the other party of (i) 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 Effective Time and (ii) 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 GM and Raytheon. The representations and warranties of GM relate generally
to: due corporate organization and qualification; corporate authority;
ownership of the capital stock of HE Holdings; absence of violations of, among
other things, certificates of incorporation, by-laws and certain contracts or
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 this
Solicitation Statement/Prospectus.
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The representations and warranties of Raytheon relate generally to: due
corporate organization and qualification; corporate authority; the accuracy of
certain information contained in the GM Solicitation Statement/Prospectus; and
all of the representations and warranties of Raytheon set forth in the Merger
Agreement. See "--The Merger Agreement--Representations and Warranties; No
Survival."
The representations and warranties made in the Implementation Agreement by GM
and Raytheon will not survive the Effective Time.
WAIVER AND AMENDMENT
The Implementation Agreement provides that, subject to applicable law, the
parties may (i) extend the time for the performance of any of the obligations
or other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties contained in the Implementation Agreement or in
any document delivered pursuant thereto and (iii) 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.
In addition, subject to applicable law, the parties to the Implementation
Agreement may amend the Implementation Agreement by action of their respective
board of directors, at any time; provided, that after adoption of the
Implementation Agreement by Raytheon Common Stockholders or approval of the
Pre-Merger Transactions by GM Common Stockholders, amendments which by law
require further approval or authorization by the stockholders of Raytheon or
GM, 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
Effective Time by mutual written consent of GM and Raytheon, or by either GM or
Raytheon for any of the following reasons:
. at any time following the termination of either of the Merger Agreement or
the Spin-Off Merger Agreement in accordance with the terms thereof; or
. in the event of either: (i) 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 (ii) 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.
The Implementation Agreement may be terminated at any time prior to the
Effective Time by GM 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, (i) that it must revoke or
withdraw its recommendation included in the GM Solicitation
Statement/Prospectus in favor of the Pre-Merger Transactions and (ii) that the
foregoing determination could not reasonably be avoided by adjusting the
Distribution Ratio so as to satisfy the conditions set forth in the
Implementation Agreement as of the date of such adjustment.
The Implementation Agreement may be terminated at any time prior to the
Effective Time by Raytheon in the event that:
. the GM Board makes a determination regarding the Distribution Ratio as
described above and does not terminate the Implementation Agreement within
10 business days thereafter; or
. the GM Board withdraws or modifies in any adverse manner its approval or
recommendation of the Pre-Merger Transactions or fails to reaffirm such
approval or recommendation upon Raytheon's request.
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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, their subsidiaries or their respective
directors, officers or stockholders, except for the payment of expenses and a
termination fee as may be provided in the Merger Agreement. See "--Description
of the Merger--The Merger Agreement--Effect of Termination; Termination Fees."
Notwithstanding the foregoing, nothing in the Implementation Agreement will
relieve either party to the Implementation Agreement of liability for a willful
breach of any provision of the Implementation Agreement.
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SEPARATION AND TRANSITION AGREEMENTS
INTRODUCTION
As a condition to the consummation of the Merger, Raytheon has required that
HE Holdings be, at the time of the consummation of the Merger, an independent,
publicly owned company comprising only Hughes Defense. Such condition will be
satisfied in part by means of the Hughes Defense Spin-Off. Certain
restructuring activities involving HEC and its business--the Hughes
Reorganization--will need to occur prior to the Hughes Defense Spin-Off in
order for HE Holdings to comprise only the business of Hughes Defense. Under
the Implementation Agreement, GM has agreed to enter into, and cause HE
Holdings, Hughes Network Systems and Delco to enter into, the Master Separation
Agreement and the agreements contemplated thereby, including the Hughes
Separation Agreement, pursuant to which, among other things, the Hughes
Reorganization will be effected.
Pursuant to the Implementation Agreement, GM has agreed to consult with
Raytheon regarding any changes, amendments or additions that are proposed to be
made to the Separation Agreements prior to the Effective Time, whether before
or after any such agreement is entered into by the respective parties thereto.
GM has also agreed that it will not permit any such change, amendment or
addition to be made prior to the Effective Time to the forms or terms of the
Separation Agreements without Raytheon's consent (which consent shall not be
unreasonably withheld or delayed), unless such change, amendment or addition
could not reasonably be foreseen (i) to have an adverse effect on the business,
assets, liabilities or financial condition of HE Holdings (after giving effect
to the consummation of the Hughes Reorganization) or, following the Effective
Time, New Raytheon or (ii) to delay materially the consummation of the Merger
on the terms and subject to the conditions of the Transaction Agreements.
Unless the Implementation Agreement has been terminated, GM has agreed that it
will not, and will not permit any of its subsidiaries to, terminate (except as
may be permitted by the terms of any of the Separation Agreements) or waive any
condition of the Separation Agreements, without the prior written consent of
Raytheon. GM has also agreed that it will not permit HE Holdings to make, prior
to the Effective Time, any formal election expressly referenced in the Master
Separation Agreement to be made by HE Holdings unless such election is
acceptable to Raytheon. See "--Description of the Merger--The Implementation
Agreement--Covenants of GM."
THE SEPARATION AGREEMENTS WILL BE ENTERED INTO IMMEDIATELY PRIOR TO THE
CONSUMMATION OF THE SPIN-OFF MERGER. THE FOLLOWING IS A SUMMARY DESCRIPTION OF
CERTAIN OF THE MATERIAL PROVISIONS OF THE SEPARATION AGREEMENTS. THE
DESCRIPTION OF THE SEPARATION AGREEMENTS DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE SEPARATION AGREEMENTS. THE MASTER
SEPARATION AGREEMENT, THE HUGHES SEPARATION AGREEMENT AND THE TAX SHARING
AGREEMENT HAVE BEEN FILED WITH THE SEC AS EXHIBITS TO THE REGISTRATION
STATEMENT AND ARE INCORPORATED HEREIN BY REFERENCE.
SUMMARY OF MASTER SEPARATION AGREEMENT
GENERAL
The Master Separation Agreement is an agreement among GM, HE Holdings, Delco
and Hughes Network Systems, pursuant to which, among other things, the
transfers of certain assets and liabilities (which transfers are required so
that each of HE Holdings, Delco and Hughes Network Systems 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 Hughes Network Systems and New Raytheon based on an adjusted net worth
of HE Holdings as of immediately prior to the Merger and for certain other
separation and transition arrangements. The Master Separation Agreement also
requires that certain parties to such agreement enter into the Hughes
Separation Agreement, the Tax Sharing Agreement and certain other agreements.
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ASSET AND LIABILITY TRANSFERS
Pursuant to the Master Separation Agreement, prior to the effective time of
the Spin-Off Merger, GM will cause HEC (or the appropriate subsidiary of HEC)
to transfer to each of HE Holdings, Delco and Hughes Network Systems all of
HEC's right, title and interest in the assets of HEC that are used or held for
use primarily in (but not presently owned by) the respective businesses of
these entities. See "--Description of the Pre-Merger Transactions--Hughes
Reorganization." The assets transferred will be transferred "as is where is"
and, except as set forth under "--Indemnification," no transferor of the assets
described above will make any warranty, 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 HEC's intellectual property, see "--Summary of
Other Agreements Contemplated by the Master Separation Agreement--Intellectual
Property."
Simultaneously with the transfers described above, each of HE Holdings, Delco
and Hughes Network Systems, in partial consideration for the transfers
described above, 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 HE Holdings, Delco and
Hughes Network Systems 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 HEC as
conducted at any time prior to, on or after the 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, HEC will merge with GM, with GM as the surviving
corporation, and the subsidiary of HE Holdings that principally operates Hughes
Defense will merge with HE Holdings, with HE Holdings as the surviving
corporation. HE Holdings will then transfer to GM all of its right, title and
interest in and to the shares of capital stock of Hughes Network Systems in the
Hughes Telecom Spin-Off. See "--Description of the Pre-Merger Transactions."
INDEMNIFICATION
Under the Master Separation Agreement, Hughes Network Systems will represent
and warrant to HE Holdings that the assets of HE Holdings (with certain
enumerated exceptions) as of immediately following the Spin-Off Merger
Effective Time will include all assets owned by HEC (and all assets in which
HEC has contractual rights) which are primarily used in, or held primarily for
use in, Hughes Defense as of the Spin-Off Merger Effective Time and will be
sufficient to conduct such business after the Spin-Off Merger Effective Time as
it is conducted immediately prior to the Spin-Off Merger Effective Time. Hughes
Network Systems will indemnify, defend and hold harmless HE Holdings, New
Raytheon, GM, HEC and Delco, their respective successors-in-interest,
subsidiaries and past and present directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives against any
and all liabilities arising 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 liability.
HE Holdings, Hughes Network Systems and Delco will each indemnify, defend and
hold harmless each other and GM and HEC, and their respective successors-in-
interest, subsidiaries, past and present directors, officers, employees,
agents, consultants, advisors, accountants, attorneys and representatives,
against any and all liabilities arising out of or in connection with their
respective assets and liabilities and the conduct of their respective
businesses (including, in the case of HE Holdings, in connection with any
breach by HE Holdings or any of its subsidiaries after the Spin-Off Merger
Effective Time of any terms of the Transactions Agreements) and will reimburse
them for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such liability.
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POST-CLOSING ADJUSTMENT
The Master Separation Agreement provides for a payment by either Hughes
Network Systems or New Raytheon to the other party under certain circumstances
to be made following the consummation of the Merger based upon a comparison of
(i) the adjusted net worth of HE Holdings as reflected on the September 30,
1996 balance sheet provided to Raytheon, as adjusted pursuant to the terms of
the Master Separation Agreement (the "TARGET"), and (ii) the adjusted net worth
of HE Holdings as of immediately prior to the Effective Time and after the
consummation of the Hughes Reorganization based on an audited balance sheet
prepared as of such time and in such manner as described in the Master
Separation Agreement (the "CLOSING DATE FINAL AMOUNT"). If the Target exceeds
the Closing Date Final Amount by $50 million or more, then Hughes Network
Systems will pay to New Raytheon in cash the amount in excess of $50 million by
which the Target exceeds the Closing Date Final Amount, plus interest thereon
from the 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 Effective Time. If the Closing Date Final
Amount exceeds the Target by $50 million or more, then New Raytheon will pay to
Hughes Network Systems in cash the amount in excess of $50 million by which the
Closing Date Final Amount exceeds the Target, plus interest thereon calculated
in the same manner as described above. In addition to the foregoing, any cash
reflected in the balance sheet of HE Holdings and its subsidiaries as of
immediately prior to the Effective Time and after the consummation of the
Hughes Reorganization, prepared as described in the Master Separation
Agreement, will be transferred to Hughes Network Systems 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 balance sheet, together with interest
thereon calculated in the same manner as described above.
SUMMARY OF HUGHES SEPARATION AGREEMENT
GENERAL
The Master Separation Agreement contemplates that, prior to the Effective
Time, GM and HE Holdings will enter into the Hughes Separation Agreement,
pursuant to which, among other things, HE Holdings will covenant to preserve
the tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off
and the Merger, indemnification will be established, and certain transaction-
related liabilities will be allocated.
Pursuant to the Hughes Separation Agreement, HE Holdings, and New Raytheon,
as successor to HE Holdings following the Merger, will agree to certain
covenants restricting New Raytheon's future actions following the Merger. These
restrictions are intended to provide further assurances that the Merger and the
Pre-Merger Transactions will be tax free for U.S. federal income tax purposes.
Specifically, New Raytheon will agree not to engage in any of the transactions
listed below unless GM has determined, in its sole discretion, that such
transactions will not jeopardize the tax-free status of the Merger or the Pre-
Merger Transactions.
For a period of two years following the Merger, New Raytheon will not:
. enter into or permit to occur (to the extent it has a right to prohibit)
any transaction (or series of transactions) which would result in any
individual or entity acquiring 15% or more of the value or the number of
outstanding shares of New Raytheon Common Stock;
. enter into or permit to occur (to the extent it has a right to prohibit)
any transaction (or series of transactions) which would result in any
individual or entity acquiring from New Raytheon all or a substantial
portion of New Raytheon's assets or business in exchange for equity
interests in the acquiring entity where such equity interests are received
by holders of capital stock of New Raytheon;
. issue any shares or rights to acquire shares of New Raytheon Capital Stock
if, as a result of such issuance, the number of shares of Class A Common
Stock issued in the Hughes Defense Spin-Off would constitute less than 80%
of the voting power of New Raytheon in the election of directors;
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. enter into any transaction as a result of which New Raytheon or one of its
affiliates 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 then
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;
. issue any non-voting stock in New Raytheon;
. cause New Raytheon, by any means, to cease to engage in the active conduct
of the trade or business (within the meaning of Code Section 355(b)(2))
conducted by Hughes Defense immediately prior to the Effective Time;
. voluntary dissolve or liquidate;
. dispose of any of the historic business assets that, in the aggregate,
constitute more than 60% of either the gross assets of New Raytheon or the
consolidated gross assets of New Raytheon and its subsidiaries; or
. take any other actions reasonably likely to jeopardize the tax-free status
of the Merger or the Pre-Merger Transactions.
For a period of three years following the Merger, New Raytheon will not amend
or change the New Raytheon Certificate or the New Raytheon By-Laws in a manner
that would 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.
New Raytheon also agreed that it will not propose a plan of recapitalization
or amendment to the New Raytheon Certificate or other action providing for,
. the conversion of shares of Class A Common Stock or Class B Common Stock
into any other class (including entering into an acquisition transaction
if, as a result, shareholders of New Raytheon would hold more than 50% of
the equity of the acquiror as a result);
. a change in the voting rights of any class of New Raytheon Common Stock;
or
. any other action having the same effect.
In the event that New Raytheon desires to take one of the actions prohibited by
these covenants, after notifying GM, GM may elect either to seek a tax opinion
of counsel or a ruling of the IRS to the effect that the proposed action will
not jeopardize the tax-free status of the Merger or the Pre-Merger
Transactions, or to cooperate with New Raytheon in its effort to seek such an
opinion or ruling.
In connection with the covenants described above, HE Holdings and New
Raytheon, as successor, have agreed to indemnify GM for any tax-related losses
incurred by GM due to any tax assessment or controversy with respect to the
Hughes Defense Spin-Off or the Merger to the extent that such losses are caused
by any breach by New Raytheon of any of the representations, warranties or
covenants made in the Hughes Separation Agreement, unless, with respect to
violation of the above covenants, GM has delivered to New Raytheon notice that
GM has determined that such action will not jeopardize the tax-free status of
the Merger or the Pre-Merger Transactions, or to cooperate with New Raytheon in
its effort to seek such an opinion or ruling.
INDEMNIFICATION
Following the Merger, New Raytheon will indemnify GM, all affiliates of GM,
and each of their respective directors, officers and employees, from and
against (i) all losses relating to any breach by New Raytheon or any affiliate
of New Raytheon of any of the provisions of the Hughes Separation Agreement,
(ii) all losses relating to
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misrepresentations relating to Raytheon, the Merger, or other forward-looking
information regarding New Raytheon which are included in either this
Solicitation Statement/Prospectus, or the Hughes Defense Registration
Statement, and (iii) all losses relating to actions taken by Raytheon or any
affiliate of Raytheon in violation of the Merger Agreement.
Following the Merger, GM will indemnify, defend, and hold harmless New
Raytheon, all affiliates of New Raytheon, and each of their respective
directors, officers and employees, from and against (i) all losses relating to
any breach by GM or any affiliate of GM of any of the provisions of the Hughes
Separation Agreement; (ii) all losses relating to misrepresentations relating
to HE Holdings (as it existed prior to the Merger) or the Pre-Merger
Transactions; and (iii) all losses relating to or arising out of any breach of
GM's representation in the Implementation Agreement that none of the
Transaction Agreements conflict with either the certificates of incorporation
or the bylaws of GM or any of its subsidiaries.
SUMMARY OF TAX SHARING AGREEMENT
As part of the Master Separation Agreement and as a condition to the
consummation of the Merger, GM, HE Holdings and Hughes Network Systems will
enter into the Tax Sharing Agreement. The Tax Sharing Agreement sets outs
certain duties and obligations of GM, HE Holdings and Hughes Network Systems
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 (i) 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"), (ii) 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"), (iii) 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 (iv) certain indemnification rights and
obligations among New Raytheon, Hughes Network Systems and GM. The Tax Sharing
Agreement also sets out the rights of GM, Hughes Network Systems 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. GM or Hughes Network Systems generally will
pay all Income Taxes attributable to HE Holdings 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 HE Holdings and its
subsidiaries for a Straddle Period generally will be allocated between Hughes
Network Systems or GM, 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 (i) 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 (ii) 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.
Indemnification. Except as provided in the Hughes Separation Agreement, GM
and Hughes Network Systems generally will indemnify New Raytheon for all
liabilities (other than foreign income tax liabilities) related to the
following:
. all 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 Merger;
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. 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 Merger;
. all Income Tax liabilities which GM or Hughes Network Systems is obligated
to pay as set out under "--Post-Distribution Taxable Period," "--Pre-
Distribution Taxable Period" or "--Straddle Period;" and
. any Income Tax liabilities of the HE Holdings Group resulting from a
breach by Hughes Network Systems or GM of any of their covenants contained
in the Tax Sharing Agreement.
Under the terms of the Tax Sharing Agreement, New Raytheon generally will
indemnify GM for all liabilities (other than foreign income tax liabilities)
related to the following:
. all Income Tax liabilities which HE Holdings/New Raytheon is obligated to
pay as set out under "--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 GM
and certain of its affiliates by, HE Holdings (and, after the 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 Merger, see "--Summary of
the Hughes Separation Agreement."
SUMMARY OF OTHER AGREEMENTS CONTEMPLATED BY THE MASTER SEPARATION AGREEMENT
Pursuant to the Master Separation Agreement, the parties thereto 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/environmental, employee matters, stock options,
insurance, supply arrangements, transition services and corporate purchasing.
As a result of the Merger, each of the rights, benefits and obligations of HE
Holdings pursuant to the agreements described below will become a right,
benefit or obligation, as the case may be, of New Raytheon. Each reference in
this section to HE Holdings shall also be a reference to New Raytheon following
the Merger. SET FORTH BELOW IS A SUMMARY DESCRIPTION OF THE MATERIAL PROVISIONS
OF THE ARRANGEMENTS WITH RESPECT TO EACH OF THESE MATTERS. SUCH DESCRIPTION
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH AGREEMENTS. See "--Introduction."
INTELLECTUAL PROPERTY
Pursuant to the provisions of the Master Separation Agreement and the
agreements with respect to the treatment of intellectual property entered into
pursuant to the Master Separation Agreement, Hughes Network Systems will
acquire or otherwise own, and HE Holdings will assign to Hughes Network
Systems, all of Hughes Defense right, title and interest in and to all of HEC's
or HEC's subsidiaries' intellectual property (including trademarks), other than
the intellectual property relating primarily to Hughes Defense. HE Holdings
will continue to own from and after the Spin-Off Merger Effective Time all
intellectual property of HEC relating primarily to Hughes Defense, except as
set forth in the next sentence. Hughes Network Systems will also acquire all
right, title and interest in and to the (i) "DUAL USE TECHNOLOGY," which is
intellectual property developed by Hughes Defense for the business of Hughes
Defense (a) that is useful in the business of Hughes Telecom as conducted
immediately prior to the Spin-Off Merger Effective Time and (b) which covers
components manufactured or processes that are to be utilized by Hughes Telecom,
(ii) the intellectual property of Hughes Research Labs that exists as of the
Spin-Off Merger Effective Time and (iii) any trademark, service mark or trade
name which contains the name "Hughes." HE Holdings will grant to Hughes Network
Systems and Delco a non-exclusive,
57
THE MERGER
<PAGE>
perpetual, royalty-free license to make, have made, use, sell and import
products under HE Holdings' 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 Network Systems or its
affiliates or Delco or its affiliates, as the case may be, after the 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 Network Systems will grant a non-
exclusive, perpetual, royalty-free license to HE Holdings to make, have made,
use, sell and import products utilizing Dual Use Technology for use in any
business that is not competitive with Hughes Telecom or Delco, in each case, as
conducted at the Spin-Off Merger Effective Time. Hughes Network Systems will
also grant a non-exclusive, perpetual, royalty-free license to HE Holdings 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 Spin-Off Merger Effective Time. In addition, Hughes Network
Systems will grant a non-exclusive, perpetual, royalty-free license to HE
Holdings to make, have made, use, sell and import products under intellectual
property of Hughes Research Labs existing prior to the 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 Spin-Off Merger Effective
Time.
Effective at the Spin-Off Merger Effective Time, Hughes Network Systems will
grant a non-exclusive, perpetual, royalty-free trademark and trade and company
name license to HE Holdings to use the name "Hughes" solely in connection with
the business of Hughes Defense as part of any trade and company name of HE
Holdings (or any subsidiary or division thereof), provided that Raytheon's name
is also used as part of such trade or company name and provided further that
Raytheon's name precedes the name "Hughes." In no event, however, will HE
Holdings have rights to use the logo of the word "Hughes" in the round-cornered
blue rectangle except for a transitional period where such use occurs within a
narrative text and such text describes the transactions contemplated by the
Master Separation Agreement.
HUGHES RESEARCH LABS
HE Holdings and Hughes Network Systems will each continue to have an interest
in Hughes Research Labs, HEC's 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 HE Holdings
and 50% by Hughes Network Systems.
In general, Hughes Research Labs will own the intellectual property resulting
from general research projects and each of HE Holdings and Hughes Network
Systems will have a perpetual, royalty-free license to such intellectual
property for their respective businesses. In addition, each of HE Holdings and
Hughes Network Systems 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 HE Holdings and Hughes Network
Systems 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 HE Holdings will
be retained by HE Holdings, including HEC's present corporate headquarters
building in Los Angeles. Similarly, substantially all real property owned or
leased by HEC and occupied by Hughes Network Systems will be transferred to
Hughes Telecom. Certain facilities, however, will be shared by Hughes Defense
and Hughes Network Systems, with one party leasing or subleasing 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 Merger.
58
THE MERGER
<PAGE>
EMPLOYEE MATTERS; PENSION PLAN LITIGATION
Pursuant to the Master Separation Agreement, HE Holdings 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. HE Holdings 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, HE Holdings
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 HE Holdings and Hughes
Network Systems with those allocated to HE Holdings transferred to separate
plans of HE Holdings.
We have reached an agreement with HE Holdings and Hughes Network Systems
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.
The complaint in Jacobson was filed in January 1992 by five retired employees
against HE Holdings 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 HEC 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 HE Holdings' 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 $200 to $600 million. The complaint does not
quantify the amount of the plaintiffs' claims and HE Holdings is unable to
estimate an amount at this time.
At the time the 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. HE Holdings 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 HE Holdings' request for a rehearing.
HE Holdings 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 governmental
agency that regulates pension plan terminations (the "PBGC"), 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 HE Holdings' request
for rehearing, the PBGC took the position that a pension plan may be terminated
only in accordance with PBGC regulations and not constructively. HE Holdings
intends to seek review of the amended Court of Appeals decision by the U.S.
Supreme Court.
The agreement with HE Holdings and Hughes Network Systems contemplates that
Hughes Network Systems 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 New Raytheon to be established after the Merger
with certain of the assets of that plan, and to settle the litigation at any
time. Further, in the event a final
59
THE MERGER
<PAGE>
judgment adverse to the defendants is entered in the Jacobson case or a
settlement thereof, Hughes Network Systems would indemnify such plan or New
Raytheon, as appropriate, for certain resulting liabilities. However, Hughes
Network Systems 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 Merger
Agreement would have permitted Raytheon to refuse to consummate the 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 Network Systems' 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
HE Holdings contained in the Merger Agreement or results in any condition to
Raytheon's obligation to consummate the Merger not being satisfied.
STOCK OPTIONS
All stock options in respect of GM Class H Common Stock, vested and non-
vested, held by HE Holdings 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 less exercise price) in all material respects.
INSURANCE
HE Holdings will institute its own insurance program after the Spin-Off
Merger Effective Time while maintaining the ability to assert claims under
policies maintained prior to the Spin-Off Merger Effective Time. To the extent
permitted by law and contract, such policies will remain under the control and
administration of Hughes Network Systems or GM with settlement authority on
site-specific environmental claims afforded to HE Holdings on a basis not
prejudicial to Hughes Network Systems or GM.
SUPPLY ARRANGEMENTS
HE Holdings and Hughes Network Systems will continue to supply various
technical services to each other after the Spin-Off Merger Effective Time. In
addition, Hughes Network Systems will procure as prime contractor, and HE
Holdings will make available as subcontractor, certain products and services
for a period of two years after the Spin-Off Merger Effective Time. The
products and services generally will be provided to the other party at market
prices.
TRANSITION SERVICES
HE Holdings and Hughes Network Systems will continue to provide various
transitional services to each other at cost for a minimum transition period of
12 months after the Spin-Off Merger Effective Time (with longer periods for
employee benefit administration and 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 Spin-Off Merger Effective
Time. If the periods of providing such services are extended beyond the initial
transition period pursuant to agreement of New Raytheon and Hughes Network
Systems, the applicable services generally will then be provided at cost plus
6%.
CORPORATE PURCHASING
For an initial period of one year after the Spin-Off Merger Effective Time
(with termination upon 90-day notice thereafter), (i) HE Holdings will have
access to GM's Worldwide Purchasing Process, (ii) GM, Hughes Network Systems
and HE Holdings will continue to work together under joint purchasing
agreements and (iii) GM will continue to support HE Holdings' Tomahawk
procurement activities in the manner supported prior to the Spin-Off Merger
Effective Time until completion of HE Holdings' participation in such program.
60
THE MERGER
<PAGE>
FINANCIAL AND BUSINESS INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECENT DEVELOPMENTS.................................................... 62
Sale of Portions of the Appliances Business.......................... 62
TI Acquisition....................................................... 62
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION............ 63
RAYTHEON SELECTED HISTORICAL FINANCIAL DATA............................ 64
RAYTHEON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................. 65
Comparison: Third Quarter 1997 versus 1996........................... 65
Comparison: Nine Months 1997 versus 1996............................. 67
Comparison: Fiscal 1996 to Fiscal 1995............................... 69
Comparison: Fiscal 1995 to Fiscal 1994............................... 75
BUSINESS OF RAYTHEON................................................... 79
Electronics.......................................................... 79
Engineering and Construction......................................... 79
Aircraft............................................................. 80
Appliances........................................................... 80
HUGHES DEFENSE SELECTED COMBINED HISTORICAL FINANCIAL DATA............. 81
HUGHES DEFENSE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................... 82
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996.................................................. 82
1996 Compared to 1995................................................ 83
1995 Compared to 1994................................................ 84
BUSINESS OF HUGHES DEFENSE............................................. 86
Introduction......................................................... 86
Sensors & Communications Systems..................................... 87
Weapons Systems...................................................... 89
Information Systems.................................................. 91
Defense Systems...................................................... 93
U.S. Government Contracts............................................ 93
</TABLE>
61
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
RECENT DEVELOPMENTS
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 $550.0 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 the sales and 50% of
the operating income of the Appliance Group. In addition, Raytheon has realized
approximately $200.0 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 TI Acquisition. The 1996 sales, operating income, net
income and total assets of the businesses sold were not material to Raytheon's
results of operations.
TI ACQUISITION
On July 11, 1997, the Company consummated the TI Acquisition, pursuant to
which Raytheon purchased substantially all of the assets of, and assumed
substantially all the liabilities related to, TI Defense for an aggregate
amount of $2.875 billion in cash, subject to post-closing adjustments for
certain changes in the net assets of TI Defense between September 30, 1996 and
the closing date of the TI Acquisition. In addition, the Company paid $75
million for an assignment and license of certain related intellectual property.
TI Defense had 1996 sales of approximately $1.8 billion. Because the TI
Acquisition involved the purchase of assets, a significant portion of the
goodwill created by the TI Acquisition will be deductible for tax purposes.
In connection with the TI Acquisition and in contemplation of the Merger,
Raytheon arranged revolving credit facilities with a syndicate of banks
totaling $7.0 billion, $4.0 billion of which has a maturity of five years and
$3.0 billion of which has a maturity of 364 days (collectively, the "RAYTHEON
FACILITIES"). Raytheon incurred indebtedness in the amount of $2.95 billion
under the Raytheon Facilities in order to finance the TI Acquisition. The
Raytheon Facilities include covenants which require (i) 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 (ii) 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 and Hughes
Defense and the Raytheon Notes.
On August 12, 1997, Raytheon completed a public offering of $3.0 billion
aggregate principal amount of Raytheon Notes offered with final maturities of
three, five, 10 and 30 years. 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 TI 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.
62
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE AND
DIVIDEND INFORMATION
Raytheon Common Stock is listed on the NYSE, the CSE and the PSE under the
symbol "RTN." There is currently no public trading market for either the Class
A Common Stock or the Class B Common Stock, and there can be no assurance that
an active trading market will develop or, if a trading market develops, that
such a market will be maintained, or as to the prices at which trading in the
Class A Common Stock or the Class B Common Stock will occur after the Merger.
See "Risk Factors--No Assurance as to Market Price of Class B Common Stock;
Dual-Class Capital Structure." Application will be made to list the Class A
Common Stock and the Class B Common Stock on the NYSE, the CSE and the PSE.
The table below sets forth, for the calendar quarters indicated, the reported
high and low sale prices of Raytheon Common Stock as reported on the NYSE
Composite Transaction Tape, in each case based on published financial sources,
and the dividends declared on such stock.
<TABLE>
<CAPTION>
RAYTHEON COMMON STOCK
-----------------------
CASH
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
<S> <C> <C> <C>
1995
First Quarter.................................... $37.19 $31.44 $0.1875
Second Quarter................................... 39.81 34.75 0.1875
Third Quarter.................................... 42.69 38.75 0.1875
Fourth Quarter................................... 47.25 41.50 0.1875
1996
First Quarter.................................... $54.13 $45.00 $ 0.20
Second Quarter................................... 53.63 48.75 0.20
Third Quarter.................................... 55.00 43.38 0.20
Fourth Quarter................................... 56.13 45.75 0.20
1997
First Quarter.................................... $51.25 $43.25 $ 0.20
Second Quarter................................... 53.88 41.75 0.20
Third Quarter.................................... 60.56 50.75 0.20
</TABLE>
On January 15, 1997, the last full trading day prior to the public
announcement of the proposed Merger, the closing price on the NYSE Composite
Transaction Tape was $47.00 per share of Raytheon Common Stock. Certain of the
prices set forth on the above table may reflect the impact of several news
articles that headlined the merger discussions between Raytheon and HEC. See
"The Merger--Background--Background of the Merger." On November 6, 1997, the
most recent practicable date prior to the printing of this Solicitation
Statement/Prospectus, the closing price on the NYSE Composite Transaction Tape
was $52.31 per share of Raytheon Common Stock. Stockholders are urged to obtain
current market quotations prior to making any decision with respect to the
Merger.
63
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
RAYTHEON SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data have been prepared by the
Company's management from its historical consolidated financial statements.
Such data should be read in conjunction with the historical financial
statements of the Company and the related notes thereto, which are included in
Appendix C. In the opinion of management, the unaudited consolidated interim
financial data 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 results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
--------------------------- ----------------------------------------------------------
SEPTEMBER 28, SEPTEMBER 29, DECEMBER 31,
1997 1996 1996 1995 1994 1993 1992
------------- ------------- --------- --------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS:
Net sales............... $ 9,669.2 $ 8,946.7 $12,330.5 $11,804.2 $10,097.7 $9,334.1 $9,121.7
Costs and expenses...... 8,754.7 8,124.9(1) 11,247.0(1) 10,612.5(2) 9,197.8(3) 8,286.8 8,165.7
Income before taxes..... 914.5 821.8(1) 1,083.5(1) 1,191.7(2) 899.9(3) 1,047.3 956.0
Income taxes............ 310.4 238.0 322.3 399.2 303.0 354.3 320.9
Net income.............. 604.1 583.8(1) 761.2(1) 792.5(2) 596.9(3) 693.0 635.1
Earnings per common
share.................. 2.56 2.45(1) 3.21(1) 3.25(2) 2.26(3) 2.56 2.36
Dividend declared per
common share........... .60 .60 0.80 0.75 0.738 0.70 0.663
BALANCE SHEET DATA:
Cash and marketable se-
curities............... $ 267.7 $ 161.4 $ 138.8 $ 210.3 $ 202.2 $ 190.2 $ 88.8
Current assets.......... 6,554.0 6,278.3 5,603.9 5,275.2 4,985.5 4,609.2 3,775.8
Total assets............ 15,256.2 11,785.7 11,126.1 9,840.9 7,395.4 7,257.7 6,015.1
Current liabilities..... 5,345.1 5,494.4 4,691.8 3,690.4 3,283.1 2,800.3 2,136.8
Long-term debt.......... 4,386.4 1,493.2 1,500.5 1,487.7 24.5 24.4 25.3
Stockholders' equity.... 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 amorti-
zation................. 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>
- ------
(1) Includes special charge of $34.0 million pre-tax, $22.1 million after-tax,
or $.09 per share.
(2) Includes one-time gain of $8.0 million pre-tax, $5.2 million after-tax, or
$.02 per share.
(3) Includes restructuring charge of $249.8 million pre-tax, $162.3 million
after-tax, or $.61 per share.
64
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
RAYTHEON MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON: THIRD QUARTER 1997 VERSUS 1996
Raytheon reported third quarter earnings of $211.2 million, or $.89 per
share, on record third quarter sales of $3.445 billion.
The third quarter 1997 earnings of $211.2 million, or $.89 per share, were
achieved despite higher non-operating expense of $84 million. This higher non-
operating expense included $49 million of increased interest expense, $51
million of lower interest income primarily associated with non-recurring R&D
tax credits recorded in the third quarter of last year, and $16 million of
higher other income including a $13 million gain on the sale of several
operations within the Major Appliances segment. The sale of these appliance
operations contributed 3 cents per share to the 1997 third quarter earnings.
The third quarter earnings of $211.2 million were up slightly from the $210.0
million recorded in the third quarter of 1996. The 1996 earnings exclude a
$22.1 million after-tax special charge. Earnings per share of $.89 were flat
with 1996, and 1997 sales of $3.445 billion, including the TI Acquisition, were
up 14% from the $3.032 billion recorded in 1996. Including the special after-
tax charge, reported earnings for the third quarter of 1996 were $187.9 million
or $.80 per share compared to $.89 per share in the third quarter of 1997.
The 1997 third quarter effective tax rate of 34.5% compares to a 19.2%
effective tax rate, excluding the special charge, during the comparable period
last year reflecting $38 million in nonrecurring R&D tax credits recorded in
1996.
During the quarter, Raytheon completed the TI Acquisition. The bond offering
to finance the TI Acquisition was successfully completed with substantial over-
subscription. The sale of several operations of the Appliance Group was also
completed.
Shortly after the close of the quarter, the Department of Justice gave
approval to the Merger. The Merger, once completed, will create a combined
company of more than 120,000 employees, with approximately $20 billion in
sales, on a 1996 pro forma basis, of which over $13 billion is attributable to
defense and government electronics. The Merger is subject to approval by
stockholders of Raytheon and General Motors, including GM Class H Common
Stockholders.
The Aircraft segment reported record third quarter sales and operating income
of $594 million and $61 million, respectively. The 19% increase in sales and
85% increase in operating income over the third quarter of 1996 reflected
substantially increased shipments of general aviation aircraft.
The Electronics segment led Raytheon's increase with record third quarter
sales and operating income, as segment sales grew 33% and segment operating
income increased 65%, compared with the third quarter of 1996. These increases
include partial results for Raytheon TI Systems. Both sales and operating
income were up for Raytheon Electronic Systems, Raytheon E-Systems and
Commercial Electronics compared to the same period a year ago, with record
sales and operating income for the quarter for Raytheon E-Systems, and strong
sales and operating income for Raytheon Electronic Systems and Commercial
Electronics. Raytheon Electronic Systems recorded its third successive quarter
of increased sales and operating income.
The Engineering & Construction segment reported quarterly operating income of
$39 million on revenues of $752 million. Sales were down from the third quarter
of 1996 due to delays in funding of new international orders and a slower than
anticipated pace of several turnkey projects. Operating income was flat with
the third quarter of 1996.
Raytheon Engineers & Constructors has experienced delays in the award and
funding of international projects that have adversely affected its financial
performance during 1997. While the company is trying to address this trend,
such delays are continuing currently.
65
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
The Major Appliances segment reported third quarter sales of $297 million and
operating income of $6 million. On September 10, Raytheon completed the sale of
the home appliance, heating and air conditioning and commercial cooking
operations of its Appliance Group to Goodman Manufacturing Company, L.P., of
Houston, Texas. Raytheon has retained the commercial laundry and electronic
controls operations of the Appliance Group. Raytheon is a market leader in
commercial laundry. In 1996, these two operations combined accounted for
approximately 20% of revenues and 50% of profits for the Appliance Group.
Raytheon is continuing its strategic evaluation of these two businesses.
SEGMENT DATA
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED ENDED
------------------- -------------------
SEPT. 28, SEPT. 29, SEPT. 28, SEPT. 29,
1997 1996 1997 1996
--------- --------- --------- ---------
Sales (IN MILLIONS)
<S> <C> <C> <C> <C>
Electronics............................ $1,802 $1,358 $4,791 $3,992
Engineering & Construction............. 752 792 2,198 2,305
Aircraft............................... 594 498 1,649 1,494
Major Appliances....................... 297 384 1,031 1,156
------ ------ ------ ------
Total sales.......................... $3,445 $3,032 $9,669 $8,947
Segment Income
Electronics............................ $ 314 $ 190 $ 803 $ 590
Engineering & Construction............. 39 39 144 156
Aircraft............................... 61 33 150 105
Major Appliances....................... 6 11 44 55
------ ------ ------ ------
Total segment income................. $ 420 $ 273 $1,141 $ 906
Segment Income as a Percent of Sales
Electronics............................ 17.4% 14.0% 16.8% 14.8%
Engineering & Construction............. 5.2 4.9 6.6 6.8
Aircraft............................... 10.3 6.6 9.1 7.0
Major Appliances....................... 2.0 2.9 4.3 4.8
------ ------ ------ ------
Total segment income as a percent of
sales............................... 12.2% 9.0% 11.8% 10.1%
</TABLE>
Certain reclassifications of prior period information were made to conform to
the current year presentation.
Sales to the U.S. government, including Foreign Military Sales, were $1.621
billion, an increase of $345 million or 27.0% from the comparable quarter of
1996 due principally to the TI Acquisition. U.S. government sales were 47.1% of
consolidated net sales in 1997, and were 42.1% of sales in 1996.
Administration and selling expenses were $269.5 million or 7.8% of sales in
1997 versus $254.4 million or 8.4% of sales in 1996. The percent decline was
primarily from record sales in the Aircraft and Electronics segments.
Research and development expenses were $120.5 million or 3.5% of sales in
1997 versus $76.9 million or 2.5% of sales in 1996. Research and development
expenses increased due to the TI Acquisition and increased spending in the
Aircraft segment.
Operating income was $419.6 million or 12.2% of sales versus $273.1 million
or 9.0% of sales, excluding the special charge, in 1996. Operating income in
1997 was 53.7% above 1996.
Interest expense increased to $119.8 million in 1997 from $70.8 million in
1996. The increase was due to higher debt levels from the TI Acquisition and
higher short-term interest rates.
66
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
Interest and dividend income declined to $9.3 million in 1997 from $60.3
million in 1996. The 1996 results included accrued interest on a retroactive
federal income tax refund claim.
Other (income) expense, net for 1997 was income of $13.2 million versus
expense of $2.6 million in 1996. The 1997 results included $13.0 million income
before tax from the sale of several operations within the Major Appliances
segment.
The 1997 effective tax rate of 34.5% reflects the statutory rate of 35%
reduced by Foreign Sales Corporation tax credits and incremental research and
development tax credits applicable to certain government contracts, partially
offset by non-deductible amortization of goodwill.
For reasons discussed above, net income for 1997 was $211.2 million versus
$210.0 million, excluding the special charge, in 1996. The 1996 earnings
including the special charge were $187.9 million.
Earnings per common share for the third quarter of 1997 were $.89 versus
$.80, including the special charge, in 1996. The average number of shares
outstanding during the third quarter of 1997 was 236.4 million versus 235.9
million in 1996.
COMPARISON: NINE MONTHS 1997 VERSUS 1996
Consolidated net sales during the first nine months of 1997 increased by 8.1%
to $9.669 billion from $8.947 billion in 1996. Sales increased in the
Electronics and Aircraft segments, partially offset by lower sales in the
Engineering & Construction and Major Appliances segments.
Sales to the U.S. government were $4.310 billion in the first nine months of
1997 versus $3.708 billion in 1996 and were 44.6% of consolidated net sales in
1997 versus 41.4% in 1996.
Operating income was $1.141 billion or 11.8% of sales in 1997 versus $906.0
million or 10.1% of sales, excluding the special charge, in 1996. Operating
income for the first nine months of 1997 was 25.9% above 1996.
Non-operating expense was $226.2 million in 1997 versus $50.2 million in
1996. Interest expense increased to $262.6 million from $185.7 million in 1996
due principally to the TI Acquisition in July 1997, the acquisitions of
Chrysler Technologies and Rust Engineering in the second quarter of 1996 and
higher short-term interest rates. Interest and dividend income decreased to
$24.3 million in 1997 from $92.9 million in 1996. The 1996 results included
accrued interest on a retroactive federal income tax refund claim. Other income
was $12.1 million in 1997 versus $42.6 million in 1996. The 1996 results
included $40.0 million income before tax from the release of a contingency
reserve associated with the sale of a business.
The effective tax rate of 33.9% in 1997 reflects the statutory rate of 35%
reduced principally by Foreign Sales Corporation tax credits and incremental
research and development tax credits applicable to certain government
contracts, partially offset by non-deductible amortization of goodwill.
For reasons discussed above, net income for 1997 was $604.1 million versus
$605.9 million, excluding the special charge, in 1996. Including the special
charge, net income increased from $583.8 million in 1996 to $604.1 million for
the first nine months of 1997.
Earnings per share were $2.56 for the first nine months of 1997 and $2.45 for
the comparable period of 1996, including the special charge. Earnings per share
in 1996 were $2.55 excluding the special charge. The average number of common
shares outstanding was 236.3 million for the first nine months of 1997 versus
237.8 million for 1996. During the first nine months of 1997, outstanding
shares were increased by 1.3 million principally due to the exercise of
employee stock options. These were mostly offset by the repurchase of 1.2
million shares on the open market at a cost of $65.3 million.
67
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
On February 22, 1995, the Raytheon Board authorized the repurchase of up to
12 million shares of Raytheon Common Stock. There have been 9.5 million shares
purchased under this authorization.
The book value of Raytheon Common Stock outstanding at the end of the period
was $21.22 as compared with $19.46 at December 31, 1996 and $18.85 at September
29, 1996.
All share and per share data have been restated for the two-for-one stock
split on October 23, 1995.
Backlog consisted of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 31, SEPTEMBER 29,
1997 1996 1996
------------- ------------ -------------
(IN MILLIONS)
<S> <C> <C> <C>
Electronics...................... $ 8,757 $ 7,303 $ 6,824
Engineering & Construction....... 3,167 3,565 3,101
Aircraft......................... 1,543 1,163 1,284
Major Appliances................. 44 35 45
------- ------- -------
Total Backlog.................. $13,511 $12,066 $11,254
U.S. government backlog included
above........................... $ 6,706 $ 5,637 $ 4,918
</TABLE>
During the first nine months of 1997 there was a positive cash flow from
operations of $294.0 million versus a negative cash flow of $521.1 million for
the comparable period in 1996. Net income plus depreciation and amortization
provided a positive cash flow of $929.5 million. Working capital requirements,
principally receivables, contracts in process and inventories were $1.703
billion in the period. Raytheon sold $1.081 billion of receivables, including
appliance, general and commuter aviation eligible long-term receivables and
eligible engineering and construction and appliance short-term receivables, to
a bank syndicate and other financial institutions. During the period, Raytheon
used $2.496 billion for net acquisitions and divestitures, $305.4 million for
additions to property, plant and equipment and $141.8 million for payment of
dividends. Principally as a result of the above, total debt increased by $2.834
billion. Short-term debt decreased by $52.2 million. Long-term debt increased
by $2.886 billion due to the TI Acquisition which also increased excess of cost
over net assets of acquired companies by $2.921 billion. On August 12, 1997,
Raytheon completed a public offering of $3.0 billion aggregate principal amount
of Raytheon Notes offered with final maturities of three, five, 10 and 30
years.
Debt, net of cash and marketable securities, was $6.293 billion at September
28, 1997, as compared with $3.589 billion at December 31, 1996 and $4.273
billion at September 29, 1996. Net debt as a percentage of total capitalization
was 55.7% at September 28, 1997, as compared with 43.8% at December 31, 1996
and 49.0% at September 29, 1996.
Capital expenditures were $305.4 million for the first nine months of 1997
versus $287.6 million for the first nine months of 1996. Capital expenditures
in 1997 are expected to be moderately above the 1996 level, excluding the
effect of acquisitions.
Dividends declared to Raytheon Common Stockholders in the first nine months
of 1997 were $141.8 million versus $142.3 million in 1996. The dividend rate
was $.20 per quarter for the first three quarters of 1997 and for all quarters
of 1996.
Total employment was 80,700 at September 28, 1997 versus 75,300 at December
31, 1996, and 76,400 at September 29, 1996. The increase from September 29,
1996 is due principally to the TI Acquisition, partially offset by the sale of
several operations within the Major Appliances segment and employee reductions
in the Aircraft and Engineering & Construction segments.
68
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
Credit ratings for Raytheon, based on the TI Acquisition and the Merger, have
been established by Moody's at P-2 for short-term borrowing and Baa1 for senior
debt, by Standard and Poor's at A-3 for short-term borrowing and BBB for senior
debt. Duff & Phelps has provided ratings of D-2 for short-term borrowing and
BBB+ for senior debt. Raytheon expects that its cash flow from operations and
asset reductions will be sufficient to maintain investment grade credit ratings
and available debt financing will be sufficient to meet any additional funding
requirements in 1997.
Raytheon announced in the third quarter of 1996 that it would exit the
manual-clean range market and dispose of the assets related to that operation,
including its facility located in Delaware, Ohio, and recorded a $34.0 million
pre-tax charge for this closing. The after-tax effect was $22.1 million or $.09
per share.
Raytheon enters into interest rate swaps and foreign currency forward
agreements with commercial and investment banks to reduce the impact of changes
in interest rates and foreign exchange rates on long-term debt and on
purchases, sales and financing arrangements with lenders, vendors, customers
and foreign subsidiaries. Raytheon meets its working capital requirements
mainly with variable rate short-term financing. Raytheon also enters into
foreign exchange forward contracts to minimize fluctuations in the value of
payments due to international vendors and the value of foreign currency
denominated receipts. The hedges used by Raytheon are directly related to a
particular asset, liability, or transaction for which a firm commitment is in
place. The impact on the financial position, liquidity, and results of
operations from likely changes in foreign exchange and interest rates is
immaterial due to the minimizing of risk through the hedging of transactions
related to specific assets, liabilities, or commitments.
Recurring costs associated with Raytheon's environmental compliance program
are not material and are expensed as incurred. Capital expenditures in
connection with the environmental compliance are immaterial. Raytheon is
involved in various stages of investigation and cleanup relative to remediation
of various sites. All appropriate costs incurred in connection therewith have
been expensed. Due to the complexity of environmental laws and regulations, the
varying costs and effectiveness of alternative cleanup methods and
technologies, the uncertainty of insurance coverage, and the unresolved extent
of Raytheon's responsibility, it is difficult to determine the ultimate outcome
of these matters. However, in the opinion of management, any additional
liability will not have a material effect on Raytheon's financial position,
liquidity, or results of operations after giving effect to provisions already
recorded.
Raytheon will adopt Statement of Financial Accounting Standards No. 128,
Earnings per Share, in the fourth quarter of 1997. The adoption is not expected
to have a material effect on Raytheon's financial position, results of
operations, or earnings per share.
Raytheon will adopt Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, in 1998, by making the appropriate disclosures.
Raytheon will adopt Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information, in 1998,
by making the appropriate disclosures.
COMPARISON: FISCAL 1996 TO FISCAL 1995
Raytheon reported 1996 earnings of $783.3 million, or $3.30 per share, before
a third quarter special charge of $22.1 million or $.09 per share. For 1995,
earnings were $787.3 million, or $3.23 per share before a one-time gain of $5.2
million, or $.02 per share.
Total Raytheon sales in 1996 reached $12.3 billion, the highest in the
company's history, as sales were up in all four business segments.
69
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
In January 1997, Raytheon entered into definitive agreements to purchase TI
Defense for $2.95 billion in cash and to merge with Hughes Defense, with the
combined company to be called Raytheon Company. The Merger is valued at $9.5
billion, comprised of approximately $5.1 billion in common stock and $4.4
billion in debt to be assumed by New Raytheon.
On a 1996 pro forma basis, New Raytheon will have revenues of approximately
$21 billion, over $13 billion of which will be in defense electronics. The
current backlog for New Raytheon will be approximately $23 billion, with
defense electronics accounting for $18 billion. The Merger, coupled with the
recently announced TI Acquisition, is expected to result in a slight dilution
to the earnings of the combined company in 1997, as compared to the earnings of
Raytheon on a stand-alone basis for the same period. The combined transactions
should be minimally accretive in 1998 and increasingly accretive thereafter.
The two transactions are subject to regulatory approvals, including Hart-
Scott-Rodino antitrust review, with the Merger subject to a favorable ruling by
the IRS and approval by Raytheon and GM stockholders.
Raytheon's total backlog at the end of 1996 stood at a record $12.1 billion,
up $1.5 billion, or 14.4%, compared with year-end 1995. The backlog increase
was driven principally by a 59% increase in the backlog of Raytheon Engineers &
Constructors at the end of 1996 compared with the end of 1995. Raytheon
Engineers & Constructors ended 1996 with a record backlog of $3.6 billion.
Raytheon made three acquisitions in 1996: the aircraft modification and
defense electronics businesses of Chrysler Technologies; the engineering and
construction assets of Rust International; and the marine communication assets
of Standard Radio AB of Sweden.
The segment financial results are as follows:
The Electronic segment's 1996 sales and income increased over 1995's results,
which included a one-time special charge. Sales and income increased at Dallas-
based Raytheon E-Systems, reflecting inclusion of a full year of E-Systems
results as well as a partial year's results for the complementary acquisition
of two Chrysler Technologies defense businesses. Raytheon's Massachusetts-based
defense operations experienced declines in sales and income. Excluding D.C.
Heath and Xyplex, which were divested in late 1995 and early 1996,
respectively, sales and income increased in Raytheon's Commercial Electronics
business.
Raytheon Aircraft of Wichita, Kansas, the world leader in general aviation,
reported record sales and increased income for the year over 1995, which
included a one-time special charge, due to increased aircraft shipments and
services.
Raytheon Engineers & Constructors, one of the largest engineering,
construction, operations and maintenance firms in the world, reported record
sales for the year. Although sales were higher than 1995 due primarily to
increased engineering and construction effort, income was down due to the delay
of higher margin international turnkey projects combined with the effects of
strike-related losses at Cedarapids.
Raytheon Appliances had record sales for the year due to increased shipments
of heating and air conditioning products, refrigerators and self-clean ranges;
however, income, excluding the special charge, was flat due principally to
competitive pressures in the retail market and increased sales promotion costs.
On February 23, 1997, the company announced that it is evaluating strategic
alternatives for the Appliance Group, which may result in the sale or merger of
the group at some time in the future. The company retained an advisor to assist
with this evaluation. The decision to undertake this strategic reassessment was
made in the context of Raytheon's financial priorities, and the belief that the
Appliance Group may have greater value to another company with more focus on
the markets served by the group.
70
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
Sales to the U.S. Department of Defense were $4.032 billion or 32.7% of
consolidated sales in 1996 versus $3.961 billion or 33.6% of consolidated sales
in 1995. Total sales to the U.S. government were $5.140 billion or 41.7% of
consolidated sales in 1996 versus $4.677 billion or 39.6% of consolidated sales
in 1995.
Administration and selling expenses decreased to $1,021.0 million, or 8.3% of
sales in 1996, from $1,085.8 million, or 9.2% of sales in 1995, due principally
to the inclusion of a full year of E-Systems results and a partial year's
results for the acquired Chrysler Technologies businesses.
Research and development expenses increased to $323.3 million, or 2.6% of
sales in 1996, from $315.6 million, or 2.7% of sales in 1995, due principally
to the inclusion of a full year of E-Systems results and a partial year's
results for the acquired Chrysler Technologies businesses.
Operating income in 1996, excluding the special charge of $34.0 million pre-
tax, was $1,232.2 million, or 10.0% of sales, versus $1,320.4 million, or 11.2%
of sales, in 1995. The 1995 operating income excludes a special charge of
$125.0 million and nonrecurring items of $77.0 million. Operating income for
1996, including the special charge, was $1,198.2 million, or 9.7% of sales,
while operating income for 1995, including the special charge and nonrecurring
items, was $1,118.4 million.
In the fourth quarter of 1995, Raytheon recorded, in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets, and Raytheon's past practice, a special pre-
tax charge of $125 million related principally to a provision for idle real
estate of $65 million and goodwill valuation adjustments of $60 million. Of the
$125 million charge, $115 million applied to the Electronics segment and $10
million applied to the Engineering and Construction segment. Raytheon also
reported an additional pre-tax charge of $77 million to cost of sales related
principally to provisions for inventory of $42 million and contracts of $35
million. Of the $77 million charge, $47 million applied to the Electronics
segment and $30 million applied to the Aircraft segment.
Raytheon announced in the third quarter of 1996 that it would exit the
manual-clean range market and dispose of the assets related to that operation,
including its facility located in Delaware, Ohio, and recorded a $34.0 million
pre-tax charge for this closing. The after-tax effect was $22.1 million or $.09
per share.
Raytheon recorded in the first quarter of 1994 a restructuring provision of
$249.8 million before tax. The restructuring was driven by the significant
reductions in the defense budget and increasing commercial competition.
Approximately 65% of the restructuring costs were attributable to Raytheon's
defense business and the remainder to its commercial business. Raytheon
completed personnel reductions of 4,400 people under this restructuring
provision, including both salaried and bargaining unit employees located in the
Massachusetts and other states and in foreign locations. Through December 31,
1996, $249.3 million of restructuring costs have been incurred, of which $103.4
million were employee-related costs and $145.9 million were related principally
to asset disposals and idle facilities.
Interest expense for 1996 increased to $256.3 million from $196.6 million in
1995. The increase was due principally to the higher average debt level.
Interest and dividend income increased to $102.0 million in 1996 from $26.3
million in 1995 due principally to accrued interest before tax on a retroactive
federal income tax refund claim.
Other income, net was $39.5 million in 1996 versus $243.6 million in 1995.
The 1995 amount includes a $210.0 million net pre-tax gain from the sale of
D.C. Heath.
Federal and foreign income taxes were $322.3 million in 1996 compared with
$399.2 million in 1995. The 1996 effective tax rate was 29.7% versus 33.5% in
1995. The effective tax rate for 1996 reflects the statutory
71
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
rate of 35% reduced by accrued research and development tax credits and Foreign
Sales Corporation (FSC) tax credits, partially offset by nondeductible
amortization of goodwill. The decrease in the effective tax rate in 1996 from
1995 was due to the accrued retroactive research and development tax credits
applicable to certain government contracts. For reasons discussed above,
income, excluding the special charge of $22.1 million, was $783.3 million in
1996 versus $787.3 million in 1995 before the 1995 one-time gain of $5.2
million.
The composition of the $5.2 million net gain recorded in 1995 is as follows:
<TABLE>
<CAPTION>
PRE-TAX AFTER-TAX
GAIN (CHARGE) TAX GAIN (CHARGE)
------------- ------ -------------
<S> <C> <C> <C>
Sale of DC Heath...................... $210.0 $(73.5) $136.5
Special Charge........................ (125.0) 43.7 (81.3)
Non-recurring charge.................. (77.0) 27.0 (50.0)
------ ------ ------
$ 8.0 $ (2.8) $ 5.2
</TABLE>
Earnings per common share were $3.30 before the special charge of $.09 per
share, versus $3.23 per share in 1995 excluding the one-time gain of $.02 per
share. Earnings per share including the special charge were $3.21 in 1996,
versus $3.25 in 1995 including the one-time gain.
Earnings per common share calculations were based on 237.4 million average
shares outstanding in 1996 and 244.0 million average shares outstanding in
1995. Common shares outstanding and all per share date have been restated to
reflect the two-for-one stock split effective October 23, 1995. During 1996,
outstanding shares were reduced by 6.1 million shares as the result of the
company's purchase of outstanding shares at a cost of $305.8 million, partially
offset by 1.8 million shares issued upon the exercise of employee stock
options.
In November 1992, the Raytheon Board authorized the purchase of up to 4
million shares of Raytheon Common Stock per year over the next five years to
counter the dilution due to the exercise of stock options. During 1996, 1.8
million shares were purchased under this authorization. On February 23, 1994,
the Raytheon Board authorized the repurchase of up to 24 million shares of the
Raytheon Common Stock. Purchases under this authorization were completed in
1995. On February 22, 1995, the Raytheon Board authorized the repurchase of up
to 12 million shares of Raytheon Common Stock. Through December 31, 1996, 9.5
million shares have been purchased under this authorization.
The book value of common shares outstanding at December 31, 1996, was $19.46
as compared with $17.83 at December 31, 1995. Return on average equity was
17.9% in 1996 excluding the special charge, versus 19.2% in 1995 excluding the
net one-time gain.
Backlog consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN MILLIONS)
<S> <C> <C>
Electronics............................................... $7,303 $7,411
Engineering & Construction................................ 3,565 2,240
Aircraft.................................................. 1,163 836
Major Appliances.......................................... 35 64
------- -------
Total Backlog........................................... $12,066 $10,551
U.S. government-funded backlog included above............. $ 5,637 $ 5,142
------- -------
</TABLE>
The Electronics backlog at December 31, 1996, includes $1.1 billion related
to the SIVAM contract awarded by the government of Brazil to monitor and
protect the Amazon River rain forest. On March 14, 1997, Raytheon announced
that the contract had been signed by the government of Brazil and all financing
agreements for the program had been finalized.
72
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
For the year ended December 31, 1996, cash flows from operating activities
were $291.3 million as compared with $1,174.6 million during the year ended
December 31, 1995. In 1996 funds were used or additions to property, plant and
equipment of $406.0 million; dividends of $189.6 million; purchases of treasury
stock of $305.8 million and net payments for acquired companies of $584.4
million. Funds were provided by increasing short-term debt by $1,006.9 million.
In 1995, under Raytheon's 1992 shelf registration of $500.0 million of debt
securities and a 1995 registration of $1.5 billion of debt and/or equity
securities, Raytheon issued $1.125 billion of debt securities in a public
offering comprised of $750.0 million of notes due 2005, which have a coupon
rate of 6 1/2% and $375.0 million of debentures due 2025 which have a coupon
rate of 7 3/8%. The notes are not redeemable prior to maturity, and the
debentures are not redeemable prior to July 15, 2005. This financing, along
with increased short-term borrowing, was used principally to fund the 1995
acquisition of E-Systems.
Debt, net of cash and marketable securities, was $3.589 billion at December
31, 1996, as compared with $2.493 billion at December 31, 1995. Net debt as a
percentage of total capitalization was 43.8% at December 31, 1996, as compared
with 36.7% at December 31, 1995.
Accounts receivable decreased to $808.7 million at December 31, 1996, from
$926.8 million at December 31, 1995 due principally to the sale of receivables
to bank syndicates and other financial institutions.
Contracts in process increased to $2.592 billion at December 31, 1996, from
$2.213 billion at December 31, 1995, due principally to increased effort on
major foreign turnkey projects at the Engineering and Construction segment.
Property, plant and equipment, net, increased to $1.802 billion at December
31, 1996, from $1.584 billion at December 31, 1995, due to increased investment
at the Aircraft segment and the acquisition of the Chrysler Technologies
businesses and Rust Engineering.
Other assets increased to $3.720 billion at December 31, 1996, from $2.982
billion at December 31, 1995, due principally to goodwill arising from the
acquisitions of the Chrysler Technologies businesses and Rust Engineering.
Capital expenditures were $406.0 million in 1996 versus $328.6 in 1995. The
increase was due principally to higher expenditures in the Aircraft segment.
Capital expenditures in 1997 are expected to be above the 1996 level, excluding
the effect of acquisitions.
Dividends declared to stockholders during 1996 were $189.6 million versus
$182.5 million in 1995. The quarterly dividend rate was $.20 for each quarter
of 1996 versus $.1875 for each quarter of 1995.
Total employment was 75,300 at December 31, 1996, as compared with 73,200 at
December 31, 1995. The increase was due principally to the acquisitions of the
Chrysler Technologies businesses and Rust Engineering, partially offset by
reductions in the defense electronics segment and the sale of Xyplex.
Raytheon's debt of $3.727 billion at December 31, 1996 will increase by
approximately $2.950 billion as a result of the planned acquisition of TI
Defense. The planned merger of Hughes Defense will add approximately $4.400
billion of additional debt and approximately $5.1 billion of additional equity
through the issuance of additional common shares. Raytheon intends to finance
the additional debt initially through an expansion of Raytheon's short-term
borrowing facilities. Approximately $3.0 to $4.5 billion of the short-term
borrowing is expected to be replaced with a combination of medium and long-term
notes and bonds shortly after the closure of the transactions. The covenants
applicable to the existing financing arrangements have been modified by the
participating entities to accommodate the increase in debt.
Total debt as a percentage of total capital was 44.8% at December 31, 1996,
and 38.6% at December 31, 1995, and is expected to rise as a result of the TI
Acquisition and the Merger.
73
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
Credit ratings for Raytheon, based on the proposed acquisitions, have been
lowered by Moody's to P-2 for short-term borrowing and A-3 for senior debt as
of January 16, 1997, by Standard and Poor's to A-3 for short-term borrowing and
BBB for senior debt as of January 17, 1997, and by Duff & Phelps to D-2 for
short-term borrowing and BBB+ for senior debt as of February 26, 1997. Moody's
and Standard and Poor's still have Raytheon's ratings under review with
negative implications. Raytheon expects that its cash flow from operations and
asset reductions will be sufficient to maintain investment grade credit ratings
and available debt financing will be sufficient to meet any additional funding
requirements in 1997.
Lines of credit with certain commercial banks exist as a standby facility to
support the issuance of commercial paper by Raytheon. The lines of credit were
$3.483 billion and $3.203 billion at December 31, 1996, and December 31, 1995,
respectively. Through the end of 1996, there were no borrowings under these
lines of credit, as borrowings were via commercial paper supported by the lines
of credit. Commencing on January 17, 1997 substantially all new borrowings have
been under the committed lines of credit from the participating commercial
banks.
Raytheon enters into interest rate swaps and locks and foreign currency
forward agreements with commercial and investment banks to reduce the impact of
changes in interest rates and foreign exchange rates on long-term debt and on
purchases, sales and financing arrangements with lenders, vendors, customers
and foreign subsidiaries. Raytheon meets its working capital requirements
mainly with variable rate short-term financing. Interest rate swaps are
primarily used to provide purchasers of the company's products with fixed
financing terms over extended time periods. Raytheon also enters into foreign
exchange forward contracts to minimize fluctuations in the value of payments
due to international vendors and the value of foreign currency denominated
receipts. The hedges used by Raytheon are directly related to a particular
asset, liability, or transaction for which a firm commitment is in place. Swaps
and foreign exchange contracts are normally held to maturity and no exchange
traded or over-the-counter instruments have been purchased. The impact on the
financial position, liquidity, and results of operations from likely changes in
foreign exchange and interest rates is not material due to the minimizing of
risk through the hedging of transactions related to specific assets,
liabilities, or commitments.
Raytheon adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, in 1996. The standard defines a fair
value based method of accounting for employee stock options. The compensation
expense arising from this method of accounting can be reflected in the
financial statements or, alternatively, the pro forma net income and earnings
per share effect of the fair value based accounting can be disclosed in the
notes to the financial statements. Raytheon adopted the disclosure alternative
and the results are disclosed in the notes to the financial statements.
Recurring costs associated with Raytheon's environmental compliance program
are not material and are expensed as incurred. Capital expenditures in
connection with environmental compliance are not material. Raytheon is involved
in various stages of investigation and cleanup relative to remediation of
various sites. All appropriate costs incurred in connection therewith have been
expensed. Due to the complexity of environmental laws and regulations, the
varying costs and effectiveness of alternative cleanup methods and
technologies, the uncertainty of insurance coverage, and the unresolved extent
of Raytheon's responsibility, it is difficult to determine the ultimate outcome
of these matters. However, in the opinion of management, any additional
liability will not have a material effect on Raytheon's financial position,
liquidity, or results of operations after giving effect to amounts already
recorded.
Raytheon will adopt Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, in 1997. The adoption is not expected to have a material effect
on Raytheon's financial position or results of operations.
Raytheon will adopt the American Institute of Certified Public Accountants'
Statement of Position 96-1, Environmental Remediation Liabilities, in 1997. The
adoption of the standard will not have a material effect on Raytheon's
financial position or results of operations.
74
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
COMPARISON: FISCAL 1995 TO FISCAL 1994
Raytheon reported increased 1995 net income of $792.5 million, or $3.25 per
share compared with 1994 net income of $596.9 million, or $2.26 per share. The
1994 results include a first quarter after-tax restructuring charge of $162.3
million, or $.61 per share. The 1994 earnings, excluding the restructuring
charge, were $759.2 million, or $2.87 per share.
Total Raytheon sales in 1995 reached $11.8 billion, the highest in the
company's history, compared with sales of $10.1 billion in 1994. Raytheon's
results in 1995 reflect the company's solid overall commercial sales and
profits driven by continued strong performances at Raytheon Aircraft, Raytheon
Engineers & Constructors, and Commercial Electronics, as well as the
significant contribution of E-Systems, the Dallas-based defense and
governmental electronics company acquired by Raytheon in 1995.
Total debt came down substantially to $2.7 billion at year end compared with
a peak of approximately $4 billion earlier in 1995 following the acquisition of
E-Systems. Raytheon ended the year with debt, net of cash and marketable
securities, of $2.5 billion, or 36.7% of total capitalization.
Raytheon's total backlog ended the year at a record $10.551 billion
reflecting a 47% increase in the backlog of Raytheon Engineers & Constructors
compared with year-end 1994 and a record E-Systems backlog.
Raytheon made three acquisitions in 1995: E-Systems, a leader in
intelligence, reconnaissance and surveillance systems, was acquired on April
29, 1995; assets of Litwin Engineers & Constructors, an international leader in
hydrocarbon refining and process technology were, acquired on July 26, 1995;
and Anschutz, one of the world's leading manufacturers of gyro compasses,
autopilots, and steering control systems--a high seas product line that
complements Raytheon's existing marine electronics line, was acquired on
February 15, 1995.
Raytheon recorded in the fourth quarter of 1995 a net pre-tax gain of $210
million from the sale of D.C. Heath, its educational publishing unit. Raytheon
also recorded in the fourth quarter of 1995 a special pre-tax change of $125
million related principally to real estate and goodwill valuation adjustments,
and an additional charge of $77 million to cost of sales related principally to
provisions for inventory and contracts. The above transactions resulted in a
$5.2 million after-tax increase to net income, or $.02 per share.
The segment financial results are as follows:
The Engineering and Construction segment reported record sales and income for
1995. Sales increased to $2.883 billion in 1995. Income increased by 9.6% to
$262 million due principally to higher returns on international projects.
The Aircraft segment reported records sales for 1995. Sales of $2.060 billion
were up 17.1% based on strong unit sales growth of regional and general
aviation aircraft. Segment income was $197 million, before a nonrecurring
charge of $30 million included as part of the previously mentioned $77 million
charge.
Raytheon Aircraft was selected by the U.S. Air Force and U.S. Navy for the
next generation primary trainer, the Joint Primary Aircraft Training System
(JPATS). The JPATS program, a major win for Raytheon, is valued at up to $7
billion over more than 20 years. Additionally, there is the potential for
significant international sales.
The Major Appliances segment had increased sales to $1.472 billion in 1995
due principally to the acquisition of UniMac, while income was down due to
strong competitive price pressures and higher material costs.
The Electronics segment had increased sales and income in 1995 due to the
contribution of E-Systems and commercial electronics. Segment income was $787
million before a nonrecurring charge of $47 million. Raytheon's Massachusetts-
based defense operations experience declines in sales and income; however, the
rate of decline was not as great as in prior years.
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
In 1995, Raytheon initialed sweeping changes in its defense business in
Massachusetts, moving forward with management, workforce, legislative, and
utility initiatives to achieve $600 million in cost savings to enable the
company to remain competitive in defense manufacturing in the state. Raytheon
Electronic Systems was formed through the consolidation of the Missile Systems
and Equipment Divisions. In addition to management initiatives, Raytheon worked
with local unions to achieve cost controls and enhance productivity. Working
with Massachusetts lawmakers, the company won tax reduction legislation for
manufacturing firms in the state and the company reached a groundbreaking
agreement with a major Massachusetts utility to cut its electricity costs in
the state. These initiatives are designed to make Raytheon more competitive
with companies based in lower-cost areas.
Sales to the U.S. Department of Defense were $3.961 billion, or 33.6% of
consolidated sales in 1995, versus $3.546 billion, or 35.1% of consolidated
sales in 1994. Total sales to the U.S. government were $4.677 billion, or 39.6%
of consolidated sales, versus $3.930 billion, or 38.9% in 1994.
Administration and selling expenses increased to $1,085.8 million in 1995,
versus $912.3 million in 1994, due principally to the acquisition of E-Systems.
Research and development expenses increased to $315.6 million in 1995, versus
$269.6 million in 1994, due principally to the acquisition of E-Systems.
Operating income in 1995, excluding the special charge and nonrecurring
items, was $1,320.4 million, or 11.2% of sales, versus $1,145.9 million, or
11.3% of sales, in 1994. The 1994 results exclude the effect of the first
quarter 1994 restructuring provision. Operating income for 1995, including the
special charge and nonrecurring items, was $1,118.4 million or 9.5% of sales.
Raytheon recorded in the first quarter of 1994 a restructuring provision of
$249.8 million before tax. The restructuring was driven by the significant
reductions in the defense budget and increasing commercial competition.
Approximately 65% of the restructuring costs are attributable to Raytheon's
defense business and the remainder to its commercial business. Raytheon
completed personnel reductions of 4,400 people under this restructuring
provision, including both salaried and bargaining unit employees located in
Massachusetts and other states and in foreign locations. Through the end of
1995, $240.4 million of restructuring costs have been incurred, of which $102.2
million were employee-related costs and $138.2 million were related principally
to asset disposals and idle facilities. Cash flow expenditures, net of tax
recovery of $87 million, were $67 million in 1994 and $32 million in 1995.
Interest expense for 1995 increased to $196.6 million from $48.5 million in
1994. The increase was due to higher interest rates and higher average levels
of debt outstanding, due principally to the acquisition of E-Systems.
Interest and dividend income was $26.3 million in 1995 versus $19.6 million
in 1994. This income arises principally from the financing of customer long-
term receivables.
Other income (net) for 1995 increased to $243.6 million from $32.7 million in
1994. The 1995 amount includes a $210 million net pre-tax gain from the sale of
D.C. Heath.
Federal and foreign income taxes were $399.2 million in 1995 compared with
$303.1 million in 1994. The 1995 effective tax rate was 33.5% versus 33.7% in
1994. The effective tax rate for 1995 reflects the statutory rate of 35%
reduced by Foreign Sales Corporation tax credits, partially offset by non-
deductible amortization of goodwill.
For reasons discussed above, income increased by 4.4% to $792.5 million from
the $759.2 million reported for 1994 before the restructuring provision.
Earnings per common share increased 13.2% to $3.25 per share from $2.87 per
share in 1994 before the restructuring provision.
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
Earnings per common share calculations were based on 244.0 million average
shares outstanding in 1995 and 264.7 million average shares outstanding in
1994. Common shares outstanding and all per share data have been restated to
reflect the two-for-one stock split effective October 23, 1995. During 1995,
outstanding shares were reduced by 8.1 million shares as a result of the
company's purchase of outstanding shares at a cost of $320.0 million, partially
offset by 2.2 million shares issued upon the exercise of employee stock
options.
In November 1992, the Raytheon Board authorized the purchase of up to 4
million shares of Raytheon Common Stock per year over the next five years to
counter the dilution due to the exercise of stock options. During 1995, 2.2
million shares were purchased under this authorization. On February 23, 1994,
the Raytheon Board authorized the repurchase of up to 24 million shares of
Raytheon. In 1994, 23.4 million shares were purchased under this authorization
and the balance purchased in 1995. On February 22, 1995 the Raytheon Board
authorized the repurchase of up to 12 million shares of Raytheon Common Stock.
In 1995, 5.3 million shares were purchased under this authorization.
The book value of common shares outstanding at December 31, 1995, was $17.83
as compared with $15.92 at December 31, 1994. Return on average equity was
19.3% in 1995 versus 17.4% in 1994 excluding the restructuring provision.
Backlog consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN MILLIONS)
<S> <C> <C>
Electronics............................................... $ 7,411 $ 5,287
Engineering and Construction.............................. 2,240 1,522
Aircraft.................................................. 836 1,203
Major Appliances.......................................... 64 58
------- -------
Total Backlog........................................... $10,551 $ 8,070
U.S. government-funded backlog included above............. $ 5,142 $ 3,641
------- -------
</TABLE>
Raytheon's total backlog of $10,551 billion at year-end 1995 was up 31% from
year-end 1994. The increase in the Electronics backlog and the U.S. government
portion of the total backlog reflects the acquisition of E-Systems. The
Electronics backlog includes $1.1 billion related to the SIVAM contract awarded
by the government of Brazil to monitor and protect the Amazon River rain
forest.
For the year ended December 31, 1995, cash flows from operating activities
were $1,174.6 million as compared to $1,157.9 million during the comparable
1994 period. In 1995 these funds were used for: additions to property, plant
and equipment of $328.6 million; dividends of $182.5 million; the purchase of
treasury shares of $260.7 million, net of the proceeds received on the exercise
of employee stock options; and to pay down short-term debt. During 1995, $2.342
billion was expended for acquired companies, principally the acquisition of
E-Systems. The funds for the acquisitions were provided by increasing long-term
and short-term debt. In the fourth quarter of 1995, $449.2 million of funds
were received from the sale of D.C. Heath and were used to reduce short-term
debt.
Debt, net of cash and marketable securities, was $2.494 billion at December
31, 1995, as compared with $855 million at December 31, 1994. Net debt as a
percentage of total capitalization was 36.7% at December 31, 1995, as compared
with 17.9% at December 31, 1994.
Contracts in process increased to $2.213 billion at December 31, 1995, from
$1.951 billion at December 31, 1994, due principally to the acquisition of E-
Systems.
Property, plant and equipment increased to $1.584 billion at December 31,
1995, from $1.361 billion at December 31, 1994, due principally to the
acquisition of E-Systems.
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
Other assets (net) increased to $2.982 billion at December 31, 1995, from
$1.049 billion at December 31, 1994, due principally to the goodwill arising
from the acquisition of E-Systems.
Capital expenditures were $328.6 million in 1995 versus $267.4 million in
1994. The increase was due principally to the acquisition of E-Systems.
Dividends declared to stockholders during 1995 were $182.5 million versus
$192.7 million in 1994. The quarterly dividend rate was $.1875 for each quarter
of 1995 versus $.175 in the first quarter of 1994 and $.1875 for the second,
third, and fourth quarters of 1994.
Total employment was 73,200 at December 31, 1995, as compared with 60,200 at
December 31, 1994. The increase in employment is principally due to the
acquisition of E-Systems.
78
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
BUSINESS OF RAYTHEON
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. See "--Recent
Developments--Sale of Portions of the Appliances Business."
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 TI Acquisition. Since that date, TI
Defense has been conducted through Raytheon TI Systems, a wholly owned
subsidiary of Raytheon. RTIS is a premier supplier of advanced defense systems,
including tactical missiles, precision-guided weapons, radar, night vision
systems and electronic warfare systems. Examples of RTIS' major systems
include:
. Precision-guided weapons, such as the Paveway laser-guided weapon program;
the Joint Stand-Off Weapon (JSOW), which is a U.S. Navy/U.S. Air Force
system for attacking high-value ground targets; and the Javelin program,
which is an anti-tank system for the U.S. Army.
. Long Range Precision Strike programs, such as the High-Speed Anti-
Radiation Missile (HARM). HARM, along with Paveway, constituted 65% of the
air-delivered weapons used by Coalition Forces in Operation Desert Storm.
. Radar and surveillance systems, such as P-3 and S-3 ocean surveillance, F-
22 airborne radars and the LANTIRN terrain-following radar.
. Electro-optics, particularly with Forward-Looking InfraRed (FLIR) sensors,
deployed on platforms such as the M-1 Tank, Bradley Fighting Vehicle, F-117
"Stealth" fighter and the F-18 Hornet.
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 13 industries. RE&C is engaged in the design, construction and
maintenance of facilities and plants operated by a range of customers,
including independent
79
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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.
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 $550.0 million in cash.
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--Sale of Portions of the
Appliances Business."
80
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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 $ 177.6 $ 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.
81
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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 the 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.
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
82
FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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.
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
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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 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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<PAGE>
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.
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.
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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 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>
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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 Merger to proceed under the Hart-Scott-
Rodino Act, New Raytheon is obligated to sell assets relating to HE Holdings'
second-generation ground vehicle electro-optical systems business. See "The
Merger--Background--Certain Regulatory Requirements."
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 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").
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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.
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.
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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.
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.
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<PAGE>
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 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
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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>
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. 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 is 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.
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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
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 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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FINANCIAL AND BUSINESS INFORMATION
<PAGE>
NEW RAYTHEON
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEW RAYTHEON PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS.................................................. 95
OVERVIEW OF NEW RAYTHEON BUSINESS...................................... 102
DIRECTORS AND MANAGEMENT OF NEW RAYTHEON FOLLOWING THE
MERGER................................................................ 104
Directors and Executive Officers..................................... 104
Director and Executive Compensation.................................. 107
Treatment of Raytheon Stock Options.................................. 107
Stock Ownership of Directors, Executive Officers and Five Percent
Stockholders........................................................ 107
Change in Control Employment Agreements.............................. 107
</TABLE>
94
NEW RAYTHEON
<PAGE>
NEW RAYTHEON PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following pro forma combined condensed financial statements have been
prepared by Raytheon's management from Raytheon's historical consolidated
financial statements and from the historical financial statements of TI Defense
and Hughes Defense. The pro forma combined condensed statement of earnings
reflects adjustments as if the TI Acquisition and the Merger had occurred on
January 1, 1996. The pro forma combined condensed balanced sheet reflects
adjustments as if the Merger had occurred on September 28, 1997. The pro forma
adjustments described in the accompanying notes are based upon preliminary
estimates and certain assumptions that Raytheon management believes are
reasonable in such circumstances.
The pro forma combined condensed financial statements should be read in
conjunction with Raytheon's Consolidated Financial Statements (including the
notes thereto) included as Appendix C to this document, and with the historical
financial statements of Hughes Defense and TI Defense (including the related
notes thereto), which are included in Appendices D & E, respectively, to this
document.
The pro forma combined condensed financial statements are not necessarily
indicative of what Raytheon's actual financial position or results of
operations would have been if the TI Acquisition and the Merger had occurred on
the applicable date indicated. Moreover, they are not intended to be indicative
of future results of operations or financial position. The pro forma combined
condensed financial statements do not reflect the cost and revenue synergies
associated with such transactions, which Raytheon expects to realize commencing
in the first year of operation.
95
NEW RAYTHEON
<PAGE>
NEW RAYTHEON PRO FORMA COMBINED CONDENSED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
(IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL HISTORICAL PRO FORMA PRO FORMA HUGHES PRO FORMA PRO FORMA
RAYTHEON TI DEFENSE ADJUSTMENTS COMBINED DEFENSE ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ---------- ----------- ---------
<S> <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 4,272 $(18)(3c) 12,380
(6)(2b) (72)(3d)
35 (2e) 140 (3g)
(10)(2c) (21)(3e)
Amortization of push-
down goodwill.......... 76 (76)(3c) 0
Administration and
selling expenses....... 812 55 867 259 1,126
Research and development
expenses............... 290 44 334 127 461
------ ---- ----- ------- ------ ---- -------
Operating income....... 1,141 87 (15) 1,213 423 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) 874 361 (106) 1,129
------ ---- ----- ------- ------ ---- -------
Federal and foreign
income taxes........... 310 32 (44)(2f) 298 154 (20)(3h) 432
------ ---- ----- ------- ------ ---- -------
Net income............. $ 604 $ 53 $ (81) $ 576 $ 207 $(86) $ 697
====== ==== ===== ======= ====== ==== =======
Earnings per common
share
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>
See accompanying notes to pro forma combined condensed financial statements.
96
NEW RAYTHEON
<PAGE>
NEW RAYTHEON PRO FORMA COMBINED CONDENSED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL HISTORICAL PRO FORMA PRO FORMA HUGHES PRO FORMA PRO FORMA
RAYTHEON TI DEFENSE ADJUSTMENTS COMBINED DEFENSE ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ---------- ----------- ---------
<S> <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 5,216 $ (18)(3c) 16,430
(12)(2b) (95)(3d)
69 (2e) 187 (3g)
(52)(2c) (29)(3e)
Amortization of push-
down goodwill.......... 101 (101)(3c) 0
Administration and
selling expenses 1,021 129 1,150 301 1,451
Research and development
expenses............... 323 78 401 192 593
Special charges......... 34 0 34 0 34
------- ------ ----- ------- ------ ----- -------
Operating income....... 1,198 178 1 1,377 573 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) 1,062 490 (152) 1,400
------- ------ ----- ------- ------ ----- -------
Federal and foreign
income taxes........... 322 66 (69)(2f) 319 209 (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>
See accompanying notes to pro forma combined condensed financial statements.
97
NEW RAYTHEON
<PAGE>
NEW RAYTHEON PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 28, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL PRO FORMA HUGHES PRO FORMA PRO FORMA
RAYTHEON RECLASSIFICATIONS 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>
See accompanying notes to pro forma combined condensed financial statements.
98
NEW RAYTHEON
<PAGE>
NOTES TO NEW RAYTHEON PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying pro forma combined condensed statements of earnings present
the historical results of operations of Raytheon, TI 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 TI Acquisition and the Merger
had taken place on January 1, 1996. The historical results of operations of
Raytheon for the nine months ended September 28, 1997 includes the financial
results for Raytheon TI Systems from July 11, 1997. The historical results of
operations of TI Defense includes financial results for the six month period
ending June 29, 1997. The TI 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 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, TI Defense and Hughes Defense to conform to the pro
forma combined condensed financial statement presentation on a consistent
basis.
2. PRO FORMA ADJUSTMENTS--TI DEFENSE
The following adjustments give pro forma effect to the TI Acquisition (in
millions):
<TABLE>
<C> <S>
(a) Adjustment to eliminate the amortization of intangible assets of TI
Defense which would not have been incurred if the TI 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 TI Defense as
a result of the TI Acquisition for the year ended December 31, 1996
and $10 of non-recurring corporate allocations for the six months
ending June 29, 1997.
(d) Adjustments which represent additional estimated interest expense
resulting from the use of borrowings to finance the TI Acquisition
and incremental interest on Raytheon's pre-TI Acquisition variable
rate borrowings to reflect the change in credit rating as a result of
the TI 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 TI Defense historical financial
statements to the unaudited pro forma combined condensed financial
statement presentation.
</TABLE>
99
NEW RAYTHEON
<PAGE>
NOTES TO NEW RAYTHEON PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
3. PRO FORMA ADJUSTMENTS--HUGHES DEFENSE
The following adjustments give pro forma effect to the Merger (in millions):
<TABLE>
<C> <S> <C>
(a) To record the exchange consideration at closing:
Purchase price ($9,500 less acquired debt of $120)......... $9,380
======
(Assumed financing is based on the price per share of
Raytheon Common Stock at the announcement date of the
merger:
Equity--102,634 thousand shares at assumed market value of
$49.35 per share totals $5,065. $49.35 represents the mid-
point of the market price collar mechanism. Neither the use
of other market price assumptions within the range, nor the
use of the highest recent closing price of Raytheon Common
Stock of $60.25 on October 2, would 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:
Net assets of Hughes Defense at September 28, 1997......... 5,266
Additional assets to be recorded in the Merger............. 45
Additional liabilities to be recorded in the Merger........ (94)
Cash not included in the 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
Acquisition costs.......................................... (125)
Elimination of Hughes Defense goodwill..................... (2,892)
------
$9,380
======
</TABLE>
<TABLE>
<C> <S>
(c) Adjustment to eliminate the amortization of intangible assets of
Hughes Defense which would not have been incurred if the 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 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 Merger and
incremental interest on Raytheon's pre-Merger variable rate
borrowings to reflect the change in credit rating as a result of the
Merger.
</TABLE>
100
NEW RAYTHEON
<PAGE>
NOTES TO NEW RAYTHEON PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<C> <S>
(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.
(h) The estimated tax effect on the applicable pro forma adjustments.
(i) Elimination of Hughes Defense interest expense.
(j) The purchase price 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.
</TABLE>
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 Co., 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. The 1996
sales, operating income, net income and total assets of the businesses sold
were not material to Raytheon's results of operations and as such the sale of
these businesses was not included in the pro forma financial statements.
The Department of Justice and Raytheon entered into an agreement regarding
the TI Acquisition on July 2, 1997, pursuant to which Raytheon agreed to divest
the Gallium Arsenide foundry and Monolithic Microwave Integrated Circuit
business of the R/F Microwave business unit of Texas Instruments 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 Department of Justice filed with the U.S. District
Court for the District of Columbia an agreement among the Department of Justice
Raytheon, GM and HE Holdings regarding the 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 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.
101
NEW RAYTHEON
<PAGE>
OVERVIEW OF NEW RAYTHEON BUSINESS
In early January 1997, Raytheon entered into agreements to acquire what is
now Raytheon TI Systems and to merge with Hughes Defense, thereby creating a
unique technology company and a world leader in what we consider 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 TI Acquisition on July 11, 1997, Raytheon now proposes
merging with Hughes Defense to form a strategic combination through which it
expects to offer an even broader range of products and services, greater
returns to shareholders, 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
R&D; 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 TI Acquisition and the 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 Raytheon TI Systems 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 merger with Hughes Defense is completed, the business of New
Raytheon will consist of:
. the combined operations of the existing Raytheon defense business, Hughes
Defense and Raytheon TI Systems;
102
NEW RAYTHEON
<PAGE>
. the Commercial Electronics business (See "Business of Raytheon--Commercial
Electronics");
. the Engineering and Construction business (See "Business of Raytheon--
Engineering and Construction");
. the Aircraft business (See "Business of Raytheon--Aircraft"); and
. the Commercial Laundry and Electronic Controls business (See "Business of
Raytheon--Appliances").
103
NEW RAYTHEON
<PAGE>
DIRECTORS AND MANAGEMENT OF NEW RAYTHEON
FOLLOWING THE MERGER
DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
The Merger Agreement provides that, immediately following the consummation of
the Merger, the New Raytheon Board will have 15 members, 12 of whom currently
are directors of Raytheon. The New Raytheon Board will be constituted as set
forth below. None of the members of the New Raytheon Board are currently
employees of Raytheon or are expected to be employees of New Raytheon, other
than Dennis J. Picard and A. Lowell Lawson. See "--Officers."
FORMER RAYTHEON COMPANY DIRECTORS
<TABLE>
<CAPTION>
NAME AGE
---- ---
<S> <C>
Ferdinand Colloredo-Mansfeld.......................................... 57
Theodore L. Eliot, Jr................................................. 69
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
Thomas L. Phillips.................................................... 73
Dennis J. Picard...................................................... 65
Warren B. Rudman...................................................... 67
Alfred M. Zeien....................................................... 67
</TABLE>
NEW DIRECTORS
<TABLE>
<CAPTION>
NAME AGE
---- ---
<S> <C>
Steven D. Dorfman..................................................... 62
Thomas E. Everhart.................................................... 65
Charles H. Noski...................................................... 45
</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.
Ferdinand Colloredo-Mansfeld. Director of Raytheon since 1987. Chairman and
Chief Executive Officer, Cabot Partners since October, 1990. Prior thereto, Mr.
Colloredo-Mansfeld was 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: 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. Director of Raytheon since 1983. Dean Emeritus of the
Fletcher School of Law and Diplomacy, Tufts University; former U.S. Ambassador.
Principal Business: International Relations. Director: Neurobiological
Technologies, Inc. and Fiberstars, Inc.
104
NEW RAYTHEON
<PAGE>
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).
John R. Galvin. Director of Raytheon since February 1996. 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 Gen. Galvin served as the Olin Distinguished
Professor of National Security at the U.S. Military Academy at West Point. In
1994-1995 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. Director of Raytheon since 1987. Principal Business:
Corporate Director. Director: The Vanguard Group of Investment Companies and
each of the mutual funds in the 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. Director of Raytheon since 1974. Retired Chairman, Bank of
Boston Corporation and The First National Bank of Boston. Principal Business:
Corporate Director.
L. Dennis Kozlowski. Director of Raytheon since June 1995. 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. Director of Raytheon since 1978. Principal Business:
Corporate Financial Advisor. Director: E.W. Blanch Holdings, Inc.
A. Lowell Lawson. Director of Raytheon since May 1995. Executive Vice
President of the Company 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. Director of Raytheon since 1962. 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. Director of Raytheon since 1989. Chairman of the Board and
Chief Executive Officer since March 1, 1991. Prior thereto, Mr. Picard served
as President from 1989 and as Senior Vice President, General Manager of the
Missile Systems Division from 1983. Director: State Street Boston Corporation.
Warren B. Rudman. Director of Raytheon since 1993. Partner, law firm of Paul,
Weiss, Rifkind, Wharton and Garrison since January 1992. Principal Business:
Law. Prior thereto, Mr. Rudman served as a United States Senator from 1980
through January 1992. Director: Chubb Corporation; Collins & Aikman
Corporation; Prime Succession, Inc.; and several mutual funds managed by
Dreyfus Corporation.
105
NEW RAYTHEON
<PAGE>
Alfred M. Zeien. Director of Raytheon since 1992. Chairman of the Board and
Chief Executive Officer of The Gillette Company since 1991. Prior thereto, Mr.
Zeien served as 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 Corporation; The Gillette Company;
Polaroid Corporation; Massachusetts Mutual Life Insurance Company.
COMMITTEES
The Merger Agreement provides for the composition of various committees of
the New Raytheon Board and for the creation of three new committees which are
principally charged with overseeing and implementing the integration of
Raytheon, Raytheon TI Systems and Hughes Defense and with supervising and
managing the combined defense business. The new committees are the Board
Transition Committee, the Management Transition Committee and the Defense
Business Executive Council, and each will be composed of directors or
management personnel designated by both Raytheon and Hughes Defense.
In addition, as of the Effective Time, the Audit Committee will consist of
three directors designated by Raytheon and one director designated by Hughes
Defense and the Nominating Committee will consist of five directors designated
by Raytheon and one director designated by Hughes Defense.
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.
OFFICERS
The Merger Agreement provides that the officers of Raytheon immediately prior
to the Effective Time will be the officers of New Raytheon following the
Effective Time. Accordingly, as of the Effective Time, the executive officers
of New Raytheon are expected to be as set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gail P. Anderson............... 55 Vice President--Human Resources
Shay D. Assad.................. 47 Vice President--Contracts
Renso L. Caporali.............. 64 Senior Vice President Engineering and Business
Development
Philip W. Cheney............... 61 Vice President and Group Executive--Commercial
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
Michele C. Heid................ 43 Vice President--Corporate Controller and Investor
Relations
Christoph L. Hoffmann.......... 53 Executive Vice President--Law, Corporate
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.
Robert S. McWade............... 41 Vice President--Corporate Affairs and Communications
Charles Q. Miller.............. 52 Executive Vice President and Chairman and Chief
Executive Officer of Raytheon Engineers &
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.
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<PAGE>
DIRECTOR AND EXECUTIVE COMPENSATION
The directors and executive officers of New Raytheon will receive no
compensation from New Raytheon prior to the 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 Effective Time. For
information regarding compensation paid to directors and executive officers of
Raytheon in 1996, reference is made to the Raytheon 1996 Form 10-K.
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 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
Merger: the Raytheon Company 1991 Stock Plan and the Raytheon Company 1995
Stock Option Plan.
TREATMENT OF RAYTHEON STOCK OPTIONS
The Merger Agreement provides that each unexpired and unexercised Raytheon
Option outstanding at the Effective Time will be converted into an option to
purchase shares of Class B Common Stock. See "The Merger--The Merger
Agreement--Consideration to be Received in the Merger." For information on the
ownership of Raytheon Options by certain directors and executive officers of
Raytheon, reference is made to the Raytheon 1996 10-K.
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND FIVE PERCENT STOCKHOLDERS
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
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 Merger. No person is
expected to beneficially own more than 10 percent of the outstanding shares of
New Raytheon after giving effect to the Merger (based upon publicly available
information).
CHANGE IN CONTROL EMPLOYMENT 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. In the event of a termination or constructive termination of
employment following a change in control, 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.
In connection with the Pre-Merger Transactions, HE Holdings 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 HE
Holding's obligations under these agreements after the Effective Time.
The change in control agreements are effective for three years following the
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,
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NEW RAYTHEON
<PAGE>
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 of 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 case of other key
employees) after the 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
Merger is a "change in control" for purposes of the agreements.
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NEW RAYTHEON
<PAGE>
CAPITAL STOCK
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEW RAYTHEON CAPITAL STOCK.............................................. 110
Introduction.......................................................... 110
Common Stock.......................................................... 110
Preferred Stock....................................................... 111
New Raytheon Rights Agreement......................................... 112
Limitation on New Raytheon Directors' Liability....................... 115
Section 203 of the Delaware General Corporation Law................... 115
Limitations on Changes in Control..................................... 116
Stock Exchange Listing................................................ 117
New Raytheon Transfer Agent........................................... 117
COMPARISON OF RIGHTS OF STOCKHOLDERS OF
RAYTHEON AND NEW RAYTHEON.............................................. 118
Size and Classification of the Board of Directors..................... 118
Voting Rights......................................................... 118
Cumulative Voting..................................................... 118
Dividends............................................................. 119
Advance Notice of Nominations......................................... 119
Actions by Stockholders............................................... 119
Special Meetings...................................................... 119
Removal of Directors.................................................. 120
Limitation on Directors' Liability.................................... 120
Indemnification of Directors.......................................... 120
Rights Plan........................................................... 121
Transferability of Shares............................................. 121
Fair Price Provision.................................................. 121
Preferred Stock....................................................... 122
Subscription Rights................................................... 122
Amendment of Certificate of Incorporation............................. 122
Amendment of By-Laws.................................................. 122
</TABLE>
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NEW RAYTHEON CAPITAL STOCK
INTRODUCTION
Under the New Raytheon Certificate, the authorized capital stock of New
Raytheon will consist of Class A Common Stock, par value $.01 per share, Class
B Common Stock, par value $.01 per share, and New Raytheon Preferred Stock, par
value $.01 per share.
Holders of both classes of GM Common Stock will receive Class A Common Stock
in the Spin-Off Merger. Raytheon Common Stockholders will receive Class B
Common Stock in the Merger. The New Raytheon Board has no current plans to
issue New Raytheon Preferred Stock. See "The Merger--Description of The Pre-
Merger Transactions" and "The Merger--Description of the Merger."
The following descriptions of New Raytheon Capital Stock (i) are summaries
and do not purport to be complete and (ii) give effect to the consummation of
the Hughes Defense Spin-Off and the Merger. See "The Merger--Description of the
Pre-Merger Transactions," "The Merger--Description of the Merger," and "Capital
Stock--Comparison of Rights of Stockholders of Raytheon and New Raytheon."
Reference is also made to the more detailed provisions of, and such
descriptions are qualified in their entirety by reference to, the New Raytheon
Certificate and the New Raytheon By-Laws, copies of which have been filed with
the SEC as exhibits to the Registration Statement.
In addition, the Hughes Separation Agreement limits the ability of the New
Raytheon Board to take certain actions which affect New Raytheon Capital Stock.
For a description of these restrictions, see "The Merger-- Separation and
Transition Agreements--Summary of Hughes Separation Agreement."
COMMON STOCK
With respect to all matters other than the election and removal of directors,
Class A Common Stockholders and 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, as well as the approval of the holders of any class or
series of New Raytheon Preferred Stock which may be entitled to vote thereon.
With respect to the election or removal of directors only, (i) Class B Common
Stockholders will be entitled to one vote for each share of Class B Common
Stock they own, which votes shall represent in the aggregate 19.9% of the total
voting power of all holders of New Raytheon Common Stock, and (ii) Class A
Common Stockholders will be entitled to such number of votes for each share of
Class A Common Stock they own as shall be necessary to entitle the Class A
Common Stockholders to vote, in the aggregate, 80.1% 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. Except as may be provided
in connection with any New Raytheon Preferred Stock or as may otherwise be
required by law or the New Raytheon Certificate, 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. A plurality of votes cast shall elect directors.
The New Raytheon Common Stock will not have cumulative voting rights.
Subject to the prior rights of holders of New Raytheon Preferred Stock, if
any, Class A Common Stockholders and Class B Common Stockholders are entitled
to receive such dividends as may be lawfully declared from time to time by the
New Raytheon Board. The Class A Common Stockholders and Class B Common
Stockholders will be entitled to receive the same amount per share of any such
dividends, except that New Raytheon may declare a dividend or other
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.
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CAPITAL STOCK
<PAGE>
In the case of any split, subdivision, combination or reclassification of
either the Class A Common Stock or the Class B Common Stock, shares of the
other class 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, Class A Common Stockholders and 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
them, respectively, without regard to class, after there shall have been paid
or set apart 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. 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 Class A Common
Stockholders or Class B Common Stockholders, the holders of each class will
receive the same type and amount of consideration on a per share basis.
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 (i) effected ratably in accordance with the number of
outstanding shares of Class A Common Stock and Class B Common Stock, (ii) for
consideration of the same type and amount as to shares of Class A Common Stock
and shares of Class B Common Stock and (iii) 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.
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 Class A Common Stockholders and
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 Class A Common
Stockholders and Class B Common Stockholders are subject to discriminatory or
unequal treatment.
PREFERRED STOCK
The New Raytheon Board is empowered, without approval of the 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 New Raytheon Junior Preferred Stock described under "--New
Raytheon Rights Agreement" is the only series of New Raytheon Preferred Stock
that has been authorized by the New Raytheon Board.
Although the New Raytheon Board has no current 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
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CAPITAL STOCK
<PAGE>
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 is limited for a specified period following the
Effective Time by certain provisions of the Hughes Separation Agreement. See
"The Merger--Separation and Transition Arrangements--Summary of the Hughes
Separation Agreement."
NEW RAYTHEON RIGHTS AGREEMENT
In connection with the Merger, the Hughes Defense Board intends to adopt the
New Raytheon Rights Agreement, effective as of the Effective Date. Prior to the
Effective Date, the Hughes Defense Board will declare a dividend of one New
Raytheon Right to be paid at the Spin-Off Merger Effective Time in the case of
the Class A Common Stock and at the Effective Time in the case of the Class B
Common Stock to the holder of record thereof as of the Effective Date. Thus,
each share of Class B Common Stock distributed to Raytheon Common Stockholders
in the Merger will have a New Raytheon Right attached. The following
description of the New Raytheon Rights and the New Raytheon Rights Agreement
(i) is a summary and does not purport to be complete and (ii) gives effect to
the consummation of the Merger and related transactions. This description,
which summarizes the material provisions of the New Raytheon Rights Agreement,
does not purport to be complete and is qualified in its entirety by reference
to, the New Raytheon Rights Agreement, a copy of which is filed with the SEC as
an exhibit to the Registration Statement.
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 determined by the
Hughes Defense Board prior to the Effective Date (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 (i) will not be exercisable until the New Raytheon
Rights Effective Date and (ii) will expire on the 10th anniversary of the
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 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).
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CAPITAL STOCK
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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 Effective Date will be evidenced by
the certificates representing shares of New Raytheon Common Stock which will be
on deposit with the Transfer Agent until the New Raytheon Rights Effective
Date. Ownership of New Raytheon Rights will be reflected on the account
statements you receive in connection with your Book-Entry Ownership of shares
of Class B Common Stock. See "The Merger--The Merger Agreement--Manner of
Effecting the Exchange." The "NEW RAYTHEON RIGHTS EFFECTIVE DATE" is a date
which is the earlier to occur of (i) 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 (ii) 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
. 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 New Raytheon 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
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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 $.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 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 New
Raytheon 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 (i) the threshold at which a person becomes an Acquiring
Person and (ii) 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 .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.
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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 B Common Stock
distributed in the Merger are being registered under the Exchange Act, together
with the Class B Common Stock, pursuant to the Registration Statement. 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 provides, as authorized by Section 102(b)(7) of
the DGCL, 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 DGCL as it currently exists or as it may be amended in the future.
The inclusion of this provision in the New Raytheon Certificate 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
Hughes Defense is, and New Raytheon will be, a Delaware corporation and
subject to Section 203 of the DGCL. 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 (i) 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, (ii) upon 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 (iii) 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 (i) any merger or consolidation of the corporation with
the interested stockholder, (ii) 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, (iii) certain transactions resulting
in the issuance or transfer by the corporation of stock of the corporation to
the interested stockholder, (iv) 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 (v) certain transactions in which the interested stockholder receives
financial benefits provided by the corporation. An "INTERESTED STOCKHOLDER"
generally is (i) any person that owns 15% or more of the outstanding voting
stock of the corporation, (ii) any person that is an affiliate or associate of
the corporation and
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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
(iii) the affiliates or associates of any such person described in (i) and
(ii).
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. To be timely, 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 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.
The New Raytheon Certificate provides that, except as may be provided by the
New Raytheon Certificate 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 15 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 "New Raytheon-- Directors and Management of New
Raytheon following the Merger." A director of New Raytheon may be removed only
for cause.
The New Raytheon Certificate 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 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
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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 and the effect upon
communities in which offices or other facilities of New Raytheon are located,
and any other factors the directors consider pertinent.
The foregoing provisions of the New Raytheon Certificate and the New Raytheon
By-Laws, together with the New Raytheon Rights Agreement and the provisions of
Section 203 of the DGCL, 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--Certain
Limitations on Changes in Control of New Raytheon; New Raytheon's Ability to
Participate in Future Defense Industry Consolidation." 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 B Common Stock on the NYSE, CSE
and PSE. The trading symbol for the Class B Common Stock on the these exchanges
is expected to be "RTNB."
NEW RAYTHEON TRANSFER AGENT
State Street Bank and Trust Company will serve as the Transfer Agent for the
New Raytheon Common Stock.
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COMPARISON OF RIGHTS OF STOCKHOLDERS OF RAYTHEON
AND NEW RAYTHEON
If the Merger is consummated, Raytheon Common Stockholders will become Class
B Common Stockholders of New Raytheon. The rights of Class B Common
Stockholders will be governed by the DGCL, the New Raytheon Certificate, the
New Raytheon By-Laws and the New Raytheon Rights Agreement. Both Raytheon and
New Raytheon are incorporated under the laws of the State of Delaware. Certain
differences between the rights of Class B Common Stockholders under the New
Raytheon Certificate and the New Raytheon By-Laws and the rights of Raytheon
Common Stockholders under the Raytheon Certificate and Raytheon By-Laws are
summarized below. This summary describes the material terms of such agreements,
does not purport to be complete and is qualified by reference to the full text
of such documents. For information as to how such documents may be obtained,
see "Consent Solicitation and Other Matters--Where You Can Find More
Information."
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
The Raytheon Certificate provides that the number of directors of Raytheon
will be not less than five nor more than 15, and that such number is to be
fixed from time to time, pursuant to Raytheon By-Laws, by affirmative vote of a
majority of the entire Raytheon Board. The Raytheon Board currently consists of
15 directors. The Raytheon By-Laws provide that the Raytheon Board is divided
into three classes, with each class being as nearly equal as possible. At each
annual meeting of shareholders, directors are chosen for a full three-year term
to succeed those whose terms expire.
The New Raytheon Certificate provides that the number of directors will be
15, but may be increased or decreased to not less than three by a resolution
adopted by a majority of the New Raytheon Board. The New Raytheon Board will be
classified into three classes, as nearly equal in number as possible. At each
annual meeting of shareholders, directors will be chosen for a full three-year
term to succeed those whose terms expire, except that at the first annual
meeting, one class will be elected for a one-year term and a second class will
be elected for a two-year term.
VOTING RIGHTS
Raytheon Common Stockholders are entitled to one vote per share. The voting
rights of Class B Common Stockholders differ based on the matter being
submitted to a vote. With respect to the election or removal of directors only,
Class B Common Stockholders are entitled to one vote per share, and such votes,
when aggregated, will represent 19.9% of the total voting power of all holders
of New Raytheon Common Stock. Class A Common Stockholders have the remaining
80.1% of the total voting power of all holders of New Raytheon Common Stock. As
a result, the number of votes per share to which each share of Class A Common
Stock is entitled is based on the number of shares of Class A Common Stock
entitled to vote. This number is determined by dividing the number of votes
required to equal 80.1% of the aggregate voting power of all holders of New
Raytheon Common Stock by the number of shares of Class A Common Stock. With
respect to all other matters, Class B Common Stockholders and Class A Common
Stockholders are each entitled to one vote per share. The approval of any such
matter requires the affirmative vote of each class of New Raytheon Common
Stock, with each class voting separately, in each case acting by such vote as
is required by law for a corporation possessing only one class of common stock
(or by such greater vote as set forth in the New Raytheon Certificate or in the
New Raytheon By-Laws). In certain instances, the approval of the holders of any
class or series of New Raytheon Preferred Stock, may also be required.
CUMULATIVE VOTING
No holder of Raytheon Common Stock or New Raytheon Common Stock is entitled
to cumulate such holder's votes in voting for directors.
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DIVIDENDS
The Raytheon Certificate provides that Raytheon Common Stockholders are
entitled to such dividends as may be declared by the Raytheon Board out of any
funds of Raytheon which are legally available for the payment of dividends.
Dividends may not be paid to Raytheon Common Stockholders unless all accrued
dividends or sinking funds payments on Raytheon's preferred stock, if any, have
been paid or set aside. Class B Common Stockholders possess similar rights.
ADVANCE NOTICE OF NOMINATIONS
Any Raytheon Common Stockholder intending to nominate a person for election
to the Raytheon Board at a meeting of Stockholders may do so only if written
notice of the Raytheon Common Stockholder's intention to make such nomination,
including certain information specified in the Raytheon By-Laws, is given to
the Secretary of Raytheon not later than 60 days or earlier than 90 days in
advance of the annual meeting at which the nomination is to be made (or, in the
case of a special meeting, not later than the 10th day following the date on
which notice of that meeting is first given to shareholders).
Any holder of New Raytheon Common Stock intending to nominate a person for
election to the New Raytheon Board at a meeting of stockholders of New Raytheon
may do so only if written notice of the stockholder's intention to make such
nomination, including certain information specified in the New Raytheon By-
Laws, is timely given to the Secretary of New Raytheon. To be timely, 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 before or more than 60 calendar days after
such anniversary date, or in the event that a special meeting of stockholders
is called for the purpose of electing one or more directors, 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 or special meeting and not later than the close of business on the later
of the 90th calendar day prior to such annual or special 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.
ACTIONS BY STOCKHOLDERS
Neither the Raytheon Certificate nor the Raytheon By-Laws contains any
provision which limits the right of shareholders to take any action at other
than duly called annual or special meeting of shareholders. The New Raytheon
Certificate provides that any action required or permitted to be taken by
shareholders is to be taken at a duly called annual or special meeting of
shareholders and that no action may be taken by written consent of
shareholders.
SPECIAL MEETINGS
The Raytheon By-Laws permit a special meeting of stockholders to be called
only by the Chairman of the Raytheon Board, by the Secretary upon written
request of the Chairman of the Raytheon Board, or by the Raytheon Board
pursuant to a resolution adopted by a majority of the total number of directors
which Raytheon would have if there were no vacancies. Business transacted at
such meetings must be confined to the purpose stated in the notice of such
special meeting.
The New Raytheon Certificate provides that, except as required by law, a
special meeting of stockholders may be called only by the New Raytheon Board
pursuant to a resolution stating the purposes thereof and approved by a
majority of the total number of directors which New Raytheon would have if
there were no vacancies, or by the Chairman of the New Raytheon Board. Any
power of the stockholders to call a special meeting is specifically denied.
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REMOVAL OF DIRECTORS
The Raytheon Certificate provides that any director may be removed only for
cause by the affirmative vote of a majority of the voting power of the all
shares entitled to vote in the election of directors. Vacancies on the Raytheon
Board, whether resulting from removal or other cause, as well as newly created
directorships, resulting from an increase in the number of directors, are
filled by a majority vote of the remaining directors then in office, even if
less than a quorum. Decreases in the number of directors constituting the
Raytheon Board will not shorten the term of any incumbent director. Certain
additional provisions may apply with respect to directors elected by holders of
Raytheon preferred stock.
The New Raytheon Certificate permits directors to be removed only for cause
by the affirmative vote of the Class A Common Stockholders and Class B Common
Stockholders, voting together as a single class, in the same manner and with
the same voting power to which they are entitled with respect to election of
directors. The New Raytheon Certificate provides that vacancies on the New
Raytheon Board resulting from death, resignation, disqualification, removal or
otherwise, are filled by a majority vote of the remaining directors then in
office, even if less than a quorum, and not by stockholders. Newly created
directorships resulting from any increase in the number of directors are filled
by the affirmative vote of the Class A Common Stockholders and Class B Common
Stockholders, voting together as a single class, in the same manner and with
the same voting power to which they are entitled with respect to election of
directors. Decreases in the number of directors constituting the New Raytheon
Board will not shorten the term of any incumbent director. Certain additional
provisions may apply with respect to directors elected by holders of New
Raytheon Preferred Stock.
LIMITATION ON DIRECTORS' LIABILITY
The DGCL permits Delaware corporations to eliminate or limit the monetary
liability of directors for breach of their fiduciary duty of care, subject to
certain limitations. The Raytheon Certificate provides that Raytheon directors
are not liable to Raytheon or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to Raytheon or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the DGCL, or (iv)
for any transaction from which a director derived an improper personal benefit.
The New Raytheon Certificate provides that, to the full extent of the DGCL, New
Raytheon directors are not liable to New Raytheon or its stockholders for
monetary damages for breach of fiduciary duty as a director.
INDEMNIFICATION OF DIRECTORS
The DGCL provides for indemnification of directors, officers, employees and
agents subject to certain limitations.
The Raytheon By-Laws provide that Raytheon will indemnify any person against
all expenses, liabilities and losses incurred in litigation brought by third
parties arising by reason of the fact that such person is or was a director or
officer of Raytheon, or is or was serving at the request of Raytheon in an
authorized capacity, 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
Raytheon, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. The Raytheon
By-Laws also provide that Raytheon will make similar indemnification with
respect to actions brought by or on behalf of Raytheon, except that no
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged to be liable for willful negligence
or misconduct in the performance of such person's duty to Raytheon (unless and
to the extent the Court of Chancery of the State of Delaware will find such
person to be fairly and reasonably entitled to indemnity). To the extent that
any such person has been successful on the merits or otherwise in defense of an
action to which indemnification is available, such person will be indemnified
against all expenses actually and reasonably incurred by him or her in
connection therewith. The Raytheon By-Laws further provide that Raytheon
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may purchase and maintain insurance on behalf of any of Raytheon's officers or
directors or certain other individuals against any liability asserted against
him or her and incurred by him or her in any such capacity, whether or not
Raytheon would have the power to indemnify him or her against such liability
under the provisions of the Raytheon By-Laws or the DGCL.
The New Raytheon Certificate provides, in substance, that each person made a
party or threatened to be made a party to any type of proceeding, by reason of
the fact that such person is or was a director or officer of New Raytheon, or
is or was serving at the request of New Raytheon as a director or officer of
another corporation or other enterprise, will be indemnified and held harmless
by New Raytheon to the fullest extent authorized by the DGCL, against all
expense, liability and loss reasonably incurred or suffered by such person in
connection therewith.
RIGHTS PLAN
Shares of Raytheon Common Stock have no rights to purchase other shares of
capital stock of Raytheon associated with them. Each share of Class B Common
Stock will have a New Raytheon Right associated with it. The terms and
conditions relating to such rights are described in "--New Raytheon Capital
Stock--New Raytheon Rights Agreement."
TRANSFERABILITY OF SHARES
The Raytheon Certificate contains no provision restricting the
transferability of shares of Raytheon Common Stock. The New Raytheon
Certificate contains no provision restricting transferability of shares of
Class B Common Stock by the stockholder. The New Raytheon Certificate does
impose certain limits on New Raytheon's ability to purchase, redeem or
repurchase or otherwise acquire shares of New Raytheon Common Stock in any
manner that is prejudicial to the holders of one class of common stock in favor
of the other class of common stock.
FAIR PRICE PROVISION
The Raytheon Certificate requires approval by holders of at least 75% of
Raytheon's outstanding voting stock for mergers and certain other corporate
transactions ("BUSINESS TRANSACTIONS") that involve a beneficial owner of (or
person that has announced an intention to acquire) 10% or more of the voting
stock of Raytheon (a "RELATED PERSON"), unless (i) the transaction has been
approved by a majority of certain directors ("CONTINUING DIRECTORS") who
constitute a majority of the entire Raytheon Board at such time or (ii) certain
fair price criteria and procedural requirements are satisfied. These provisions
of Raytheon Certificate may be amended or repealed only by the vote of the
holders of 75% or more of the voting stock of Raytheon, or by the vote of
holders of a simple majority of the voting stock of Raytheon if the Raytheon
Board is composed entirely of Continuing Directors and unanimously approves the
amendment or repeal.
The fair price criteria require that, in the event of a Business Transaction
in which cash or other consideration would be paid to Raytheon's Common
Stockholders, (i) the consideration to be received by the stockholders be
either cash or the same type of consideration used by the Related Person to
acquire the largest portion of such Related Person's shares, and (ii) the fair
market value of such consideration to be received per share of Raytheon Common
Stock be not less than the highest per share price paid by the Related Person
in acquiring any Raytheon Common Stock within two years before becoming and
while a Related Person, or if higher, the per share price on the date of first
public announcement of the Business Transaction.
The fair price criteria also require that the aggregate amount of cash and
fair market value of other consideration to be received by holders of shares of
voting stock other than Raytheon Common Stock will be the higher of: (i) the
highest per share price paid by the Related Person in acquiring such voting
stock within two years before becoming and while a Related Person, or if
higher, the per share price on the date of first public
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announcement of the Business Transaction, and (ii) the highest preferential
liquidation amount per share to which such voting shares are entitled.
The procedural requirements would not be satisfied if, (i) after a Related
Person became a 10% voting stockholder, the Related Person acquired additional
shares of voting stock of Raytheon, other than pursuant to a pro rata stock
split or dividend, (ii) before consummation of the Business Transaction, the
Related Person will have received the benefit of any financial assistance or
tax advantage provided by Raytheon not shared proportionately with all other
stockholders, (iii) before consummation of the Business Transaction, the
Related Person causes a material change in Raytheon's business, capital
structure or dividend rates or policy, or (iv) the proposed Business
Transaction will not have been described in a proxy or information statement
mailed to Raytheon Common Stockholders no later than 30 days prior to the
consummation of such transaction, which proxy or information statement must
prominently set forth any statements any of the Continuing Directors choose to
make with respect to the advisability (or inadvisability) of the proposed
Business Transaction and, if deemed advisable by a majority of the Continuing
Directors, the opinion of an investment bank selected by a majority of the
Continuing Directors as to the fairness (or not) to Raytheon Common
Stockholders of the proposed Business Transaction.
The New Raytheon Certificate contains no provision restricting business
combinations with "interested shareholders," but does provide that in the event
of any corporate reorganization in which any consideration is to be received by
the Class A Common Stockholders or Class B Common Stockholders, the holders of
the other class must receive the same type and amount of consideration on a per
share basis.
PREFERRED STOCK
The Raytheon Certificate provides that the Raytheon Board has the authority
to issue preferred stock from time to time in one or more subsequent series,
with or without voting powers, and with designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as determined by the Raytheon Board. There
are no shares of preferred stock currently issued or outstanding or reserved
for issuance.
Similarly, the New Raytheon Certificate authorizes the New Raytheon Board to
authorize the issuance of preferred stock from time to time in one or more
series. The New Raytheon Board is authorized to fix the voting powers and such
designations, preferences and relative, participating, optional or other
rights, and qualifications, limitations or restrictions thereof.
SUBSCRIPTION RIGHTS
The Raytheon Certificate provides that no Raytheon stockholder will be
entitled, as a matter of right, to subscribe for, purchase or receive any
shares of stock of Raytheon which Raytheon may issue or sell. The New Raytheon
Certificate does not include similar provisions with respect to shares of Class
A Common Stock or Class B Common Stock.
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Raytheon Certificate provides, with certain exceptions, that provisions
of the Raytheon Certificate may be amended or repealed in the manner at the
time prescribed by statute. The New Raytheon Certificate provides, with certain
exceptions, that New Raytheon reserves the right to amend or repeal any
provision contained in the New Raytheon Certificate in the manner prescribed by
law.
AMENDMENT OF BY-LAWS
The Raytheon By-Laws provide, with certain exceptions and subject to certain
notice requirements, that provisions of the Raytheon By-Laws may be amended or
repealed by the Raytheon Board or by the affirmative
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vote of at least 80% of the voting power of all outstanding shares. The New
Raytheon By-Laws may be altered or repealed and new by-laws may be adopted (i)
by the affirmative vote of a majority of the Class A Common Stockholders and
Class B Common Stockholders, with each class voting separately, in the same
manner and with the same voting power to which they are entitled with respect
to matters other than the election of directors; provided, however, that in the
case of such stockholder action at a special meeting, notice of the proposed
change must be contained in the notice of meeting; or (ii) by the affirmative
vote of a majority of the whole New Raytheon Board.
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CONSENT SOLICITATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SOLICITATION OF WRITTEN CONSENT OF RAYTHEON COMMON STOCKHOLDERS......... 125
Matter to Be Considered............................................... 125
Action by Written Consent............................................. 125
Record Date........................................................... 125
Consents; Revocation of Consents...................................... 125
Costs of Solicitation of Consents..................................... 126
Certain Plans......................................................... 126
</TABLE>
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SOLICITATION OF WRITTEN CONSENT OF
RAYTHEON COMMON STOCKHOLDERS
MATTER TO BE CONSIDERED
This Solicitation Statement/Prospectus is furnished in connection with the
solicitation by the Raytheon Board of written consents from the Raytheon Common
Stockholders approving the Merger Proposal, pursuant to which, among other
things, (i) Raytheon will merge with and into HE Holdings, which at the time of
the Merger will consist primarily of Hughes Defense and (ii) each share of
Raytheon Common Stock will be exchanged for one share of the Class B Common
Stock of New Raytheon. The full text of the Merger Agreement is attached as
Appendix A to this Solicitation Statement/Prospectus and is incorporated herein
by reference. See "The Merger."
Consummation of the Merger is conditioned upon, among other things, receiving
the consent of Raytheon Common Stockholders to the Merger Proposal. Approval of
the Merger Proposal requires the consent of the holders of a majority of the
voting power of all outstanding shares of Raytheon Common Stock and the
consents of a majority of the voting power of all outstanding shares of both
classes of GM Common Stock, voting together as a single class, 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 the Merger Proposal is approved, the Merger will become
effective upon the filing of a Certificate of Merger with the Secretary of
State of the State of Delaware.
ACTION BY WRITTEN CONSENT
IN LIEU OF A SPECIAL MEETING OF RAYTHEON COMMON STOCKHOLDERS, ACTION ON THE
MERGER PROPOSAL WILL BE TAKEN BY WRITTEN CONSENT. THE MERGER WILL BE
CONSUMMATED ON A DATE TO BE DETERMINED BY RAYTHEON, WHICH IS EXPECTED TO BE AS
SOON AS PRACTICABLE AFTER CONSENTS HAVE BEEN RECEIVED AND NOT REVOKED FROM
HOLDERS OF THE NUMBER OF OUTSTANDING SHARES OF RAYTHEON REQUIRED FOR APPROVAL,
BUT WHICH WILL NOT IN ANY EVENT BE SOONER THAN 20 BUSINESS DAYS AFTER THE DATE
OF MAILING OF THIS SOLICITATION STATEMENT/PROSPECTUS. NOTWITHSTANDING THE
FOREGOING, NO CONSENT SHALL BE EFFECTIVE TO APPROVE THE MERGER PROPOSAL UNLESS,
WITHIN 60 DAYS OF THE EARLIEST DATED CONSENT TO THE MERGER PROPOSAL IS
DELIVERED TO RAYTHEON, THE NUMBER OF CONSENTS REQUIRED TO APPROVE THE MERGER
PROPOSAL ARE DELIVERED TO RAYTHEON.
RECORD DATE
The Raytheon Board has fixed the close of business on October 14, 1997, as
the Record Date for determining which shares of Raytheon Common Stock are
entitled to consent with respect to the Merger Proposal. Only holders of record
of shares of Raytheon Common Stock on the Record Date are entitled to consent
to the Merger Proposal. On the Record Date, there were approximately
236,221,503 shares of Raytheon Common Stock outstanding, held by approximately
21,475 shareholders of record.
As of the Record Date, directors and executive officers of Raytheon held an
aggregate of 3,176,425 shares (including options to purchase shares exercisable
within 60 days) of Raytheon Common Stock. Such holdings constituted, as of the
Record Date, less than 5% of the outstanding shares of Raytheon Common Stock.
See "New Raytheon--Directors and Management of New Raytheon following the
Merger--Stock Ownership of Directors, Executive Offices and Five Percent
Stockholders."
CONSENTS; REVOCATION OF CONSENTS
The shares represented by each executed consent submitted with respect to the
Merger Proposal will be voted in accordance with the instructions indicated in
such consents. Failure to execute and submit a consent to the Merger Proposal
will have the effect of a vote against the Merger Proposal. In addition, 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 those to approve the
Merger Proposal without specific instructions from such customers. Thus,
"broker non-votes" with respect to the Merger Proposal will have the effect of
a vote against such proposal.
125
CONSENT SOLICIATION
<PAGE>
Arrangements will be made to furnish copies of consent solicitation materials
to fiduciaries, custodians and brokerage houses for forwarding to beneficial
owners of Raytheon Common Stock. Brokers, dealers, banks, voting trustees and
their nominees who desire a supply of this solicitation material for
transmittal by them to beneficial owners should write to Raytheon Company, c/o
Morrow & Co., Inc., 909 Third Avenue, 20th Floor, New York, NY 10022-4799.
Any consent given pursuant to this solicitation with respect to the Merger
Proposal being submitted for Raytheon Common Stockholder consent may be revoked
by the person giving it at any time before unrevoked consents representing the
requisite number of shares required to approve the Merger Proposal are
delivered to Raytheon. Consents may be revoked by filing with the Secretary of
Raytheon a written notice of revocation. Any such notice of revocation should
be sent to Raytheon at the following address:
Raytheon Company
141 Spring Street
Lexington, Massachusetts 02173
Attention: Secretary
COSTS OF SOLICITATION OF CONSENTS
The cost of solicitation of written consents from Raytheon Common
Stockholders will be paid by Raytheon. In addition to solicitation by mail,
Raytheon may solicit written consents by telephone, telegram, facsimile or
through personal contacts. The extent to which this will be necessary depends
entirely upon how promptly written consents are returned. Raytheon will also
make arrangements with brokerage houses and other custodians, nominees and
fiduciaries to send solicitation materials to beneficial owners and Raytheon
will, upon request, reimburse them for their reasonable expenses in so doing.
Raytheon has retained Morrow & Co., Inc. to aid in the solicitation of consents
and to verify certain records related to the solicitation at a fee of $16,500
plus expenses. You are urged to send in your written consent without delay.
YOU SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR WRITTEN CONSENT. A
LETTER OF TRANSMITTAL WITH INSTRUCTIONS FOR THE SURRENDER OF YOUR STOCK
CERTIFICATES WILL BE MAILED TO YOU BY NEW RAYTHEON AS SOON AS PRACTICABLE AFTER
CONSUMMATION OF THE MERGER.
The Raytheon Board has unanimously recommended that the Merger Proposal be
approved. To the best of Raytheon's knowledge, all of Raytheon's directors and
executive officers currently intend to consent to approval of the Merger
Proposal and, except as described under "Summary--The Merger and Related
Transactions," and "The Merger--Background--Background of the Merger" and "--
Reasons for the Merger," none of Raytheon's executive officers who are not
directors has made any recommendations with respect to the Merger Proposal.
CERTAIN PLANS
If you are a participant in Raytheon's Automatic Dividend Reinvestment and
Stock Purchase Plan, each of your consents will also serve as voting
instructions as to the number of shares in your plan account as well as shares
held directly by you. If you are a participant in the Raytheon Employee Stock
Ownership Plan ("RAYSOP"), the Raytheon Stock Ownership Plan for Specified
Hourly Payroll Employees ("HOURLY RAYSOP"), the Raytheon Savings and Investment
Plan ("RAYSIP"), the Raytheon Savings and Investment Plan for Specified Hourly
Employees ("HOURLY RAYSIP"), the Raytheon Employee Savings and Investment Plan
("RESIP"), the Raytheon Savings and Investment Plan for Puerto Rico Based
Employees ("PR SIP") or the Raytheon E-Systems Employee Savings Plan ("ESP"),
and the accounts are registered in the same name, the consent card will also
serve as voting instructions for the respective trustees of those plans. The
RAYSOP, Hourly RAYSOP, RAYSIP, Hourly RAYSIP, RESIP, PR SIP and ESP provide
that the respective trustees shall not vote plan shares unless the card is
signed and returned.
126
CONSENT SOLICIATION
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ADDITIONAL BACKGROUND INFORMATION
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INTRODUCTION........................................................... 128
APPROVALS BY THE CAPITAL STOCK COMMITTEE AND THE GM BOARD; FAIRNESS OF
THE RAYTHEON MERGER................................................... 128
RAYTHEON MERGER FAIRNESS OPINION: GOLDMAN SACHS........................ 128
</TABLE>
127
ADDITIONAL BACKGROUND INFORMATION
<PAGE>
INTRODUCTION
This section includes additional information relating to the Pre-Merger
Transactions and the Merger which has been prepared for inclusion in the GM
Solicitation Statement/Prospectus to be sent to GM's Common Stockholders. The
information includes information regarding the factors considered by the
Capital Stock Committee of the GM Board and the GM Board in deciding to
recommend the approval of the Merger as well as a summary of the analyses and
opinion of Goldman Sachs relating to the Merger. Because this information has
been reproduced from the GM Solicitation Statement/Prospectus, certain defined
terms are different than those used in this document and certain cross-
references refer you to other sections and captions of the GM Solicitation
Statement/Prospectus not reproduced here. We refer you to the Hughes Defense
Registration Statement for complete definitions of these terms and disclosures
of the sections cross-referenced below. You should note, however, that all of
the materials summarized below were prepared for the boards of directors of GM,
HEC and HE Holdings in connection with such boards' consideration of the Pre-
Merger Transactions and were not prepared with a view toward the interests of
Raytheon, the Raytheon Board or Raytheon Common Stockholders.
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 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.
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."
128
ADDITIONAL BACKGROUND INFORMATION
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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.
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 THE GM SOLICITATION
STATEMENT/PROSPECTUS. A COPY OF THE WRITTEN PRESENTATION BY GOLDMAN SACHS TO
THE GM BOARD IN JANUARY 1997 AND THE WRITTEN CONFIRMATION, DATED NOVEMBER 7,
1997, OF THE GOLDMAN SACHS FAIRNESS OPINION HAVE BEEN FILED AS EXHIBITS TO THE
SCHEDULE 13E-3 FILED BY GM WITH THE SEC WITH RESPECT TO THE HUGHES
TRANSACTIONS. 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 OF THE HUGHES DEFENSE
REGISTRATION STATEMENT 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
129
ADDITIONAL BACKGROUND INFORMATION
<PAGE>
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).
(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
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ADDITIONAL BACKGROUND INFORMATION
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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 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 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 $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
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ADDITIONAL BACKGROUND INFORMATION
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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 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
132
ADDITIONAL BACKGROUND INFORMATION
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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 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.
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CERTAIN OTHER MATTERS
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.............. 135
LEGAL MATTERS........................................................... 135
EXPERTS................................................................. 135
STOCKHOLDER PROPOSALS................................................... 136
WHERE YOU CAN FIND MORE INFORMATION..................................... 136
GLOSSARY................................................................ 138
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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document that are subject to
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of New Raytheon set
forth under "Risk Factors," and "The Merger--Background--Reasons for the
Merger" and "--Fairness Opinions" and those preceded by, followed by or that
include the words "believes," "expects," "anticipates" or similar expressions.
Such statements reflect the current views of Raytheon and/or HE Holdings with
respect to future events. For those statements as they relate to Raytheon only,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, to the
extent provided by applicable law. This safe harbor does not apply to forward-
looking statements of HE Holdings because HE Holdings has never registered
securities prior to this Solicitation Statement/Prospectus. You should
understand that the following important factors, in addition to those discussed
elsewhere in this document and in the documents which we incorporate by
reference, could affect the future results of New Raytheon and Raytheon, and
could cause those results to differ materially from those expressed in our
forward-looking statements: materially adverse changes in economic conditions
in the markets served by our companies; a significant delay in the expected
closing of the Merger; future regulatory actions and conditions in our
companies' operating areas; competition from others; ability to successfully
integrate Raytheon TI Systems, Hughes Defense and Raytheon management
structures and consolidate activities/operations in New Raytheon in order to
achieve anticipated cost and revenue synergies; product demand and market
acceptance; the timing of new business awards; the successful conversion of
defense products to commercially viable products; the ability to protect
proprietary information and technology or to obtain necessary licenses on
commercially reasonable terms; and obtaining and retaining skilled workers.
Raytheon and HE Holdings do not intend to update these forward-looking
statements.
LEGAL MATTERS
The validity of the Class B Common Stock to be issued in connection with the
Merger will be passed upon by Weil, Gotshal & Manges LLP. Certain matters
relating to the U.S. federal income tax considerations in connection with the
Merger will be passed upon for Raytheon by Wachtell, Lipton, Rosen & Katz.
EXPERTS
The consolidated financial statements 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, attached as Appendix C to this document, have
been audited by Coopers & Lybrand L.L.P., independent 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 financial statements of TI Defense as of December 31, 1996 and 1995 and
for each of the years in the three-year period ended December 31, 1996,
attached as Appendix E to this document, have been audited by Ernst & Young
LLP, independent auditors, 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 Defense as of December 31, 1996
and 1995 and for each of the years in the three-year period ended December 31,
1996, attached as 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.
135
CERTAIN OTHER MATTERS
<PAGE>
STOCKHOLDER PROPOSALS
Any New Raytheon stockholder who intends to submit a proposal for inclusion
in the proxy materials for the 1998 Annual Meeting of New Raytheon must submit
such proposal to the Secretary of New Raytheon by December 31, 1997. In
addition, the New Raytheon By-Laws provide that any stockholder wishing to make
a nomination for director, or wishing to introduce a proposal or other
business, at the 1998 Annual Meeting of New Raytheon must give at least 90 days
advance notice, subject to certain exceptions, and that notice must meet
certain other requirements set forth in the New Raytheon By-Laws. A copy of the
applicable New Raytheon By-Laws may be obtained from the Secretary of New
Raytheon.
WHERE YOU CAN FIND MORE INFORMATION
Raytheon files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. Our 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."
HE Holdings filed a Registration Statement on Form S-4 to register with the
SEC the Class B Common Stock to be issued to Raytheon Common Stockholders in
the Merger. This Solicitation Statement/Prospectus is a part of that
Registration Statement and constitutes a prospectus of Hughes Defense in
addition to being a solicitation of written consents of Raytheon Common
Stockholders to approve the Merger Proposal. Although such Registration
Statement is a filing of HE Holdings, most of the information contained in it,
including information in this Solicitation Statement/Prospectus relating to the
business of Raytheon, historical and pro forma financial information and data
relating to Raytheon and certain information in the section entitled
"Background," has been prepared by Raytheon and provided to HE Holdings for
inclusion in the Registration Statement, as HE Holdings' management does not
have direct knowledge thereof. Moreover, this Solicitation Statement/Prospectus
makes frequent references to the words "we" and "us." These words refer to
Raytheon Company. As allowed by SEC rules, this Solicitation
Statement/Prospectus does not contain all the information you can find in the
Registration Statement or the exhibits to the Registration Statement.
The SEC allows us to "incorporate by reference" information into this
Solicitation Statement/Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Solicitation Statement/Prospectus, except for any information superseded by
information in this Solicitation Statement/Prospectus. This Solicitation
Statement/Prospectus incorporates by reference the documents set forth below
that we have previously filed with the SEC. These documents contain important
information about our company and its finances.
This document incorporates by reference the documents set forth below that
Raytheon previously filed with the SEC. These documents contain important
information about Raytheon and Raytheon TI Systems and their finances.
<TABLE>
<CAPTION>
SEC FILINGS (FILE NO. 1-2833) PERIOD
----------------------------- ------
<C> <S>
Raytheon 1996 Form 10-K.......... Year ended December 31, 1996
Quarterly Reports on Form 10-Q... Quarters ended March 30, 1997 and June
29, 1997
Current Reports on Form 8-K...... Dated January 4, 1997, January 16, 1997,
March 14, 1997, July 11, 1997, July 11,
1997, September 10, 1997 and October 7,
1997.
</TABLE>
136
CERTAIN OTHER MATTERS
<PAGE>
This document also incorporates by reference the documents set forth below
that GM previously filed with the SEC. These documents contain important
information about GM and HE Holdings and their finances.
<TABLE>
<CAPTION>
SEC FILINGS (FILE NO. 1-2143) PERIOD
----------------------------- ------
<C> <S>
Annual Report on Form 10-K....... Year ended December 31, 1996
Quarters ended March 31, 1997 and June
Quarterly Reports on Form 10-Q... 30, 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>
We are also incorporating by reference additional documents that we and GM
file with the SEC between the date of this document and the consummation of the
Merger. 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.
If you are a Raytheon Common Stockholder, we may have already sent you some
of the Raytheon 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 Raytheon 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 Raytheon by telephone at (781) 860-2888 or in
writing at the following address:
Raytheon Company
141 Spring Street
Lexington, Massachusetts 02173
Attn: Shareholder Services
If you would like to request documents from Raytheon, please do so within 15
business days of the date of the mailing of this document in order to ensure
timely delivery.
137
CERTAIN OTHER MATTERS
<PAGE>
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.
"ACQUIRING PERSON" has the meaning provided in "Capital Stock--New Raytheon
Capital Stock--New Raytheon Rights Agreement."
"ANTITRUST DIVISION" means the Antitrust Division of the U.S. Department of
Justice.
"APPLIANCE GROUP" means the subsidiaries of Raytheon which, prior to
September 10, 1997, conducted the major appliances business of Raytheon.
"BEAR STEARNS" means Bear, Stearns & Co. Inc., in its capacity as financial
advisor to Raytheon in connection with the Merger.
"BEAR STEARNS FAIRNESS OPINION" means the written opinion of Bear Stearns,
dated the date of this Solicitation Statement/Prospectus, addressed to the
Raytheon Board in connection with the Merger that, on the basis of and subject
to the assumptions, limitations and other matters set forth therein, taking
into account all relevant aspects of the Merger, the financial terms of the
Merger are fair to Raytheon Common Stockholders from a financial point of view.
It is a condition to the completion of the Merger that Bear Stearns has not
withdrawn, revoked or modified in an adverse manner its fairness opinion.
"BOOK-ENTRY OWNERSHIP" means ownership of shares of New Raytheon Capital
Stock without share certificates through the Direct Registration System. You
are still the direct owner of your shares and will receive all dividends
directly from New Raytheon. New Raytheon's transfer agent, which serves as the
recordkeeper for all stockholders, will periodically mail a statement to you
reflecting the number of shares you own.
"BUSINESS COMBINATION" has the meaning provided in "Capital Stock--New
Raytheon Capital Stock-- Section 203 of the Delaware General Corporation Law."
"BUSINESS TRANSACTIONS" has the meaning provided in "Capital Stock--
Comparison of Rights of Stockholders of Raytheon and New Raytheon."
"CLASS A COMMON STOCK" means the Class A common stock, $.01 par value per
share, of HE Holdings to be distributed to GM common stockholders pursuant to
the Spin-Off Merger which will continue as the Class A Common Stock of New
Raytheon following the Merger.
"CLASS A COMMON STOCK AMOUNT" has the meaning provided in "The Merger--
Description of the Merger--The Merger Agreement--Certain Covenants--
Indebtedness."
"CLASS A COMMON STOCKHOLDER" means a holder of shares of Class A Common
Stock.
"CLASS B COMMON STOCK" means the Class B common stock, $.01 par value per
share, of HE Holdings (and, following the Merger, New Raytheon) to be
distributed to Raytheon Common Stockholders pursuant to the Merger.
"CLASS B COMMON STOCKHOLDER" means a holder of shares of Class B Common
Stock.
"CLOSING" means the closing under the Merger Agreement, which will occur as
soon as practicable after the satisfaction or waiver of all of the conditions
specified in the Merger Agreement.
138
GLOSSARY
<PAGE>
"CLOSING DATE" means the date on which the Closing occurs.
"CLOSING DATE FINAL AMOUNT" has the meaning provided in "The Merger--
Separation and Transition Arrangements--Summary of Master Separation
Agreement."
"CODE" means the Internal Revenue Code of 1986, as amended.
"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 Pre-Merger Transactions) of such party, or any combination
of the foregoing.
"CONTINUING DIRECTORS" has the meaning provided in "Capital Stock--Comparison
of Rights of Stockholders of Raytheon and New Raytheon."
"CSE" means the Chicago Stock Exchange, Inc.
"CSFB" means Credit Suisse First Boston Corporation, in its capacity as
financial advisor to Raytheon in connection with the Merger.
"CSFB FAIRNESS OPINION" means the written opinion of CSFB, dated the date of
this Solicitation Statement/Prospectus, addressed to the Raytheon Board, in
connection with the Merger to the effect that, as of such date and based upon
and subject to certain matters stated in such opinion, the Merger Consideration
(as defined therein) was fair to Raytheon Common Stockholders from a financial
point of view. It is a condition to the completion of the Merger that CSFB has
not withdrawn, revoked or modified in an adverse manner its fairness opinion.
"DELCO" means Delco Electronics Corporation, a Delaware corporation and a
wholly owned subsidiary of HEC, which will be a wholly owned subsidiary of GM
comprising the automotive electronics business of HEC after the Hughes
Reorganization.
"DEPARTMENT OF DEFENSE" means the U.S. Department of Defense.
"DIRECT REGISTRATION SYSTEM" means the [to come].
"DISTRIBUTION RATIO" means the relationship between (i) the number of shares
of Class A Common Stock to be allocated and distributed to the GM $1 2/3 Common
Stockholders and (ii) the number of shares of Class A Common Stock to be
allocated and distributed to the GM Class H Common Stockholders, in each case,
pursuant to the Spin-Off Merger.
"DGCL" means the General Corporation Law of the State of Delaware, as
amended.
"EBIT" means earnings before interest and taxes.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"EDS" means Electronic Data Systems Corporation, a Delaware corporation and a
former wholly owned subsidiary of General Motors.
"EDS SPLIT-OFF" means the split-off of EDS from General Motors consummated on
June 7, 1996.
139
GLOSSARY
<PAGE>
"EFFECTIVE TIME" means the time at which the Merger becomes effective, which
shall be immediately following the consummation of the Spin-Off Merger.
"EPS" means earnings per share.
"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.
"EXCHANGE AGENT" means State Street Bank and Trust Company in its capacity as
the exchange agent for the Merger.
"EXERCISE PRICE" has the meaning provided in "Capital Stock--New Raytheon
Capital Stock--New Raytheon Rights Agreement."
"FAA" means the United States Federal Aviation Administration.
"FINAL EXPIRATION DATE" has the meaning provided in "Capital Stock--New
Raytheon Capital Stock-- New Raytheon Rights Agreement."
"FLIP-IN RIGHT" has the meaning provided in "Capital Stock--New Raytheon
Capital Stock--New Raytheon Rights Agreement."
"FLIP-OVER RIGHT" has the meaning provided in "Capital Stock--New Raytheon
Capital Stock--New Raytheon Rights Agreement."
"FTC" means the United States Federal Trade Commission.
"GAAP" means United States generally accepted accounting principles.
"GENERAL MOTORS" or "GM" means General Motors Corporation, a Delaware
corporation.
"GM $1 2/3 COMMON STOCK" means the common stock, $1 2/3 par value per share,
of GM.
"GM $1 2/3 COMMON STOCKHOLDER" means a holder of shares of GM $1 2/3 Common
Stock.
"GM 1996 FORM 10-K" means the Annual Report on Form 10-K of GM for the year
ended December 31, 1996.
"GM BOARD" means the Board of Directors of GM.
"GM BY-LAWS" means the By-Laws of GM, as amended.
"GM CERTIFICATE" means the Restated Certificate of Incorporation of GM, as
amended.
"GM CLASS H COMMON STOCK" means the Class H common stock, $0.10 par value per
share, of GM.
"GM CLASS H COMMON STOCKHOLDER" means a holder of shares of GM Class H Common
Stock.
"GM COMMON STOCK" means the GM $1 2/3 Common Stock and the GM Class H Common
Stock.
140
GLOSSARY
<PAGE>
"GM COMMON STOCKHOLDER" means a holder of shares of GM Common Stock.
"GM FINANCIAL ADVISORS" means Merrill Lynch and Salomon Brothers, in their
capacity as financial advisors to GM for the Pre-Merger Transactions.
"GM REGISTRATION STATEMENT" means the Registration Statement on Form S-4 of
GM, as amended and including exhibits, to register with the SEC the shares of
New GM Class H Common Stock to be distributed in the Spin-Off Merger.
"GM SOLICITATION STATEMENT/PROSPECTUS" means the solicitation
statement/prospectus of GM with respect to the Pre-Merger Transactions.
"GM STOCKHOLDER APPROVAL" means the approval by (i) 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 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.
"GOLDMAN SACHS" means Goldman, Sachs & Co., in its capacity as financial
advisor to GM, HEC and Hughes Defense in connection with the 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 GM, HEC
and HE Holdings 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.
"HEC" means Hughes Electronics Corporation, a Delaware corporation and a
wholly owned subsidiary of GM, which, after the Pre-Merger Transactions, will
consist of the Hughes Telecom business.
"HE HOLDINGS" means HE Holdings, Inc., a Delaware corporation and (i) before
the Hughes Reorganization, a wholly owned subsidiary of HEC comprising the
defense electronics business and the telecommunications and space business of
HEC, and (ii) after the Hughes Reorganization (but before the Hughes Defense
Spin-Off), a wholly owned subsidiary of GM comprising the defense electronics
business of HEC. HE Holdings is the corporate name currently used by the
Corporation that was called "Hughes Aircraft Company" when it was acquired by
GM 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 Merger, Raytheon will merge
with and into HE Holdings, with HE Holdings as the surviving corporation, which
will be renamed "Raytheon Company." With respect to periods following the
Effective Time, we refer in this document to HE Holdings as "New Raytheon."
"HE HOLDINGS BOARD" means the Board of Directors of HE Holdings.
"HE HOLDINGS BY-LAWS" means the Amended and Restated By-Laws of HE Holdings,
which will continue as the by-laws of New Raytheon after the Merger. With
respect to the periods following the Effective Time, we refer in this document
to the HE Holdings By-Laws as the "New Raytheon By-Laws."
"HE HOLDINGS CERTIFICATE" means the Amended and Restated Certificate of
Incorporation of HE Holdings, which will continue as the certificate of
incorporation of New Raytheon after the Merger. With respect to the periods
following the Effective Time, we refer in this document to the HE Holdings
Certificate as the "New Raytheon Certificate."
141
GLOSSARY
<PAGE>
"HE HOLDINGS COMMON STOCK" means the Class A Common Stock and the Class B
Common Stock. With respect to periods following the Effective time, we refer in
this document to the Hughes Defense Common Stock as "New Raytheon Common
Stock."
"HE HOLDINGS EXPENSES" has the meaning provided in "The Merger--The Merger
Agreement--Effect of Termination; Termination Fees."
"HUGHES AIRCRAFT" means the corporation that was called "Hughes Aircraft
Company" when it was acquired by GM in 1985. This corporation is currently
named "HE Holdings, Inc."
"HUGHES DEFENSE" means the defense electronics business of HEC.
"HUGHES DEFENSE RECAPITALIZATION" means the adoption by HE Holdings of the
New Raytheon Certificate, which authorizes the Class A Common Stock and Class B
Common Stock, and the recapitalization of shares of common stock, no par value
per share, of HE Holdings owned by GM into shares of Class A Common Stock.
"HUGHES DEFENSE REGISTRATION STATEMENT" means the Registration Statement on
Form S-4 of HE Holdings, as amended and including exhibits, to register with
the SEC the shares of Class A Common Stock to be distributed in the Spin-Off
Merger.
"HUGHES DEFENSE SPIN-OFF" means the spin-off of HE Holdings from GM.
"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.
"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 NETWORK SYSTEMS" means Hughes Network Systems, Inc., a Delaware
corporation and a wholly owned subsidiary of HE Holdings, which, following the
Hughes Reorganization, will consist of Hughes Telecom.
"HUGHES REORGANIZATION" means all transfers of assets and liabilities by and
among Delco, Hughes Network Systems and HE Holdings and their respective
subsidiaries, the Hughes Telecom Spin-Off, the transfer of Delco from HEC to
GM, the merger of HEC with GM (resulting in the liquidation of HEC), the merger
of the subsidiary of HE Holdings that principally operates Hughes Defense with
HE Holdings (resulting in the liquidation of such subsidiary) and the Hughes
Defense Recapitalization.
"HUGHES RESEARCH LABS" means Hughes Research Laboratories, Inc. and, from and
after the Spin-Off Merger Effective Time, Hughes Research Laboratories LLC, a
Delaware limited liability company.
"HUGHES SEPARATION AGREEMENT" means the Spin-Off Separation Agreement, by and
between HE Holdings and GM to be entered into in connection with the
consummation of the Pre-Merger Transactions.
"HUGHES TELECOM" means the telecommunications and space business of HEC.
"HUGHES TELECOM SPIN-OFF" means the spin-off of Hughes Network Systems (which
at the time of the spin-off, will consist of the business of Hughes Telecom) by
HE Holdings to GM.
"IMPLEMENTATION AGREEMENT" means the Implementation Agreement, dated as of
January 16, 1997, by and between GM and Raytheon.
"INCOME TAXES" has the meaning provided in "The Merger--Separation and
Transition Arrangements--Summary of Tax Sharing Agreement."
142
GLOSSARY
<PAGE>
"INDEMNIFIED PARTIES" has the meaning provided in "The Merger--The Merger
Agreement-- Indemnification."
"INTERCOMPANY PAYMENT" means the cash payment by HE Holdings to one or more
affiliates of HE Holdings (including, without limitation, the contribution of
at least $3.9 billion to Hughes Network Systems) as of or prior to the
effective time of the Hughes Telecom Spin-Off.
"INTERCOMPANY PAYMENT AMOUNT" has the meaning provided in "The Merger--The
Merger Agreement--Certain Covenants--Indebtedness."
"INTERESTED STOCKHOLDER" has the meaning provided in "Capital Stock--New
Raytheon Capital Stock-- Section 203 of the Delaware General Corporation Law."
"IRS" means the Internal Revenue Service of the U.S. Department of Treasury.
"IRS RULING" means the ruling of the IRS to the effect that each of (i) the
distribution of Class A Common Stock to the GM Class H Stockholders and the GM
$1 2/3 Common Stockholders as contemplated by the Spin-Off Merger Agreement and
(ii) the 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.
"IRS SUPPLEMENTAL RULING" means the ruling of the IRS that the consummation
of the transactions contemplated by the Spin-Off Merger Agreement and the
consummation of Merger will not in any way jeopardize the tax-free status of
the EDS Split-Off.
"LETTER OF TRANSMITTAL" means the Letter of Transmittal which you will
receive from the Transfer Agent following the Effective Time, which will
include instructions for exchanging shares of Raytheon Common Stock for shares
of Class B Common Stock.
"MASTER SEPARATION AGREEMENT" means the Master Separation Agreement among GM,
Hughes Network Systems, Delco and HE Holdings, to be entered into in connection
with the Pre-Merger Transactions.
"MERGER" means the merger of Raytheon with and into Hughes Defense pursuant
to the Merger Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Merger, dated as of
January 16, 1997, by and between HE Holdings and Raytheon, as amended.
"MERGER OPINIONS" means collectively the opinions of Wachtell, Lipton, Rosen
& Katz, counsel to Raytheon, and Weil, Gotshal & Manges LLP, counsel to HE
Holdings, each to the effect that the Merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Code.
"MERGER PROPOSAL" means the proposal to adopt the Merger Agreement and
approve the Merger and, pursuant to which, among other things, (i) Raytheon
will merge with and into HE Holdings, which at the time of the Merger will
consist primarily of Hughes Defense and (ii) each share of Raytheon Common
Stock will be exchanged for one share of the Class B Common Stock of New
Raytheon. This Solicitation Statement/Prospectus is being furnished in
connection with the solicitation by the Raytheon Board of written consents from
the Raytheon Common Stockholders to approve the Merger Proposal.
"MERGER SUB" means GM Mergeco Corporation, a Delaware corporation and a
wholly owned subsidiary of GM, formed for the purpose of effecting the Spin-Off
Merger.
143
GLOSSARY
<PAGE>
"MERRILL LYNCH" means Merrill Lynch, Pierce, Fenner & Smith Incorporated in
its capacity as financial advisor to GM in connection with the Pre-Merger
Transactions.
"MERRILL LYNCH FAIRNESS OPINION" means a written opinion of Merrill Lynch,
dated on or about the date of the GM Solicitation Statement/Prospectus,
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 Pre-Merger Transactions, the consideration
to be provided to GM and its subsidiaries and to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders in the Pre-Merger
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.
"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 Spin-Off Merger.
"NEW RAYTHEON" means HE Holdings (renamed Raytheon Company) as the surviving
corporation of the Merger.
"NEW RAYTHEON BOARD" means the Board of Directors of New Raytheon.
"NEW RAYTHEON BY-LAWS" means the Amended and Restated By-Laws of HE Holdings,
which will continue as the by-laws of New Raytheon after Merger.
"NEW RAYTHEON CAPITAL STOCK" means the New Raytheon Common Stock and New
Raytheon Preferred Stock.
"NEW RAYTHEON CERTIFICATE" means the Amended and Restated Certificate of
Incorporation of HE Holdings, as amended, which will continue as the
certificate of incorporation of New Raytheon after Merger. See the definition
of "HE Holdings Certificate."
"NEW RAYTHEON COMMON STOCK" means the Class A Common Stock and the Class B
Common Stock. See the definition of "HE Holdings Common Stock."
"NEW RAYTHEON EXCHANGE OPTION" has the meaning provided in "The Merger--The
Merger Agreement--Consideration to be Received in the Merger."
"NEW RAYTHEON JUNIOR PREFERRED STOCK" means the Series A Junior Participating
Preferred Stock, $0.01 par value, of New Raytheon.
"NEW RAYTHEON PREFERRED STOCK" means the Preferred Stock, $.01 par value per
share, of New Raytheon.
"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), which will continue in effect following the Merger.
"NEW RAYTHEON RIGHTS CERTIFICATES" has the meaning provided in "Capital
Stock--New Raytheon Capital Stock--New Raytheon Rights Agreement."
"NEW RAYTHEON RIGHTS EFFECTIVE DATE" has the meaning provided in "Capital
Stock--New Raytheon Capital Stock--New Raytheon Rights Agreement."
144
GLOSSARY
<PAGE>
"NYSE" means the New York Stock Exchange, Inc.
"POST-DISTRIBUTION TAXABLE PERIOD" has the meaning provided in "The Merger--
Separation and Transition Arrangements--Summary of Tax Sharing Agreement."
"PRE-DISTRIBUTION TAXABLE PERIOD" has the meaning provided in "The Merger--
Separation and Transition Arrangements--Summary of Tax Sharing Agreement."
"PRE-MERGER TRANSACTIONS" means collectively (i) the Hughes Reorganization,
(ii) the Hughes Defense Recapitalization, (iii) the Hughes Defense Spin-Off,
(iv) the recapitalization of GM Class H Common Stock into New GM Class H Common
Stock and the right to receive a distribution of Class A Common Stock, (v) the
consummation of the Spin-Off Merger, (vi) the execution and delivery of each of
the Separation Agreements and (vii) the consummation of the other transactions
and events contemplated by the Transaction Agreements.
"PSE" means the Pacific Stock Exchange Incorporated.
"RAYTHEON" means Raytheon Company, a Delaware corporation.
"RAYTHEON BOARD" means the Board of Directors of Raytheon.
"RAYTHEON BY-LAWS" means the Amended and Restated By-Laws of Raytheon, as
amended.
"RAYTHEON CERTIFICATE" means the Restated Certificate of Incorporation of
Raytheon, as amended.
"RAYTHEON COMMON STOCK" means the Common Stock, par value $1.00 per share, of
Raytheon.
"RAYTHEON COMMON STOCKHOLDER" means a holder of shares of Raytheon Common
Stock.
"RAYTHEON EXPENSES" has the meaning provided in "The Merger--The Merger
Agreement--Effect of Termination; Termination Fees--Termination Fees Payable by
HE Holdings."
"RAYTHEON FACILITIES" has the meaning provided in "Financial and Business
Information--Recent Developments--The TI Acquisition."
"RAYTHEON 1996 FORM 10-K" means the Annual Report on Form 10-K for Raytheon
Company for the fiscal year ended December 31, 1996.
"RAYTHEON NOTES" means the 6.30% Notes Due 2000, the 6.45% Notes Due 2002,
the 6.75% Notes Due 2007 and the 7.20% Debentures Due 2027 of Raytheon.
"RAYTHEON OPTION" has the meaning provided in "The Merger--The Merger
Agreement--Consideration to be Received in the Merger."
"RAYTHEON TI SYSTEMS" or "RTIS" means Raytheon TI Systems, Inc., a Delaware
corporation and wholly owned subsidiary of Raytheon which conducts the business
and operations of TI Defense.
"RECORD DATE" means October 14, 1997.
"REDEMPTION PRICE" has the meaning provided in "Capital Stock--New Raytheon
Capital Stock--New Raytheon Rights Agreement."
145
GLOSSARY
<PAGE>
"REGISTRATION STATEMENT" means the Registration Statement on Form S-4 of HE
Holdings, as amended and including exhibits, to register with the SEC the
shares of Class B Common Stock to be distributed in the Merger. This document
is part of the Registration Statement.
"RELATED PERSON" has the meaning provided in "Capital Stock--Comparison of
Rights of Stockholders of Raytheon and New Raytheon."
"SALOMON BROTHERS" means Salomon Brothers Inc. in its capacity as financial
advisor to GM in connection with the Pre-Merger Transactions.
"SALOMON BROTHERS FAIRNESS OPINION" means a written opinion of Salomon
Brothers, dated on or about the date of the GM Solicitation
Statement/Prospectus, 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 Pre-Merger
Transactions, the consideration to be provided to GM and its subsidiaries and
to the GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders in
the Pre-Merger 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.
"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 Hughes Separation Agreement, the Tax Sharing Agreement and all of the other
agreements contemplated by the Master Separation Agreement.
"SPIN-OFF MERGER" means the merger of Merger Sub with and into GM, with GM as
the Surviving corporation, to effect, among other things, the Hughes Defense
Spin-Off.
"SPIN-OFF MERGER AGREEMENT" means the Agreement and Plan of Merger dated as
of October 17, 1997, as amended, by and between GM and Merger Sub to effect the
Spin-Off Merger.
"SPIN-OFF MERGER EFFECTIVE TIME" means the time at which the Spin-Off Merger
becomes effective.
"STRADDLE PERIOD" has the meaning provided in "The Merger--Separation and
Transition Arrangements--Summary of Tax Sharing Agreement."
"SURVIVING CORPORATION" means New Raytheon, or, HE Holdings as the surviving
corporation of the Merger.
"TARGET" has the meaning provided in "The Merger--Separation and Transition
Arrangements-- Summary of Master Separation Agreement--Post-Closing
Adjustment."
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement by and among GM, HE
Holdings and Hughes Network Systems, to be entered into in connection with the
Pre-Merger Transactions and the Merger.
"TERMINATION FEE" has the meaning provided in "The Merger--The Merger
Agreement--Effect of Termination; Termination Fees."
"TEXAS INSTRUMENTS" means Texas Instruments Incorporated, a Delaware
corporation.
146
GLOSSARY
<PAGE>
"TI ACQUISITION" means the acquisition of TI Defense, which was consummated
on July 11, 1997.
"TI DEFENSE" means the defense systems and electronics business of Texas
Instruments, which was acquired by Raytheon in the TI Acquisition and which now
conducts its business as Raytheon TI Systems.
"TRANSACTION AGREEMENTS" means the Spin-Off Merger Agreement, the
Implementation Agreement, the Merger Agreement and the Separation Agreements.
"TRANSFER AGENT" means State Street Bank and Trust Company in its capacity as
the Transfer Agent for Raytheon and New Raytheon.
"TREASURY REGULATIONS" means the rules and regulations promulgated by the
U.S. Department of Treasury under the Code.
"TRIGGERING HOLDING" has the meaning provided in "Capital Stock--New Raytheon
Capital Stock--New Raytheon Rights Agreement."
147
GLOSSARY
<PAGE>
APPENDICES
<TABLE>
<C> <S> <C>
APPENDIX A Merger Agreement........................................... A-1
APPENDIX B Fairness Opinions
Appendix B-I--Bear Stearns Fairness Opinion................ B-I-1
Appendix B-II--CSFB Fairness Opinion....................... B-II-1
APPENDIX C Raytheon Consolidated Financial Statements................. C-1
Report of Independent Accountants.......................... C-6
Raytheon Consolidated Financial Statements and Notes
Thereto.................................................... C-7
APPENDIX D Hughes Defense Combined Financial Statements............... D-1
Independent Auditors' Report............................... D-7
Hughes Defense Combined Financial Statements and Notes
Thereto.................................................... D-8
APPENDIX E TI Defense Financial Statements............................ E-1
Report of Independent Auditors............................. E-6
TI Defense Financial Statements............................ E-7
</TABLE>
APPENDICES
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
HE HOLDINGS, INC.
AND
RAYTHEON COMPANY
DATED AS OF JANUARY 16, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX A
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <C> <S> <C>
ARTICLE 1
THE MERGER
Section 1.1. The Merger............................................ A-2
Section 1.2. Effective Time........................................ A-2
Section 1.3. Effects of The Merger................................. A-2
Section 1.4. Certificate of Incorporation and By-laws.............. A-2
Section 1.5. Boards, Committees and Officers....................... A-2
Section 1.6. Additional Actions.................................... A-3
ARTICLE 2
CONVERSION OF SECURITIES
Section 2.1. Conversion of Capital Stock........................... A-3
Section 2.2. Exchange of Certificates.............................. A-3
(a) Exchange Agent........................................ A-3
(b) Exchange Procedures................................... A-3
(c) Distributions With Respect to Unexchanged Shares...... A-4
(d) No Further Ownership Rights in Raytheon Common Stock.. A-4
Section 2.3. No Fractional Share Certificates...................... A-4
(a) Determination of Excess Shares........................ A-4
(b) Common Shares Trust................................... A-5
(c) Distribution to Holders of Fractional Hughes Class B
Common Stock.......................................... A-5
Section 2.4. Exchange Fund and Common Shares Trust Matters......... A-5
(a) No Liability.......................................... A-5
(b) Investment of Exchange Fund........................... A-5
(c) Withholding Rights.................................... A-5
(d) Termination of Exchange Fund and Common Shares Trust.. A-5
Section 2.5. Treatment of Raytheon Stock Options................... A-6
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF HUGHES
Section 3.1. Organization and Standing............................. A-6
Section 3.2. Subsidiaries.......................................... A-6
Section 3.3. Corporate Power and Authority......................... A-7
Section 3.4. Capitalization of Hughes.............................. A-7
Section 3.5. Conflicts, Consents and Approvals..................... A-8
Section 3.6. Hughes Financial Statements........................... A-8
Section 3.7. Registration Statement................................ A-9
Section 3.8. Compliance with Law................................... A-9
Section 3.9. Litigation............................................ A-9
Section 3.10. Taxes................................................. A-10
Section 3.11. Absence of Certain Changes............................ A-10
Section 3.12. Undisclosed Liabilities............................... A-10
Section 3.13. Environmental Matters................................. A-10
Section 3.14. Employee Benefits..................................... A-11
Section 3.15. Brokerage and Finder's Fees........................... A-12
Section 3.16. Opinion of Financial Advisor.......................... A-12
Section 3.17. Board and Stockholder Approval........................ A-13
Section 3.18. DGCL Section 203 and State Takeover Laws.............. A-13
Section 3.19. Permits............................................... A-13
</TABLE>
A-i
APPENDIX A
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<C> <C> <S> <C>
Section 3.20. Restrictive Agreements................................. A-13
Section 3.21. Real Estate............................................ A-13
Section 3.22. Employees.............................................. A-13
Section 3.23. Certain Retirement Assets.............................. A-14
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF RAYTHEON
Section 4.1. Organization and Standing.............................. A-14
Section 4.2. Subsidiaries........................................... A-14
Section 4.3. Corporate Power and Authority.......................... A-15
Section 4.4. Capitalization of Raytheon............................. A-15
Section 4.5. Conflicts, Consents and Approvals...................... A-15
Section 4.6. Raytheon SEC Documents................................. A-16
Section 4.7. Registration Statement................................. A-17
Section 4.8. Compliance with Law.................................... A-17
Section 4.9. Litigation............................................. A-17
Section 4.10. Taxes.................................................. A-17
Section 4.11. Absence of Certain Changes............................. A-18
Section 4.12. Undisclosed Liabilities................................ A-18
Section 4.13. Environmental Matters.................................. A-18
Section 4.14. Employee Benefits...................................... A-18
Section 4.15. Brokerage and Finder's Fees............................ A-19
Section 4.16. Opinion of Financial Advisor........................... A-20
Section 4.17. Board Recommendation................................... A-20
Section 4.18. Voting Requirements.................................... A-20
Section 4.19. DGCL Section 203 and State Takeover Laws............... A-20
Section 4.20. Permits................................................ A-20
Section 4.21. Restrictive Agreements................................. A-20
Section 4.22. Real Estate............................................ A-20
Section 4.23. Employees.............................................. A-21
Section 4.24. Shareholder Rights Plan................................ A-21
ARTICLE 5
COVENANTS OF THE PARTIES
Section 5.1. Mutual Covenants....................................... A-21
(a) General................................................ A-21
(b) HSR Act................................................ A-21
(c) Tax-Free Treatment..................................... A-21
(d) NYSE Listing........................................... A-22
(e) Letters of Accountants................................. A-22
(f) Public Announcements................................... A-22
(g) Access................................................. A-22
(h) Indemnification........................................ A-23
(i) Expenses............................................... A-23
(j) Preparation of SEC Documents........................... A-23
(k) No Solicitation........................................ A-24
(l) Additional Agreements.................................. A-24
(m) Blue Sky............................................... A-24
(n) Notification of Certain Matters........................ A-24
</TABLE>
A-ii
APPENDIX A
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<C> <C> <S> <C>
Section 5.2. Covenants of Hughes................................... A-25
(a) Conduct of Hughes' Operations......................... A-25
(b) Notification of Certain Matters....................... A-26
(c) Debt.................................................. A-26
(d) Adoption of Rights Plan............................... A-26
Section 5.3. Covenants of Raytheon................................. A-26
(a) Raytheon Stockholders Meeting......................... A-26
(b) Conduct of Raytheon's Operations...................... A-26
(c) Notification of Certain Matters....................... A-27
(d) Affiliates............................................ A-27
(e) Raytheon Securities Law Filings....................... A-27
ARTICLE 6
CONDITIONS
Section 6.1. Mutual Conditions..................................... A-28
Section 6.2. Conditions to Obligations of Raytheon................. A-29
Section 6.3. Conditions to Obligations of Hughes................... A-30
ARTICLE 7
TERMINATION AND AMENDMENT
Section 7.1. Termination........................................... A-30
Section 7.2. Effect of Termination................................. A-31
Section 7.3. Amendment............................................. A-32
Section 7.4. Extension; Waiver..................................... A-33
ARTICLE 8
MISCELLANEOUS
Section 8.1. No Survival of Representations and Warranties......... A-33
Section 8.2. Notices............................................... A-33
Section 8.3. Interpretation; Absence of Presumption................ A-34
Section 8.4. Counterparts.......................................... A-34
Section 8.5. Entire Agreement; Severability........................ A-34
Section 8.6. Definitions of "subsidiary" and "significant
subsidiary"........................................... A-35
Section 8.7. Third Party Beneficiaries............................. A-35
Section 8.8. Governing Law......................................... A-35
Section 8.9. Specific Performance.................................. A-35
Section 8.10. Assignment............................................ A-35
</TABLE>
<TABLE>
<C> <S> <C> <C>
EXHIBITS
--Form of Amended and Restated Certificate of
Exhibit A Incorporation of Hughes
Exhibit B --Form of Amended and Restated By-laws of Hughes
Exhibit C --Form of GM Implementation Agreement
--Form of Agreement and Plan of Merger with respect to the
Exhibit D Hughes Distribution
Exhibit E --Directors/Officers of the Surviving Corporation
Exhibit F --Form of Affiliate Letter
Exhibit G --Form of Raytheon Tax Opinion
Exhibit H --Form of Hughes Tax Opinion
Exhibit I --Form of Raytheon Tax Letter
Exhibit J --Form of Hughes Tax Letter
Exhibit K --Terms for Rights Plan
</TABLE>
A-iii
APPENDIX A
<PAGE>
SCHEDULES
Hughes Disclosure Schedule
Section 3.2 Subsidiaries............................................ A-6
Section 3.4 Capitalization of Hughes................................ A-7
Section 3.5 Conflicts, Consents & Approvals......................... A-8
Section 3.6 Hughes Financial Statements............................. A-8
Section 3.9 Litigation.............................................. A-9
Section 3.10 Taxes................................................... A-10
Section 3.11 Absence of Certain Changes.............................. A-10
Section 3.12 Undisclosed Liabilities................................. A-10
Section 3.13 Environmental Matters................................... A-10
Section 3.14(d) Certain Employee Benefit Plans.......................... A-11
Section 3.14(h) Certain Employee Benefit Plans and Agreements........... A-12
Section 3.20 Restrictive Agreements.................................. A-13
Section 3.21 Real Estate............................................. A-13
Section 3.22 Employees............................................... A-13
Section 5.2 (a) Covenants of Hughes (Conduct of Hughes' Operations)..... A-25
Raytheon Disclosure Schedule
Section 4.2 Subsidiaries............................................ A-14
Section 4.4 Capitalization of Raytheon.............................. A-15
Section 4.5 Conflicts, Consents & Approvals......................... A-15
Section 4.6 Raytheon Financial Statements........................... A-16
Section 4.9 Litigation.............................................. A-17
Section 4.10 Taxes................................................... A-17
Section 4.11 Absence of Certain Changes.............................. A-18
Section 4.12 Undisclosed Liabilities................................. A-18
Section 4.13 Environmental Matters................................... A-18
Section 4.14(a) Employee Benefit Plans and Agreements................... A-18
Section 4.14(c) Employee Benefit Plans Subject to Sections 4063, 4064 or A-19
4202 of ERISA...........................................
Section 4.21 Restrictive Agreements.................................. A-20
Section 4.23 Employees............................................... A-21
Section 5.3 (b) Covenants of Raytheon (Conduct of Raytheon's A-26
Operations).............................................
A-iv
APPENDIX A
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and entered into
as of January 16, 1997, by and between HE Holdings, Inc., a Delaware
corporation ("Hughes"), and Raytheon Company, a Delaware corporation
("Raytheon").
WHEREAS, Hughes and Raytheon desire to combine Raytheon's business with the
Defense Business (as defined in the Separation Agreement (as hereinafter
defined), the "Defense Business"), through a merger pursuant to which Raytheon
shall merge (the "Merger") with and into Hughes, with Hughes as the surviving
corporation, and each share of Raytheon Common Stock (as defined herein)
outstanding at the Effective Time (as defined herein) will be converted into a
share of Hughes Class B Common Stock (as defined herein) as more fully provided
herein; and
WHEREAS, prior to the Effective Time, Hughes shall adopt the restated
certificate of incorporation and restated by-laws attached as Exhibits A and B,
respectively, which provide for, among other things, a recapitalization of the
outstanding capital stock of Hughes into Class A common stock, par value $0.01
per share ("Hughes Class A Common Stock"), and provide also for a Class B
common stock, par value $0.01 per share ("Hughes Class B Common Stock"); and
WHEREAS, as a condition to entering into this Agreement, Raytheon has
required that Hughes be, at the time of consummation of the Merger, an
independent, publicly owned company, comprising the Defense Business; and
WHEREAS, concurrently with the execution and delivery of this Agreement,
General Motors Corporation ("GM"), a Delaware corporation and the indirect
parent of Hughes, and Raytheon are entering into an Implementation Agreement
dated as of the date hereof, in the form attached as Exhibit C (the "GM
Implementation Agreement"), setting forth, among other things, the rights and
obligations of GM with respect to the execution and delivery of the Hughes
Distribution Agreement (as defined below); and
WHEREAS, prior to the Effective Time, subject to the satisfaction or waiver
of the conditions set forth in the GM Implementation Agreement, GM and a wholly
owned subsidiary of GM to be designated by GM ("Merger Sub") will enter into an
Agreement and Plan of Merger, in the form attached as Exhibit D or with such
changes thereto as are permitted pursuant to the GM Implementation Agreement
(the "Hughes Distribution Agreement"), and immediately prior to the Effective
Time, shall consummate the GM Transactions (as defined therein, the "GM
Transactions") in accordance with the terms and subject to the conditions
thereof. Pursuant to the Hughes Distribution Agreement, Merger Sub shall merge
with and into GM, with GM as the surviving corporation (the "GM Merger"), and,
pursuant thereto, among other things, holders of shares of common stock, par
value $1 2/3 per share, of GM (the "GM $1 2/3 Common Stock") and of Class H
common stock, par value $0.10 per share, of GM (the "GM Class H Common Stock")
will receive in accordance with the Hughes Distribution Ratio (as defined in
the GM Implementation Agreement) a distribution of shares of Hughes Class A
Common Stock on account of their holdings of such GM $1 2/3 Common Stock and GM
Class H Common Stock, such that, prior to the consummation of the Merger, such
shares of Hughes Class A Common Stock shall represent the entire equity
interest in Hughes; and
WHEREAS, the parties intend that (a) the Merger constitute a tax-free
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and (b) certain of the transactions
contemplated by the Hughes Distribution Agreement qualify as tax-free spin-offs
within the meaning of Sections 355 and 368(a)(1)(D) of the Code; and
WHEREAS, the respective Boards of Directors of GM, Hughes and Raytheon have
determined that the Merger is desirable and in the best interests of their
respective common stockholders and, by resolutions duly adopted, the respective
Boards of Directors of Hughes and Raytheon have approved and adopted this
Agreement and the respective Boards of Directors of GM and Raytheon have
approved and adopted the GM Implementation Agreement;
A-1
APPENDIX A
<PAGE>
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, 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 hereto
hereby agree as follows:
ARTICLE 1
THE MERGER
Section 1.1. The Merger. Upon the terms and subject to the conditions hereof,
and in accordance with the provisions of the Delaware General Corporation Law
(the "DGCL"), Raytheon shall be merged with and into Hughes as soon as
practicable following the satisfaction or waiver of the conditions set forth in
Article 6. Following the Merger, the separate corporate existence of Raytheon
shall cease and Hughes shall continue its existence under the laws of the State
of Delaware. Hughes, in its capacity as the corporation surviving the Merger,
is hereinafter sometimes referred to as the "Surviving Corporation".
Section 1.2. Effective Time. The Merger shall be consummated by filing with
the Secretary of State of the State of Delaware (the "Delaware Secretary of
State") a certificate of merger (the "Certificate of Merger") in such form as
is required by and executed in accordance with the DGCL. The Merger shall
become effective (the "Effective Time") when the Certificate of Merger has been
filed with the Delaware Secretary of State or at such later time as shall be
specified in the Certificate of Merger, which shall be immediately following
the consummation of the GM Merger. Prior to the filing referred to in this
Section 1.2, a closing shall be held at the New York offices of Weil, Gotshal &
Manges LLP, or such other place as Hughes and Raytheon may agree on a date (the
"Closing Date") mutually agreed to by Hughes and Raytheon.
Section 1.3. Effects of The Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL.
Section 1.4. Certificate of Incorporation and By-laws. Unless the same
already shall have been adopted, the Certificate of Merger shall provide that
at the Effective Time (i) the Certificate of Incorporation of the Surviving
Corporation shall be the certificate of incorporation attached as Exhibit A
(except as regards the corporate name), (ii) the By-laws of the Surviving
Corporation shall be the By-laws attached as Exhibit B and (iii) the corporate
name of the Surviving Corporation shall be "Raytheon Company."
Section 1.5. Boards, Committees and Officers. At the Effective Time, the
Board of Directors, committees of the Board of Directors, composition of such
committees (including chairmen thereof) and certain officers of the Surviving
Corporation (as indicated on Exhibit E) shall be as set forth on Exhibit E
until the earlier of the resignation or removal of any individual listed on or
designated in accordance with Exhibit E or until their respective successors
are duly appointed or elected and qualified, as the case may be. Hughes shall
create, effective from and after the Effective Time, the following three new
committees: a Management Transition Committee which shall be responsible for
supervising and implementing the integration of the businesses, facilities,
functions and employees of Hughes, Raytheon and the Defense Systems and
Electronics business of Texas Instruments Incorporated to be acquired by
Raytheon, which shall be chaired by an individual who prior to the Effective
Time is an executive officer of Hughes; a Board Transition Committee which
shall be responsible for resolving issues relating to such integration at the
Board of Directors level; and a Defense Business Executive Council which shall
supervise and manage the combined defense businesses of Hughes, Raytheon and
the Defense Systems and Electronics business of Texas Instruments Incorporated
to be acquired by Raytheon, on an ongoing basis and shall serve as a vehicle
for planning, communication and decision making on issues involving such
combined businesses. The composition of such committees also shall be as set
forth on Exhibit E until the earlier of the resignation or removal of any
individual listed on or designated in accordance with Exhibit E or until their
respective successors are duly appointed or elected and qualified, as the case
may be. If any officer listed on or appointed in accordance with Exhibit E
ceases to be a full-time employee of Hughes or Raytheon prior to the Effective
Time, or if any director, committee member or committee chairman listed or
designated on
A-2
APPENDIX A
<PAGE>
Exhibit E is not available to serve as such at the Effective Time, the parties
shall agree upon another person to serve in such person's stead. On or prior to
the Effective Time, Hughes, to the extent necessary, shall deliver to Raytheon
evidence of the resignations of the directors of Hughes not so designated to be
continuing to serve as directors of the Surviving Corporation, such
resignations to be effective as of the Effective Time.
Section 1.6. Additional Actions. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary or desirable
to (a) vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Raytheon or Hughes, or (b) otherwise carry out the
provisions of this Agreement, Raytheon and its directors and officers shall be
deemed to have granted to the Surviving Corporation an irrevocable power of
attorney to execute and deliver all such deeds, assignments or assurances in
law and to take all acts necessary, proper or desirable to vest, perfect or
confirm title to and possession of such rights, properties or assets in the
Surviving Corporation and otherwise to carry out the provisions of this
Agreement, and the directors and officers of the Surviving Corporation are
authorized in the name of Hughes or Raytheon, as the case may be, or otherwise
to take any and all such action.
ARTICLE 2
CONVERSION OF SECURITIES
Section 2.1. Conversion of Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of Hughes, Raytheon, any holder
of Hughes Class A Common Stock, any holder of Raytheon Common Stock or any
other person:
(a) Subject to Section 2.3 below, each whole share of Hughes Class A
Common Stock that is issued and outstanding immediately prior to the
Effective Time shall remain outstanding and shall be unchanged after the
Merger, and each fractional share of Hughes Class A Common Stock that is
issued and outstanding immediately prior to the Effective Time shall be
converted into and represent an equivalent fractional share of Hughes Class
B Common Stock (which shall be sold by the Exchange Agent as provided in
Section 2.3 below). For purposes of determining whether a holder of Hughes
Class A Common Stock immediately prior to the Effective Time holds a
fractional share of Hughes Class A Common Stock, all shares of Hughes Class
A Common Stock held by such holder shall be aggregated;
(b) Each share of common stock, par value $1.00 per share, of Raytheon
("Raytheon Common Stock") issued and outstanding immediately prior to the
Effective Time shall be converted into and represent one share of Hughes
Class B Common Stock; and
(c) Each share of capital stock of Raytheon held in the treasury of
Raytheon or owned by any wholly-owned subsidiary of Raytheon shall be
cancelled and retired and no payment shall be made in respect thereof.
Section 2.2. Exchange of Certificates.
(a) Exchange Agent. Following the Effective Time, Hughes shall deposit with
the exchange agent mutually agreed to and designated by Hughes and Raytheon
(the "Exchange Agent"), as required for exchange in accordance with this
Section 2.2, certificates representing shares of Hughes Class B Common Stock
issuable pursuant to Section 2.1 in exchange for outstanding shares of Raytheon
Common Stock and cash, as required for payments pursuant to Section 2.2(c)
below (such shares of Hughes Class B Common Stock, together with any cash
deposited with the Exchange Agent pursuant to this Section 2.2, being
hereinafter referred to as the "Exchange Fund.")
(b) Exchange Procedures. As soon as practicable after the Effective Time, the
Exchange Agent, pursuant to the terms of an exchange agent agreement to be
entered into with Hughes prior to the Effective Time, shall mail to each holder
of record of a certificate or certificates (the "Certificates") which
immediately prior to the Effective Time represented outstanding shares of
Raytheon Common Stock whose shares were converted into
A-3
APPENDIX A
<PAGE>
shares of Hughes Class B Common Stock pursuant to Section 2.1(b): (i) a letter
of transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Hughes and Raytheon may specify), and (ii) instructions for
effecting the surrender of the Certificates in exchange for certificates
representing shares of Hughes Class B Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal, the holder of such Certificate shall be
entitled to receive in exchange therefor (x) a certificate representing that
number of shares of Hughes Class B Common Stock which such holder has the right
to receive pursuant to Section 2.1 and (y) a check representing the unpaid
dividends and distributions, if any, which such holder has the right to receive
pursuant to the provisions of this Article, after giving effect to any required
withholding tax pursuant to Section 2.4(c) below, and the shares represented by
the Certificate so surrendered shall forthwith be cancelled. No interest will
be paid or accrued on unpaid dividends and distributions, if any, payable to
holders of Raytheon Common Stock ("Raytheon Stockholders"). In the event of a
transfer of ownership of shares of Raytheon Common Stock which is not
registered on the transfer records of Raytheon, a certificate representing the
proper number of shares of Hughes Class B Common Stock, together with a check
for the cash to be paid in lieu of unpaid dividends and distributions, if any,
may be issued to such transferee if the Certificate representing such shares of
Raytheon Common Stock held by such transferee is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.2, each Certificate
shall be deemed at any time after the Effective Time to represent that number
of whole shares of Hughes Class B Common Stock into which the shares of
Raytheon Common Stock formerly represented by such Certificate shall have been
converted, together with the right to receive any unpaid dividends and
distributions.
(c) Distributions With Respect to Unexchanged Shares. Notwithstanding any
other provisions of this Agreement, no dividends or other distributions
declared or made after the Effective Time with respect to shares of Hughes
Class B Common Stock having a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate, until the holder shall
surrender such Certificate as provided in this Section 2.2. Subject to the
effect of Applicable Law (as defined herein), following surrender of any such
Certificate, there shall be paid to the holder of the certificates representing
whole shares of Hughes Class B Common Stock issued in exchange therefor,
without interest, (i) promptly following such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Hughes Class B Common
Stock and not paid, less the amount of any withholding taxes which may be
required thereon pursuant to Section 2.4(c) below, and (ii) at the appropriate
payment date subsequent to surrender, the amount of dividends or other
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Hughes Class B Common Stock, less the amount of any
withholding taxes which may be required thereon.
(d) No Further Ownership Rights in Raytheon Common Stock. All shares of
Hughes Class B Common Stock issued upon surrender of Certificates in accordance
with the terms hereof (including any cash paid pursuant to this Article 2)
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Raytheon Common Stock represented thereby, and
from and after the Effective Time there shall be no further registration of
transfers of shares of Raytheon Common Stock on the stock transfer books of
Raytheon. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be cancelled and exchanged as
provided in this Section 2.2.
Section 2.3. No Fractional Share Certificates.
(a) Determination of Excess Shares. As promptly as practicable following the
Effective Time, the Exchange Agent shall determine the aggregate number of
fractional shares of Hughes Class A Common Stock converted into Hughes Class B
Common Stock pursuant to Section 2.1(a) (such aggregate number of shares being
herein called the "Excess Shares"). Following the Effective Time, the Exchange
Agent, as agent for the holders of GM Common Stock, shall sell the Excess
Shares at then prevailing prices on the New York Stock Exchange, Inc. (the
"NYSE"), all in the manner provided in subsection (b) of this Section 2.3.
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(b) Common Shares Trust. The sale of the Excess Shares by the Exchange Agent
shall be executed on the NYSE through one or more member firms of the NYSE and
shall be executed in round lots to the extent practicable. The Exchange Agent
shall use all reasonable efforts to complete the sale of the Excess Shares as
promptly following the Effective Time as, in the Exchange Agent's reasonable
judgment, is practicable consistent with obtaining the best execution of such
sales in light of prevailing market conditions. Until the net proceeds of such
sale or sales have been distributed to the holders of Hughes Class B Common
Stock constituting Excess Shares, the Exchange Agent will hold such proceeds in
trust for the holders of such Hughes Class B Common Stock (the "Common Shares
Trust"). The Surviving Corporation shall pay all commissions, transfer taxes
and other out-of-pocket transaction costs, including the expenses and
compensation of the Exchange Agent, incurred in connection with such sale of
the Excess Shares. The Exchange Agent shall determine the portion of the Common
Shares Trust to which each holder of such fractional interests in Hughes Class
B Common Stock shall be entitled, if any, by multiplying the amount of the
aggregate net proceeds comprising the Common Shares Trust by a fraction the
numerator of which is the amount of fractional share interests to which such
holder of Hughes Class B Common Stock is entitled and the denominator of which
is the aggregate amount of fractional share interests to which all such holders
of Hughes Class B Common Stock are entitled.
(c) Distribution to Holders of Fractional Hughes Class B Common Stock. As
soon as practicable after the determination of the amount of cash, if any, to
be paid to holders of Hughes Class B Common Stock with respect to any
fractional share interests, the Exchange Agent shall make available such
amounts, net of any required withholding, to such holders of Hughes Class B
Common Stock, subject to and in accordance with the terms of this Agreement.
Section 2.4. Exchange Fund and Common Shares Trust Matters.
(a) No Liability. None of any party hereto, the Exchange Agent or the
Surviving Corporation shall be liable to any person in respect of any shares of
Hughes Class B Common Stock (or dividends or distributions with respect
thereto) or cash from the Exchange Fund or the Common Shares Trust delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law. If any Certificates shall not have been surrendered prior to seven
years after the Effective Time (or immediately prior to such earlier date on
which any cash, any dividends or distributions with respect to whole shares of
Hughes Class B Common Stock in respect of such Certificate would otherwise
escheat to or become the property of any Governmental Authority (as defined
herein)), any such cash, dividends or distributions in respect of such
Certificate shall, to the extent permitted by Applicable Law (as defined in
Section 3.8 hereof), become the property of the Surviving Corporation, free and
clear of all claims or interest of any person previously entitled thereto.
(b) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund and the Common Shares Trust, as directed by the
Surviving Corporation, on a daily basis. Any interest and other income
resulting from such investments shall be paid to the Surviving Corporation from
time to time as the Surviving Corporation may request.
(c) Withholding Rights. The Exchange Agent, on behalf of the Surviving
Corporation, shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of Raytheon Common
Stock and to any holder of fractional interests in Hughes Class B Common Stock
as set forth in Section 2.3 above, such amounts as may be required to be
deducted and withheld with respect to the making of such payment under the
Code, or under any provision of state, local or foreign tax (as defined herein)
law. To the extent that amounts are so withheld and paid over to the
appropriate taxing authority, such withheld amounts will be treated for all
purposes of this Agreement as having been paid to the holder of Raytheon Common
Stock or Hughes Class B Common Stock, as the case may be, in respect of which
such deduction and withholding was made.
(d) Termination of Exchange Fund and Common Shares Trust. Any portion of the
Exchange Fund and the Common Shares Trust which remains undistributed for six
months after the Effective Time shall be delivered to the Surviving
Corporation, and any holders of fractional interests in Hughes Class B Common
Stock or any
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holders of Raytheon Common Stock representing Hughes Class B Common Stock who
have not theretofore complied with the provisions of this Article 2 shall
thereafter look only to the Surviving Corporation for satisfaction of their
claims for Hughes Class B Common Stock, dividends and other distributions, if
any, and, with respect to shares of Hughes Class B Common Stock constituting
Excess Shares, any cash in lieu of fractional shares thereof, as the case may
be.
Section 2.5. Treatment of Raytheon Stock Options. Prior to the Effective
Time, Hughes and Raytheon shall take all such actions as may be necessary to
cause each unexpired and unexercised option under stock option plans of
Raytheon in effect on the date hereof which has been granted to current or
former directors, officers, employees, consultants or independent contractors
of Raytheon or its subsidiaries or to any other persons by Raytheon (each, a
"Raytheon Option") to be automatically converted at the Effective Time into an
option (a "Hughes Exchange Option") to purchase that number of shares of Hughes
Class B Common Stock equal to the number of shares of Raytheon Common Stock
issuable immediately prior to the Effective Time upon exercise of the Raytheon
Option (without regard to actual restrictions on exercisability), with an
exercise price equal to the exercise price which existed under the
corresponding Raytheon Option, and with other terms and conditions that are the
same as the terms and conditions of such Raytheon Option immediately before the
Effective Time (except for any changes in vesting rights or permitted time of
exercise which result from the occurrence of the Merger). In connection with
the issuance of Hughes Exchange Options, Hughes shall (i) reserve for issuance
the number of shares of Hughes Class B Common Stock that will become subject to
Hughes Exchange Options pursuant to this Section 2.5, and (ii) from and after
the Effective Time, upon exercise of Hughes Exchange Options, make available
for issuance all shares of Hughes Class B Common Stock covered thereby, subject
to the terms and conditions applicable thereto.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF HUGHES
In order to induce Raytheon to enter into this Agreement, Hughes hereby
represents and warrants to Raytheon that the statements contained in this
Article are true, correct and complete. The parties hereto agree that
representations and warranties of Hughes set forth in this Article 3 have been
prepared on a basis that reflects the consummation of the HEC Reorganization
(as defined in the Hughes Distribution Agreement, the "HEC Reorganization") and
accordingly, all references to Hughes exclude all businesses, assets or
obligations of Hughes which will not be such following the consummation of the
HEC Reorganization.
Section 3.1. Organization and Standing. Hughes and each of its significant
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, with respect to Hughes, and
under the laws of its state or other jurisdiction of incorporation, with
respect to its significant subsidiaries, in each case with full power and
authority (corporate and other) to own, lease, use and operate its properties
and to conduct its business as and where owned, leased, used, operated and
conducted. Hughes and each of its significant subsidiaries is duly qualified to
do business and in good standing in each jurisdiction in which the nature of
the business conducted by it or the property it owns, leases or operates makes
such qualification necessary, except where the failure to be so qualified or in
good standing in such jurisdiction would not have a material adverse effect on
Hughes. Hughes is not in default in the performance, observance or fulfillment
of any provision of its certificate of incorporation or by-laws, as amended.
Section 3.2. Subsidiaries. Hughes does not own, directly or indirectly, any
equity or other ownership interest in any corporation, partnership, joint
venture or other entity or enterprise, except as set forth in Section 3.2 to
the disclosure schedule delivered by Hughes to Raytheon and dated as of the
date hereof (the "Hughes Disclosure Schedule"). Except as set forth in Section
3.2 to the Hughes Disclosure Schedule, Hughes is not subject to any obligation
or requirement to provide funds to or make any investment (in the form of a
loan, capital contribution or otherwise) in any such entity. Except as set
forth in Section 3.2 to the Hughes Disclosure Schedule, Hughes owns directly or
indirectly each of the outstanding shares of capital stock (or other ownership
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interests having by their terms ordinary voting power to elect a majority of
directors or others performing similar functions with respect to such
significant subsidiary) of each of its significant subsidiaries. Each of the
outstanding shares of capital stock of each of Hughes' significant subsidiaries
is duly authorized, validly issued, fully paid and nonassessable, and is owned,
directly or indirectly, by Hughes free and clear of all liens, pledges,
security interests, claims or other encumbrances. Other than as set forth in
Section 3.2 to the Hughes Disclosure Schedule, there are no outstanding
subscriptions, options, warrants, puts, calls, agreements, understandings,
claims or other commitments or rights of any type relating to the issuance,
sale or transfer of any securities of any significant subsidiary of Hughes, nor
are there outstanding any securities which are convertible into or exchangeable
for any shares of capital stock of any significant subsidiary of Hughes; and no
significant subsidiary of Hughes has any obligation of any kind to issue any
additional securities or to pay for securities of Hughes or any significant
subsidiary of Hughes or any predecessor of any of the foregoing.
Section 3.3. Corporate Power and Authority. Hughes has all requisite
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by Hughes and the consummation of the transactions contemplated
hereby to be effected by Hughes have been duly authorized by all necessary
corporate action on the part of Hughes. This Agreement has been duly executed
and delivered by Hughes, and constitutes the legal, valid and binding
obligation of Hughes, enforceable against it in accordance with its terms.
Section 3.4. Capitalization of Hughes. (a) As of September 30, 1996, Hughes'
authorized capital stock consisted solely of 75,000 shares of common stock,
without par value, all of which were issued and outstanding. Each outstanding
share of Hughes capital stock is duly authorized and validly issued, fully paid
and nonassessable, and has not been issued in violation of any preemptive or
similar rights and is owned indirectly by GM free and clear of all liens,
pledges, security interests, claims or other encumbrances. Each share of Hughes
Class B Common Stock to be issued in connection with the Merger will be duly
authorized and validly issued, fully paid and nonassessable and will not be
issued in violation of any preemptive or similar rights. Hughes has no
authorized or outstanding bonds, debentures, notes or other obligations or
securities, the holders of which have the right to vote with the stockholders
of Hughes on any matter.
(b) Immediately prior to the Effective Time, but after giving effect to the
GM Transactions, Hughes will have (i) 102,630,503 shares of Class A Common
Stock outstanding, (ii) no shares of Class A Common Stock reserved for issuance
upon the exercise of outstanding options, warrants and convertible securities,
(iii) not more than 4,150,000 shares of Class B Common Stock reserved for
issuance upon the exercise of outstanding options (plus (x) up to 1,000,000
additional shares of Class B Common Stock which may be reserved for issuance in
respect of options granted after July 1, 1997 in accordance with Section 5(c)
of Schedule EM of the Separation Agreement and plus (y) such additional shares
of Class B Common Stock which may be reserved for issuance in respect of
options associated with any corporate employees of Hughes or its affiliates
which Hughes and Raytheon agree may become or remain employees of the Surviving
Corporation after the Merger), (iv) no shares of any other class of capital
stock outstanding, and (v) except as set forth in the foregoing clause (iii) or
as otherwise contemplated by this Agreement, no shares of Class A Common Stock,
Class B Common Stock or any other class of capital stock subject in any event
to issuance upon the exercise, conversion or exchange of any other securities
or pursuant to any contractual or other right, option, warrant or agreement.
(c) Other than as contemplated by the Merger or as set forth in Section 3.4
to the Hughes Disclosure Schedule, there are no outstanding subscriptions,
options, warrants, puts, calls, agreements, understandings, claims or other
commitments or rights of any type relating to the issuance, sale or transfer of
any securities of Hughes, nor are there outstanding any securities which are
convertible into or exchangeable for any shares of capital stock of Hughes; and
Hughes has no obligation of any kind to issue any additional securities or to
pay for securities of Hughes or any predecessor or affiliate. The issuance and
sale of all of the shares of capital stock described in this Section 3.4 have
been in compliance with federal and state securities laws. Except as set forth
in Section 3.4 to the Hughes Disclosure Schedule, Hughes has not agreed to
register any securities under the Securities Act of 1933, as amended (together
with rules and regulation thereunder, the "Securities Act"), or
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under any state securities law or granted registration rights with respect to
any securities of Hughes to any person or entity.
Section 3.5. Conflicts, Consents and Approvals. Neither the execution and
delivery of this Agreement by Hughes nor the consummation of the transactions
contemplated hereby will:
(a) conflict with, or result in a breach of any provision of the
certificate of incorporation or by-laws of Hughes or its significant
subsidiaries;
(b) violate, or conflict with, or result in a breach of any provision of,
or constitute a default (or an event which, with the giving of notice, the
passage of time or otherwise, would constitute a default) under, or entitle
any party (with the giving of notice, the passage of time or otherwise) to
terminate, accelerate, modify or call a default under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of Hughes or any of its significant subsidiaries
under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, intellectual property or other license,
contract, undertaking, agreement, lease or other instrument or obligation to
which Hughes or any of its significant subsidiaries is a party;
(c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Hughes or any of its significant subsidiaries or
any of their respective properties or assets; or
(d) except as contemplated by the Hughes Distribution Agreement, require
any action or consent or approval of, or review by, or registration or
filing by Hughes or any of its affiliates with, any third party or any
court, arbitral tribunal, administrative agency or commission or other
governmental or regulatory body, agency, instrumentality or authority (a
"Governmental Authority"), other than (i) authorization for listing of the
shares of Hughes Class A Common Stock and Hughes Class B Common Stock to be
issued in the Merger on the NYSE, subject to official notice of issuance,
(ii) actions required by the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder (the
"HSR Act") and any comparable laws of foreign jurisdictions, (iii)
registrations or other actions required under federal and state securities
laws as are contemplated by this Agreement, and (iv) as set forth in Section
3.5 to the Hughes Disclosure Schedule;
except in the case of (b), (c) and (d) for any of the foregoing that,
individually or in the aggregate, would neither have a material adverse effect
on Hughes nor materially delay or adversely impact Hughes' ability to
consummate the transactions contemplated hereby and by the other Transaction
Agreements (as defined in the GM Implementation Agreement, the "Transaction
Agreements").
Section 3.6. Hughes Financial Statements. (a) Included in the Hughes
Disclosure Schedule are (i) pro forma unaudited consolidated balance sheets as
of December 31, 1995 and 1994, and pro forma unaudited consolidated statements
of income and cash flows for the two years ended December 31, 1995 and 1994,
for Hughes and its subsidiaries (such financial statements, the "Hughes
Statements" and the balance sheet as of December 31, 1995 included therein, the
"Hughes Balance Sheet"), and (ii) an unaudited pro forma consolidated balance
sheet and statement of income and cash flows at and for the nine months ended
September 30, 1996 for Hughes and its subsidiaries (the "Hughes Interim
Statements"). The Hughes Statements and the Hughes Interim Statements have been
prepared on a basis that gives effect to the consummation of the HEC
Reorganization, except to the extent disclosed in the notes thereto. The Hughes
Balance Sheet (including any related notes and schedules) and the consolidated
balance sheet included in the Hughes Interim Statements fairly present in all
material respects the consolidated financial position of Hughes and its
subsidiaries, after giving effect to the consummation of the HEC
Reorganization, as of their respective dates, and each of the consolidated
statements of income and cash flows included in the Hughes Statements and the
Hughes Interim Statements fairly presents in all material respects the
consolidated results of operations and cash flows, as the case may be, of
Hughes and its subsidiaries, after giving effect to the consummation of the HEC
Reorganization, for the periods set forth therein, in each case in accordance
with generally accepted accounting principles ("GAAP") consistently applied
except as disclosed in the Basis of Presentation note thereto and except that
footnotes to the Hughes Statements and the Hughes Interim Statements required
by GAAP are omitted.
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(b) Proper accounting controls are, and since January 1, 1994, have been, in
place to ensure that no portion of any international sales representative
commission or contingent fee payment is included, directly or indirectly, in
the contract price of any sale to the United States Government pursuant to the
Foreign Military Sales ("FMS") program, or any sale to a foreign government
financed in whole or in part with funding from the U.S. Foreign Military
Finance ("FMF") program, except as permitted thereunder and except where there
is no reasonable likelihood that the failure to have in place such controls
would give rise to any unreserved loss, cost or expense in excess of $10
million individually or, when aggregated with the aggregate of those items
excepted from the representations set forth in clause (c) below and in Sections
3.9 and 3.13, $100 million.
(c) All payments to international sales representatives since January 1,
1994, including commission and contingent fee payments to international sales
representatives on FMS and FMF contracts, (i) have been accurately reported on
Hughes' books and records, and (ii) have been made consistent with all
applicable United States and foreign laws and regulations, except where there
is no reasonable likelihood that the failure to accurately report or to be
consistent with applicable law would give rise to any unreserved loss, cost or
expense in excess of $10 million individually or, when aggregated with the
aggregate of those items excepted from the representations set forth in clause
(b) above and in Sections 3.9 and 3.13, $100 million.
Section 3.7. Registration Statement. None of the information provided by or
on behalf of Hughes for inclusion in the registration statement on Form S-4, as
supplemented or amended from time to time (the "Registration Statement"),
including the prospectus, as supplemented or amended from time to time,
relating to the shares of Hughes Class B Common Stock to be issued in the
Merger (the "Prospectus"), at the time it becomes effective or, in the case of
Raytheon's proxy statement or consent solicitation with respect to the Merger,
as supplemented or amended from time to time (the "Proxy Statement"), at the
date of mailing or at the date of voting or consent and approval with respect
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. The Registration Statement, except for such portions
thereof that relate only to Raytheon, will comply as to form in all material
respects with the provisions of the Securities Act and the Securities Exchange
Act of 1934, as amended (together with the rules and regulations thereunder,
the "Exchange Act").
Section 3.8. Compliance with Law. Hughes and its subsidiaries are in
compliance with, and at all times since December 31, 1994 have been in
compliance with, all applicable laws, statutes, orders, rules, regulations,
policies or guidelines promulgated, or judgments, decisions or orders entered
by any Governmental Authority (collectively, "Applicable Law") relating to them
or their businesses or properties, including, without limitation, the Truth-In-
Negotiations Act, the Procurement Integrity Act, the Foreign Corrupt Practices
Act and the Cost Accounting Standards, except where the failure to be in
compliance therewith would not have a material adverse effect on Hughes.
Section 3.9. Litigation. Except as set forth in Section 3.9 to the Hughes
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation, whether civil, criminal or administrative in nature (an
"Action"), pending or, to the knowledge of Hughes threatened against Hughes or
any of its subsidiaries, nor are there any facts known to Hughes which would
support an Action, which has any reasonable likelihood of resulting in
unreserved liability to Hughes or its subsidiaries in excess of $10 million
individually or, when aggregated with the aggregate of those items excepted
from the representations set forth in Sections 3.6(b) and (c) and Section 3.13,
$100 million or a material adverse effect on the ability of Hughes to
consummate the transactions contemplated hereby. Hughes is not subject to any
outstanding order, writ, injunction or decree which, individually or in the
aggregate, insofar as can be reasonably foreseen, could have a material adverse
effect on Hughes or on its ability to consummate the transactions contemplated
hereby. Except as set forth in Section 3.9 to the Hughes Disclosure Schedule,
since December 31, 1994, neither Hughes nor any of its significant subsidiaries
has been subject to any outstanding order, writ, injunction or decree relating
to its method of doing business or its relationship with past, existing or
future users or purchasers of any goods or services of Hughes or any such
subsidiaries.
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Section 3.10. Taxes. Hughes and its subsidiaries have filed (or there have
been duly filed on their behalf) all federal and material state, local and
foreign income, franchise, excise, real and personal property and other tax
returns and reports (including, but not limited to, those filed on a
consolidated, combined or unitary basis) required to have been filed by them
prior to the date hereof (taking into account extensions). All of the foregoing
returns and reports, to the extent they relate to the income, assets or
business of Hughes or its subsidiaries, are true and correct in all material
respects, and Hughes and its subsidiaries have paid (or there have been paid on
their behalf), or adequate provision has been made in the financial statements
of Hughes included in the Hughes Disclosure Schedule for all taxes payable in
respect of all periods ending on or prior to September 30, 1996. None of Hughes
or any of its subsidiaries (i) will have any liability for any taxes in excess
of the amounts so paid or reserves so established, (ii) is delinquent in the
payment of any tax, assessment or governmental charge or (iii) has requested
any extension of time within which to file any returns in respect of any fiscal
year which have not since been filed, except, in each case, where such
liability, delinquency or failure to request such an extension would not have a
material adverse effect on Hughes. No deficiencies for any tax, assessment or
governmental charge have been proposed in writing, asserted or assessed
(tentatively or definitely), in each case, by any taxing authority, against
Hughes or any of its subsidiaries for which there are not adequate reserves.
Except as set forth in Section 3.10 to the Hughes Disclosure Schedule, none of
Hughes or any of its subsidiaries (or any consolidated, combined or unitary
group of which any such corporation is a member) is the subject of any tax
audit which could reasonably be expected to have a material adverse effect on
Hughes. As of the date of this Agreement, there are no pending requests for
waivers of the time to assess any such tax, other than those made in the
ordinary course and for which payment has been made or there are adequate
reserves. The consolidated federal income tax returns of GM through the fiscal
year ending December 31, 1990 have been audited by the Internal Revenue
Service. For the purposes of this Agreement, the term "tax" shall include all
federal, state, local and foreign taxes including interest and penalties
thereon.
Section 3.11. Absence of Certain Changes. (a) Except as set forth in Section
3.11 to the Hughes Disclosure Schedule and except as contemplated by the GM
Implementation Agreement, since September 30, 1996, the businesses of Hughes
and its subsidiaries have been conducted in the ordinary course, consistent
with past practice, and there has been no (i) material adverse change in the
assets, liabilities, results of operations, business or financial condition of
Hughes and its subsidiaries taken as a whole or (ii) material adverse effect on
the ability of Hughes to consummate the transactions contemplated hereby.
(b) Except (i) as set forth in Schedule 3.11 to the Hughes Disclosure
Schedule, (ii) for the Separation Agreements (as defined in the Hughes
Distribution Agreement, the "Separation Agreement"), and (iii) pursuant to
customary accounting practices relating to Government Contracts (A) neither
Hughes nor any of its subsidiaries has entered into any agreement material to
Hughes and its subsidiaries, taken as a whole, with GM or any affiliate of GM
on terms that are not as favorable, in all material respects, to terms that
would be obtainable in comparable agreements with unrelated third parties, and
(B) from the date hereof to the Effective Time Hughes will not enter into any
such agreement, excluding for all purposes of this Section 3.11 any such
agreement which will not continue in force from and after the Effective Time.
(c) Except (i) as set forth in Schedule 3.11 to the Hughes Disclosure
Schedule and (ii) for the Separation Agreement, since September 30, 1996,
neither Hughes nor any of its subsidiaries has taken any action referred to in
clauses (i) through (xiii) of Section 5.2(a) hereof.
Section 3.12. Undisclosed Liabilities. Except as and to the extent disclosed
or reserved against on the Hughes Interim Statements, neither Hughes nor any of
its subsidiaries has any liabilities or obligations of any nature, whether
known or unknown, absolute, accrued, contingent or otherwise, and whether due
or to become due, except (i) as set forth in Section 3.12 to the Hughes
Disclosure Schedule, (ii) as incurred after the date of the Hughes Interim
Statements in the ordinary course of business consistent with prior practice,
or (iii) for liabilities and obligations which are not, individually or in the
aggregate, material to Hughes and its subsidiaries, taken as a whole.
Section 3.13. Environmental Matters. (a) As used herein, the term
"Environmental Laws" means all applicable federal, state, local or foreign laws
relating to pollution or protection of human health or the
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environment (including ambient air, surface water, groundwater, land surface or
subsurface strata), including laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or industrial,
toxic or hazardous substances or wastes (collectively, "Hazardous Materials")
into the environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all applicable authorizations, codes, decrees,
demands or demand letters, injunctions, judgments, licenses, notice or notice
letters, orders, permits, plans or regulations issued, entered, promulgated or
approved thereunder.
(b) There are, with respect to Hughes and its subsidiaries, and to Hughes'
knowledge with respect to its and their predecessors, no past or present
material violations of Environmental Laws, releases of any material into the
environment, actions, activities, circumstances, conditions, events, incidents,
or contractual obligations which may give rise to any liability under any
applicable Environmental Laws and none of Hughes or its subsidiaries has
received any notice with respect to any of the foregoing, nor is any Action
pending or to Hughes' knowledge threatened in connection with any of the
foregoing;
(c) Hughes is in material compliance with all applicable Environmental Laws;
(d) Hughes has all valid permits required under Environmental Laws for the
operation of its business as presently conducted;
except, in the case of (b), (c) and (d) for any of the foregoing matters that
would not reasonably be expected to result in Hughes or its subsidiaries
incurring unreserved losses, costs or expenses in excess of $10 million
individually or, when aggregated with the aggregate of those items excepted
from the representations set forth in Sections 3.6(b) and (c) and Section 3.9,
$100 million, and except as is set forth in Section 3.9 or 3.13 to the Hughes
Disclosure Schedule.
Section 3.14. Employee Benefits. (a) The plans, contracts or arrangements
described in subsections 3, 4, 5, 6 and 7 of Schedule EM to the Separation
Agreement include (i) all "employee benefit plans", as defined in Section 3(3)
of ERISA, which Hughes and/or its subsidiaries maintain (the "Hughes Employee
Benefit Plans") and (ii) all material employment agreements, and all material
bonus and other incentive compensation, deferred compensation, disability,
severance, stock award, stock option or stock purchase agreements, collective
bargaining agreements, workers' compensation, policies and arrangements with
respect to the employment and termination of employment of any officer,
director or other employee whose principal place of employment is in the United
States under which Hughes or its subsidiaries could have any liability (the
"Hughes Employee Arrangements").
(b) With respect to each Hughes Employee Benefit Plan and Hughes Employee
Arrangement, a complete and correct copy of each of the following documents has
been provided or made available to Raytheon: (i) the most recent plan document
or agreement, and all amendments thereto and all related trust documents; (ii)
the most recent summary plan description, and all related summaries of material
modifications; and (iii) the most recent actuarial and financial reports.
(c) None of the Hughes Employee Benefit Plans is subject to Section 4063,
4064 or 4202 of ERISA.
(d) With respect to each Hughes Employee Benefit Plan that is subject to
Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code (other than
a Multiemployer Plan, as defined below), except as would not have a material
adverse effect on Hughes: (i) there does not exist any accumulated funding
deficiency within the meaning of Section 412 of the Code or Section 302 of
ERISA, whether or not waived; (ii) except for the Hughes Employee Benefit Plans
disclosed in Section 3.14(d) of the Hughes Disclosure Schedule, the fair market
value of the assets of such Plan equals or exceeds the actuarial present value
of all accrued benefits under the Plan (whether or not vested), on a
termination basis; (iii) other than the consummation of the transactions
contemplated by this Agreement, no reportable event within the meaning of
Section 4043(c) of ERISA has occurred; and (iv) all premiums to the Pension
Benefit Guaranty Corporation have been paid in full and there are
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no outstanding penalties or interest assessments. With respect to each Hughes
Employee Benefit Plan which is a Multiemployer Plan, except as would not have a
material adverse effect on Hughes: (i) no Withdrawal Liability (as defined
below) exists that has not been satisfied in full; (ii) if Hughes or any of its
subsidiaries were to experience a withdrawal or partial withdrawal from such
Plan, no Withdrawal Liability would be incurred; and (iii) neither Hughes nor
any of its subsidiaries has received any notification, nor has any reason to
believe, that any such Plan is in reorganization, has been terminated, or may
reasonably be expected to be in reorganization or to be terminated. A
"Multiemployer Plan" means any "multiemployer plan" within the meaning of
Section 4001(a)(3) of ERISA. "Withdrawal Liability" means liability to a
Multiemployer Plan as a result of a complete or partial withdrawal from such
Multiemployer Plan, as those terms are defined in Part I of Subtitle E of Title
IV of ERISA.
(e) All contributions required to have been made by Hughes or its
subsidiaries under any Hughes Employee Benefit Plan or any Applicable Law to
any trusts established thereunder or in connection therewith have been made by
the due date therefor (including any valid extensions), except where any
failure to contribute would not, individually or in the aggregate, have a
material adverse effect on Hughes.
(f) The Hughes Employee Benefit Plans and Hughes Employee Arrangements have
been maintained, in all material respects, in accordance with their terms and
Applicable Law, including but not limited to the filing of applicable reports,
documents and notices regarding any Hughes Employee Benefit Plans with the
Secretary of Labor and the Secretary of the Treasury, or the furnishing of such
documents to participants in the Hughes Employee Benefit Plans, except where
any failure to comply would not, individually or in the aggregate, have a
material adverse effect on Hughes.
(g) With respect to each Hughes Employee Benefit Plan that is intended to be
a "qualified plan" within the meaning of Section 401(a) of the Code (a
"Qualified Plan"), either the Internal Revenue Service has issued a favorable
determination letter that has not been revoked, or an application for a
favorable determination letter was timely submitted to the Internal Revenue
Service for which no final action has been taken by the Internal Revenue
Service, and there are no existing circumstances nor any events that have
occurred that could adversely affect the qualified status of any Qualified Plan
or the related trust, except to the extent such circumstances or events can be
cured without a material adverse effect on Hughes. Each Hughes Employee Benefit
Plan which is intended to meet the requirements of Section 501(c)(9) of the
Code meets such requirements and provides no disqualified benefits (as such
term is defined in Section 4976(b) of the Code), except as would not have a
material adverse effect on Hughes.
(h) Section 3.14(h) of the Hughes Disclosure Schedule (i) identifies each
Hughes Employee Benefit Plan and each Hughes Employee Arrangement that is part
of a plan or arrangement that is to be split pursuant to Schedule EM to the
Separation Agreement, (ii) identifies any funding vehicle associated therewith
and (iii) states whether there are any employee contributions made with respect
thereto.
Section 3.15. Brokerage and Finder's Fees. Except for obligations to Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon
Brothers Inc, neither Hughes nor any of its affiliates, stockholders,
directors, officers or employees has incurred or will incur on behalf of Hughes
or any affiliate of Hughes, any brokerage, finder's or similar fee in
connection with the transactions contemplated by this Agreement. Other than
with respect to the fee of Goldman, Sachs & Co., which may be paid by Hughes,
no such fee will be charged against or payable by Hughes or any subsidiary
thereof, and if the fee of Goldman, Sachs & Co. is payable by Hughes after the
Effective Time, it will be reflected as a liability on the Closing Date Balance
Sheet (as defined in the Separation Agreement). A copy of all agreements
relating to any such fee payable by Hughes or any subsidiary thereof to
Goldman, Sachs & Co. has (or upon request will be) delivered to Raytheon.
Section 3.16. Opinion of Financial Advisor. The Boards of Directors of GM,
HEC and Hughes have received the written opinion of Goldman, Sachs & Co., their
financial advisor, to the effect that, as of January 16, 1997, the Aggregate
Consideration (as defined therein) is fair to the GM Group (as defined therein)
as a
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whole. Hughes has heretofore provided a copy of such opinion to Raytheon and
such opinion has not been withdrawn, revoked or modified.
Section 3.17. Board and Stockholder Approval. The Board of Directors of
Hughes, at a meeting duly called and held, has, by unanimous vote of the
directors then in office determined that this Agreement and the transactions
contemplated hereby are fair to and in the best interests of Hughes and its
stockholder. Hughes Electronics Corporation ("HEC"), in its capacity as sole
stockholder of Hughes, has, acting by written consent, determined that this
Agreement and the transactions contemplated hereby are fair to and in the best
interests of Hughes and its stockholder, and adopted and approved this
Agreement and the transactions contemplated hereby. No other vote of the
holders of any class or series of Hughes capital stock or indebtedness is
necessary to approve and adopt this Agreement and the transactions contemplated
hereby.
Section 3.18. DGCL Section 203 and State Takeover Laws. Prior to the date
hereof, the Board of Directors of Hughes has taken all action necessary to
exempt under or make not subject to (x) Section 203 of the DGCL and (y) to its
knowledge, any other state takeover law or state law that purports to limit or
restrict business combinations or the ability to acquire or vote shares (i) the
execution of this Agreement, (ii) the Merger and (iii) the transactions
contemplated hereby and by the Hughes Distribution Agreement.
Section 3.19. Permits. Hughes and its subsidiaries have in effect all
federal, state, local and foreign governmental approvals, authorizations,
certificates, filings, franchises, licenses, notices, permits and rights
("Permits") necessary for them to own, lease and operate their properties and
assets and to carry on their business as now conducted or as presently
contemplated to be conducted, and there has occurred no default under any such
Permit, except for the absence of Permits and for defaults under Permits which
absence or defaults, individually or in the aggregate, would not have a
material adverse effect on Hughes.
Section 3.20. Restrictive Agreements. Except as set forth in Section 3.20 of
the Hughes Disclosure Schedule, Hughes and its subsidiaries will not be parties
to or bound by any agreement, contract, policy, license, Permit, document,
instrument, arrangement or commitment that materially limits, after the
Effective Time, the ability of Hughes or any of its subsidiaries to compete in
any line of business or with any person or in any geographic area or which
would so limit, after the Effective Time, the ability of the Surviving
Corporation or any subsidiary thereof.
Section 3.21. Real Estate. Each of Hughes and its subsidiaries (i) has good
and marketable title to its owned real properties and (ii) has valid and
subsisting leasehold interests in its leased real properties, in each case free
and clear of any liens or encumbrances of whatsoever nature, other than liens
and encumbrances which would not reasonably be expected to have a material
adverse effect on Hughes. The real property leased or owned by Hughes or any of
its subsidiaries (including, without limitation, all buildings, structures,
improvements and fixtures located thereon, thereunder, thereover or therein,
and all appurtenances thereto and other aspects thereof): (1) is in good
operating condition and repair and is structurally sound and free of defects,
with no material alterations or repairs being required thereto under applicable
law or insurance company requirements; and (2) is otherwise suitable,
sufficient, adequate and appropriate in all respects (whether physical,
structural, operational, legal, practical or otherwise) for its current use,
operation and occupancy, except, in each such case, to the extent that failure
to meet such standards would not reasonably be expected to have a material
adverse effect on Hughes. Except as set forth in Section 3.21 of the Hughes
Disclosure Schedule, no material real property owned or leased by Hughes or any
of its subsidiaries is subject to any sales contracts, option, right of first
refusal or similar agreement or arrangement with any third party.
Section 3.22. Employees. (a) There is no labor strike or work stoppage
pending or, to the knowledge of Hughes, threatened against Hughes or any of its
subsidiaries that, individually or in the aggregate, has had or would
reasonably be expected to have a material adverse effect on Hughes. Except as
set forth in Section 3.22 of the Hughes Disclosure Schedule, neither Hughes nor
any of its subsidiaries is a party to any collective bargaining agreement, nor
has Hughes received, within the past 12 months, any demand or request for
recognition by a labor organization purporting to represent any employees of
Hughes or its subsidiaries.
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(b) Except as set forth in Section 3.22 of the Hughes Disclosure Schedule,
neither Hughes nor any of its subsidiaries is a party to any severance or
change-in-control plan or agreement which could entitle any employee of Hughes
or any such subsidiary to payments as a result of the consummation of the
transactions contemplated by this Agreement.
Section 3.23. Certain Retirement Assets. (a) The aggregate fair market value
of the assets of the HEC Bargaining and Nonbargaining Retirement Plans as of
November 30, 1996 was not less than $7,000,000,000. The actuarial accrued
liability for such plans as of December 1, 1995 under government cost
accounting standards was $4,677,000,000 as calculated and disclosed in the
Actuarial Reports for Fiscal Year ending December 31, 1996 and Plan Year
beginning December 1, 1995 as prepared by Towers, Perrin. To the best knowledge
of Hughes, as of December 1, 1996 there has been no material increase in such
liabilities, other than those arising as a result of benefit accruals,
terminations, retirements, salary increases and growth due to interest, all of
which have occurred in the ordinary course of business.
(b) To the best knowledge of Hughes, the share of the assets of the HEC
Retirement Plan allocable to the defense business under government cost
accounting standards (i.e., the Defense Business Fraction, as defined in
Schedule EM to the Separation Agreement as determined as of November 30, 1996)
is not less than 70% as of November 30, 1996.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF RAYTHEON
In order to induce Hughes to enter into this Agreement, Raytheon hereby
represents and warrants to Hughes that the statements contained in this Article
are true, correct and complete.
Section 4.1. Organization and Standing. Raytheon and each of its significant
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, with respect to Raytheon, and
under the laws of its state or other jurisdiction of incorporation, with
respect to its significant subsidiaries, in each case with full power and
authority (corporate and other) to own, lease, use and operate its properties
and to conduct its business as and where owned, leased, used, operated and
conducted. Raytheon and each of its significant subsidiaries is duly qualified
to do business and in good standing in each jurisdiction in which the nature of
the business conducted by it or the property it owns, leases or operates makes
such qualification necessary, except where the failure to be so qualified or in
good standing in such jurisdiction would not have a material adverse effect on
Raytheon. Raytheon is not in default in the performance, observance or
fulfillment of any provision of its certificate of incorporation, as amended or
by-laws, as amended and restated.
Section 4.2. Subsidiaries. Raytheon does not own, directly or indirectly, any
equity or other ownership interest in any corporation, partnership, joint
venture or other entity or enterprise, except as set forth in Section 4.2 to
the disclosure schedule delivered by Raytheon to Hughes and dated as of the
date hereof (the "Raytheon Disclosure Schedule"). Except as set forth in
Section 4.2 to the Raytheon Disclosure Schedule, Raytheon is not subject to any
obligation or requirement to provide funds to or make any investment (in the
form of a loan, capital contribution or otherwise) in any such entity. Except
as set forth in Section 4.2 to the Raytheon Disclosure Schedule, Raytheon owns
directly or indirectly each of the outstanding shares of capital stock (or
other ownership interests having by their terms ordinary voting power to elect
a majority of directors or others performing similar functions with respect to
such significant subsidiary) of each of its significant subsidiaries. Each of
the outstanding shares of capital stock of each of Raytheon's significant
subsidiaries is duly authorized, validly issued, fully paid and nonassessable,
and is owned, directly or indirectly, by Raytheon free and clear of all liens,
pledges, security interests, claims or other encumbrances. Other than as set
forth in Section 4.2 to the Raytheon Disclosure Schedule, there are no
outstanding subscriptions, options, warrants, puts, calls, agreements,
understandings, claims or other commitments or rights of any type relating to
the issuance, sale or transfer of any securities of any significant subsidiary
of Raytheon, nor are there outstanding any securities which are convertible
into or exchangeable for any shares of capital stock of any significant
subsidiary of Raytheon; and
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<PAGE>
no significant subsidiary of Raytheon has any obligation of any kind to issue
any additional securities or to pay for securities of Raytheon or any
significant subsidiary of Raytheon or any predecessor of any of the foregoing.
Section 4.3. Corporate Power and Authority. Raytheon has all requisite
corporate power and authority to enter into this Agreement and, subject to the
approval of Raytheon Stockholders, Raytheon has all requisite corporate power
and authority to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Raytheon and the consummation of the
transactions contemplated hereby to be effected by Raytheon have been duly
authorized by all necessary corporate action on the part of Raytheon, subject
to the approval of Raytheon Stockholders. This Agreement has been duly executed
and delivered by Raytheon, and constitutes the legal, valid and binding
obligation of Raytheon, enforceable against it in accordance with its terms.
Section 4.4. Capitalization of Raytheon. (a) As of December 31, 1996,
Raytheon's authorized capital stock consisted solely of (x) 400,000,000 shares
of Raytheon Common Stock, of which (i) 236,250,167 shares were issued and
outstanding, (ii) 69,123,796 shares of Raytheon Common Stock were held in the
treasury of Raytheon and (iii) 12,570,360 shares were reserved for issuance
upon the exercise or conversion of outstanding options granted by Raytheon with
an average weighted exercise price as set forth in Section 4.4 of the Raytheon
Disclosure Schedule and (y) 3,000,000 shares of preferred stock, without par
value, none of which were issued and outstanding or reserved for issuance. Each
outstanding share of Raytheon capital stock is duly authorized and validly
issued, fully paid and nonassessable, and has not been issued in violation of
any preemptive or similar rights. Raytheon has no authorized or outstanding
bonds, debentures, notes or other obligations or securities, the holders of
which have the right to vote with the stockholders of Raytheon on any matter.
(b) Other than as contemplated by the Merger or as set forth in Section 4.4
to the Raytheon Disclosure Schedule, there are no outstanding subscriptions,
options, warrants, puts, calls, agreements, understandings, claims or other
commitments or rights of any type relating to the issuance, sale or transfer of
any securities of Raytheon, nor are there outstanding any securities which are
convertible into or exchangeable for any shares of capital stock of Raytheon;
and Raytheon has no obligation of any kind to issue any additional securities
or to pay for securities of Raytheon or any predecessor or affiliate. The
issuance and sale of all of the shares of capital stock described in this
Section 4.4 have been in compliance with federal and state securities laws. The
Raytheon Disclosure Schedule accurately sets forth the number of shares of
Raytheon Common Stock issuable upon exercise of Raytheon Options, and the
average exercise prices with respect thereto, along with a list of the options
held by each corporate officer of Raytheon. Except as set forth in Section 4.4
to the Raytheon Disclosure Schedule, Raytheon has not agreed to register any
securities under the Securities Act or under any state securities law or
granted registration rights with respect to any securities of Raytheon to any
person or entity.
Section 4.5. Conflicts, Consents and Approvals. Neither the execution and
delivery of this Agreement by Raytheon nor the consummation of the transactions
contemplated hereby will:
(a) conflict with, or result in a breach of any provision of the
certificate of incorporation or by-laws of Raytheon or its significant
subsidiaries;
(b) violate, or conflict with, or result in a breach of any provision of,
or constitute a default (or an event which, with the giving of notice, the
passage of time or otherwise, would constitute a default) under, or entitle
any party (with the giving of notice, the passage of time or otherwise) to
terminate, accelerate, modify or call a default under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of Raytheon or any of its significant subsidiaries
under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, intellectual property or other license,
contract, undertaking, agreement, lease or other instrument or obligation to
which Raytheon or any of its significant subsidiaries is a party;
(c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Raytheon or any of its significant subsidiaries or
any of their respective properties or assets; or
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(d) require any action or consent or approval of, or review by, or
registration or filing by Raytheon or any of its affiliates with, any third
party or any Governmental Authority, other than, (i) authorization of the
Merger and the transactions contemplated hereby by Raytheon Stockholders,
(ii) actions required by the HSR Act and any comparable laws of foreign
jurisdictions, (iii) registrations or other actions required under federal
and state securities laws as are contemplated by this Agreement and (iv) as
set forth in Section 4.5 to the Raytheon Disclosure Schedule;
except in the case of (b), (c) and (d) for any of the foregoing that,
individually or in the aggregate, would neither have a material adverse effect
on Raytheon nor materially delay or adversely impact Raytheon's ability to
consummate the transactions contemplated hereby.
Section 4.6. Raytheon SEC Documents. (a) Raytheon has timely filed with the
Securities and Exchange Commission (the "Commission") all forms, reports,
schedules, statements and other documents required to be filed by it since
December 31, 1994 under the Exchange Act or the Securities Act (such documents,
as supplemented and amended since the time of filing, collectively, the
"Raytheon SEC Documents"). The Raytheon SEC Documents, including any financial
statements or schedules included therein, at the time filed (and, in the case
of registration statements and proxy statements, on the dates of effectiveness
and the dates of mailing, respectively) (i) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, and (ii)
complied in all material respects with the applicable requirements of the
Exchange Act and the Securities Act, as the case may be. The financial
statements of Raytheon included in the Raytheon SEC Documents at the time filed
(and, in the case of registration statements and proxy statements, on the date
of effectiveness and the date of mailing, respectively) complied as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto, were
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by Form 10-Q of the Commission), and
fairly present (subject in the case of unaudited statements to normal,
recurring audit adjustments) the consolidated financial position of Raytheon
and its consolidated subsidiaries as at the dates thereof and the consolidated
results of its operations and cash flows for the periods then ended.
Included in the Raytheon Disclosure Schedule are (i) audited consolidated
balance sheets as of December 31, 1995 and 1994, and consolidated statements of
income, cash flows and shareholders' equity for the two years ended December
31, 1995 and 1994, together with a report of Raytheon's independent accountants
thereon, for Raytheon and its subsidiaries (such financial statements, the
"Raytheon Statements" and the balance sheet as of December 31, 1995 included
therein, the "Raytheon Balance Sheet"), and (ii) an unaudited consolidated
balance sheet and statement of income, cash flows and shareholders' equity at
and for the nine months ended September 29, 1996 for Raytheon and its
subsidiaries (the "Raytheon Interim Statements"). The Raytheon Balance Sheet
(including any related notes and schedules) and the consolidated balance sheet
included in the Raytheon Interim Statements fairly present in all material
respects the consolidated financial position of Raytheon and its subsidiaries
as of their respective dates, and each of the consolidated statements of
income, cash flows and shareholders' equity included in the Raytheon Statements
and the Raytheon Interim Statements (including any related notes and schedules)
fairly presents in all material respects the consolidated results of
operations, retained earnings and cash flows, as the case may be, of Raytheon
and its subsidiaries for the periods set forth therein, in each case in
accordance with GAAP consistently applied except as disclosed in the footnotes
thereto.
(b) Proper accounting controls are, and since January 1, 1994, have been, in
place to ensure that no portion of any international sales representative
commission or contingent fee payment is included, directly or indirectly, in
the contract price of any sale to the United States Government pursuant to the
FMS program, or any sale to a foreign government financed in whole or in part
with funding from the FMF program, except as permitted thereunder and except
where there is no reasonable likelihood that the failure to have in place such
controls would give rise to any unreserved loss, cost or expense in excess of
$10 million individually or, when aggregated with the aggregate of those items
excepted from the representations set forth in clause (c) below and in Sections
4.9 and 4.13, $100 million.
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(c) All payments to international sales representatives since January 1,
1994, including commission and contingent fee payments to international sales
representatives on FMS and FMF contracts, (i) have been accurately reported on
Raytheon's books and records, and (ii) have been made consistent with all
applicable United States and foreign laws and regulations, except where there
is no reasonable likelihood that the failure to accurately report or to be
consistent with applicable law would give rise to any unreserved loss, cost or
expense in excess of $10 million individually or, when aggregated with the
aggregate of those items excepted from the representations set forth in clause
(b) above and in Sections 4.9 and 4.13, $100 million.
Section 4.7. Registration Statement. None of the information provided by or
on behalf of Raytheon for inclusion in the Registration Statement, including
the Prospectus, at the time it becomes effective, or in the Proxy Statement, at
the date of mailing or at the date of voting or consent and approval with
respect thereto, and none of the information provided by Raytheon for inclusion
in GM's proxy statement or consent solicitation statement regarding the GM
Transactions (the "GM Proxy Statement") at the date of mailing or at the date
of voting or consent and approval with respect thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading. The Proxy
Statement, except for such portions thereof that relate only to GM or Hughes,
and such portions of the Registration Statement that relate only to Raytheon,
will comply as to form in all material respects with the provisions of the
Securities Act and the Exchange Act.
Section 4.8. Compliance with Law. Raytheon and its subsidiaries are in
compliance with, and at all times since December 31, 1994 have been in
compliance with, all Applicable Law relating to them or their businesses or
properties, including, without limitation, the Truth-In-Negotiations Act, the
Procurement Integrity Act, the Foreign Corrupt Practices Act and the Cost
Accounting Standards, except where the failure to be in compliance therewith
would not have a material adverse effect on Raytheon.
Section 4.9. Litigation. Except as set forth in Section 4.9 to the Raytheon
Disclosure Schedule, there is no Action pending or, to the knowledge of
Raytheon, threatened against Raytheon or any of its subsidiaries, nor are there
any facts known to Raytheon which would support an Action, which has any
reasonable likelihood of resulting in unreserved liability to Raytheon or its
subsidiaries in excess of $10 million individually or, when aggregated with the
aggregate of those items excepted from the representations set forth in
Sections 4.6(b) and (c) and Section 4.13, $100 million or a material adverse
effect on the ability of Raytheon to consummate the transactions contemplated
hereby. Raytheon is not subject to any outstanding order, writ, injunction or
decree which, individually or in the aggregate, insofar as can be reasonably
foreseen, could have a material adverse effect on Raytheon or on its ability to
consummate the transactions contemplated hereby. Except as set forth in Section
4.9 to the Raytheon Disclosure Schedule, since December 31, 1994, neither
Raytheon nor any of its significant subsidiaries has been subject to any
outstanding order, writ, injunction or decree relating to its method of doing
business or its relationship with past, existing or future users or purchasers
of any goods or services of Raytheon or any such subsidiaries.
Section 4.10. Taxes. Raytheon and its subsidiaries have duly filed all
federal and material state, local and foreign income, franchise, excise, real
and personal property and other tax returns and reports (including, but not
limited to, those filed on a consolidated, combined or unitary basis) required
to have been filed by them prior to the date hereof (taking into account
extensions). All of the foregoing returns and reports are true and correct in
all material respects, and Raytheon and its subsidiaries have paid or made
adequate provision in the financial statements of Raytheon included in the
Raytheon Disclosure Schedule for all taxes payable in respect of all periods
ending on or prior to September 30, 1996. None of Raytheon or any of its
subsidiaries (i) will have any liability for any taxes in excess of the amounts
so paid or reserves so established, (ii) is delinquent in the payment of any
tax, assessment or governmental charge or (iii) has requested any extension of
time within which to file any returns in respect of any fiscal year which have
not since been filed, except, in each case, where such liability, delinquency
or failure to request such an extension would not have a material adverse
effect on Raytheon. No deficiencies for any tax, assessment or governmental
charge have been proposed in writing, asserted or assessed (tentatively or
definitely), in each case, by any taxing authority, against Raytheon or any of
its subsidiaries for which there are not adequate reserves. Except as set forth
in Section 4.10 to the Raytheon
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Disclosure Schedule, none of Raytheon or any of its subsidiaries is the subject
of any tax audit which could reasonably be expected to have a material adverse
effect on Raytheon. As of the date of this Agreement, there are no pending
requests for waivers of the time to assess any such tax, other than those made
in the ordinary course and for which payment has been made or there are
adequate reserves. The consolidated federal income tax returns of Raytheon
through the fiscal year ending December 31, 1991 have been audited by the
Internal Revenue Service.
Section 4.11. Absence of Certain Changes. (a) Except as set forth in Section
4.11 to the Raytheon Disclosure Schedule, since September 29, 1996, the
businesses of Raytheon and its subsidiaries have been conducted in the ordinary
course, consistent with past practice, and there has been no (i) material
adverse change in the assets, liabilities, results of operations, business or
financial condition of Raytheon and its subsidiaries taken as a whole or (ii)
material adverse effect on the ability of Raytheon to consummate the
transactions contemplated hereby.
(b) Except as set forth in Section 4.11 to the Raytheon Disclosure Schedule,
since September 29, 1996, neither Raytheon nor any of its subsidiaries has
taken any action referred to in clauses (i) through (vi) of Section 5.3(b)
hereof.
Section 4.12. Undisclosed Liabilities. Except as and to the extent disclosed
or reserved against on the Raytheon Interim Statements, neither Raytheon nor
any of its subsidiaries has any liabilities or obligations of any nature,
whether known or unknown, absolute, accrued, contingent or otherwise, and
whether due or to become due except (i) as set forth in Section 4.12 to the
Raytheon Disclosure Schedule, (ii) as incurred after the date of the Raytheon
Interim Statements in the ordinary course of business consistent with prior
practice, or (iii) for liabilities and obligations which are not, individually
or in the aggregate, material to Raytheon and its subsidiaries, taken as a
whole.
Section 4.13. Environmental Matters. (a) There are, with respect to Raytheon
and its subsidiaries, and to Raytheon's knowledge with respect to its and their
predecessors, no past or present material violations of Environmental Laws,
releases of any material into the environment, actions, activities,
circumstances, conditions, events, incidents, or contractual obligations which
may give rise to any liability under any applicable Environmental Laws and none
of Raytheon or its subsidiaries has received any notice with respect to any of
the foregoing, nor is any Action pending or to Raytheon's knowledge threatened
in connection with any of the foregoing;
(b) Raytheon is in material compliance with all applicable Environmental
Laws;
(c) Raytheon has all valid permits required under Environmental Laws for the
operation of its business as presently conducted;
except, in each case, for any of the foregoing matters that would not
reasonably be expected to result in Raytheon or its subsidiaries incurring
unreserved losses, costs or expenses in excess of $10 million individually or,
when aggregated with the aggregate of those items excepted from the
representations set forth in Sections 4.6(b) and (c) and Section 4.9, $100
million, and except as is set forth in Section 4.9 or 4.13 to the Raytheon
Disclosure Schedule.
Section 4.14. Employee Benefits. (a) Section 4.14(a) of the Raytheon
Disclosure Schedule sets forth a complete and correct list of: (i) all
"employee benefit plans", as defined in Section 3(3) of ERISA, which Raytheon
and/or its subsidiaries maintain (the "Raytheon Employee Benefit Plans") and
(ii) all material employment agreements, and all material bonus and other
incentive compensation, deferred compensation, disability, severance, stock
award, stock option or stock purchase agreements, collective bargaining
agreements, workers' compensation, policies and arrangements with respect to
the employment and termination of employment of any officer, director or other
employee whose principal place of employment is or was in the United States
under which Raytheon or its subsidiaries could have any liability (the
"Raytheon Employee Arrangements").
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<PAGE>
(b) With respect to each Raytheon Employee Benefit Plan and Raytheon Employee
Arrangement, a complete and correct copy of each of the following documents has
been provided or made available to Hughes: (i) the most recent plan document or
agreement, and all amendments thereto and all related trust documents; (ii) the
most recent summary plan description, and all related summaries of material
modifications; and (iii) the most recent actuarial and financial reports.
(c) Except as set forth in Section 4.14(c) of the Raytheon Disclosure
Schedule, none of the Raytheon Employee Benefit Plans is subject to Section
4063, 4064 or 4202 of ERISA.
(d) With respect to each Raytheon Employee Benefit Plan that is subject to
Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code (other than
a Multiemployer Plan), except as would not have a material adverse effect on
Raytheon: (i) there does not exist any accumulated funding deficiency within
the meaning of Section 412 of the Code or Section 302 of ERISA, whether or not
waived; (ii) the fair market value of the assets of such Plan equals or exceeds
the actuarial present value of all accrued benefits under the Plan (whether or
not vested), on a termination basis; (iii) other than the consummation of the
transactions contemplated by this Agreement, no reportable event within the
meaning of Section 4043(c) of ERISA has occurred; and (iv) all premiums to the
Pension Benefit Guaranty Corporation have been paid in full and there are no
outstanding penalties or interest assessments. With respect to each Raytheon
Employee Benefit Plan which is a Multiemployer Plan, except as would not have a
material adverse effect on Raytheon: (i) no Withdrawal Liability exists that
has not been satisfied in full; (ii) if Raytheon or any of its subsidiaries
were to experience a withdrawal or partial withdrawal from such Plan, no
Withdrawal Liability would be incurred; and (iii) neither Raytheon nor any of
its subsidiaries has received any notification, nor has any reason to believe,
that any such Plan is in reorganization, has been terminated, or may reasonably
be expected to be in reorganization or to be terminated.
(e) All contributions required to have been made by Raytheon or its
subsidiaries under any Raytheon Employee Benefit Plan or any Applicable Law to
any trusts established thereunder or in connection therewith have been made by
the due date therefor (including any valid extensions), except where any
failure to contribute would not, individually or in the aggregate, have a
material adverse effect on Raytheon.
(f) The Raytheon Employee Benefit Plans and Raytheon Employee Arrangements
have been maintained, in all material respects, in accordance with their terms
and Applicable Law, including but not limited to the filing of applicable
reports, documents and notices regarding any Raytheon Employee Benefit Plans
with the Secretary of Labor and the Secretary of the Treasury, or the
furnishing of such documents to participants in the Raytheon Employee Benefit
Plans, except where any failure to comply would not, individually or in the
aggregate, have a material adverse effect on Raytheon.
(g) With respect to each Raytheon Employee Benefit Plan that is intended to
be a "qualified plan" within the meaning of Section 401(a) of the Code (a
"Qualified Plan"), either the Internal Revenue Service has issued a favorable
determination letter that has not been revoked, or an application for a
favorable determination letter was timely submitted to the Internal Revenue
Service for which no final action has been taken by the Internal Revenue
Service, and there are no existing circumstances nor any events that have
occurred that could adversely affect the qualified status of any Qualified Plan
or the related trust, except to the extent such circumstances or events can be
cured without a material adverse effect on Raytheon. Each Raytheon Employee
Benefit Plan which is intended to meet the requirements of Section 501(c)(9) of
the Code meets such requirements and provides no disqualified benefits (as such
term is defined in Section 4976(b) of the Code), except as would not have a
material adverse effect on Raytheon.
Section 4.15. Brokerage and Finder's Fees. Except for Raytheon's obligations
to Bear, Stearns & Co. Inc. and Credit Suisse First Boston Corporation, neither
Raytheon nor any of its affiliates, stockholders, directors, officers or
employees has incurred or will incur on behalf of Raytheon or any affiliate of
Raytheon, any brokerage, finder's or similar fee in connection with the
transactions contemplated by this Agreement. A copy of all agreements relating
to any such fees payable by Raytheon or any affiliate of Raytheon has (or upon
request will be) delivered to Hughes.
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APPENDIX A
<PAGE>
Section 4.16. Opinion of Financial Advisor. The Board of Directors of
Raytheon has received (a) the opinion of Bear, Stearns & Co. Inc. to the effect
that, as of January 16, 1997, the financial terms of the Merger are fair to the
Raytheon Stockholders from a financial point of view and (b) the opinion of
Credit Suisse First Boston Corporation to the effect that, as of January 16,
1997, the Merger Consideration (as defined in such opinion) is fair to the
Raytheon Stockholders from a financial point of view, and on or promptly
following the date hereof such opinions will be confirmed in writing. Raytheon,
promptly upon receipt thereof, will provide a copy of such written opinions to
Hughes. Neither of such opinions has been withdrawn, revoked or modified.
Section 4.17. Board Recommendation. The Board of Directors of Raytheon, at a
meeting duly called and held, has by the unanimous vote of all directors
present (i) determined that this Agreement and the transactions contemplated
hereby are fair to and in the best interests of Raytheon and the Raytheon
Stockholders and (ii) resolved to recommend that the Raytheon Stockholders
approve this Agreement and the transactions contemplated hereby.
Section 4.18. Voting Requirements. The affirmative vote of the holders of a
majority of all outstanding shares of Raytheon Common Stock, voting as a single
class, at the Raytheon stockholders meeting to adopt and approve this
Agreement, is the only vote of the holders of any class or series of Raytheon
capital stock or indebtedness necessary to approve and adopt this Agreement and
the transactions contemplated hereby.
Section 4.19. DGCL Section 203 and State Takeover Laws. Prior to the date
hereof, the Board of Directors of Raytheon has taken all action necessary to
exempt under or make not subject to (x) Section 203 of the DGCL and (y) to its
knowledge, any other state takeover law or state law that purports to limit or
restrict business combinations or the ability to acquire or vote shares (i) the
execution of this Agreement, (ii) the Merger and (iii) the transactions
contemplated hereby.
Section 4.20. Permits. Raytheon and its subsidiaries have in effect all
federal, state, local and foreign Permits necessary for them to own, lease and
operate their properties and assets and to carry on their business as now
conducted or as presently contemplated to be conducted, and there has occurred
no default under any such Permit, except for the absence of Permits and for
defaults under Permits which absence or defaults, individually or in the
aggregate, would not have a material adverse effect on Raytheon.
Section 4.21. Restrictive Agreements. As of the date hereof, except as set
forth in Section 4.21 of the Raytheon Disclosure Schedule, Raytheon and its
subsidiaries will not be parties to or bound by any agreement, contract,
policy, license, Permit, document, instrument, arrangement or commitment that
materially limits, after the Effective Time, the ability of Raytheon or any of
its subsidiaries to compete in any line of business or with any person or in
any geographic area or which would so limit, after the Effective Time, the
ability of the Surviving Corporation or any subsidiary thereof.
Section 4.22. Real Estate. Each of Raytheon and its subsidiaries (i) has good
and marketable title to its owned real properties and (ii) has valid and
subsisting leasehold interests in its leased real properties, in each case free
and clear of any liens or encumbrances of whatsoever nature, other than liens
and encumbrances which would not reasonably be expected to have a material
adverse effect on Raytheon. The real property leased or owned by Raytheon or
any of its subsidiaries (including, without limitation, all buildings,
structures, improvements and fixtures located thereon, thereunder, thereover or
therein, and all appurtenances thereto and other aspects thereof): (1) is in
good operating condition and repair and is structurally sound and free of
defects, with no material alterations or repairs being required thereto under
applicable law or insurance company requirements; and (2) is otherwise
suitable, sufficient, adequate and appropriate in all respects (whether
physical, structural, operational, legal, practical or otherwise) for its
current use, operation and occupancy, except, in each such case, to the extent
that failure to meet such standards would not reasonably be expected to have a
material adverse effect on Raytheon. No material real property owned or leased
by Raytheon or any of its subsidiaries is subject to any sales contracts,
option, right of first refusal or similar agreement or arrangement with any
third party.
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APPENDIX A
<PAGE>
Section 4.23. Employees. (a) There is no labor strike or work stoppage
pending or, to the knowledge of Raytheon, threatened against Raytheon or any of
its subsidiaries that, individually or in the aggregate, has had or would
reasonably be expected to have a material adverse effect on Raytheon. Except as
set forth in Section 4.23 of the Raytheon Disclosure Schedule, neither Raytheon
nor any of its subsidiaries is a party to any collective bargaining agreement,
nor has Raytheon received, within the past 12 months, any demand or request for
recognition by a labor organization purporting to represent any employees of
Raytheon or its subsidiaries.
(b) Except as set forth in Section 4.23 of the Raytheon Disclosure Schedule,
neither Raytheon nor any of its subsidiaries is a party to any severance or
change-in-control plan or agreement which could entitle any employee of
Raytheon or any such subsidiary to payments as a result of the consummation of
the transactions contemplated by this Agreement.
Section 4.24. Shareholder Rights Plan. There does not exist any shareholder
rights plan or any outstanding rights issued by Raytheon with respect to any of
Raytheon's securities (other than as disclosed in Section 4.4(a)(iii) or
Section 4.4 of the Raytheon Disclosure Schedule).
ARTICLE 5
COVENANTS OF THE PARTIES
The parties hereto agree as follows with respect to the period from and after
the execution of this Agreement.
Section 5.1. Mutual Covenants.
(a) General. Each of the parties hereto shall use all commercially reasonable
efforts to take all action and to do all things necessary, proper or advisable
to consummate the Merger and the transactions contemplated by this Agreement
(including using all commercially reasonable efforts to cause the conditions
set forth in Article 6 for which they are responsible to be satisfied as soon
as practicable and to prepare, execute and deliver such further instruments and
take or cause to be taken such other and further action as any other party
hereto shall reasonably request), subject to the limitations in Section 5.1(b)
below.
(b) HSR Act. As soon as practicable, and in any event no later than ten (10)
business days after the date hereof, each of the parties hereto shall file any
Notification and Report Forms and related material required to be filed by it
with the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice under the HSR Act with respect to the Merger and
shall promptly make any further filings pursuant thereto that may be necessary,
proper or advisable. Each of Raytheon and Hughes shall furnish to the other
such information and assistance as the other reasonably may request in
connection with the preparation of any submissions to, or agency proceedings
by, any Governmental Authority under the HSR Act or any comparable laws of
foreign jurisdictions, and each of Raytheon and Hughes shall keep the other
promptly apprised of any communications with, and inquiries or requests for
information from, such Governmental Authorities. Each of Raytheon and Hughes
hereby agrees to use its best efforts to cause the condition set forth in
Section 6.1(b) of this Agreement to be satisfied, including, without
limitation, by disposing of or holding separate, or agreeing to dispose of or
hold separate, any assets (but in the case of Hughes, only Hughes Assets, as
defined in the Separation Agreement).
Each of Raytheon and Hughes hereby agrees to use its best efforts to
cooperate and assist in any defense by the other party hereto of the Merger
before any Governmental Authority reviewing the Merger, including by promptly
providing such information as may be requested by such Governmental Authority
or such assistance as may be reasonably requested by the other party hereto in
such defense.
(c) Tax-Free Treatment. The parties intend the Merger to qualify as a
reorganization under Section 368(a) of the Code and certain of the transactions
contemplated by the Hughes Distribution Agreement (the "Spin-Off
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APPENDIX A
<PAGE>
Transactions") to qualify as tax-free spin-offs within the meaning of Sections
355 and 368(a)(1)(D) of the Code. Each of the parties and its affiliates shall
use all commercially reasonable efforts to cause the Merger and the Spin-Off
Transactions to so qualify and to obtain, as of the Effective Time, the
opinions (the "Tax Opinions") of Wachtell, Lipton, Rosen & Katz, special
counsel to Raytheon, and Weil, Gotshal & Manges LLP, special counsel to Hughes,
substantially in the forms attached hereto as Exhibits G and H (or otherwise in
form and substance satisfactory to Raytheon or Hughes, respectively), in each
case to the effect that the Merger shall qualify as a reorganization within the
meaning of Section 368 of the Code, it being understood that in rendering such
Tax Opinions, such tax counsel shall be entitled to rely upon, inter alia,
representations of officers of Raytheon and Hughes substantially in the form of
Exhibits I and J. Neither party hereto nor its affiliates shall take any action
that would cause the Merger not to qualify as a reorganization under Section
368(a) or that would cause the Spin-Off Transactions not to qualify as tax-free
spin-offs within the meaning of Sections 355 and 368(a)(1)(D) of the Code. The
parties shall take the position for all purposes that the Merger qualifies as a
reorganization under Section 368(a) of the Code, and the Spin-Off Transactions
qualify as tax-free spin-offs within the meaning of Sections 355 and
368(a)(1)(D) of the Code, unless and until the parties fail to obtain either of
the Tax Opinions as of the Closing Date.
(d) NYSE Listing. The parties hereto shall use all commercially reasonable
efforts to cause the shares of Hughes Class A Common Stock and Hughes Class B
Common Stock to be issued pursuant to the Hughes Distribution Agreement and the
Merger, respectively, to be approved for listing on the NYSE, subject to
official notice of issuance, prior to the Closing Date.
(e) Letters of Accountants. Hughes shall use all commercially reasonable
efforts to cause to be delivered to Raytheon two letters from Hughes'
independent accountants, one dated a date within two business days before the
date on which the Registration Statement shall become effective and one dated a
date within two business days before the date on which the Proxy Statement is
mailed to Raytheon Stockholders, in each case addressed to Raytheon, in form
and substance reasonably satisfactory to Raytheon and customary in scope and
substance for comfort letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement
and proxy statements similar to the Proxy Statement.
Raytheon shall use all commercially reasonable efforts to cause to be
delivered to Hughes two letters from Raytheon's independent accountants, one
dated a date within two business days before the date on which the Registration
Statement shall become effective and one dated a date within two business days
before the date on which the Proxy Statement is mailed to Raytheon
Stockholders, in each case addressed to Hughes, in form and substance
reasonably satisfactory to Hughes and customary in scope and substance for
comfort letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement and proxy
statements similar to the Proxy Statement.
(f) Public Announcements. Unless otherwise required by Applicable Law or
requirements of the NYSE (and in that event only if time does not permit), at
all times prior to the earlier of the Effective Time or termination of this
Agreement pursuant to Section 7.1, the parties hereto shall consult with each
other before issuing any press release or other public announcement with
respect to the Merger or the other transactions and matters contemplated hereby
and shall not issue any such press release or public announcement prior to such
consultation, provided that the initial press release relating to this
Agreement and the transactions contemplated hereby will be a joint press
release.
(g) Access. From and after the date of this Agreement until the Effective
Time (or the termination of this Agreement), Raytheon and Hughes shall permit
representatives of the other to have appropriate access at all reasonable times
to the other's premises, properties, books, records, contracts, tax records and
documents to the extent related to Hughes' business (which, for purposes of
this Section 5.1(g), shall mean Hughes' business after giving effect to the
consummation of HEC Reorganization) or Raytheon's business, as the case may be.
Information obtained by Raytheon and Hughes pursuant to this Section 5.1(g)
shall be subject to the provisions of the confidentiality agreements between
them, each dated February 7, 1996 (together, the "Confidentiality Agreement"),
which agreements remain in full force and effect.
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APPENDIX A
<PAGE>
(h) Indemnification. From and after the Effective Time, the Surviving
Corporation shall indemnify, defend and hold harmless each individual who is
now, or has been at any time prior to the date hereof or who becomes prior to
the Effective Time, an officer or director of Raytheon or Hughes 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 the Surviving Corporation (which
approval shall 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 (i) the fact that such person is
or was a director or officer of Raytheon or Hughes or their respective
subsidiaries, as the case may be, whether pertaining to any matter existing or
occurring at or prior to the Effective Time and whether asserted or claimed
prior to, or at or after, the Effective Time (but in the case of Hughes only
insofar as relating to the Defense Business (as defined in the Separation
Agreement)) and (ii) this Agreement or the transactions contemplated hereby, in
each case to the full extent Raytheon or Hughes, as the case may be, would have
been permitted under Delaware law and its certificate of incorporation and
bylaws to indemnify such person, and the Surviving Corporation shall 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 DGCL. 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
Effective Time), after the Effective Time, the Surviving Corporation (i) shall
pay all reasonable fees and expenses of any counsel retained by any Indemnified
Parties promptly as statements therefor are received, and (ii) shall use its
commercially reasonable efforts to assist in the vigorous defense of any such
matter, provided that the Surviving Corporation shall not be liable for any
settlement of any claim effected without its written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification under this Section 5.1(h), upon learning of any such
claim, action, suit, proceeding or investigation, shall notify the Surviving
Corporation (but the failure so to notify the Surviving Corporation shall not
relieve it from any liability which it may have under this Section 5.1(h)
except to the extent such failure materially prejudices the Surviving
Corporation), and shall deliver to the Surviving Corporation the undertaking,
if any, contemplated by Section 145(e) of the DGCL.
The provisions of this Section 5.1(h) are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party, his or her heirs and his
or her legal representatives.
(i) Expenses. Except as otherwise provided in this Agreement or the other
Transaction Agreements, whether or not the Merger is consummated, the parties
hereto shall pay their own costs and expenses associated with this Agreement
and the transactions contemplated hereby.
(j) Preparation of SEC Documents. Hughes shall promptly furnish Raytheon, and
Raytheon shall promptly furnish Hughes and GM, with all information concerning
such party as may be requested for inclusion in the Proxy Statement, the
Registration Statement and the GM Proxy Statement to be filed with the
Commission with respect to the Merger, the GM Merger and the other transactions
contemplated by this Agreement and the Hughes Distribution Agreement. Hughes
and Raytheon jointly shall prepare the Proxy Statement and the Registration
Statement and shall cooperate with GM in the preparation of the GM Proxy
Statement. The parties shall use all commercially reasonable efforts to file
the Proxy Statement with the Commission on a confidential basis as soon as is
reasonably practicable after the date hereof. If at any time prior to the
Effective Time, any information pertaining to Raytheon or Hughes contained in
or omitted from the Registration Statement, the Proxy Statement or the GM Proxy
Statement makes such statements contained therein false or misleading, Raytheon
or Hughes, as the case may be, shall promptly inform the other or GM, as
appropriate, and promptly provide the information necessary to make the
statements contained therein not false and misleading. The parties shall use
all commercially reasonable efforts to have the Registration Statement declared
effective by the Commission on a date as close as reasonably practicable to the
anticipated date of termination of any applicable waiting periods under the HSR
Act and to maintain the effectiveness of the Registration Statement through the
Effective Time. Raytheon shall use all commercially reasonable efforts to mail
to its stockholders the Proxy Statement on a date as soon as reasonably
practicable after the effectiveness of the Registration Statement which shall
include all
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APPENDIX A
<PAGE>
information required under Applicable Law to be furnished to such stockholders
in connection with the Merger and the transactions contemplated hereby.
(k) No Solicitation. Each of the parties hereto agrees that, during the term
of this Agreement, without the consent of the other, it shall not, and shall
not authorize or permit any of its subsidiaries or any of its or its
subsidiaries' directors, officers, employees, agents or representatives,
directly or indirectly, to 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 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 GM Transactions) of such
party, or any combination of the foregoing (in each case, a "Competing
Transaction"), or negotiate, explore or otherwise engage in discussions with
any person (other than the other party hereto or its respective directors,
officers, employees, agents and representatives or, with respect to Hughes, its
affiliates) 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 Merger; provided, however, that Hughes'
obligations under this Section 5.1(k) shall only apply with respect to a
Competing Transaction that includes the Defense Business or the consummation of
which would otherwise result in the termination or material breach of any of
the Transaction Agreements, and provided further, that notwithstanding any
other provision hereof, each party may (i) engage in discussions or
negotiations with a third party who (without any solicitation, initiation,
knowing encouragement, discussion or negotiation, directly or indirectly, by or
with such party or its subsidiaries, or any of its or its subsidiaries'
directors, officers, employees, agents or representatives after the date
hereof) seeks to initiate such discussion or negotiations and may furnish such
third party information concerning such party and its business, properties and
assets if, and only to the extent that, in each case (A) (x) the third party
has first proposed a Competing Transaction that is superior to the transactions
contemplated by this Agreement and has demonstrated that the consideration
necessary for the Competing Transaction is reasonably likely to be available
(all as determined in good faith in each case by such party's Board of
Directors after consultation with its financial advisors) and (y) such party's
Board of Directors has concluded in good faith, on the basis of oral or written
advice of outside counsel, that such action is necessary for the Board of
Directors to act in a manner consistent with its fiduciary duties under
Applicable Law and (B) prior to furnishing such information to or entering into
discussions or negotiations with such person, such party shall have (x)
provided prompt notice to the other party of its intent to furnish information
to or enter into discussions or negotiations with such person or entity and a
description of the financial and other terms of the proposed Competing
Transaction (as well as all material revisions or modifications thereof),
together with the evidence by which the third party which proposed such
Competing Transaction demonstrated the likely availability of the consideration
therefor, and (y) received from such person or entity an executed
confidentiality agreement in reasonably customary form on terms not in the
aggregate materially more favorable to such person or entity than the terms
contained in the Confidentiality Agreement, (ii) with respect to Raytheon,
comply with Rule 14e-2 promulgated under the Exchange Act with regard to a
tender or exchange offer, and/or (iii) provided such party shall have
terminated this Agreement pursuant to Section 7.1(i) hereof, accept a Competing
Transaction from a third party. Each party hereto will immediately cease all
existing activities, discussions and negotiations with any parties conducted
heretofore with respect to any of the foregoing.
(l) Additional Agreements. Each of Hughes and Raytheon will comply in all
material respects with all applicable laws and with all applicable rules and
regulations of any Governmental Authority in connection with its execution,
delivery and performance of this Agreement and the transactions contemplated
hereby.
(m) Blue Sky. Hughes and Raytheon will use all commercially reasonable
efforts to obtain prior to the Effective Time all necessary blue sky permits
and approvals required to permit the distribution of the shares of Hughes Class
B Common Stock to be issued in accordance with the provisions of this
Agreement.
(n) Notification of Certain Matters. Each of Hughes and Raytheon shall notify
the other promptly following the receipt of process with respect to any
stockholder litigation initiated against it relating to the Merger, and from
time to time upon the request of the other shall provide a summary of the
status thereof.
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APPENDIX A
<PAGE>
Section 5.2. Covenants of Hughes.
(a) Conduct of Hughes' Operations. During the period from the date of this
Agreement to the Effective Time, Hughes (which for purposes of this Section
5.2(a) shall mean Hughes after giving effect to the consummation of the HEC
Reorganization, as if the HEC Reorganization had been consummated as of the
date of this Agreement), shall conduct its business and operations in the
ordinary course except with respect to the consummation of the GM Transactions
in accordance with the terms thereof as contemplated by the Transaction
Agreements and except as expressly contemplated by this Agreement, the
Separation Agreement, and the transactions contemplated hereby and thereby, and
shall 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 shall not be impaired in any material
respect. Without limiting the generality of the foregoing, during the period
from the date of this Agreement to the Effective Time, Hughes shall not, except
with respect to the consummation of the GM Transactions and except as otherwise
expressly contemplated by this Agreement, the Separation Agreement and the
transactions contemplated hereby and thereby or as otherwise set forth in
Section 5.2(a) or Section 3.22 to the Hughes Disclosure Schedule, without the
prior written consent of Raytheon:
(i) grant any person any right or option to acquire any shares of its
capital 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;
(ii) 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;
(iii) make or propose any changes in its certificate of incorporation or
bylaws;
(iv) merge or consolidate with any other person 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;
(v) create any subsidiaries which are material to Hughes and which are
not, directly or indirectly, wholly owned by Hughes;
(vi) 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 this Agreement;
(vii) 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;
(viii) take any action that would reasonably be expected to result in the
representations and warranties set forth in Article 3 becoming false or
inaccurate;
(ix) enter into or carry out any other transaction which is material to
Hughes other than in the ordinary and usual course of business;
(x) take any action which could reasonably be expected to adversely affect
or delay the ability of any parties hereto to obtain any approval of any
Governmental Authority required to consummate the transaction contemplated
hereby;
(xi) settle any Actions, whether now pending or hereafter made or brought,
on terms which include a material limitation on the business or operations
of the Surviving Corporation;
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<PAGE>
(xii) permit or cause any subsidiary to do any of the foregoing or agree
or commit to do any of the foregoing; or
(xiii) agree in writing or otherwise to take any of the foregoing actions.
(b) Notification of Certain Matters. Hughes shall give prompt notice to
Raytheon of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any Hughes representation or warranty
contained in this Agreement to be untrue or inaccurate in any material respect
at or prior to the Effective Time and (ii) any material failure of Hughes to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 5.2(b) shall not limit or otherwise affect the
remedies available hereunder to Raytheon.
(c) Debt. As of or prior to the Effective Time, Hughes shall incur
indebtedness for borrowed money (the principal amount of which is referred to
as "Debt") in an amount equal to the Intercompany Payment Amount (as defined
below) for the purpose of funding payments to one or more Affiliates of Hughes
(which may include, without limitation, payments with respect to existing debt,
dividends, distributions and/or contributions to capital) as of or prior to the
Effective Time (collectively the "Intercompany Payment"). Hughes and Raytheon
shall cooperate in connection with Hughes' negotiation of the terms and
conditions relating to the Debt comprising the Intercompany Payment Amount, and
Hughes shall not commit to incur such Debt without obtaining the consent of
Raytheon to such terms and conditions, which consent shall not be unreasonably
withheld or delayed. No interest in respect of the Debt comprising the
Intercompany Payment Amount shall be accrued and unpaid at the Effective Time.
The "Intercompany Payment Amount" will be equal to $9,500,000,000 ($9.5
billion) minus the "Class A Common Stock Amount" (as defined below) and minus
all other Debt of Hughes which is outstanding as of the Effective Time. The
"Class A Common Stock Amount" is equal to 102,630,503 multiplied by the average
closing price of Raytheon Common Stock, regular way, on the New York Stock
Exchange during the 30-day period ending 5 days prior to the Effective Time,
provided, however, that in the event such average price is greater than $54.29
such price shall be deemed to be $54.29, and in the event such average price is
less than $44.42, such price shall be deemed to be $44.42.
(d) Adoption of Rights Plan. Hughes shall take all action necessary to adopt
a shareholder rights plan incorporating in all material respects the terms and
provisions set forth in Exhibit K effective as of the Effective Time.
Section 5.3. Covenants of Raytheon.
(a) Raytheon Stockholders Meeting. Raytheon shall take all action in
accordance with the federal securities laws, the DGCL and its Certificate of
Incorporation and bylaws necessary to obtain the consent and approval of
Raytheon Stockholders with respect to the Merger, this Agreement, and the
transactions contemplated hereby and thereby. The stockholder vote or consent
required for approval of this Agreement will be no greater than is provided in
Section 4.17. Raytheon shall use all commercially reasonable efforts to solicit
from its stockholders proxies to be voted at its stockholders meeting in favor
of this Agreement pursuant to the Proxy Statement and, subject to the fiduciary
duties of its Board of Directors, the Proxy Statement shall include the
recommendation of the Board of Directors of Raytheon in favor of this Agreement
and the Merger. Raytheon shall use all commercially reasonable efforts to
promptly and expeditiously secure any vote or consent of stockholders required
by the DGCL, the applicable requirements of any securities exchange and
Raytheon's Certificate of Incorporation and Bylaws to effect the Merger.
(b) Conduct of Raytheon's Operations. During the period from the date of this
Agreement to the Effective Time, Raytheon shall conduct its business and
operations in the ordinary course except as expressly contemplated by this
Agreement and the transactions contemplated hereby and shall 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 shall not be impaired in any material respect.
Without limiting the generality of the foregoing, during the period from the
date of this Agreement to the
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Effective Time, Raytheon shall not, except as otherwise expressly contemplated
by this Agreement and the transactions contemplated hereby, or pursuant to
agreements, arrangements or understandings in effect as of the date hereof,
which are disclosed in Section 5.3(b) to the Raytheon Disclosure Schedule, or
as otherwise set forth in Section 5.3(b) to the Raytheon Disclosure Schedule,
without the prior written consent of Hughes:
(i) do or effect any of the following actions with respect to its
securities: (A) adjust, split, combine, recapitalize or reclassify its
capital stock, (B) make, 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 purchases of
shares of Raytheon Common Stock by Raytheon in the open market, the
aggregate number of which shares is not in excess of the number of shares of
Raytheon Common Stock issued by Raytheon after the date hereof pursuant to
the exercise of stock options by employees of Raytheon), (C) 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 the amount set
forth in Section 5.3(b) to the Raytheon Disclosure Schedule, (D) issue,
deliver or sell or agree to issue, deliver 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 pursuant to the exercise of options to purchase Raytheon
Common Stock outstanding on the date hereof or the Raytheon Company Deferral
Plan for Directors or created hereafter in accordance with this Section
5.3(b)(i)) or (E) enter into any agreement, understanding or arrangement
with respect to the sale or voting of its capital stock;
(ii) 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;
(iii) take any action that would reasonably be expected to result in the
representations and warranties set forth in Article 4 becoming false or
inaccurate;
(iv) take any action which could reasonably be expected to adversely
affect or delay the ability of any parties hereto to obtain any approval of
any Governmental Authority required to consummate the transaction
contemplated hereby;
(v) permit or cause any subsidiary to do any of the foregoing or agree or
commit to do any of the foregoing; or
(vi) agree in writing or otherwise to take any of the foregoing actions.
(c) Notification of Certain Matters. Raytheon shall give prompt notice to
Hughes of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any Raytheon representation or warranty
contained in this Agreement to be untrue or inaccurate in any material respect
at or prior to the Effective Time and (ii) any material failure of Raytheon to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 5.3(c) shall not limit or otherwise affect the
remedies available hereunder to Hughes.
(d) Affiliates. Prior to the Effective Time, Raytheon shall deliver to Hughes
a letter identifying all persons who are, at the time this Agreement is
submitted for adoption to the stockholders of Raytheon, "affiliates" of
Raytheon for purposes of Rule 145 under the Securities Act. Raytheon shall use
all reasonable efforts to cause each such person to deliver to the Surviving
Corporation on or prior to the Effective Time a written agreement substantially
in the form attached as Exhibit F.
(e) Raytheon Securities Law Filings. During the period from the earlier of
(i) the date on which the registration statement for Hughes Class A Common
Stock relating to the GM Proxy Statement is declared effective by the
Commission and (ii) the date on which the Registration Statement is declared
effective by the
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<PAGE>
Commission, through and including the later of (x) the date of the meeting of
Raytheon's Stockholders with respect to this Agreement or (y) the date of the
meeting of GM's stockholders with respect to the GM Proxy Statement (or in the
case of a consent solicitation, the date on which the requisite approval of the
GM Transactions by the stockholders of GM shall have been obtained), Raytheon
shall provide Hughes and GM with drafts of each filing under the Securities Act
or the Exchange Act (other than a filing under the Exchange Act on Form 8-K
with respect to matters not contemplated by the Transaction Agreements) which
it proposes to make a reasonable period of time in advance of the filing
thereof with the Commission, and shall consult with Hughes and GM as regards
any comments or concerns raised by Hughes or GM with respect thereto, all with
a view towards coordinating the disclosure contained in such filings with the
disclosure to be contained in or incorporated by reference in the Registration
Statement, the Prospectus, and the proxy statement or consent solicitation to
be used by GM in connection with the GM Transactions.
ARTICLE 6
CONDITIONS
Section 6.1. Mutual Conditions. The obligations of the parties hereto to
consummate the Merger shall be subject to fulfillment of the following
conditions:
(a) No temporary restraining order, preliminary or permanent injunction or
other order or decree which prevents the consummation of the Merger 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 the Merger.
(b) All waiting periods applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated and all approvals of, or
filings with, any Governmental Authority required to consummate the
transactions contemplated hereby shall have been obtained or made, other
than immaterial approvals and filings, the failure to obtain or make which
would have no material adverse effect on Hughes or Raytheon or, following
the Effective Time, the Surviving Corporation.
(c) All consents or approvals of all persons (other than Governmental
Authorities) required for the consummation of the transactions contemplated
hereby shall have been obtained and shall 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
on Hughes or Raytheon or, following the Effective Time, the Surviving
Corporation.
(d) The requisite approval of the stockholders of Raytheon to the Merger
shall have been obtained.
(e) The Commission shall have declared the Registration Statement and the
Proxy Statement effective. On the Closing Date and at the Effective Time, no
stop order or similar restraining order shall have been threatened by the
Commission or entered by the Commission or any state securities
administrator prohibiting the Merger.
(f) The GM Transactions shall have been consummated in accordance with the
terms contemplated by the Transaction Agreements.
(g) The shares of Hughes Class B Common Stock to be issued pursuant to the
Merger shall have been authorized for listing on the NYSE, subject to
official notice of issuance.
(h) Hughes shall have received from Goldman, Sachs & Co. a written
confirmation, dated as of a date within two business days of the date of the
first mailing of the Proxy Statement, of its opinion dated January 16, 1997,
to the boards of directors of GM, Hughes and HEC that on the basis of and
subject to the assumptions and 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 (if requested by Hughes or
Raytheon) with a consent authorizing the use of such opinion in connection
with the Registration Statement and Proxy Statement, and such opinion shall
not have been withdrawn, revoked or modified in an adverse manner.
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(i) Raytheon shall have received from Bear, Stearns & Co. Inc. and Credit
Suisse First Boston Corporation a written confirmation, dated as of a date
within two business days of the date of the first mailing of the Proxy
Statement, of its opinion dated January 16, 1997, to Raytheon's board of
directors that on the basis of and subject to the assumptions,
representations, limitations and other matters set forth therein, the
financial terms of the Merger are fair to the stockholders of Raytheon from
a financial point of view (with respect to Bear, Stearns & Co. Inc.) and the
Merger Consideration (as defined in the opinion of Credit Suisse First
Boston Corporation) is fair to the stockholders of Raytheon from a financial
point of view, together with a consent authorizing the use of such opinions
in connection with the Registration Statement and Proxy Statement, and such
opinions shall not have been withdrawn, revoked or modified in an adverse
manner.
(j) Receipt by Raytheon and Hughes, respectively, of the Tax Opinions of
Wachtell, Lipton, Rosen & Katz, special counsel to Raytheon, and Weil,
Gotshal & Manges LLP, special counsel to Hughes, substantially in the forms
attached hereto as Exhibits G and H (or otherwise in form and substance
satisfactory to Raytheon or Hughes, respectively), in each case to the
effect that the Merger shall qualify as a reorganization within the meaning
of Section 368 of the Code, it being understood that in rendering the Tax
Opinions, such tax counsel shall be entitled to rely upon, inter alia,
representations of officers of Raytheon and Hughes substantially in the form
of Exhibits I and J.
(k) All state securities or blue sky permits or approvals required to
carry out the transaction contemplated hereby shall have been received.
Section 6.2. Conditions to Obligations of Raytheon. The obligations of
Raytheon to consummate the Merger and the transactions contemplated hereby
shall be subject to the fulfillment of the following conditions unless waived
by Raytheon:
(a) The representations and warranties of Hughes set forth in Article 3
shall be true and correct on the date hereof and on and as of the Closing
Date as though made on and as of the Closing Date (except for
representations and warranties made as of a specified date, which need be
true and correct only as of the specified date), except, in the case of the
representations and warranties other than those set forth in Sections 3.6(b)
and (c), the first two sentences of Section 3.9, Section 3.13 and any
representation or warranty that is qualified by the words "material adverse
effect," for such inaccuracies which have not had and would not reasonably
be expected to have a material adverse effect on Hughes or the Surviving
Corporation; provided, however, that any and all actions taken by Hughes
pursuant to Section 5.1(b) and the effects thereof on the representations
and warranties of Hughes set forth in Article 3 shall be ignored for
purposes of this Section 6.2(a).
(b) Hughes shall have performed in all material respects each obligation
and agreement and shall have complied in all material respects with each
covenant to be performed and complied with by it hereunder at or prior to
the Effective Time.
(c) Hughes shall have furnished Raytheon with a certificate dated the
Closing Date signed on behalf of it by the Chairman, President or any Vice
President to the effect that the conditions set forth in Sections 6.2(a) and
(b) have been satisfied.
(d) Since the date of this Agreement, except to the extent contemplated by
Section 3.11 to the Hughes Disclosure Schedule, and except for any actions
taken by Hughes pursuant to Section 5.1(b) and any effects thereof upon
Hughes, there shall not have been any material adverse change in the assets,
liabilities, results of operations, business or financial condition of
Hughes and its subsidiaries taken as a whole or any material adverse effect
on the ability of Hughes to consummate the transactions contemplated hereby.
(e) GM shall have received the Ruling (as defined in the Hughes
Distribution Agreement) and the substance thereof shall be reasonably
satisfactory to Raytheon.
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<PAGE>
Section 6.3. Conditions to Obligations of Hughes. The obligations of Hughes
to consummate the Merger and the other transactions contemplated hereby shall
be subject to the fulfillment of the following conditions unless waived by
Hughes:
(a) The representations and warranties of Raytheon set forth in Article 4
shall be true and correct on the date hereof and on and as of the Closing
Date as though made on and as of the Closing Date (except for
representations and warranties made as of a specified date, which need be
true and correct only as of the specified date), except, in the case of the
representations and warranties other than those set forth in Sections 4.6(b)
and (c), the first two sentences of Section 4.9, Section 4.13 and any
representation or warranty that is qualified by the words "material adverse
effect," for such inaccuracies which have not had and would not reasonably
be expected to have a material adverse effect on Raytheon or the Surviving
Corporation; provided, however, that any and all actions taken by Raytheon
pursuant to Section 5.1(b) and the effects thereof on the representations
and warranties of Raytheon set forth in Article 4 shall be ignored for
purposes of this Section 6.3(a).
(b) Raytheon shall have performed in all material respects each obligation
and agreement and shall have complied in all material respects with each
covenant to be performed and complied with by it hereunder at or prior to
the Effective Time.
(c) Raytheon shall have furnished Hughes with a certificate dated the
Closing Date signed on its behalf by its Chairman, President or any Vice
President to the effect that the conditions set forth in Sections 6.3(a) and
(b) have been satisfied.
(d) Since the date of this Agreement, except to the extent contemplated by
Section 4.11 to the Raytheon Disclosure Schedule, and except for any actions
taken by Raytheon pursuant to Section 5.1(b) and any effects thereof upon
Raytheon, there shall not have been any material adverse change in the
assets, liabilities, results of operations, business or financial condition
of Raytheon and its subsidiaries taken as a whole or any material adverse
effect on the ability of Raytheon to consummate the transactions
contemplated hereby.
(e) The Debt contemplated by Section 5.2(c) shall have been incurred and
the borrowings thereunder received, and the Intercompany Payment shall have
been duly made in full.
ARTICLE 7
TERMINATION AND AMENDMENT
Section 7.1. Termination. This Agreement may be terminated at any time prior
to the Effective Time:
(a) by mutual written consent of Hughes and Raytheon;
(b) by either Hughes or Raytheon if any permanent injunction or other
order of a court or other competent Governmental Authority preventing the
consummation of the Merger or the GM Transactions shall have become final
and nonappealable;
(c) by either Hughes or Raytheon in the event of either: (i) a material
breach by the other party of any representation or warranty contained herein
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 (ii) a material
breach by the other party of any of the covenants or agreements contained
herein, 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;
(d) by either Hughes or Raytheon if the Merger shall not have been
consummated before December 31, 1997, unless extended by the Boards of
Directors of both Hughes and Raytheon (provided that the right to terminate
this Agreement under this Section 7.1(d) shall not be available to any party
whose failure (or whose affiliate's failure) to perform any material
covenant or obligation under this Agreement or under the GM Implementation
Agreement, has been the cause of or resulted in the failure of the Merger to
occur on or before such date);
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APPENDIX A
<PAGE>
(e) by either Hughes or Raytheon if at the meeting of Raytheon
Stockholders (including any adjournment or postponement thereof) the
requisite vote of the Raytheon Stockholders to approve the Merger and the
transactions contemplated hereby shall not have been obtained;
(f) by either Raytheon or Hughes if at the respective meetings of holders
of the GM $1 2/3 Common Stock and the GM Class H Common Stock (including any
adjournments or postponements thereof) the requisite vote of each such class
of stock of GM to approve the GM Transactions shall not have been obtained
(or with respect to a consent solicitation in lieu of such meetings, the
period to consent to such transactions shall have expired without the
requisite consents having been obtained);
(g) by either Hughes or Raytheon upon the occurrence of any event that has
resulted in a material adverse change after the date hereof in the assets,
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 Effective Time, the
Surviving Corporation, excluding for all purposes of this clause (g), any
actions taken by Hughes or Raytheon pursuant to Section 5.1(b) and any
effects thereof on Hughes or Raytheon or effects which could reasonably be
expected to result from such actions on Hughes, Raytheon or, after the
Effective Time, the Surviving Corporation;
(h) by either Hughes or Raytheon if the Board of Directors of the other
party or any committee of the Board of Directors of the other party (i)
shall withdraw or modify in any adverse manner its approval or
recommendation of this Agreement or the Merger, (ii) shall fail to reaffirm
such approval or recommendation upon such party's request, (iii) shall
approve or recommend 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 hereto or an affiliate thereof, or (iv)
shall resolve to take any of the actions specified in clause (i) above of
this subparagraph (h);
(i) by either Hughes or Raytheon upon five business days' prior notice to
the other and upon payment of the amounts specified in Section 7.2 hereof,
if, as a result of any offer, inquiry, solicitation or proposal with respect
to any Competing Transaction received by such party after the date hereof
from a person other than the other party to this Agreement or any of its
affiliates, the Board of Directors of such party shall have concluded in
good faith, after considering applicable provisions of state law and after
giving effect to all adjustments which may be offered by the other party
described below pursuant to this subparagraph (i), on the basis of oral or
written advice of outside counsel, that such action is necessary for the
Board of Directors to comply with its fiduciary duties under applicable law
and prior to any such termination, such party shall, and shall cause its
respective financial and legal advisors to, negotiate with the other party
to this Agreement to seek to make such adjustments in the terms and
conditions of this Agreement as would enable such party to proceed with the
transactions contemplated hereby; or
(j) by either Hughes or Raytheon if the GM Implementation Agreement shall
have been terminated pursuant to its terms.
Section 7.2. Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.1, this Agreement, except for the provisions of
Section 5.1(i) and the provisions of Section 7.2, shall become void and have no
effect, without any liability on the part of any party or its directors,
officers or stockholders. Notwithstanding the foregoing, nothing in this
Section 7.2 shall relieve any party to this Agreement of liability for a
willful breach of any provision of this Agreement nor invalidate the provisions
of the Confidentiality Agreement. If this Agreement is terminated (A) by
Raytheon pursuant to Section 7.1(h), (B) by Hughes pursuant to Section 7.1(i),
(C) by either Raytheon or Hughes pursuant to Section 7.1(f) or pursuant to
Section 7.1(j) (but with respect to Section 7.1(j) only in the event the GM
Implementation Agreement was terminated pursuant to Sections 5.1(d), 5.1(e) or
5.1(f) thereof or pursuant to Section 5.1(b) thereof solely as a result of the
termination of the Hughes Distribution Agreement pursuant to Section 4(a)(i),
4(a)(ii) (other than with respect to a termination arising from a failure to
obtain the opinion contemplated by Section 3(d) of the Hughes Distribution
Agreement solely as a result of any matter that would also constitute a breach
of the representations or warranties
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APPENDIX A
<PAGE>
of Raytheon set forth herein) or 4(a)(v) thereof) or (D) by Raytheon or Hughes
pursuant to Section 7.1(d) but only in the event the Merger shall not have been
consummated as a result of the non-completion of the Spin-Off Merger (as
defined in the Hughes Distribution Agreement) by reason solely of the failure
to satisfy the condition set forth in Section 3(c) or the condition set forth
in Section 3(j) of the Hughes Distribution Agreement or due solely to the
failure of the Board of Directors of GM to determine the Hughes Distribution
Ratio (as defined in the Hughes Distribution Agreement), then Hughes shall pay
to Raytheon, within five business days of such termination in cash by wire
transfer in immediately available funds to an account designated by Raytheon,
in reimbursement for Raytheon's and its affiliates' expenses, 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 this Agreement, including legal, accounting and
investment banking fees, up to but not in excess of an amount equal to $20
million in the aggregate, and, if (x) following the date hereof but prior to
the time of such termination a Competing Transaction involving the Defense
Business shall have been commenced, publicly proposed, publicly disclosed or
communicated to the Board of Directors of Hughes or (y) at any time within
three months following such termination any agreement with respect to a
Competing Transaction involving the Defense Business shall have been entered
into or any such Competing Transaction shall have been consummated, then, in
addition (except in the case of a termination pursuant to Section 7.1(i) where
such amount already has been paid), Hughes shall pay to Raytheon, within five
business days of such termination (or, in the case of clause (y), prior to the
earlier of the signing or consummation of any such transaction) in cash by wire
transfer in immediately available funds to an account designated by Raytheon a
termination fee in an amount equal to $200 million. In the event this Agreement
is terminated (A) by Hughes pursuant to Section 7.1(e) or 7.1(h), (B) by
Raytheon pursuant to Section 7.1(e) or 7.1(i), or (C) by Raytheon or Hughes
pursuant to Section 7.1(d) (but in the case of Section 7.1(d) only in the event
the Merger shall not have been consummated as a result of the failure of the
condition set forth in Section 6.1(i) to have been satisfied at a time when all
other conditions set forth in Article 6 (other than the condition set forth in
Section 6.1(f)) shall have been satisfied or be capable of being satisfied, and
only if the failure of the condition set forth in Section 6.1(i) to have been
satisfied does not result from any matter that would also constitute a breach
of the representations or warranties of Hughes set forth herein), then Raytheon
shall pay to Hughes, within five business days of such termination in cash by
wire transfer in immediately available funds to an account designated by
Hughes, in reimbursement for Hughes' and its affiliates' expenses, an amount in
cash equal to the aggregate amount of Hughes' and its affiliates' actual
documented out-of-pocket expenses incurred in connection with pursuing the
transactions contemplated by this Agreement, including legal, accounting and
investment banking fees, up to but not in excess of an amount equal to $20
million in the aggregate and if (x) following the date hereof but prior to the
time of such termination a Competing Transaction involving Raytheon shall have
been commenced, publicly proposed, publicly disclosed or communicated to the
Board of Directors of Raytheon or (y) at any time within three months following
such termination any agreement with respect to a Competing Transaction
involving Raytheon shall have been entered into or any such Competing
Transaction shall have been consummated, then, in addition (except in the case
of a termination pursuant to Section 7.1(i) where such amount already has been
paid), Raytheon shall pay to Hughes, within five business days of such
termination (or, in the case of clause (y), prior to the earlier of the signing
or consummation of any such transaction) in cash by wire transfer in
immediately available funds to an account designated by Hughes a termination
fee in an amount equal to $200 million.
Hughes and Raytheon agree that the agreements contained in this Section 7.2
are an integral part of the transactions contemplated by this Agreement and
constitute liquidated damages and not a penalty. If one party fails to pay to
the other any fee due under this Section 7.2 in accordance with the terms
hereof, the defaulting party shall pay the costs and expenses (including legal
fees and expenses) in connection with any action, including the filing of any
lawsuit or other legal action, taken to collect payment, together with interest
on the amount of any unpaid fee at the publicly announced prime rate of
Citibank, N.A. from the date such fee was required to be paid.
Section 7.3. Amendment. This Agreement may be amended by the parties hereto,
by action taken or authorized by their respective Boards of Directors, at any
time before or after adoption of this Agreement by
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APPENDIX A
<PAGE>
Raytheon stockholders and before or after approval of the GM Transactions by
GM's stockholders, but after either such approval or authorization, no
amendment shall be made which by law requires further approval or authorization
by the stockholders of GM or Raytheon, as the case may be, without such further
approval or authorization. Notwithstanding the foregoing, this Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
Section 7.4. Extension; Waiver. At any time prior to the Effective Time,
Hughes (with respect to Raytheon) and Raytheon (with respect to Hughes) by
action taken or authorized by their respective Boards of Directors, may, to the
extent legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of such party, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE 8
MISCELLANEOUS
Section 8.1. No Survival of Representations and Warranties. The
representations and warranties made herein by the parties hereto shall not
survive the Effective Time. This Section 8.1 shall not limit any covenant or
agreement of the parties hereto, which by its terms contemplates performance
after the Effective Time or the termination of this Agreement.
Section 8.2. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, telecopied (which
is confirmed) or dispatched by a nationally recognized overnight courier
service to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
(a)if to Hughes:
HE Holdings, Inc.
7200 Hughes Terrace
Los Angeles, CA 90045-0066
Attention: Charles H. Noski
Telecopy No.: (310) 568-7589
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Frederick S. Green, Esq.
Telecopy No.: (212) 310-8007
and with copies to:
GM
General Motors Corporation
3031 West Grand Boulevard
Detroit, Michigan 48202
Attention: Warren G. Anderson, Esq.
Telecopy No.: (313) 974-0685
and
A-33
APPENDIX A
<PAGE>
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Robert S. Osborne, P.C.
Telecopy No.: (312) 861-2200
(b)if to Raytheon:
Raytheon Company
141 Spring Street
Lexington, Massachusetts 02173
Attention: Christoph L. Hoffmann, Esq.
Telecopy No.: (617) 860-2822
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Adam O. Emmerich, Esq.
Telecopy No.: (212) 403-2000
Section 8.3. Interpretation; Absence of Presumption. (a) For the purposes
hereof, (i) words in the singular shall be held to include the plural and vice
versa and words of one gender shall be held to include the other gender as the
context requires, (ii) the terms "hereof", "herein", and "herewith" and words
of similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole (including all of the Schedules and Exhibits hereto) and
not to any particular provision of this Agreement, and Article, Section,
paragraph, Exhibit and Schedule references are to the Articles, Sections,
paragraphs, Exhibits and Schedules to this Agreement unless otherwise
specified, (iii) the word "including" and words of similar import when used in
this Agreement shall mean "including, without limitation," unless the context
otherwise requires or unless otherwise specified, (iv) the word "or" shall not
be exclusive, (v) provisions shall apply, when appropriate, to successive
events and transactions, and (vi) all references to any period of days shall be
deemed to be to the relevant number of calendar days.
(b) The Article, Section and paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(c) This Agreement shall be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting or
causing any instrument to be drafted.
(d) For the purposes of any provision of this agreement, a "material adverse
effect" with respect to Raytheon, Hughes (which shall mean Hughes after giving
effect to the consummation of the HEC Reorganization) or the Surviving
Corporation shall be deemed to occur if the consequences of a breach or
inaccuracy of the contemplated covenant or representation under this Agreement
are reasonably likely to have a material adverse effect on the assets,
liabilities, results of operations or financial condition of such party and its
subsidiaries taken as a whole.
Section 8.4. Counterparts. This Agreement may be executed in counterparts,
which together shall constitute one and the same Agreement. The parties may
execute more than one copy of the Agreement, each of which shall constitute an
original.
Section 8.5. Entire Agreement; Severability. (a) This Agreement (including
the documents and the instruments referred to herein) and the Confidentiality
Agreement contains the entire agreement between the parties with respect to the
subject matter hereof, supersede all previous agreements, negotiations,
discussions,
A-34
APPENDIX A
<PAGE>
writings, understandings, commitments and conversations with respect to such
subject matter and there are no agreements or understandings between the
parties other than those set forth or referred to herein or therein.
(b) If any provision of this Agreement or the application thereof to any
person or circumstance is determined by a court of competent jurisdiction to be
invalid, void or unenforceable, the remaining provisions hereof, or the
application of such provision to persons or circumstances or in jurisdictions
other than those as to which it has been held invalid or unenforceable, shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party. Upon such determination, the parties shall negotiate in good faith in an
effort to agree upon such a suitable and equitable provision to effect the
original intent of the parties.
Section 8.6. Definitions of "subsidiary" and "significant subsidiary". When a
reference is made in this Agreement to a subsidiary of a party, the term
"subsidiary" means 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. When a reference is made in this
Agreement to a significant subsidiary of a party, the phrase "significant
subsidiary" means a subsidiary of such party that constitutes a "significant
subsidiary" within the meaning of Rule 1-02 of Regulation S-X of the
Commission.
Section 8.7. Third Party Beneficiaries. Other than the provisions of Sections
5.1(h), (a) the provisions of this Agreement are solely for the benefit of the
parties and are not intended to confer upon any person except the parties any
rights or remedies hereunder, and (b) there are no third party beneficiaries of
this Agreement and this Agreement shall not provide any third person with any
remedy, claim, liability, reimbursement, claim of action or other right in
excess of those existing without reference to this Agreement.
Section 8.8. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to principles
of conflicts of law.
Section 8.9. Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are or are to be thereby aggrieved shall
have the right to specific performance and injunctive or other equitable relief
of its rights under this Agreement, in addition to any and all other rights and
remedies at law or in equity, and all such rights and remedies shall be
cumulative. The parties agree that the remedies at law for any breach or
threatened breach, including monetary damages, are inadequate compensation for
any loss and that any defense in any action for specific performance that a
remedy at law would be adequate is waived. Any requirements for the securing or
posting of any bond with such remedy are waived.
Section 8.10. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other party. Subject to the preceding sentence, this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the
parties and their respective successors and assigns.
A-35
APPENDIX A
<PAGE>
IN WITNESS WHEREOF, each of the undersigned, intending to be legally bound,
has caused this Agreement to be duly executed and delivered on the date first
set forth above.
HE HOLDINGS, INC.
By: /s/ Charles H. Noski
------------------------------------------
Name:Charles H. Noski
Title:Senior Vice President and
Chief Financial Officer
RAYTHEON COMPANY
By: /s/ Christoph L. Hoffmann
------------------------------------------
Name:Christoph L. Hoffmann
Title:Executive Vice President
A-36
APPENDIX A
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B-I
[LETTERHEAD OF BEAR STEARNS APPEARS HERE]
November 7, 1997
Board of Directors
Raytheon Company
141 Spring Street
Lexington, MA 02173
Dear Sirs and Madam:
We understand that Raytheon Company ("Raytheon") and HE Holdings, Inc. ("Hughes
Defense") have entered into a merger agreement dated as of January 16, 1997
(the "Merger Agreement") pursuant to which Hughes Defense and Raytheon will be
combined in a stock-for-stock transaction as described therein and herein
(hereinafter referred to as the "Merger").
The Merger will be structured as a merger of Raytheon with and into Hughes
Defense, with Hughes Defense continuing as the surviving corporation in the
Merger (the "Surviving Corporation"). Immediately prior to the consummation of
the Merger, Hughes Defense will be reorganized to include only certain assets
and liabilities, as specified in the Transaction Agreements (as defined
herein), and Hughes Defense will be spun-off from its parent company (the
"Spin-Off") such that the holders of Class H Common Stock, par value $.10 per
share ("Class H Shares"), of General Motors Corporation ("GM") and holders of
common stock, par value $1 2/3, of GM ("GM Common Shares") will, in the
aggregate, receive shares of a new Class A Common Stock, par value $.01 per
share, of the Surviving Corporation (the "Class A Shares"), representing, in
the aggregate, approximately 30% of the economic value, and 80.1% of the voting
power as to election of directors, of the Surviving Corporation after
consummation of the Merger. In the Merger, the holders of Raytheon Common
Stock, par value $1.00 per share ("Raytheon Common Stock"), will receive one
share of a new Class B Common Stock, par value $.01 per share, of the Surviving
Corporation (the "Class B Shares") for each share of Raytheon Common Stock,
representing, in the aggregate (together with shares issuable upon exercise of
options to purchase Raytheon Common Stock), approximately 70% of the economic
value, and 19.9% of the voting power as to election of directors, of the
Surviving Corporation after consummation of the Merger. The Class A Shares and
Class B Shares will vote as separate classes on matters other than the election
of directors and will in all other respects have the same rights and interests.
The Merger is expected to be considered by the shareholders of Raytheon at a
special meeting expected to be held after receipt of regulatory approvals and a
tax ruling and satisfaction of other closing conditions and to be consummated
shortly thereafter.
You have asked us to render our opinion as to whether the financial terms of
the Merger are fair, from a financial point of view, to holders of Raytheon
Common Stock.
In the course of our analysis for rendering this opinion, we have:
1. reviewed the Merger Agreement, and other related agreements to be entered
into by the parties in connection with the Spin-Off and the Merger
(collectively, the "Transaction Agreements"), in substantially final form
as provided by you to us;
2. reviewed the structure of the proposed recapitalization of Hughes Defense
and related entities as set forth in the Transaction Agreements and as
further described by you and your legal advisors to us;
B-I-1
APPENDIX B
<PAGE>
3. reviewed GM's Annual Report to Shareholders and Annual Report on Form 10-K
for the year ended December 31, 1996, its Quarterly Reports on Form 10-Q
for the periods ended March 31, 1997 and June 30, 1997, its Annual Report
to Shareholders and Annual Report on Form 10-K for the year ended December
31, 1995 and its Quarterly Reports on Form 10-Q for the periods ended March
31, 1996, June 30, 1996 and September 30, 1996;
4. reviewed unaudited financial statements for the fiscal years ended
December 31, 1995 and 1994 for Hughes Defense and its subsidiaries and
reviewed certain other operating and financial information provided to us
by the management of Raytheon and GM and Hughes Defense relating to such
businesses, including internal projections of future financial results;
5. met with certain members of Raytheon's senior management to discuss
Raytheon's operations, historical financial statements and future
prospects, as well as their views with respect to the operations,
historical financial statements and future prospects of Hughes Defense, and
their views of the business, operational and strategic benefits, potential
synergies and tax and other implications of the Merger;
6. reviewed certain estimates of cost savings and other combination benefits
(collectively, the "Projected Benefits") expected to result from the
Merger, prepared and provided to us by the management of Raytheon;
7. met with certain members of GM's and Hughes Defense's senior management to
discuss Hughes Defense operations, historical financial statements and
future prospects, as well as their views of the business and assets of
Hughes Defense, operational and strategic benefits, potential synergies and
tax and other implications of the Merger;
8. reviewed the pro forma financial impact of the Merger on Raytheon and
Hughes Defense, including its earnings, cash flow, financial ratios and
earnings per share;
9. discussed with certain members of senior management the potential
implications of not doing the Merger;
10. reviewed and compared with Hughes Defense certain publicly available
financial information and stock market performance data of publicly-held
companies which we deemed generally comparable to Hughes Defense;
11. reviewed and compared with the Merger the financial terms of certain
other recent acquisitions of companies which we deemed generally
comparable to Hughes Defense;
12. reviewed discounted cash flow analyses of Hughes Defense and Raytheon;
13. reviewed the historical market prices and trading activity for the Class
H Shares, the GM Common Shares and the Raytheon Common Stock;
14. conducted such other studies, analyses, inquires and investigations as we
deemed appropriate; and
15. conducted the above studies and analyses, where we deemed relevant, in
the context of consummating the Merger on a pro forma basis both with and
without giving effect to the pending acquisition by Raytheon of the
Defense Systems and Electronics unit of Texas Instruments Incorporated.
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us or reviewed for us by Raytheon, GM, Hughes
Electronics and Hughes Defense. With respect to the projected financial results
of such business and the Projected Benefits, we have assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the respective senior managements of Raytheon, GM
and Hughes Defense as to the anticipated future performance of their respective
companies and as to the anticipated Projected Benefits within the time frames
forecast therein. We have not assumed any responsibility for independent
verification of such information and have relied upon the assurances of the
management of Raytheon and the managements of GM, Hughes Defense and Hughes
Electronics that they are unaware of any facts that would make the information
provided to or reviewed by us incomplete or misleading. In arriving at our
opinion, we have not performed or obtained any independent appraisal of the
assets of Raytheon or Hughes Defense nor have we been furnished with any such
appraisals. We note that the Merger is intended to qualify as a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"), and we have assumed
B-I-2
APPENDIX B
<PAGE>
that it will so qualify. We note that the Spin-Off is intended to qualify as a
tax-free distribution within the meaning of Section 355 of the code, and we
have assumed that it will so qualify. In addition, we have assumed that the
Transaction Agreements in the form finally entered into will not differ in any
material respect from the drafts furnished to us, and that the Transactions
will be consummated on the terms set forth in the Transaction Agreements
without waiver or amendment of any of the terms thereof. Our opinion is
necessarily based on the economic, market, competitive and other conditions,
and governmental policies and practices in the defense sector, as in effect on,
and the information made available to us as of, the date hereof. No opinion is
express herein as to the price which the new securities of the Surviving
Corporation to be issued to the shareholders of both Raytheon and GM may trade
at any time.
We have acted as financial advisor to Raytheon in connection with the Merger
and will receive a fee for such advisory services, including the rendering of
this opinion, payment of a significant portion of which is contingent upon the
consummation of the Merger. We have previously rendered certain investment
banking and financial advisory services to Raytheon for which we received
customary compensation.
In the ordinary course of our business, we may actively trade the securities
and senior loans of Raytheon and GM (including the Class H Shares and the GM
Common Shares) 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.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of Raytheon and is not to be reproduced, disseminated,
quoted or referred to at any time, in whole or in part, in any manner without
our prior written consent, which shall not be unreasonably withheld. This
opinion does not address the Company's underlying decision to effect the Merger
and does not constitute a recommendation to any shareholder as to how any such
shareholder should vote on the Merger or related Transactions.
Based on and subject to the foregoing, it is our opinion that, as of the date
hereof, the financial terms of the merger are fair, from a financial point of
view, to the shareholders of Raytheon.
Very truly yours,
Bear, Stearns & Co. Inc.
B-I-3
APPENDIX B
<PAGE>
November 7, 1997
Board of Directors
Raytheon Company
141 Spring Street
Lexington, Massachusetts 02173
Members of the Board:
You have asked us to advise you with respect to the fairness to the holders of
the common stock of Raytheon Company ("Raytheon") from a financial point of
view of the Merger Consideration (as hereinafter defined) as contemplated by
the terms of the Agreement and Plan of Merger, dated as of January 16, 1997
(the "Merger Agreement"), by and between HE Holdings, Inc. ("Hughes"), a
subsidiary of General Motors Corporation ("GM"), and Raytheon. The Merger
Agreement and the transactions contemplated thereby provide for, among other
things, (i) the transfer by certain subsidiaries of GM to Hughes of all assets
and associated liabilities primarily related to the defense business operations
of such subsidiaries not currently held by Hughes or its subsidiaries (the
defense business operations of Hughes, after giving effect to such transfer,
being referred to as the "Business") and the transfer by Hughes to certain
subsidiaries of GM of all assets and associated liabilities primarily related
to the non-defense business operations of Hughes and its subsidiaries, (ii) the
recapitalization of the capital stock of Hughes into shares of Class A common
stock, par value $0.01 per share (the "Class A Common Stock"), and the creation
of a series of shares of Class B common stock, par value $0.01 per share (the
"Class B Common Stock"), of Hughes (the "Recapitalization") and the subsequent
distribution to holders of shares of the common stock, par value $1-2/3 per
share, of GM (the "$1-2/3 Stock") and shares of the Class H common stock, par
value $0.10 per share, of GM (the "GMH Stock") of shares of the
Class A Common Stock, which shares of Class A Common stock will represent in
the aggregate 80.1% of the voting power of the holders of the common stock of
Hughes entitled to vote in the election or removal of directors (the
"Distribution"), (iii) the merger of Raytheon with and into Hughes pursuant to
which each outstanding share of the common stock, par value $1.00 per share, of
Raytheon (the "Raytheon Common Stock") will become one share of the Class B
Common Stock (the "Merger"), such that, after giving effect to the Distribution
and the Merger, the equity ownership in the entity resulting from the Merger
(the "Surviving Corporation") by the former holders of Raytheon Common Stock
(including options to purchase Raytheon Common Stock) will equal approximately
70% (the "Merger Consideration") and the equity ownership in the Surviving
Corporation represented by the shares of Class A Common Stock distributed to
the former holders of the GMH Stock and $1-2/3 Stock will equal approximately
30%, all in accordance with the terms of the Merger Agreement, and (iv) the
incurrence by Hughes prior to or as of the effective time of the Merger (the
"Effective Time") of indebtedness for borrowed money, in an amount to be
determined in accordance with the terms of the Merger Agreement, incurred
primarily for the purpose of funding certain intercompany payments to
affiliates of Hughes (the "Debt Amount"). You have advised us that, based upon
the closing sale price of Raytheon Common Stock on November 6, 1997 (the last
trading day prior to the date of this opinion) and after giving effect to the
foregoing transactions, the total Debt Amount and the 30% equity position of
the holders of the GMH Stock and $1-2/3 Stock in the Surviving Corporation as
of the Effective Time will, subject to a "collar" mechanism as specified in the
Merger Agreement, have a value equal to approximately $9.3 billion. The
foregoing transactions are collectively referred to herein as the
"Transaction."
In arriving at our opinion, we have reviewed the Merger Agreement and certain
related documents, the Solicitation Statement/Prospectus of Raytheon relating
to the proposed Transaction (the "Solicitation Statement") and certain publicly
available business and financial information relating to Raytheon and the
Business. We have also reviewed certain other information provided to us by
Raytheon and Hughes, including financial forecasts, relating to Raytheon and
the Business, and have met with the managements of Raytheon and Hughes to
discuss the operations and prospects of Raytheon and the Business.
B-II-1
APPENDIX B
<PAGE>
Board of Directors
Raytheon Company
November 7, 1997
Page 2
We have also considered certain financial and stock market data of Raytheon and
Hughes, and we have compared certain financial and stock market data for Hughes
with similar data for publicly held companies in businesses similar to that of
the Business and we have considered, to the extent publicly available, the
financial terms of certain other business combinations and other transactions
which have recently been effected. We also considered such other information,
financial studies, analyses and investigations and financial, economic and
market criteria that we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information (including the
information contained in the Solicitation Statement) and have relied on its
being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
managements of Raytheon and Hughes as to the future financial performance of
Raytheon and the Business and the best currently available estimates and
judgments of the management of Raytheon as to the cost savings and other
potential synergies (including the timing, amount and achievability thereof)
anticipated to result from the Transaction. In addition, we have not been
requested to make, and have not made, an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of Raytheon or Hughes, nor
have we been furnished with any such evaluations or appraisals. Our opinion is
necessarily based upon information available to us, and financial, economic,
market and other conditions as they exist and can be evaluated, on the date
hereof. We are expressing no opinion as to what the value of the Class A Common
Stock or Class B Common Stock actually will be when issued pursuant to the
Transaction or the prices at which the Class A Common Stock or the Class B
Common Stock will trade subsequent to the Transaction.
We have acted as financial advisor to Raytheon in connection with the
Transaction and will receive a fee for our services, a significant portion of
which is contingent upon the consummation of the Transaction. In the past, we
have performed certain financial advisory and investment banking services for
Raytheon, Hughes and GM, for which services we have received compensation. In
the ordinary course of our business, Credit Suisse First Boston and its
affiliates may actively trade the debt and equity securities of Raytheon,
Hughes and GM for their own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Raytheon in connection with its evaluation of the Transaction,
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on any matter in connection with the proposed
Transaction, and is not to be quoted or referred to, in whole or in part, in
any manner, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Merger Consideration is fair to holders of Raytheon Common Stock
from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
B-II-2
APPENDIX B
<PAGE>
APPENDIX C
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
UNAUDITED FINANCIAL STATEMENTS AS OF SEPTEMBER 28, 1997 AND FOR THE
NINE MONTH PERIODS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
Balance Sheets..................................................... C-2
Statements of Income............................................... C-3
Statements of Cash Flows........................................... C-4
Notes to Combined Financial Statements............................. C-5
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 AND REPORT
OF INDEPENDENT ACCOUNTANTS
Report of Independent Accountants.................................. C-6
Balance Sheets..................................................... C-7
Statements of Income............................................... C-8
Statements of Stockholders' Equity................................. C-9
Statements of Cash Flows........................................... C-10
Notes to Financial Statements...................................... C-11
</TABLE>
C-1
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 31, 1996
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and marketable securities............ $ 267,684 $ 138,821
Accounts receivable....................... 953,652 808,715
Federal and foreign income taxes, includ-
ing deferred............................. 227,554 246,120
Contracts in process, less progress pay-
ments.................................... 3,148,259 2,592,006
Inventories............................... 1,652,815 1,590,967
Prepaid expenses.......................... 304,005 227,266
----------- -----------
Total current assets.................. 6,553,969 5,603,895
Property, plant and equipment, net........ 2,046,958 1,802,012
Other assets.............................. 6,655,225 3,720,169
----------- -----------
$15,256,152 $11,126,076
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable and current portion of long-
term debt................................ $ 2,174,785 $ 2,226,935
Accounts payable.......................... 1,265,300 1,125,881
Advance payments, less contracts in proc-
ess...................................... 389,327 341,326
Accrued expenses.......................... 1,515,709 997,691
----------- -----------
Total current liabilities............. 5,345,121 4,691,833
Accrued retiree benefits.................. 423,793 249,992
Federal and foreign income taxes, includ-
ing deferred............................. 85,765 85,765
Long-term debt............................ 4,386,377 1,500,476
Stockholders' equity...................... 5,015,096 4,598,010
----------- -----------
$15,256,152 $11,126,076
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
C-2
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996 SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET SALES............... $3,445,310 $3,032,360 $9,669,204 $8,946,745
---------- ---------- ---------- ----------
Cost of sales......... 2,635,702 2,428,087 7,426,576 7,004,735
Administrative and
selling expenses..... 269,501 254,358 811,871 781,655
Research and
development expenses. 120,510 76,862 290,057 254,326
Special charge........ -- 34,000 -- 34,000
---------- ---------- ---------- ----------
Total operating
expenses........... 3,025,713 2,793,307 8,528,504 8,074,716
---------- ---------- ---------- ----------
OPERATING INCOME........ 419,597 239,053 1,140,700 872,029
---------- ---------- ---------- ----------
Interest expense...... 119,810 70,827 262,593 185,684
Interest and dividend
income............... (9,291) (60,314) (24,341) (92,884)
Other (income)
expense, net......... (13,189) 2,623 (12,050) (42,613)
---------- ---------- ---------- ----------
Non-operating
expense, net....... 97,330 13,136 226,202 50,187
---------- ---------- ---------- ----------
INCOME BEFORE TAXES..... 322,267 225,917 914,498 821,842
Federal and foreign
income taxes........... 111,047 38,027 310,366 238,069
---------- ---------- ---------- ----------
NET INCOME.............. $ 211,220 $ 187,890 $ 604,132 $ 583,773
========== ========== ========== ==========
Earnings per common
shares................. $ 0.89 $ 0.80 $ 2.56 $ 2.45
Average number of common
shares outstanding
during period.......... 236,411 235,932 236,327 237,833
Dividends declared per
common share........... $ 0.20 $ 0.20 $ 0.60 $ 0.60
</TABLE>
The accompanying notes are an integral part of the financial statements.
C-3
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
SEPT. SEPT.
28, 1997 29, 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 604,132 $ 583,773
Adjustments to reconcile net income to net cash
provided by operating activities..................
Depreciation and amortization.................... 325,326 271,321
Special charge................................... -- 34,000
Sale of receivables.............................. 1,080,500 524,500
Gain on sale of operating unit................... (13,000) --
Other adjustments, net........................... (1,702,995) (1,934,741)
----------- -----------
Net cash provided by (used in) operating
activities........................................ 293,963 (521,147)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment......... (305,381) (287,597)
Payment for purchase of acquired companies, net of
cash received..................................... (3,018,277) (584,390)
Proceeds from sale of operating unit, net.......... 522,200 66,551
Additions to intangible assets..................... (8,684) (36,207)
All other, net..................................... (86,059) (5,481)
----------- -----------
Net cash used in investing activities.............. (2,896,201) (847,124)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in short-term debt.......................... (52,150) 1,721,396
Change in long-term debt........................... 2,885,901 (3,122)
Dividends.......................................... (141,808) (142,317)
Purchase of treasury shares........................ (65,256) (305,842)
Proceeds under common stock plans.................. 48,722 45,047
All other, net..................................... 60,069 4,992
----------- -----------
Net cash provided by financing activities.......... 2,735,478 1,320,154
----------- -----------
Effect of foreign exchange rates on cash............. (3,986) (663)
----------- -----------
Net increase (decrease) in cash and cash equivalents. 129,254 (48,780)
Cash and cash equivalents at beginning of year....... 137,379 208,614
----------- -----------
Cash and cash equivalents at end of third quarter.... $ 266,633 $ 159,834
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
C-4
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
(1) Details of certain balance sheet accounts are as follows:
<TABLE>
<CAPTION>
SEPT. 28, 1997 DEC. 31, 1996
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
CASH AND MARKETABLE SECURITIES
Cash and cash equivalents........................ $ 266,633 $ 137,379
Marketable securities............................ 1,051 1,442
----------- -----------
Total cash and marketable securities........... $ 267,684 $ 138,821
=========== ===========
INVENTORIES
Finished goods................................... $ 371,977 $ 616,660
Work in process.................................. 934,847 650,132
Material and purchased parts..................... 503,968 482,152
Excess of current cost over LIFO values.......... (157,977) (157,977)
----------- -----------
Total inventories.............................. $ 1,652,815 $ 1,590,967
=========== ===========
PROPERTY, PLANT AND EQUIPMENT
At cost.......................................... $ 4,928,196 $ 4,490,359
Accumulated depreciation and amortization........ (2,881,238) (2,688,347)
----------- -----------
Net property, plant and equipment.............. $ 2,046,958 $ 1,802,012
=========== ===========
STOCKHOLDERS' EQUITY
Preferred stock, no outstanding shares........... $ -- $ --
Common stock, outstanding shares................. 236,331 236,250
Additional paid-in capital....................... 353,174 307,451
Equity adjustments............................... (40,670) (11,966)
Retained earnings................................ 4,466,261 4,066,275
----------- -----------
Total stockholders' equity..................... $ 5,015,096 $ 4,598,010
=========== ===========
</TABLE>
(2) In connection with the sale of receivables as noted in the Statement of
Cash Flows, the following special purpose entities were established in
accordance with Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinquishments of Liabilities: Raytheon Aircraft Receivables Corporation,
Raytheon Commercial Appliances Finance Corporation, Raytheon
Appliances/Amana Receivables Corporation, Raytheon Commercial Appliances
Receivables Corporation and Raytheon Engineers & Constructors Receivables
Corporation.
(3) The company will adopt Statement of Financial Accounting Standards No. 128,
Earnings per Share, in the fourth quarter of 1997. The adoption is not
expected to have a material effect on the company's financial position,
results of operations, or earnings per share.
(4) The company will adopt Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, in 1998, by making the appropriate
disclosures.
(5) The company will adopt Statement of Financial Standards No. 131, Disclosure
about Segments of an Enterprise and Related Information, in 1998, by making
the appropriate disclosures.
(6) Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
(7) The information furnished has been prepared from the accounts without
audit. In the opinion of management, the information reflects all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the financial statements for the interim periods.
C-5
APPENDIX C
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Raytheon Company
Lexington, Mass.
We have audited the accompanying balance sheets of Raytheon Company and
Subsidiaries Consolidated as of December 31, 1996 and 1995, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. 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 financial position of Raytheon Company and
Subsidiaries Consolidated as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Boston, Mass.
January 20,1997, except as to the information presented in note R
for which the date is February 23, 1997.
/s/ Coopers & Lybrand L.L.P.
C-6
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and marketable securities (notes A
and B).................................. $ 138,821 $ 210,284
Accounts receivable, less allowance for
doubtful accounts: 1996--$20,260,000;
1995--$22,043,000....................... 808,715 926,800
Federal and foreign income taxes,
including deferred
(notes A and I)......................... 246,120 196,711
Contracts in process (notes A and C)..... 2,592,006 2,212,689
Inventories (notes A and D).............. 1,590,967 1,502,983
Prepaid expenses (note L)................ 227,266 225,751
----------- -----------
Total current assets................... 5,603,895 5,275,218
Property, plant, and equipment, net (notes
A and E).................................. 1,802,012 1,584,035
Other assets (notes A and F)............... 3,720,169 2,981,691
----------- -----------
$11,126,076 $ 9,840,944
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of
long-term debt
(notes G and H)......................... $ 2,226,935 $ 1,216,039
Advance payments, less contracts in
process:
1996--$803,056,000; 1995--$586,792,000.. 341,326 343,470
Accounts payable......................... 1,125,881 1,041,848
Accrued salaries and wages............... 272,877 254,419
Other accrued expenses (note A).......... 724,814 834,647
----------- -----------
Total current liabilities.............. 4,691,833 3,690,423
Accrued retiree benefits (note L).......... 249,992 270,025
Income taxes, including deferred (notes A
and I).................................... 85,765 100,797
Long-term debt (note H).................... 1,500,476 1,487,735
Commitments and contingencies (note J).....
Stockholders' equity (note Q)
Preferred stock, no par value
Authorized: 3,000,000 shares...........
Outstanding: 1996 and 1995--none.......
Common stock, par value $1.00 per shares
Authorized: 400,000,000 shares.........
Outstanding: 1996--236,250,000 shares;
1995--240,690,000 shares (after
deducting shares in treasury: 1996--
118,685,000; 1995--114,245,000) (note
K).................................... 236,250 240,690
Additional paid-in capital............... 307,451 258,708
Equity adjustments (note A).............. (11,966) 5,071
Retained earnings........................ 4,066,275 3,787,495
----------- -----------
Total stockholders' equity........... 4,598,010 4,291,964
----------- -----------
$11,126,076 $ 9,840,944
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
C-7
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales (note A)................... $ 12,330,538 $ 11,804,174 $ 10,097,662
Cost of sales........................ 9,753,970 9,159,447 7,769,882
Administrative and selling expenses.. 1,021,127 1,085,765 912,313
Research and development expenses
(note A)............................ 323,271 315,581 269,613
Restructuring and special charges
(note A)............................ 34,000 125,000 249,751
------------ ------------ ------------
Total operating expenses......... 11,132,368 10,685,793 9,201,559
------------ ------------ ------------
Operating income..................... 1,198,170 1,118,381 896,103
------------ ------------ ------------
Interest expense..................... 256,253 196,627 48,504
Interest and dividend income......... (101,996) (26,288) (19,611)
Other income, net (note A)........... (39,549) (243,641) (32,729)
------------ ------------ ------------
Non-operating expense (income), net.. 114,708 (73,302) (3,836)
------------ ------------ ------------
Income before taxes.................. 1,083,462 1,191,683 899,939
Federal and foreign income taxes
(notes A and I)..................... 322,311 399,195 303,063
------------ ------------ ------------
Net income (note A).................. $ 761,151 $ 792,488 $ 596,876
------------ ------------ ------------
Earnings per common share (notes A
and Q)
Outstanding shares................. $ 3.21 $ 3.25 $ 2.26
Fully diluted...................... $ 3.16 $ 3.20 $ 2.24
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
C-8
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-----------------------------------------------------
COMMON STOCK
------------------
ADDITIONAL
PAID-IN EQUITY RETAINED
SHARES PAR VALUE CAPITAL ADJUSTMENTS EARNINGS
------- --------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993 (note Q)........... 270,428 $270,428 $193,275 $ (2,100) $3,836,257
Net income............... 596,876
Dividends declared--$.738
per share............... (192,681)
Proceeds under common
stock plans............. 1,864 1,864 41,476
Treasury shares
purchased............... (25,338) (25,338) (20,638) (758,933)
Treasury shares received
on exercise of stock
options................. (310) (310) (4,645)
Foreign exchange
translation adjustments. (3,613)
FAS No. 87 pension
adjustment.............. (3,750)
------- -------- -------- -------- ----------
Balance at December 31,
1994.................. 246,644 246,644 209,468 (9,463) 3,481,519
Net income............... 792,488
Dividends declared--$.75
per share............... (182,487)
Proceeds under common
stock plans............. 2,388 2,388 64,502
Treasury shares
purchased............... (8,144) (8,144) (7,844) (304,025)
Treasury shares received
on exercise of stock
options................. (198) (198) (7,418)
Foreign exchange
translation adjustments. 10,374
FAS No. 115 unrealized
valuation adjustment.... 2,973
FAS No. 87 pension
adjustment.............. 1,187
------- -------- -------- -------- ----------
Balance at December 31,
1995.................. 240,690 240,690 258,708 5,071 3,787,495
Net income............... 761,151
Dividends declared--$.80
per share............... (189,574)
Proceeds under common
stock plans............. 1,864 1,864 63,837
Treasury shares
purchased............... (6,104) (6,104) (6,942) (292,797)
Treasury shares received
on exercise of stock
options................. (200) (200) (8,152)
Foreign exchange
translation adjustments. (3,071)
FAS No. 115 unrealized
valuation adjustment.... (15,045)
FAS No. 87 pension
adjustment.............. 1,079
------- -------- -------- -------- ----------
Balance at December 31,
1996.................. 236,250 $236,250 $307,451 ($11,966) $4,066,275
======= ======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
C-9
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
-----------------------------------
1996 1995 1994
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income.............................. $ 761,151 $ 792,488 $ 596,876
Adjustments to reconcile net income to
net cash provided by operating
activities, net of the effect of
acquired companies.....................
Depreciation and amortization......... 368,923 371,399 304,166
Net gain on sale of operating divi-
sion................................. -- (210,000) --
Gain on sale of an investment......... -- (27,846) (31,056)
Sale of receivables................... 1,208,600 1,081,100 797,000
Increase in accounts receivable....... (993,944) (964,694) (332,218)
(Increase) decrease in contracts in
process.............................. (580,830) 173,655 72,875
(Increase) decrease in inventories.... (38,154) 44,748 23,826
Increase in long term receivables..... (57,014) (11,577) (305,744)
(Decrease) increase in advance pay-
ments................................ (44,861) (216,762) 90,351
Increase in accounts payable.......... 48,510 37,003 71,820
Increase (decrease) in federal and
foreign income taxes................. 47,341 83,322 (138,889)
(Decrease) increase in other current
liabilities.......................... (373,677) 80,876 32,135
Other adjustments, net................ (54,750) (59,122) (23,283)
---------- ----------- ----------
Net cash provided by operating ac-
tivities........................... 291,295 1,174,590 1,157,859
---------- ----------- ----------
Cash flows from investing activities
Additions to property, plant, and
equipment.............................. (406,005) (328,617) (267,376)
Disposals of property, plant, and
equipment.............................. 15,765 61,861 69,844
Increase in other assets................ (7,544) (113,599) (2,891)
Payment for purchase of acquired
companies, net of cash received........ (584,390) (2,341,522) (151,209)
Proceeds from sale of operating units... 66,551 449,200 --
Proceeds from sale of an investment..... -- 10,160 85,113
Additions to intangible assets.......... (23,918) (60,551) (69,568)
All other, net.......................... 2,059 355 (6,875)
---------- ----------- ----------
Net cash used in investing activi-
ties............................... (937,482) (2,322,713) (342,962)
---------- ----------- ----------
Cash flows from financing activities
Dividends............................... (189,574) (182,487) (192,681)
Increase in short-term debt............. 1,006,928 139,692 159,912
Increase (decrease) in long-term debt... 4,149 1,463,213 (929)
Purchase of treasury shares............. (305,842) (320,013) (804,910)
Proceeds under common stock plans....... 57,348 59,274 38,386
All other, net.......................... 2,180 (4,612) (4,122)
---------- ----------- ----------
Net cash provided (used in) financ-
ing activities..................... 575,189 1,155,067 (804,344)
---------- ----------- ----------
Effect of foreign exchange rates on cash.. (237) 732 264
---------- ----------- ----------
Net (decrease) increase in cash and cash
equivalents.............................. (71,235) 7,676 10,817
Cash and cash equivalents at beginning of
year..................................... 208,614 200,938 190,121
---------- ----------- ----------
Cash and cash equivalents at end of year.. $ 137,379 $ 208,614 $ 200,938
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
C-10
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
NOTE A: ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company and all domestic and foreign subsidiary companies. The books of the
parent and all subsidiaries are maintained on a calendar year basis. All
material intercompany transactions have been eliminated. Certain amounts in the
1995 and 1994 financial statements and notes have been reclassified to conform
with the 1996 presentation. Certain accounts were reclassified in the
statements of income to reconcile operating income with segment income.
Cash Equivalents and Marketable Securities
Cash and cash equivalents include only cash and short-term, highly liquid
investments (those with original maturities when purchased of 90 days or less).
Cash equivalents and marketable securities are valued in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities (SFAS 115) (see note P).
Dividends are recorded as income when declared.
Contracts in Process
Sales under long-term contracts are recorded under the percentage of
completion method, wherein costs and estimated gross margin are recorded as
sales as the work is performed. Costs include direct engineering and
manufacturing costs, applicable overheads, and special tooling and test
equipment. Estimated gross margin provides for the recovery of allocable
research, development (including bid proposal), marketing and administration
costs, and for accrued income. Accrued income is based on the percentage of
estimated total income that incurred costs to date bear to estimated total
costs after giving effect to the most recent estimates of cost and funding at
completion. When appropriate, increased funding is assumed based on expected
adjustments of contract prices for increased scope and other changes ordered by
the customer. Some contracts contain incentive provisions based upon
performance in relation to established targets to which applicable recognition
has been given in the contract estimates. Since many contracts extend over a
long period of time, revisions in cost and funding estimates during the
progress of work have the effect of adjusting in the current period earnings
applicable to performance in prior periods. When the current contract estimate
indicates a loss, provision is made for the total anticipated loss. In
accordance with these practices, contracts in process are stated at cost plus
estimated profit but not in excess of realizable value.
Inventories
Aircraft inventories at Raytheon Aircraft, except finished goods, are stated
at the lower of cost (principally last-in, first-out) or market. Work in
process is stated at total cost incurred reduced by estimated costs of units
delivered.
All other inventories are stated at cost (principally first-in, first-out or
average basis) but not in excess of net realizable value.
Research and Development Expenses
Research and development expenditures for company-sponsored projects are
expensed as incurred.
<TABLE>
<S> <C> <C> <C>
=== === ===
</TABLE>
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Betterments and major
renewals are capitalized and included in property, plant, and equipment
accounts while expenditures for maintenance and repairs and minor renewals are
charged to expense. When assets are retired or otherwise disposed of, the
assets and related allowances for depreciation and amortization are eliminated
from the accounts and any resulting gain or loss is reflected in income.
C-11
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Provisions for depreciation are computed generally on the sum-of-the-years-
digits method, except for certain operations, which use the straight-line or
declining-balance method. Depreciation provisions are based on estimated useful
lives: buildings--20 to 45 years; machinery and equipment, including production
tooling--3 to 10 years; equipment leased to others--5 to 10 years. Leasehold
improvements are amortized over the lesser of the remaining life of the lease
or the estimated useful life of the improvement.
Excess of Cost Over Net Assets of Acquired Companies
The excess of cost over net assets acquired is amortized on the straight-line
method over its estimated useful life but not in excess of 40 years. The
company evaluates the possible impairment of goodwill at each reporting period
based on the undiscounted projected cash flows of the related business unit.
Investments
Investments, which are included in Other Assets, include equity ownership of
20 percent to 50 percent in affiliated companies and of less than 20 percent in
other companies. Investments in affiliated companies are accounted for under
the equity method, wherein the company's share of their earnings and income
taxes applicable to the assumed distribution of such earnings are included in
net income. Other investments are stated at the lower of cost or fair market
value and certain available for sale investments are accounted in accordance
with the provisions of SFAS 115.
Commissions
The company pays commissions to sales representatives, distributors, and
agents under various arrangements in return for services rendered in connection
with obtaining orders. Such commissions are charged to income as related sales
are recorded and, for income statement purposes, are applied as a reduction of
sales. In some cases, payment of such commissions is made upon the company's
receipt of advance payments under the related contracts or in accordance with
schedules contained in the contracts governing commissions, and such amounts
are applied as a reduction of advance payments received. Sales have been
reduced by $30,337,000, $36,958,000 and $32,552,000 in 1996, 1995, and 1994,
respectively, for commission expense.
Federal and Foreign Income Taxes
The company and its domestic subsidiaries provide for federal income taxes on
pretax accounting income at rates in effect under existing tax law. The
recovery of foreign tax credits related to foreign contracts, Foreign Sale
Corporation (FSC) tax benefits, and other tax credits are recorded on a flow-
through basis. Foreign subsidiaries have recorded provisions for income taxes
at applicable foreign tax rates in a similar manner.
Lease Accounting
Revenue from certain qualifying noncancelable aircraft lease contracts are
accounted for as sales-type leases wherein the present values of all payments,
net of executory costs, are recorded currently as revenues, and the related
costs of the aircraft are charged to cost of sales. Associated interest, using
the interest method, is recorded over the term of the lease agreements. All
other leases for aircraft are accounted for under the operating method wherein
revenues are recorded as earned over the rental aircraft lives. Service
revenues are recognized ratably over contractual periods or as services are
performed.
Pension Cost
The company and its subsidiaries have several pension and retirement plans
covering the majority of employees, including certain employees in foreign
countries.
C-12
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Annual charges to income are made for costs of the plans, including current
service costs, interest on projected benefit obligations, and net amortization
and deferral (unrecognized net obligation (asset) at transition, unrecognized
prior service costs, and actuarial net gains or losses), increased or reduced
by the return on assets. Unfunded accumulated benefit obligations are accounted
for as a long-term liability on the balance sheet. It is the company's policy
to fund annually those pension costs which are calculated in accordance with
Internal Revenue Service regulations and standards issued by the Cost
Accounting Standards Board.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries are translated at current
exchange rates, and the effects of these translation adjustments are reported
as a component of equity adjustments in stockholders' equity. The balances at
December 31, 1996, 1995, and 1994 were $3,840,000, $6,911,000, and
($3,463,000), respectively. Foreign exchange transaction gains and losses in
1996, 1995, and 1994 were not material.
Employee Stock Plans
Proceeds from the exercise of stock options under the employee stock plans
are credited to common stock at par value, and the excess of the option price
over par value is credited to additional paid-in capital. There are no charges
or credits to income with respect to the options. The market value at the date
of award of restricted stock awards is credited to common stock at par value,
and the excess is credited to additional paid-in capital. The market value is
also charged to income as compensation expense over the vesting period. Income
tax benefits arising from restricted stock transactions, employees' premature
disposition of option shares, and exercise of nonqualified stock options are
credited to additional paid-in capital.
The company adopted statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation, in 1996. The standard defines a fair
value based method of accounting for employee stock options. The pro forma net
income and earnings per share effect of the fair value based accounting is
disclosed in the notes to the financial statements.
Earnings Per Common Share
Earnings per common share are based upon the weighted average number of
common shares outstanding during each year.
Fully diluted earnings per common share include the additional shares
resulting from the assumed exercise of all outstanding dilutive stock options
reduced by the number of shares repurchasable from the assumed proceeds of such
options.
Restructuring and Special Items
The company announced in the third quarter of 1996 that it would exit the
manual-clean range market and dispose of the assets, including the facility of
the Delaware, Ohio, operation. A $34.0 million pre-tax charge ($22.1 million
after tax) was recorded for this closing. For 1996, earnings, earnings per
share and fully diluted earnings per share were $783.3 million, $3.30 and $3.25
respectively, excluding the special charge. The company recorded in the fourth
quarter of 1995 a net pre-tax gain of $210 million from the sale of D.C. Heath,
its educational publishing unit. The company adopted statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets
to be Disposed of, in the fourth quarter of 1995 which resulted in a $125
million pre-tax special charge ($81.2 million after tax) related to specific
assets, liabilities or commitments, and nonrecurring charges of $77 million,
related principally to inventory and contract valuations. The net gain resulted
in a $5.2 million after-tax increase to net income, or $.02 per share. For
1995, earnings, earnings per share and fully diluted earnings per share were
$787.3 million, $3.23 and $3.18 respectively, excluding the one-time gain.
C-13
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The company recorded in the first quarter of 1994 a restructuring provision
of $249.8 million before tax. The restructuring was driven by the significant
reductions in the defense budget and increasing commercial competition.
Approximately 65 percent of the restructuring costs were attributable to
Raytheon's defense business and the remainder to its commercial business.
Through year-end 1996, $249.3 million of restructuring costs have been
incurred, of which $103.4 million was employee-related costs and $145.9 million
was related to asset disposals and idle facilities. For 1994, earnings,
earnings per share and fully diluted earnings per share were $759.2 million,
$2.87 and $2.85 respectively, excluding the restructuring provision.
Interest Rate and Foreign Currency Interest Rate Swap Agreements, Rate Locks
and Foreign Exchange Contracts
The company enters into interest rate and foreign currency interest rate swap
agreements with commercial banks to reduce the impact of changes in interest
rates and foreign exchange rates on long-term debt and on financing
arrangements with customers and foreign subsidiaries. The company meets its
working capital requirements mainly with variable rate short-term financing.
Interest rate swaps are used to provide purchasers of the company's products
with fixed financing terms over extended time periods. Cross-currency interest
rates swaps have allowed the company's foreign subsidiaries to meet borrowing
needs at lower interest rates compared to local borrowing. The company also
enters into foreign exchange contracts to minimize fluctuations in the value of
payments due to international vendors and the value of foreign currency
denominated receipts. The hedges used by the company are transaction driven and
are directly related to a particular asset, liability or transaction for which
a commitment is in place. Swaps and foreign exchange contracts are held to
maturity and no exchange traded or over-the-counter instruments have been
purchased. The impact on the financial position and results of operations from
likely changes in foreign exchange rates and interest rates is not material due
to the minimizing of risk through the hedging of transactions related to
specific assets, liabilities, or commitments.
Risks and Uncertainties
Companies such as Raytheon, which are engaged in supplying defense-related
equipment to the government, are subject to certain business risks peculiar to
that industry. Sales to the government may be affected by changes in
procurement policies, budget considerations, changing concepts of national
defense, political developments abroad and other factors. As a result of the
1985 Balanced Budget and Emergency Deficit Reduction Control Act, the federal
deficit and changing world order conditions, Department of Defense (DoD)
budgets have been subject to increasing pressure resulting in an uncertainty as
to the future effects of DoD budget cuts. Raytheon has, nonetheless, maintained
a solid foundation of tactical defense systems which meet the needs of the
United States and its allies, as well as servicing a broad government program
base and wide range of commercial electronic businesses. These factors lead
management to believe that there is high probability of continuation of
Raytheon's current major tactical defense programs.
The company provides long-term financing principally to its aircraft
customers. The company sells general and regional aviation long-term
receivables to a bank syndicate and a fractional ownership in a defined pool of
trade receivables to financial institutions. The banks have recourse against
the company, at varying percentages, depending on the character of the
receivables sold. The underlying aircraft serve as collateral for the
receivables, and the future resale value of the aircraft is an important
consideration in the transaction. Based on the company's experience to date
with resale activities and pricing, management believes that any liability
arising from these transactions will not have a material effect on the
company's financial position, liquidity, or results of operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C-14
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE B: CASH AND MARKETABLE SECURITIES
<TABLE>
<CAPTION>
CASH AND MARKETABLE
SECURITIES CONSISTED OF THE
FOLLOWING AT DECEMBER 31:
---------------------------
1996 1995
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................... $ 137,379 $ 208,614
Marketable securities.............................. 1,442 1,670
------------- -------------
$ 138,821 $ 210,284
============= =============
</TABLE>
Under the company's cash management program, checks and amounts in transit
are not considered reductions of cash or accounts payable until presented to
the appropriate banks for payment. At December 31, 1996 and 1995, checks and
amounts in transit amounted to $177,600,000 and $182,900,000, respectively.
NOTE C: CONTRACTS IN PROCESS
<TABLE>
<CAPTION>
CONTRACTS IN PROCESS CONSISTED OF THE
FOLLOWING AT DECEMBER 31, 1996
-------------------------------------
COST TYPE FIXED PRICE TYPE TOTAL
--------- ---------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. government end-use contracts
Billed................................. $205,643 $ 139,655 $ 345,298
Unbilled............................... 348,971 1,813,148 2,162,119
Less progress payments................. -- 1,068,638 1,068,638
-------- ---------- ----------
Total................................ 554,614 884,165 1,438,779
-------- ---------- ----------
Other customers
Billed................................. 63,474 164,110 227,584
Unbilled............................... 123,457 1,265,478 1,388,935
Less progress payments................. -- 463,292 463,292
-------- ---------- ----------
Total................................ 186,931 966,296 1,153,227
-------- ---------- ----------
$741,545 $1,850,461 $2,592,006
======== ========== ==========
<CAPTION>
CONTRACTS IN PROCESS CONSISTED OF
THE FOLLOWING AT DECEMBER 31, 1995
-------------------------------------
COST TYPE FIXED PRICE TYPE TOTAL
--------- ---------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. government end-use contracts
Billed................................. $251,462 $ 182,320 $ 433,782
Unbilled............................... 303,148 2,239,814 2,542,962
Less progress payments................. -- 1,368,878 1,368,878
-------- ---------- ----------
Total................................ 554,610 1,053,256 1,607,866
-------- ---------- ----------
Other customers
Billed................................. 29,915 95,470 125,385
Unbilled............................... 154,665 692,069 846,734
Less progress payments................. -- 367,296 367,296
-------- ---------- ----------
Total................................ 184,580 420,243 604,823
-------- ---------- ----------
$739,190 $1,473,499 $2,212,689
======== ========== ==========
</TABLE>
C-15
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The U.S. government has a security title to unbilled amounts associated with
contracts that provide for progress payments.
Unbilled amounts are recorded on the percentage of completion method and are
recoverable from the customer upon shipment of the product, presentation of
billings, or completion of the contract. It is anticipated that substantially
all of these unbilled amounts, net of progress payments, will be collected
during 1997.
Billed and unbilled contracts in process include retentions arising from
contractual provisions. At December 31, 1996, retentions amounted to
$65,285,000 and are anticipated to be collected as follows: 1997--$41,144,000,
1998--$6,352,000, and the balance thereafter.
NOTE D: INVENTORIES
<TABLE>
<CAPTION>
INVENTORIES CONSISTED OF THE
FOLLOWING AT DECEMBER 31:
------------------------------
1996 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.................................. $ 616,660 $ 596,080
Work in process................................. 702,180 728,792
Materials and purchased parts................... 482,152 456,402
Excess of current cost over LIFO values......... (157,977) (176,725)
-------------- --------------
1,643,015 1,604,549
Less progress payments.......................... 52,048 101,566
-------------- --------------
$ 1,590,967 $ 1,502,983
============== ==============
</TABLE>
The inventory values from which the excess of current cost over LIFO values
are deductible were $423,564,000 and $488,765,000 at December 31, 1996 and
1995, respectively.
NOTE E: PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
PROPERTY, PLANT, AND
EQUIPMENT CONSISTED
OF THE
FOLLOWING AT DECEMBER 31:
-------------------------
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................. $ 66,008 $ 53,090
Buildings and leasehold improvements.................. 1,273,678 1,184,072
Machinery and equipment............................... 3,077,606 2,852,721
Equipment leased to others............................ 73,067 25,866
------------ ------------
4,490,359 4,115,749
Less accumulated depreciation and amortization........ 2,688,347 2,531,714
------------ ------------
$ 1,802,012 $ 1,584,035
============ ============
</TABLE>
Accumulated amortization of equipment leased to others was $5,508,000 and
$3,981,000 at December 31, 1996 and 1995, respectively.
C-16
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments from noncancelable aircraft operating leases,
which extend to 2006, amounted to $35,882,000.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996, THESE PAYMENTS
WERE DUE AS FOLLOWS:
--------------------
(IN THOUSANDS)
<S> <C> <C>
1997.................................................... $ 5,717
1998.................................................... 5,907
1999.................................................... 5,537
2000.................................................... 5,270
2001.................................................... 5,270
Thereafter.............................................. 8,181
</TABLE>
NOTE F: OTHER ASSETS
<TABLE>
<CAPTION>
OTHER ASSETS CONSISTED OF THE
FOLLOWING AT DECEMBER 31:
-----------------------------
1996 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term receivables
Due from customers in installments to 2009.... $ 175,920 $ 102,261
Sales-type leases, due in installments to
2012......................................... 21,559 48,277
Other, principally due from 1997 through 2012. 31,519 21,707
Investments..................................... 251,171 183,034
Deferred charges and other noncurrent assets.... 161,254 80,129
Excess of cost over net assets of acquired
companies (net of accumulated amortization of
$183.6 million and $103.5 million at December
31, 1996 and 1995, respectively)............... 3,066,972 2,532,358
Intangible pension asset........................ 11,774 13,925
-------------- --------------
$ 3,720,169 $ 2,981,691
============== ==============
</TABLE>
Long-term receivables and sales-type leases due from customers, of $197.5
million at December 31, 1996, and $150.5 million at December 31, 1995, included
commuter airline receivables of $116.1 million and $47.1 million, respectively.
Since it is the company's policy to have the aircraft serve as collateral for
the commuter airline receivables, management does not expect to incur any
material losses against the net book value of the long-term receivables. The
company sold general and commuter aviation long-term receivables to a bank
syndicate and sold a fractional ownership in a defined pool of engineering &
construction and commercial appliance trade receivables to financial
institutions. The interest rate on the general aviation receivables is
LIBOR+.55% and on the commuter receivables LIBOR+.4% and +.35% and on the trade
receivables commercial paper rate +.225% to +.29%. The interest rates are
adjusted based on the company's debt rating.
The banks have a first priority claim on all proceeds, including the
underlying equipment and any insurance proceeds, and have recourse against the
company, at varying percentages, depending upon the character of the
receivables sold. The balance of receivables sold to banks or financial
institutions and outstanding at December 31, 1996 and December 31, 1995, was
$2,493.7 million and $1,912.4 million, respectively, of which 1996 net proceeds
of $581.3 million included $288.3 million for commuter and general aviation
aircraft.
The company will adopt Statement of Financial Accounting Standard No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities, in 1997. The adoption is not expected to have a material effect
on the company's financial position or results of operation.
C-17
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE G: NOTES PAYABLE
<TABLE>
<CAPTION>
NOTES PAYABLE CONSISTED
OF THE FOLLOWING
AT DECEMBER 31:
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable......................................... $ 63,050 $ 56,086
Commercial paper...................................... 2,155,821 1,148,391
Weighted average interest rate on:
Average notes payable borrowings.................... 6.51% 6.30%
Average commercial paper............................ 5.40% 5.94%
Notes payable borrowings at December 31............. 5.11% 5.70%
Commercial paper at December 31..................... 5.53% 5.83%
Aggregate borrowings outstanding
Maximum month-end balance........................... $ 3,135,929 $ 4,051,846
Average during the year............................. $ 2,890,261 $ 2,362,599
</TABLE>
Credit lines or commitments with banks were maintained by subsidiary
companies amounting to $188.3 million in 1996 and $196.7 million in 1995.
Compensating balance arrangements are not material. In addition, lines of
credit with certain commercial banks exist as a standby facility to support the
issuance of commercial paper by the company. These lines of credit were $3.5
billion at December 31, 1996 and $3.2 billion at December 31, 1995. Through
December 31, 1996, there have been no borrowings under these lines of credit.
Total interest payments were $257 million, $160 million, and $48 million for
1996, 1995, and 1994, respectively.
NOTE H: LONG-TERM DEBT
<TABLE>
<CAPTION>
LONG-TERM DEBT
CONSISTED OF THE FOLLOWING
AT DECEMBER 31:
---------------------------
1996 1995
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
30 year 7.375% debentures due 2025 and redeemable
after July 15, 2005............................... $ 361,834 $ 361,373
10 year 6.5% long-term notes due 2005, not
redeemable prior to maturity...................... 730,499 728,216
Commercial paper backed by 5 year fixed for
variable interest rate
swap at 6.40%..................................... 375,000 375,000
Notes (including $19,392,000 and $17,639,000 at
December 31, 1996 and 1995 respectively, of
mortgage notes and industrial revenue bonds),
interest in the range of 2.04% to 10.0% in
installments, maturing at various dates from 1997
to 2006........................................... 41,207 34,708
Less installments due within one year.............. 8,064 11,562
------------- -------------
$ 1,500,476 $ 1,487,735
============= =============
</TABLE>
The aggregate amounts of installments due for the next five years are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
1997......................................................... $ 8,064
1998......................................................... 5,406
1999......................................................... 9,718
2000......................................................... 378,017
2001......................................................... 2,937
</TABLE>
C-18
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest expense on long-term debt charged to income was $103,187,000,
$52,122,000, and $1,158,000 for 1996 through 1994, respectively.
Commercial paper in the amount of $375,000,000 has been classified as long-
term due to company borrowings of that amount which are supported by a 5 year
Syndicated Bank Credit Agreement combined with a 5 year fixed for variable
interest rate swap.
In 1995, the company issued $375,000,000 of 30 year, 7.375 percent debentures
due in 2025, redeemable after ten years, and $750,000,000 of ten year 6.50
percent notes due in 2005. The proceeds from these issues were used for
acquisition financing.
The principal amounts of debt were reduced by debt issue discounts and costs
at December 31, 1996, as follows:
<TABLE>
<CAPTION>
30 YEAR DEBENTURES 10 YEAR NOTES
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Principal...................................... $375,000 $750,000
Unamortized issue discounts.................... (8,879) (7,877)
Unamortized interest rate hedging costs........ (4,287) (11,624)
-------- --------
Net debt....................................... $361,834 $730,499
</TABLE>
The company has bank agreement covenants which require (1) That the ratio of
total debt to total capitalization not exceed 55%, and (2) That the sum of
profit before tax plus net interest expense be at least three times net
interest expense over the prior four fiscal quarters. The company was in
compliance with these covenants during 1996 and 1995.
NOTE I: FEDERAL AND FOREIGN INCOME TAXES
Income reported for federal and foreign tax purposes differs from pretax
accounting income due to variations between requirements of Internal Revenue
codes and the company's accounting practices. The provisions for federal and
foreign income taxes consisted of the following for the years ended December
31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense
Federal......................................... $169,870 $263,489 $400,482
Foreign......................................... 33,784 (23,347) 25,429
Deferred income tax expense
Federal......................................... 150,983 123,858 (119,663)
Foreign......................................... (32,326) 35,195 (3,185)
-------- -------- --------
$322,311 $399,195 $303,063
======== ======== ========
</TABLE>
The provision for income taxes for 1996 through 1994 differs from the U.S.
statutory rate due to the following:
<TABLE>
<S> <C> <C> <C>
Tax at statutory rate...................................... 35.0% 35.0% 35.0%
Research and development tax credit........................ (4.6)(1) (0.4) --
FSC tax benefit............................................ (2.5) (2.0) (1.0)
Goodwill amortization...................................... 1.7 1.3 0.3
Recovery of foreign tax credits............................ -- (0.5) (1.1)
Other, net................................................. 0.1 0.1 0.5
---- ---- ----
29.7% 33.5% 33.7%
==== ==== ====
</TABLE>
- ------
(1) Accrued retroactive research and development tax credits applicable to
certain government contracts
C-19
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1996, 1995, and 1994 domestic profit before taxes amounted to
$1,061,335,000, $1,126,332,000, and $827,258,000, respectively, and foreign
profit before taxes amounted to $22,127,000, $65,351,000, and $72,681,000,
respectively.
Actual cash income tax payments by year were $274,700,000, $275,300,000, and
$425,800,000, respectively, for 1996, 1995, and 1994. In 1996 and 1995, net
deferred tax assets were increased by $108,235,000 and $175,813,000,
respectively, in connection with acquisitions.
Details of the balance sheet captions, "Federal and foreign income taxes,
including deferred," at December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current deferred tax assets (liabilities):
Inventory and other......................... $ 10,215 $ 78,377 $ 50,078
Long-term contracts......................... 198,861 115,992 97,054
Restructuring reserve....................... 154 3,261 55,055
Inventory capitalization.................... 16,611 27,689 29,546
Other....................................... (43,779) (17,803) (7,203)
--------- --------- ---------
Net current deferred tax assets............. 182,062 207,516 224,530
Current period tax prepaid (liability)........ 64,058 (10,805) (58,915)
--------- --------- ---------
Federal and foreign income taxes, including
deferred--current............................ $ 246,120 $ 196,711 $ 165,615
========= ========= =========
Noncurrent deferred tax assets (liabilities):
Depreciation................................ $(125,684) $(115,819) $ (97,095)
Revenue on leases........................... (58,096) (79,237) (27,596)
Postretirement benefits..................... 104,730 103,014 --
Other....................................... (6,715) (8,755) (9,880)
--------- --------- ---------
Noncurrent deferred tax liabilities........... (85,765) (100,797) (134,571)
--------- --------- ---------
Federal and foreign income taxes, including
deferred--noncurrent......................... $ (85,765) $(100,797) $(134,571)
========= ========= =========
</TABLE>
NOTE J: COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the company had commitments under long-term leases
requiring approximate annual rentals on a net lease basis as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C> <C>
1997.......................................................... $ 85,041
1998.......................................................... 69,677
1999.......................................................... 56,052
2000.......................................................... 46,655
2001.......................................................... 39,827
Thereafter.................................................... 182,162
</TABLE>
Rental expense for 1996, 1995, and 1994 amounted to $112,649,000,
$102,925,000, and $79,887,000, respectively.
Defense contractors are subject to many levels of audit and investigation.
Among agencies that oversee contract performance are the Defense Contract Audit
Agency, the Inspector General, the Defense Criminal Investigative Service, the
General Accounting Office, the Department of Justice, and Congressional
Committees. Over recent years, the Department of Justice has convened Grand
Juries from time to time to investigate possible irregularities by the company
in government contracting. Management believes that such investigations,
C-20
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
individually and in the aggregate, will not have any material adverse effect
upon the financial condition of the company.
The company self-insures for losses and expenses for aircraft product
liability up to a maximum of $50 million annually. Excess insurance is
purchased from third parties to cover excess aggregate liability exposure from
$50 million to $1 billion. This coverage also includes the excess of liability
over $10 million per occurrence. The aircraft product liability reserve at
December 31, 1996 was $27.5 million.
Recurring costs associated with the company's environmental compliance
program are not material and are expensed as incurred. Capital expenditures in
connection with environmental compliance are not material. The company is
involved in various stages of investigation and cleanup relative to remediation
of various sites. All appropriate costs incurred in connection therewith have
been expensed. Due to the complexity of environmental laws and regulations, the
varying costs and effectiveness of alternative cleanup methods and
technologies, the uncertainty of insurance coverage, and the unresolved extent
of the company's responsibility, it is difficult to determine the ultimate
outcome of these matters. However, in the opinion of management, any additional
liability will not have a material effect on the company's financial position,
liquidity, or results of operations after giving effect to provisions already
recorded.
The company will adopt the American Institute of Certified Public Accountants
Statement of Position 96-1, Environmental Remediation Liabilities, in 1997. The
adoption of the standard will not have a material effect on the company's
financial position or results of operations.
The company issues guarantees and has banks issue, on its behalf, letters of
credit to meet various bid, performance, warranty, retention and advance
payment obligations. Approximately $1,363 million, $979 million and $519
million of these contingent obligations, net of related outstanding advance
payments, were outstanding at December 31, 1996, 1995, and 1994, respectively.
These instruments expire on various dates through the year 2003.
Various claims and legal proceedings generally incidental to the normal
course of business are pending or threatened against the company. While the
ultimate liability from these proceedings is presently indeterminable, in the
opinion of management, any additional liability will not have a material effect
on the company's financial position, liquidity, or results of operations after
giving effect to provisions already recorded.
NOTE K: EMPLOYEE STOCK PLANS
The 1976 Stock Option Plan provides for the grant of both incentive and
nonqualified options at an exercise price which is 100% of the fair market
value on the date of grant. The 1991 Stock Option Plan provides for the grant
of incentive options at an exercise price which is 100% of the fair market
value, and non-qualified options at an exercise price which may be less than
the fair market value on the date of grant. The 1995 Stock Option Plan provides
for the grant of both incentive and nonqualified options at an exercise price
which is not less than 100% of the fair market value on the date of grant.
The plans also provide that all options may be exercised in their entirety 12
months after the date of grant. Incentive options terminate 10 years from the
date of grant, and those options granted after Dec. 31, 1986 become exercisable
to a maximum of $100,000 per year. Nonqualified options terminate 11 years from
the date of grant or 10 years and a day if issued in connection with the 1995
plan. The 1991 plan also provides for the award of restricted stock and
restricted units. Restricted awards are made at prices determined by the
Compensation Committee of the Board of Directors and are compensatory in
nature. Restricted stock and restricted unit awards vest over a specified
period of time of not less than one year nor more than 10 years. The plans'
expiration dates are March 22, 1998, March 26, 2001 and March 21, 2005.
C-21
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
All restricted stock awards entitle the participant to full dividend and
voting rights. Unvested shares are restricted as to disposition and subject to
forfeiture under certain circumstances. Upon issuance of restricted shares,
unearned compensation is charged to share-owners' equity for the cost of
restricted stock and recognized as compensation expense ratably over the
vesting periods, as applicable. Awards of 19,500; 256,000; and 380,000 shares
of restricted stock were made to employees at a weighted average value at the
grant date of $50.87, $38.07, and $32.29 in 1996, 1995 and 1994, respectively.
The amount of compensation expense recorded was $6.9 million, $4.8 million and
$2.9 million for 1996, 1995 and 1994, respectively.
There were 49,562,000; 51,383,000; and 13,765,000 shares of common stock
(including shares held in treasury) reserved for stock options and restricted
stock awards at December 31, 1996, 1995, and 1994, respectively.
The following are the shares exercisable at the corresponding weighted
average exercise price at December 31, 1996, 1995, and 1994, respectively:
8,820,000 at $31.32; 7,319,000 at $26.71; and 5,531,000 at $22.04.
Information for the years 1993 through 1996 with respect to the plans are as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
STOCK OPTIONS SHARES OPTION PRICE
- ------------- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Outstanding at December 31, 1993................ 7,054 $21.64
Granted....................................... 3,688 32.79
Exercised..................................... (1,452) 20.00
Expired....................................... (132) 28.22
------ ------
Outstanding at December 31, 1994................ 9,158 $26.30
Granted....................................... 4,071 36.61
Exercised..................................... (2,132) 22.92
Expired....................................... (316) 34.04
------ ------
Outstanding at December 31, 1995................ 10,781 $30.63
Granted....................................... 3,890 52.53
Exercised..................................... (1,845) 26.91
Expired....................................... (256) 45.47
------ ------
Outstanding at December 31, 1996................ 12,570 $37.65
====== ======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
STOCK OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- --------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
SHARES CONTRACTUAL AVERAGE SHARES AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICE RANGE AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
----------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$15.51 to $35.38........ 5,836,183 6.1 years $27.37 5,836,183 $27.37
$39.03 to $52.25........ 3,050,127 8.4 years $39.31 2,983,627 $39.06
$52.56 to $54.63........ 3,684,050 9.4 years $52.56 -- --
---------- ---------
Total................... 12,570,360 8,819,810
========== =========
</TABLE>
C-22
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The company applies Accounting Principles Board Opinion No.25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock. The company has
adopted the disclosure-only provisions of Financial Accounting Standards
No.123, Accounting for Stock-Based Compensation. Accordingly, no compensation
cost was recognized for the stock option plans. Had compensation cost for the
company's stock option plans been determined based on the fair value at the
grant date for awards under these plans, consistent with the methodology
prescribed under SFAS No.123, the company's net income and earnings per share
would have approximated the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net income-as reported..................................... $ 761,151 $ 792,488
Net income-pro forma....................................... $ 739,165 $ 779,175
Earnings per share-as reported............................. $ 3.21 $ 3.25
Earnings per share-pro forma............................... $ 3.11 $ 3.19
Fully diluted-as reported.................................. $ 3.16 $ 3.20
Fully diluted-pro forma.................................... $ 3.06 $ 3.14
</TABLE>
The weighted-average fair value of each option granted in 1996 and 1995 is
estimated as $10.79 and $8.30 on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<S> <C>
Expected life........................................... 4 years
Assumed annual dividend................................. 6%
growth rate (5 year historical rate)
Expected volatility..................................... 15%
Risk free interest rate................................. 5% to 7.5% range
(the month-end yields on 4 year
treasury strips equivalent zero coupon)
Assumed annual forfeiture rate.......................... 5%
</TABLE>
The effects of applying SFAS No.123 in this pro forma disclosure are not
indicative of future amounts. SFAS No.123 does not apply to awards prior to
1995 and additional awards in future years are anticipated.
NOTE L: PENSION AND OTHER EMPLOYEE BENEFITS
The company and its subsidiaries have several pension and retirement plans
covering the majority of employees, including certain employees in foreign
countries. The major plans covering salaried and management employees provide
pension benefits that are based on the five highest consecutive years of the
employee's compensation in the ten years before retirement. Plans covering
hourly and union employees generally provide benefits of stated amounts for
each year of service, but in some cases can also use a final average pay based
calculation. The company's funding policy for the salaried plans is to
contribute annually at a rate that is intended to remain at a level percentage
of compensation for the covered employees. The company's funding policy on the
hourly and union plans is to contribute annually at a rate that is intended to
remain level for the covered employees. Unfunded prior service costs under the
funding policy are generally amortized over periods from 10 to 30 years.
Total pension expense was $93,283,000; $31,156,000; and $29,908,000; in 1996
through 1994, respectively. Foreign pension expense was $9,937,000; $8,287,000;
and $4,866,000 in 1996 through 1994, respectively.
C-23
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net periodic pension cost for the company and its subsidiaries in 1996
through 1994 included the following components:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31
-------------------------------
1996 1995(1) 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the
period....................................... $126,589 $ 98,207 $ 95,537
Interest cost on projected benefit obligation. 307,115 267,891 218,118
Actual (gain)/loss on assets.................. (669,917) (955,942) 37,612
Net amortization and deferral................. 325,191 626,217 (323,866)
Curtailment adjustments....................... 1,176 (7,815)(2) --
-------- -------- --------
Net periodic pension costs.................... 90,154 28,558 27,401
Defined contribution pension plans............ 3,129 2,598 2,507
-------- -------- --------
Total pension costs........................... $ 93,283 $ 31,156 $ 29,908
======== ======== ========
Assumptions used in the accounting were:
Discount rate............................... 7.75% 7.50% 8.25%
Expected long-term rate of return on assets. 9.25% 9.00% 9.00%
Rate of increase in compensation levels..... 4.50% 4.50% 5.00%
</TABLE>
The following table sets forth the funded status of the plans at:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995(1)
--------------------------- ---------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value
of benefit obligations:
Vested benefit
obligation........... $(3,603,273) $(68,623) $(3,399,386) $(57,583)
----------- -------- ----------- --------
Accumulated benefit
obligation........... $(3,752,844) $(70,840) $(3,538,658) $(68,021)
----------- -------- ----------- --------
Projected benefit
obligation........... $(4,183,811) $(83,104) $(3,998,382) $(74,544)
Plan assets at fair
value................ 4,960,892 -- 4,451,725 --
----------- -------- ----------- --------
Projected benefit
obligation (in excess
of) or less than plan
assets............... 777,081 (83,104) 453,343 (74,544)
Unrecognized net
(gain) or loss....... (762,898) 15,199 (411,413) 11,907
Prior service cost not
yet recognized in net
periodic pension
cost................. 212,641 12,544 212,270 13,723
Unrecognized net
obligation (asset) at
transition........... (34,423) 911 (42,652) 1,138
Adjustment required to
recognize additional
minimum liability.... -- (18,047) -- (21,330)
----------- -------- ----------- --------
Prepaid pension cost
(liability).......... $ 192,401 $(72,497) $ 211,548 $(69,106)
=========== ======== =========== ========
</TABLE>
Plan assets primarily include equity and fixed income securities and, in
addition to normal funding contributions, include prepayments of $60,719,000;
and $1,900,000 made in 1995 and 1994 respectively.
The company's salaried pension plan provides that in the event of a
termination of the plan within three years after an involuntary change of
control of the company, the assets of the plan will be applied to satisfy all
C-24
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
liabilities to participants and beneficiaries in accordance with section 4044
of the Employee Retirement Income Security Act of 1974. Any remaining assets
will be applied on a pro rata basis to increase the benefits to the
participants and beneficiaries.
In addition to providing pension benefits, the company and most of its
subsidiaries provide certain health care and life insurance benefits for
retired employees. Substantially all of the company's U.S. employees may become
eligible for these benefits if they reach normal retirement age while working
for the company. Retiree health plans are paid for in part by retiree
contributions, which are adjusted annually. Benefits are provided through
various insurance companies whose charges are based either on the benefits paid
during the year or annual premiums. Health benefits are provided to retirees,
their covered dependents and beneficiaries. Retiree life insurance plans are
noncontributory and cover the retiree only.
In 1993, the company adopted Statement of Financial Accounting Standards No.
106, Employers' Accounting for Postretirement Benefits Other than Pensions,
which requires recognition of an accumulated postretirement benefit obligation
for retiree costs existing at the time of implementation, as well as an
incremental expense recognition for changes in the obligation attributable to
each successive year. Prior to 1995, all company segments had elected to
amortize past service costs over the allowable 20 year period. During 1995 the
company acquired E-Systems, Inc. who had elected in 1992 to recognize all its
past service cost immediately upon implementation.
The company is funding the liability for many salaried and hourly employees
and plans to continue to do so. The net postretirement benefit cost for the
company and its subsidiaries in 1996, 1995 and 1994 included the following
components:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
---------------------------------------------
1996 1995(1) 1994
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned
during the period.............. $ 9,297 $ 8,265 $ 5,546
Interest cost on accumulated
postretirement benefit
obligation..................... 52,472 47,906 37,355
Actual (gain)/loss on assets.... (29,482) (8,283) 600
Amortization of transition
obligation..................... 26,712 27,340 24,830
Other amortizations and
deferrals (net)................ 7,146 (11,299) (6,316)
Curtailment and other
adjustments.................... 3,159 18,900(3) --
------------- ------------- -------------
Net postretirement benefit cost. $ 69,304 $ 82,829 $62,015
============= ============= =============
Assumptions used in the
accounting were:
Discount rate................. 7.75% 7.50% 8.25%
Expected long-term rate of
return on assets............. 8.75% 8.50% 8.50%
Rate of increase in
compensation levels.......... 4.50% 4.50% 5.00%
Health care trend rate in the
next year.................... 7.00% 7.50% 8.00%
Gradually declining to a trend
rate of...................... 5.00% 5.00% 5.00%
In the years.................. 2001 & beyond 2001 & beyond 2001 & beyond
</TABLE>
C-25
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following amounts are recognized in the balance sheet at:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
-------------------------------
1996 1995(1) 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation
Retirees................................... $(559,666) $(516,767) $(356,573)
Active employees eligible for benefits..... (41,158) (32,339) (45,501)
Active employees not yet eligible for
benefits.................................. (131,260) (138,888) (73,674)
--------- --------- ---------
Total obligation......................... (732,084) (687,994) (475,748)
Plan assets at fair value.................. 183,750 175,172 105,983
--------- --------- ---------
Total obligation (in excess of) plan
assets.................................... (548,334) (512,822) (369,765)
Unrecognized net (gain).................... (67,258) (127,279) (89,074)
Unrecognized prior service cost............ (12,969) (14,214) --
Unrecognized net obligation at transition.. 360,255 390,079 446,786
--------- --------- ---------
Accrued postretirement benefit cost........ $(268,306) $(264,236) $ (12,053)
========= ========= =========
The effect of a one percentage point increase
in the assumed health care trend rate for
each future year on:
Aggregate of service and interest cost... $ 3,576 $ 3,055 $ 3,706
Accumulated postretirement benefit
obligation.............................. $ 43,596 $ 37,979 $ 38,262
</TABLE>
- ------
(1) 1995 data, including $17,117,000 of Net Periodic Pension Cost, $7,853,000
of Accrued Pension Cost, $15,041,000 of Net Periodic Postretirement Benefit
Cost and $235,383,000 of Accrued Postretirement Benefit Cost, were a result
of having acquired E-Systems, Inc. in April 1995.
(2) Various plan curtailments were recognized, as a result of workforce
reductions which were planned as part of the restructuring program.
(3) Benefit enhancements were made to various plans during the year in order to
accelerate attrition through voluntary retirements.
The company has adopted Statement of Financial Accounting Standards No. 112
(FAS 112), Employers' Accounting for Postemployment Benefits, in 1994. FAS 112
requires that benefits to be paid for former or inactive employees after
employment but prior to retirement must be accrued if certain criteria are met.
The adoption of FAS 112 had no material financial impact on the company.
Under the terms of the Raytheon Savings and Investment Plan, a defined
contribution plan, covered employees are allowed to contribute up to 17 percent
of their pay limited to $9,500. The company contributes amounts equal to 50
percent of the employee's contributions, up to a maximum of 3 percent of the
employee's pay. Total expense for the plan was $68,090,000; $64,563,000; and
$49,436,000 for 1996 through 1994, respectively.
The company's annual contribution to the Raytheon Employee Stock Ownership
Plans is approximately one-half of one percent of salaries and wages, limited
to $150,000, of substantially all United States salaried and a majority of
hourly employees. The expense was $14,670,000; $11,748,000; and $11,768,000 and
the number of shares allocated to participant accounts was 296,000; 177,000 and
185,000 for 1996 through 1994, respectively.
C-26
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE M: BUSINESS SEGMENT REPORTING
The company operates in four major business areas: Electronics, both
commercial and defense; Engineering and Construction; Aircraft; and Major
appliances. The principal contributors to Electronics sales and earnings are
defense missile systems and other products. The Engineering and Construction
segment does business in some 60 countries around the world. The Aircraft
segment manufactures, markets and supports piston, jetprops and medium and
light jet aircraft for commercial, regional airline and military markets around
the world. The Major Appliance segment manufactures and sells household and
commercial appliances to dealers and distributors in the United States and to
foreign locations. Sales and segment income for 1995 and 1994 have been
restated to conform with the 1996 presentation.
Certain accounts were reclassified to reconicile segment income with
operating income, as reported in the statements of income. The
reclassifications did not have a material effect on the income of the segments
other than the aircraft segment. Aircraft segment income was reduced in all
years due to the inclusion of interest cost associated with the financing of
off-balance sheet receivables. This cost was previously reported as a part of
corporate interest expense. The change did not affect the company's income
before taxes or net income.
OPERATIONS BY BUSINESS SEGMENTS
<TABLE>
<CAPTION>
SALES TO UNAFFILIATED CUSTOMERS SEGMENT INCOME
-------------------------------- ----------------------------
1996 1995 1994 1996 1995 1994
---------- ---------- ---------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Electronics............. $ 5,424 $ 5,389 $ 4,057 $ 766 $ 740 (3) $ 630
Engineering and
Construction........... 3,053 2,883 2,827 211 (6) 262 239
Aircraft................ 2,345 2,060 1,759 181 167 (4) 195
Major Appliances........ 1,509 1,472 1,455 74 74 82
---------- ---------- ---------- ------ ------ ------
Total Operating
Segments............... $ 12,331 $ 11,804 $ 10,098 $1,232 $1,243 $1,146
========== ========== ========== ====== ====== ======
Restructuring and
special charges........ (34)(1) (125)(2) (250)(5)
Gain on sale of D.C.
Heath.................. -- 210 --
Net interest expense.... (154) (170) (28)
Other income............ 39 5 1
Gain on sale of an
investment............. -- 29 31
---------- ---------- ---------- ------ ------ ------
Income before taxes..... $1,083 $1,192 $ 900
========== ========== ========== ====== ====== ======
</TABLE>
- ------
(1) The 1996 special charge of $34 million relates to the Major Appliances
segment.
(2) The special charge relates to the business segments as follows:
Electronics, $115, and Engineering and Construction, $10.
(3) Includes a nonrecurring charge of $47 million.
(4) Includes a nonrecurring charge of $30 million.
(5) The restructuring provision relates to the business segments as follows:
Electronics, $193, Engineering and Construction, $37, Aircraft $13, and
Major Appliances $7.
(6) Excludes second quarter fee adjustment on a major foreign project which was
covered by a pre-existing contingency reserve.
C-27
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DEPRECIATION AND
CAPITAL EXPENDITURES AMORTIZATION
-------------------- -----------------
1996 1995 1994 1996 1995 1994
------ ------ ------ ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Electronics............................. $ 160 $ 147 $ 120 $ 220 $ 228 $ 167
Engineering and Construction............ 27 26 22 37 32 31
Aircraft................................ 140 80 74 50 51 52
Major Appliances........................ 79 76 51 62 60 54
------ ------ ------ ----- ----- -----
Total................................... $ 406 $ 329 $ 267 $ 369 $ 371 $ 304
====== ====== ====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS AT DECEMBER 31,
------------------------------------
1996 1995 1994
------------ ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Electronics............................... $ 5,881 $ 5,473 $ 2,867
Engineering and Construction.............. 2,059 1,544 1,359
Aircraft.................................. 2,372 1,832 2,171
Major Appliances.......................... 814 992 998
------------ ----------- -----------
Total..................................... $ 11,126 $ 9,841 $ 7,395
============ =========== ===========
</TABLE>
OPERATIONS BY GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
OUTSIDE UNITED STATES
UNITED STATES (PRINCIPALLY EUROPE) CONSOLIDATED
------------- --------------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Sales to unaffiliated
customers
1996......................... $11,570 $761 $12,331
1995......................... 11,017 787 11,804
1994......................... 9,309 789 10,098
Net income
1996......................... 740 21 761
1995......................... 738 54 792
1994......................... 547 50 597
Identifiable assets at
December 31, 1996............ 10,473 653 11,126
December 31, 1995............ 9,171 670 9,841
December 31, 1994............ 6,929 466 7,395
</TABLE>
Sales between business segments and between geographic areas are not
material. In the data by geographic area, U.S. sales in millions of $11,570,
$11,017, and $9,309 include export sales, in millions, principally to Europe,
the Middle East, and Far East, of $2,137, $1,907, and $1,173 for 1996 through
1994, respectively.
Sales in millions to major customers, principally in Electronics, for 1996
through 1994, respectively, are: U.S. government (end user), $4,638, $4,079,
and $3,236; U.S. government (foreign military sales), $502, $597, and $694.
C-28
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE N: ACQUISITIONS AND DIVESTITURES
The company has included in its consolidated results of operations the
acquisitions under the purchase method of accounting of the following
companies: the aircraft modification and defense electronics businesses of
Chrysler Technologies (from June 1996); the engineering and construction assets
of Rust International (from June 1996); and the marine communication assets of
Standard Radio AB of Sweden (from June 1996). The cash paid for the
acquisitions, net of cash acquired, was $584.4 million. No pro forma results
have been presented since they would not be material to the consolidated
results.
The following unaudited pro forma financial information combines Raytheon and
E-Systems results of operations as if the acquisition had taken place on
January 1, 1995, and on January 1, 1994. The pro forma results are not
necessarily indicative of what the results of operations actually would have
been if the transaction had occurred on the applicable dates indicated and are
not intended to be indicative of future results of operations.
<TABLE>
<CAPTION>
1995 1994*
--------- ----------
(IN MILLIONS EXCEPT
EARNINGS PER SHARE)
<S> <C> <C>
Net sales................................................... $ 12,397 $ 12,046
Net income.................................................. 794 584
Earnings per share.......................................... 3.25 2.21
</TABLE>
- ------
* includes after tax restructuring provision of $162.3 million, or $.61 per
share.
Also, in April 1996, the company sold Xyplex, its data networking subsidiary,
for $177.5 million in cash and securities.
C-29
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE O: QUARTERLY OPERATING RESULTS (UNAUDITED)
QUARTERLY FINANCIAL DATA
The third quarter of 1996 includes a special charge of $22.1 million after
tax or $.09 per share to exit the manual-clean range market and close the
Delaware, Ohio plant.
The fourth quarter of 1995 includes a one-time gain of $5.2 million after tax
or $.02 per share related to the sale of D.C. Heath, net of special charges.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1996
Net sales............................. $2,787.6 $3,126.8 $3,032.4 $3,383.7
Cost of sales......................... 2,141.3 2,435.4 2,428.1 2,749.2
Net income............................ 186.5 209.4 187.9 177.4
Earnings per common share............. 0.78 0.88 0.80 0.75
Cash dividends per common share
Declared............................ 0.20 0.20 0.20 0.20
Paid................................ 0.1875 0.20 0.20 0.20
Common stock prices per the Composite
Tape
High................................ 54.13 53.63 55.00 56.13
Low................................. 45.00 48.75 43.38 45.75
1995
Net sales............................. $2,399.1 $2,844.6 $3,174.0 $3,386.5
Cost of sales......................... 1,832.3 2,130.5 2,442.7 2,754.0
Net income............................ 173.9 195.5 200.7 222.4
Earnings per common share............. 0.71 0.80 0.82 0.92
Cash dividends per common share
Declared............................ 0.1875 0.1875 0.1875 0.1875
Paid................................ 0.1875 0.1875 0.1875 0.1875
Common stock prices per the Composite
Tape
High................................ 37.19 39.81 42.69 47.25
Low................................. 31.44 34.75 38.75 41.50
</TABLE>
- ------
Note:
Share data have been restated for the two-for-one stock split in October, 1995.
NOTE P: FINANCIAL INSTRUMENTS
For certain financial instruments, including cash, cash equivalents,
marketable securities, and short-term debt, it is estimated that carrying value
approximates fair value, due to their short maturities and varying interest
rates of the debt.
The carrying value of notes receivable at December 31, 1996 and 1995 is
estimated to approximate fair value based principally on the underlying
interest rates and terms, maturities, collateral, and credit status of the
receivables.
The carrying values of marketable securities and investments are based on
quoted market prices or the present value of future cash flows and earnings
which approximate fair value.
C-30
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The value of the guarantees and letters of credit reflect fair value.
The fair value of long-term debt at December 31, 1996 and 1995 was estimated
based on current rates offered to the company for similar debt with the same
maturities and approximates the carrying value.
At December 31, 1996 and 1995, the company had outstanding interest rate swap
agreements, with notional amounts, and foreign currency forward exchange
contracts which minimized or eliminated risk associated with interest rate
changes or foreign currency exchange rate fluctuations. All of these financial
instruments were related to specific transactions and particular assets or
liabilities for which a firm commitment existed. These instruments were
executed with credit-worthy institutions and the majority of the foreign
currencies were denominated in currencies of major industrial countries:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest rate swaps.......................................... $388,785 $394,268
Foreign exchange contracts................................... $270,017 $335,068
</TABLE>
The following table summarizes major currencies and contract amounts
associated with foreign exchange contracts:
<TABLE>
<CAPTION>
1996 1995
----------------- ----------------
BUY SELL BUY SELL
-------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Pound Sterling............................... $ 94,742 $ 5,129 $ 25,007 $ 2,784
Japanese Yen................................. 9,160 30,707 2,292 58,453
Netherlands Guilder.......................... 3,437 75,600 90,144 --
German Mark.................................. 1,153 -- 16,410 390
Canadian Dollar.............................. 17,287 1,248 35,562 2,021
French Franc................................. 10,400 -- 71,663 --
Australian Dollar............................ 16,175 -- 20,015 --
All others................................... 2,738 2,241 6,885 3,442
-------- -------- -------- -------
Total........................................ $155,092 $114,925 $267,978 $67,090
======== ======== ======== =======
</TABLE>
Foreign currencies are translated at current rates at the reporting date.
"Buy" amounts represents the U.S. dollar equivalent of commitments to purchase
foreign currencies and "sell" amounts represent the U.S. dollar equivalent of
commitments to sell foreign currencies.
Swap contracts mature at various dates through the year 2000 and essentially
fix the interest rates on that portion of debt at rates from 4.7 percent to 9.5
percent at December 31, 1996, and 1995, respectively.
Foreign exchange forward contracts, used primarily to minimize fluctuations
in the values of foreign currency payments and receipts, have maturities at
various dates through April, 1999. Fair values for these contracts were
determined by applying December 31, 1996, spot rates to the eight major
currencies and comparing the U.S. dollar equivalents to the U.S. dollar
contract amounts for the same currencies. The resulting difference was not
material and approximates the contract amounts.
The company, in order to lock in favorable rates, entered into interest rate
swaps and locks in connection with the 1995 issuance of $750 million ten-year
notes and $375 million thirty-year debentures. Both the interest rate swaps and
locks were unwound prior to the issue of the 1995 debt.
C-31
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q: STOCK SPLIT
All share data have been restated to reflect the stock split effective on
October 23, 1995.
NOTE R: SUBSEQUENT EVENTS
On January 6, 1997, the company announced that the Board of Directors
approved a definitive agreement to purchase the assets of Texas Instruments'
defense operations for $2.950 billion in cash. Texas Instruments Defense
Systems and Electronics Group, headquartered in Lewisville, Texas will have
1996 revenues of approximately $1.8 billion. The group is a premier supplier of
advanced defense systems, including precision-guided weapons, antiradiation and
strike missiles, airborne radar, night vision systems and electronic warfare
systems. The group has approximately 12,000 employees, based largely in Texas.
The transaction is subject to Hart-Scott-Rodino antitrust review and is
expected to close in the second quarter of 1997.
On January 16, 1997, the company announced that it has entered into
definitive agreements with Hughes Electronics Corporation to bring about the
merger of the Hughes Electronics defense operations (Hughes Aircraft) and
Raytheon. The combined company will be called Raytheon. The transaction is
valued at $9.5 billion, comprised of approximately $5.1 billion in common stock
and $4.4 billion in debt.
The company's debt will increase as a result of the planned transactions and
the covenants applicable to the existing financing arrangements have been
modified by the participating entities to accommodate the increase in debt.
Hughes Aircraft, the Hughes Electronics' defense business, will have 1996
revenues of approximately $6.3 billion. It has approximately 40,000 employees,
principally in the states of California, Arizona, Indiana, Texas and Virginia.
Hughes is a premier supplier of advanced defense electronics systems and
services, principally in Naval systems, airborne and ground-based radars,
ground, air and ship-launched missiles, tactical communications, and training
simulators and services. Hughes also supplies Air Traffic Control systems to
the U.S. Federal Aviation Administration and to foreign governments, and is
active in the fields of global positioning systems and infrared/electro-optics.
The transaction is subject to approval by Raytheon's stockholders, certain
regulatory approvals (including Hart-Scott-Rodino antitrust review), approval
by the holders of GM and GM "H" common stocks, and the receipt by GM of rulings
from the Internal Revenue Service relating to certain federal income tax
consequences of the transaction.
TRANSACTION SUMMARY
Hughes Aircraft will be spun off to the holders of GM's $1 2/3 and Class H
common stocks in a transaction intended to be tax free. In connection with the
spin-off and subsequent merger, two classes of common stock will be created:
Class A common stock, which will be held by GM $1 2/3 and Class H stockholders
after the spin-off and will be entirely held by the public; and Class B common
stock.
Immediately following the spin-off of Hughes Aircraft, Raytheon and Hughes
Aircraft will merge. In the merger, Raytheon stockholders will receive all of
the Class B common stock of the combined company. The Class B common stock will
represent approximately 70 percent of the equity of the combined company, and
the Class A common stock will represent the remaining, approximately 30
percent.
C-32
APPENDIX C
<PAGE>
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The merger terms provide that Hughes Aircraft's total debt will be adjusted
to reflect variations in the market price of Raytheon stock, subject to
specified limits, so that the two components of value will total $9.5 billion
so long as such market price is between $44.42 and $54.29 per share. The
approximately $5.1 billion in common stock issued to the Class A stockholders
is based upon the midpoint of this range. The balance of the $9.5 billion
transaction value will be made up of approximately $4.4 billion in Hughes
Aircraft debt.
In the election of directors to the combined company board, Class A common
stock will have an 80.1 percent voting interest, and Class B common stock will
have a 19.9 percent voting interest. The board of directors will have staggered
terms for directors. Except as to voting rights for directors, each class will
vote separately as to all other matters, and the Class A and Class B stock will
have identical rights. In a merger, acquisition or any other type of
reorganization, Class A and Class B common stock must receive the same
consideration.
On February 23, 1997, the company announced that it is evaluating strategic
alternatives for the Appliance Group, which may result in the sale or merger of
the group at some time in the future. The company retained an advisor to assist
with this evaluation. The decision to undertake this strategic reassessment was
made in the context of Raytheon's financial priorities, and the belief that the
Appliance Group may have greater value to another company with more focus on
the markets served by the group.
C-33
APPENDIX C
<PAGE>
APPENDIX D
HUGHES DEFENSE
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
UNAUDITED COMBINED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30,
1996
Combined Statement of Income and Parent Company's Net Investment... D-2
Combined Balance Sheet............................................. D-3
Combined Statement of Cash Flows................................... D-4
Notes to Combined Financial Statements............................. D-5
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-7
Combined Statement of Income and Parent Company's Net Investment... D-8
Combined Balance Sheet............................................. D-9
Combined Statement of Cash Flows................................... D-10
Notes to Combined Financial Statements............................. D-11
</TABLE>
D-1
APPENDIX D
<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.
D-2
APPENDIX D
<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.
D-3
APPENDIX D
<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.
D-4
APPENDIX D
<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,
D-5
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
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.
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.
D-6
APPENDIX D
<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
D-7
APPENDIX D
<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.
D-8
APPENDIX D
<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.
D-9
APPENDIX D
<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.
D-10
APPENDIX D
<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.
D-11
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
D-12
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
D-13
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
D-14
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
D-15
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
D-16
APPENDIX D
<PAGE>
HUGHES DEFENSE
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.................... $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.
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.
D-17
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 $143.3
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.
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
D-18
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
D-19
APPENDIX D
<PAGE>
HUGHES DEFENSE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
D-20
APPENDIX D
<PAGE>
APPENDIX E
TI DEFENSE
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND FOR THE SIX
MONTH PERIODS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Statements of Assets to be Acquired and Liabilities to be Assumed... E-2
Statements of Income................................................ E-3
Statements of Cash Flows............................................ E-4
Notes to Financial Statements....................................... E-5
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 AND
REPORT OF INDEPENDENT AUDITORS
Report of Independent Auditors...................................... E-6
Statements of Assets to be Acquired and Liabilities to be Assumed... E-7
Statements of Income................................................ E-8
Statements of Cash Flows............................................ E-9
Notes to Financial Statements....................................... E-10
</TABLE>
E-1
APPENDIX E
<PAGE>
DEFENSE BUSINESS OF TEXAS INSTRUMENTS INCORPORATED
STATEMENTS OF ASSETS TO BE ACQUIRED AND
LIABILITIES TO BE ASSUMED
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997
---------
<S> <C>
ASSETS
Current assets:
Accounts receivable................................................ $ 236,845
Inventories (net of progress billings)............................. 217,478
Prepaid expenses................................................... 2,372
---------
Total current assets............................................. 456,695
Property, plant, and equipment, at cost.............................. 740,840
Less accumulated depreciation...................................... (433,458)
---------
Property, plant and equipment (net)................................ 307,382
Other assets......................................................... 41,946
---------
Total assets......................................................... $ 806,023
=========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses.............................. 211,499
Accrued Profit Sharing/Health Care................................. 9,600
Accrued retirement costs--current.................................. 53,000
---------
Total current liabilities........................................ 274,099
---------
Deferred Credits..................................................... --
---------
Accrued retirements costs............................................ 177,788
---------
Total liabilities.................................................... 451,887
---------
Net assets........................................................... $ 354,136
=========
</TABLE>
See accompanying notes.
E-2
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net revenues......................... $ 424,090 $ 454,099 $823,749 $860,214
Operating costs and expenses:........
Costs of revenues.................... 329,029 346,882 637,947 650,439
Marketing, general, and administra-
tive................................ 27,525 33,207 55,594 64,813
Research and development............. 25,675 18,070 43,720 38,204
--------- --------- -------- --------
Total................................ 382,229 398,159 737,261 753,456
--------- --------- -------- --------
Profit from operations............... 41,861 55,940 86,488 106,758
Other expense (net).................. (1,362) (670) (1,802) (1,518)
--------- --------- -------- --------
Income before provision for income
taxes............................... 40,449 55,270 84,686 105,240
Provision for income taxes........... 15,096 20,721 31,968 39,455
--------- --------- -------- --------
Net income........................... $ 25,403 $ 34,549 $ 52,718 $ 65,785
========= ========= ======== ========
</TABLE>
See accompanying notes.
E-3
APPENDIX E
<PAGE>
DEFENSE BUSINESS OF TEXAS INSTRUMENTS INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 52,718 $ 65,785
Depreciation............................................. 41,379 37,105
Deferred income taxes.................................... (9,051) (1,603)
(Increase) decrease in working capital:
Accounts receivable.................................... 41,209 11,761
Inventories............................................ 3,671 (96,327)
Prepaid expenses....................................... (1,287) (1,232)
Accounts payable and accrued expenses.................. (6,144) (29,793)
Accrued retirement costs............................... (503) 4,290
Increase (decrease) in noncurrent accrued retirement
costs................................................... 5,544 4,235
Other.................................................... (37,294) 5,616
-------- --------
Net cash provided by (used in) operating activities........ 90,242 (163)
Cash flows from investing activities:
Additions to property, plant and equipment............... (16,441) (40,510)
-------- --------
Net cash (used in) investing activities.................... (16,441) (40,510)
Cash flows from financing activities:
Net transfers (to) from Texas Instruments................ (73,801) 40,673
-------- --------
Net cash provided by (used in) financing activities........ (73,801) 40,673
Net increase (decrease) in cash and cash equivalents....... -- --
Cash and cash equivalents at beginning of period........... -- --
-------- --------
Cash and cash equivalents at end of period................. $ -- $ --
======== ========
</TABLE>
See accompanying notes.
E-4
APPENDIX E
<PAGE>
DEFENSE BUSINESS OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The statements of income, statements of cash flows and statement of assets to
be acquired and liabilities to be assumed at June 30, 1997, are not audited but
reflect all adjustments which are of a normal recurring nature and are, in the
opinion of management, necessary to a fair statement of the results of the
periods shown.
Inventories as of June 30, 1997 were comprised of the following (in
thousands):
<TABLE>
<S> <C>
Raw material and purchased parts............................... $ 99,773
Long-term contracts in process................................. 361,054
Finished goods................................................. 1,548
---------
Total........................................................ $ 462,375
Less progress billings......................................... (244,897)
---------
Inventories (net of progress billings)....................... $ 217,478
=========
</TABLE>
E-5
APPENDIX E
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Texas Instruments Incorporated
We have audited the accompanying statements of assets to be acquired and
liabilities to be assumed of the Defense Business of Texas Instruments
Incorporated (the "Defense Business" as defined in Note 1) as of December 31,
1996 and 1995, and the related statements of income and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the management of Texas Instruments
Incorporated. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets to be acquired and liabilities to be assumed
of the Defense Business 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.
/s/ Ernst & Young LLP
February 18, 1997
E-6
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
STATEMENTS OF ASSETS TO BE ACQUIRED AND
LIABILITIES TO BE ASSUMED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable..................................... $ 278,054 $ 240,328
Inventories (net of progress billings).................. 221,149 156,922
Prepaid expenses........................................ 1,085 441
--------- ---------
Total current assets.................................. 500,288 397,691
Property, plant and equipment, at cost.................... 760,688 751,591
Less accumulated depreciation........................... (464,878) (458,565)
--------- ---------
Property, plant and equipment (net)..................... 295,810 293,026
Other assets.............................................. 40,438 46,462
--------- ---------
Total assets.......................................... $ 836,536 $ 737,179
--------- ---------
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses................... 227,243 251,976
Accrued retirement costs--current....................... 53,503 49,668
--------- ---------
Total current liabilities............................. 280,746 301,644
Accrued retirement costs.................................. 172,244 157,638
--------- ---------
Total liabilities..................................... 452,990 459,282
--------- ---------
Net Assets................................................ $ 383,546 $ 277,897
========= =========
</TABLE>
See accompanying notes.
E-7
APPENDIX E
<PAGE>
DEFENSE BUSINESS OF TEXAS INSTRUMENTS INCORPORATED
STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues................................ $1,800,022 $1,739,016 $1,724,810
Operating costs and expenses:
Costs of revenues......................... 1,415,139 1,379,389 1,374,618
Marketing, general, and administrative.... 128,850 126,592 119,008
Research and development.................. 78,258 77,883 73,755
---------- ---------- ----------
Total................................... 1,622,247 1,583,864 1,567,381
---------- ---------- ----------
Profit from operations...................... 177,775 155,152 157,429
Other expense (net)......................... (2,809) (6,154) (2,123)
---------- ---------- ----------
Income before provision for income taxes.... 174,966 148,998 155,306
Provision for income taxes.................. 65,569 57,123 56,532
---------- ---------- ----------
Net income.................................. $ 109,397 $ 91,875 $ 98,774
========== ========== ==========
</TABLE>
See accompanying notes.
E-8
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income................................. $109,397 $ 91,875 $ 98,774
Depreciation and amortization.............. 86,760 76,504 85,764
Charge for purchased R&D................... -- 3,300 --
Deferred income taxes...................... (2,663) 8,751 20,588
Loss on sale of fixed assets............... 1,090 4,674 2,251
(Increase) decrease in working capital:
Accounts receivable...................... (37,726) (67,195) 30,059
Inventories.............................. (64,227) (28,268) 13,592
Prepaid expenses......................... (644) (327) 2,349
Accounts payable and accrued expenses.... (24,529) (24,722) (4,250)
Accrued retirement costs................. 3,835 15,637 4,882
Increase (decrease) in noncurrent accrued
retirement costs.......................... 14,606 (49,433) (5,065)
-------- -------- --------
Net cash provided by operating activities.... 85,899 30,796 248,944
Cash flows from investing activities:
Additions to property, plant and equipment. (80,027) (88,600) (56,304)
Acquisitions of businesses................. (175) (57,591) --
-------- -------- --------
Net cash used in investing activities........ (80,202) (146,191) (56,304)
Cash flows from financing activities:
Net transfers (to) from Texas Instruments.. (5,697) 115,395 (192,640)
-------- -------- --------
Net cash (used in) provided by financing
activities.................................. (5,697) 115,395 (192,640)
Net increase (decrease) in cash and cash
equivalents................................. -- -- --
Cash and cash equivalents at beginning of
period...................................... -- -- --
-------- -------- --------
Cash and cash equivalents at end of period .. $ -- $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes.
E-9
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Texas Instruments Incorporated ("TI") and Raytheon Company (the "Buyer")
entered into a definitive agreement (the "Agreement") on January 4, 1997 under
which, on the contractually designated closing date, the Buyer will acquire
TI's Defense Systems and Electronics business ("DS&E"), TI's Smart Antenna
business, TI's Commercial Uncooled IR business, TI's wholly owned subsidiary
SAVI Technology, Inc., and certain corporate and other assets and liabilities
of TI described below (such businesses and certain corporate and other assets
and liabilities of TI together are referred to as the "Defense Business"). The
financial statements present the assets to be acquired and liabilities to be
assumed and results of operations and cash flows of the Defense Business based
upon the structure of the transaction as described in the Agreement, and this
transaction is herein referred to as the Acquisition.
The financial statements are not intended to be a complete presentation of
the financial position, results of operations and cash flows as if the Defense
Business had operated as a stand-alone company. The financial statements have
been prepared in accordance with generally accepted accounting principles which
require management to make estimates and assumptions, in particular estimates
of anticipated contract costs and revenues utilized in the earnings recognition
process, that affect the amounts reported in the financial statements. Actual
results could differ from those estimates. Intercompany balances and
transactions within the Defense Business have been eliminated.
The Defense Business is engaged in the research, development, and manufacture
of advanced defense systems, including tactical missiles, precision guided
weapons, radar, night vision systems, and electronic warfare systems. The
Defense Business operates in one industry segment, and the principal markets
served include the military forces of the United States, aerospace prime
contractors, international military customers and commercial customers who
procure components and subsystems.
The statements of assets to be acquired and liabilities to be assumed include
certain TI corporate property (see Note 4) and certain TI pension plan and
retiree health care benefit assets and obligations related to employees of the
Defense Business (see Note 10).
TI provides various services to the Defense Business including, but not
limited to, facilities management, data processing, security, payroll and
employee benefits administration, insurance administration, duplicating and
telecommunications services. TI allocates these expenses and all other central
operating costs, first on the basis of direct usage when identifiable, with the
remainder allocated among TI's businesses on the basis of their respective
revenues, headcount, or other measures. In the opinion of management of TI,
these methods of allocating costs are reasonable. These expenses totaled $162.7
million, $168.5 million, and $161.3 million in 1996, 1995, and 1994,
respectively. Such expense allocations to the Defense Business are allowable
overhead costs on government contracts, with the exception of certain
unallowable amounts which are not material.
Sales from the Defense Business to affiliates of TI approximated $27.2
million in 1996, $19.4 million in 1995, and $17.4 million in 1994. These
amounts have been included in the statements of income. See also Note 14.
The Defense Business participates in a centralized cash management system
wherein cash receipts are transferred to and cash disbursements are funded by
TI. Since cash and cash equivalents related to the Defense Business operations
will not be acquired by the Buyer, they are excluded from the statements of
assets to be acquired and liabilities to be assumed.
Significant accounting policies are designated below as an integral part of
the notes to financial statements to which the policies relate.
E-10
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable--Commercial........................... $133,359 $110,051
Accounts receivable--United States Government............. 92,452 100,167
Account receivable--Joint Venture (see Note 14)............. 37,492 17,201
Unreimbursed costs and fees............................... 14,751 12,909
-------- --------
$278,054 $240,328
======== ========
</TABLE>
Accounts Receivable from commercial customers include amounts receivable
under subcontracts with government prime contractors. Unreimbursed costs and
fees relate to accrued but unbilled revenues under long-term cost reimbursement
contracts (see Note 8). These amounts are billed in accordance with contract
terms.
3. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and purchased parts...................... $106,610 $ 90,313
Long-term contracts in process......................... 334,940 263,815
Finished goods......................................... 6,826 5,997
-------- --------
Total................................................ $448,376 $360,125
Less progress billings................................. (227,227) (203,203)
-------- --------
Inventories (net of progress billings)................. $221,149 $156,922
======== ========
</TABLE>
Inventories related to long-term contracts are stated at actual production
costs, including manufacturing overhead and special tooling and engineering
costs, reduced by amounts identified with revenues recognized on units
delivered or with progress completed. Such inventories are reduced by charging
any amounts in excess of estimated realizable value to cost of revenues. The
costs attributed to units delivered under long-term contracts are based on the
estimated average cost of all units to be produced under existing contracts and
are determined under the learning curve concept, which anticipates a
predictable decrease in unit costs as tasks and production techniques become
more efficient through repetition. Production costs included in inventories in
excess of the estimated cost of in-process inventories (on the basis of
estimated average cost of all units to be produced) were not material.
E-11
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost less accumulated
depreciation. Depreciation is computed primarily using the sum-of-the-years-
digits method for buildings and improvements and the double declining-balance
method for machinery and equipment. Fully depreciated assets are written off
against accumulated depreciation. Maintenance and repairs are charged to
expense.
<TABLE>
<CAPTION>
DECEMBER 31
DEPRECIABLE ------------------
LIVES 1996 1995
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land....................................... $ 5,483 $ 5,483
Buildings and improvements................. 9-40 years 248,479 257,917
Machinery and equipment.................... 6-10 years 506,726 488,192
-------- --------
Total.................................... $760,688 751,592
Less accumulated depreciation.............. (464,878) (458,566)
-------- --------
Net property, plant, and equipment......... $295,810 $293,026
======== ========
</TABLE>
Pursuant to the Agreement, Defense Business facilities owned by TI which are
located in Lewisville, Texas and McKinney, Texas will be purchased by the
Buyer, and the cost and related accumulated depreciation of such facilities are
included in the financial statements of the Defense Business. See also Note 9.
5. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
----------- -----------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill........................................... $40,407 $46,204
Other assets....................................... 31 258
------- -------
$40,438 $46,462
======= =======
</TABLE>
In 1995, TI made three business acquisitions which are included within the
Defense Business. The combined cash purchase prices totaled approximately $57.8
million. Of this amount, $47.1 million of goodwill was recorded to reflect the
excess of cash paid for these businesses over the fair values of their net
assets. The goodwill for these acquisitions is being amortized on a straight-
line basis over 7 to 10 year periods.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable--trade................................. $ 54,165 $ 65,500
Accrued product warranties.............................. 23,009 15,797
Advance payments in excess of related inventories....... 46,095 65,773
Accrued payroll and benefits............................ 57,265 55,647
Other................................................... 46,709 49,259
-------- --------
$227,243 $251,976
======== ========
</TABLE>
E-12
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. FINANCIAL INSTRUMENTS AND RISK CONCENTRATION
As of December 31, 1996 and 1995, the Defense Business had forward currency
exchange contracts outstanding of $22.1 million and $88.9 million,
respectively, to hedge specific firm commitments for multi-year product sale
transactions denominated in pound sterling. The carrying amounts and current
market settlement values of the forward contracts as of December 31, 1996 and
1995 were not significant. The forward currency exchange contracts are used to
minimize the adverse impacts from the effect of exchange rate fluctuations on
the Defense Business' specific commitments to sell products. In order to
minimize its exposure to credit risk, the Defense Business limits its
counterparties on the forward currency exchange contracts to investment-grade
rated financial institutions.
Financial instruments which subject the Defense Business to concentrations of
credit risk primarily relate to accounts receivable. Contracts involving the
U.S. government do not require collateral or other security. The Defense
Business conducts ongoing credit evaluations of domestic non-U.S. Government
customers and generally does not require collateral or other security from
these customers. The Defense Business generally requires international
customers to furnish letters of credit or make advance payments in amounts
sufficient to limit the Defense Business' credit risk to a minimal level.
Historically, the Defense Business has not incurred any significant credit-
related losses.
8. CONTRACT REVENUE RECOGNITION
Revenues under long-term fixed price and fixed-price incentive contracts are
recognized as deliveries are made or as performance targets are achieved.
Revenues under long-term cost reimbursement contracts are recorded as costs are
incurred and include estimated earned fees.
Expected profits or losses on contracts are based on management estimates of
total sales values and costs at completion. These estimates are reviewed and
revised periodically throughout the lives of the contracts, and adjustments
resulting from such revisions are recorded in the periods in which the
revisions are made. In certain cases the estimated sales values include amounts
expected to be realized from contract adjustments or claims subject to
negotiations. Losses on contracts are recorded in full as they are identified.
The Defense Business accounts for general and administrative costs as period
costs for contract accounting purposes except in circumstances in which
contract revenues are not estimated to be sufficient to cover actual production
costs, including manufacturing overhead and allocable general and
administrative overhead ("loss contract situation"). In a loss contract
situation the loss recorded includes, therefore, future allocable general and
administrative costs. As of December 31, 1996 and December 31, 1995, net
contract inventories have been reduced by $14.8 million and $24.8 million,
respectively, for future general and administrative costs.
Revenues under United States Government prime contracts approximated $1,038
million in 1996, $978 million in 1995 and $985 million in 1994. Percentages of
United States Government sales by contract type were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cost....................................................... 38% 32% 27%
Firm-fixed-price........................................... 55% 64% 65%
Fixed-price-incentive...................................... 7% 4% 8%
---- ---- ----
Total.................................................... 100% 100% 100%
==== ==== ====
</TABLE>
E-13
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A portion of work performed for the United States Government is under
contracts that contain cost or performance incentives or both. These incentives
provide for increases in fees or profits for surpassing stated targets or other
criteria, or for decreases in fees or profits for failure to achieve such
targets or other criteria. Performance incentives are included in sales at the
time there is sufficient information to relate actual performance to targets or
other criteria.
9. RENTAL EXPENSE AND LEASE COMMITMENTS
The Defense Business occupies various facilities which are either owned or
leased by TI (see Note 4). The statements of income include occupancy charges
from TI of $25.7 million, $28.6 million, and $29.3 million in 1996, 1995, and
1994, respectively. These charges include depreciation, rent, and taxes (as
applicable) incurred by TI and allocated to the Defense Business based on the
square footage of facilities occupied. The occupancy charges historically
allocated to the Defense Business do not necessarily represent current market
rates to lease such facilities. TI will execute lease agreements with the Buyer
at agreed-upon rates in connection with TI-owned facilities that will be
utilized by the Buyer after the Acquisition is completed.
The Defense Business also directly leases certain facilities and equipment
from third parties under operating leases, many of which contain renewal
options and escalation clauses. Total rental expense on such operating leases
amounted to $2.8 million, $3.5 million, and $5.9 million in 1996, 1995, and
1994, respectively. The following indicates minimum rental commitments in
succeeding years under these Defense Business leases (in millions): 1997: $4.2;
1998: $2.5; 1999: $0.7.
In connection with the Acquisition, TI will assign to the Buyer certain non-
cancelable operating lease commitments with third parties. The following
indicates minimum rental commitments in succeeding years under these TI leases
(in millions): 1997: $7.5; 1998: $6.4; 1999: $5.9; 2000: $3.0; 2001: $1.9;
Later years: $2.4.
10. PROFIT SHARING AND RETIREMENT PLANS
The Defense Business participates in various incentive plans provided by TI
for its employees, including general profit sharing and savings programs as
well as an annual incentive plan for key employees. The Defense Business also
participates in TI pension and retiree health care benefit plans. Pursuant to
the Agreement, liabilities pertaining to employees of the Defense Business
pension and retiree health care benefit plans are to be assumed by the Buyer.
Profit sharing expense has been allocated to the Defense Business by TI based
on relative payroll costs, and accrued retirement costs for the Defense
Business have been separately determined based upon the Defense Business
participants in the retirement plans of TI.
PROFIT SHARING
There was no profit sharing expense in 1996. Profit sharing expense for the
Defense Business was $67.3 million in 1995 and $42.1 million in 1994. Under the
plan, TI contributes a portion of its net profits equal to 25% of the amount by
which consolidated income (as defined) before profit sharing and income taxes
exceeds 8% of TI's consolidated average assets for the year. For profit sharing
earned by eligible participants in 1993 and prior, the contributions have been
invested in TI common stock. For profit sharing earned by employees in 1994 and
thereafter, several investment options in addition to TI common stock have been
made available. And, for 1995 and thereafter, 50% of the profit sharing earned
by employees is not contributed to a deferred plan but is paid as cash to the
eligible participants.
E-14
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SAVINGS PROGRAM
The Defense Business participates in the TI matched savings program whereby
employees' contributions of up to 4% of their salary are matched by TI at the
rate of 50 cents per dollar. Contributions are subject to statutory
limitations. The contributions may be invested in several investment funds
including TI common stock. The expense under this program charged by TI to the
Defense Business was $8.1 million in 1996, $7.5 million in 1995 and $7.7
million in 1994.
PENSION PLAN
TI has a defined benefit plan which covers employees of the Defense Business
and provides benefits based on years of service and employee's compensation.
The plan is a career-average-pay plan which has been amended periodically in
the past to produce approximately the same results as a final-pay type plan.
The expected effects of such amendments have been considered in calculating
pension expense. TI's funding policy is to contribute to the plan at least the
minimum amount required by ERISA. Plan assets consist primarily of common
stock, U.S. government obligations, commercial paper, and real estate.
Pension expense of the Defense Business includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the
period.................................... $ 19,769 $ 15,604 $ 18,812
Interest cost on projected benefit
obligation................................ 27,677 25,127 26,514
Return on plan assets:
Actual return............................ (51,153) (34,881) 6,233
Deferral................................. 29,485 14,500 (26,909)
Net amortization........................... (34) (1,556) 212
-------- -------- --------
Pension expense............................ $ 25,744 $ 18,794 $ 24,862
======== ======== ========
</TABLE>
The funded status of the TI plan relating to employees of the Defense
Business was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation......................... $(277,458) $(257,269)
--------- ---------
Accumulated benefit obligation.................... $(310,730) $(292,134)
--------- ---------
Projected benefit obligation...................... $(434,163) $(428,999)
Plan assets at fair value........................... 326,117 278,471
--------- ---------
Projected benefit obligation in excess of plan
assets............................................. (108,046) (150,528)
Unrecognized net asset from initial application of
SFAS 87............................................ (10,986) (22,719)
Unrecognized net (gain) loss........................ (5,597) 78,533
Unrecognized prior service cost..................... 12,204 12,041
--------- ---------
Accrued pension..................................... $(112,425) $ (82,673)
========= =========
</TABLE>
The projected benefit obligations for 1996 and 1995 were determined using
assumed discount rates of 7.25% and 7.0%, respectively, and an assumed average
long-term pay progression rate of 4.25%. The assumed long-term rate of return
on plan assets was 9.0%.
E-15
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
RETIREE HEALTH CARE BENEFIT PLAN
In accordance with the TI plan, employees of the Defense Business are
currently eligible to receive, during retirement, specified company-paid
medical benefits. The plan is contributory and premiums are adjusted annually.
For employees retiring on or after January 5, 1993, TI has specified a maximum
annual amount per retiree, based on years of service, that it will pay toward
retiree medical premiums. For employees who retired prior to that date, TI
maintains a consistent level of cost sharing between the company and the
retiree. Funding of the plan obligation is determined at the discretion of
management. Plan assets consist primarily of common stock, U.S. government
obligations, commercial paper, and obligations of U.S. states and
municipalities.
Expense of the Defense Business for the retiree health care benefit plan
includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the
period....................................... $ 2,217 $ 2,120 $ 2,743
Interest cost on accumulated postretirement
benefit obligation........................... 11,350 13,246 12,618
Return on plan assets:
Actual return............................... (17,935) (3,660) (3,228)
Deferral.................................... 14,547 1,604 2,437
Amortization of prior service cost............ (234) (234) --
-------- ------- -------
Retiree health care benefit expense........... $ 9,945 $13,076 $14,570
======== ======= =======
</TABLE>
The funded status of the TI plan relating to Defense Business employees was
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees........................................ $(123,321) $(121,049)
Fully eligible employees........................ (4,094) (5,066)
Other employees................................. (39,424) (41,654)
--------- ---------
(166,839) (167,769)
--------- ---------
Plan assets at fair value......................... 68,976 43,753
--------- ---------
Accumulated postretirement benefit obligation in
excess
of plan assets................................... (97,863) (124,016)
Unrecognized net (gain) loss...................... (12,184) 3,108
Unrecognized prior service cost................... (3,275) (3,725)
--------- ---------
Accrued retiree health care benefit costs......... $(113,322) $(124,633)
========= =========
</TABLE>
Retiree health care benefit amounts were determined using health care cost
trend rates of 7.3% for 1997 decreasing to 5.0% by 2000, and assumed discount
rates of 7.25% for 1996 and 7.0% for 1995. Increasing the health care cost
trend rates by 1% would have increased the accumulated postretirement benefit
obligation at December 31, 1996 by $7.9 million and 1996 plan expense by $.7
million. A trust holding a portion of the plan assets is subject to federal
income taxes at a 39.6% rate. The assumed long-term rate of return on plan
assets, after taxes, was 7.3%.
E-16
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES
The operations of the Defense Business are included in the consolidated
income tax returns of TI. Pursuant to the Agreement, TI will retain all income
tax liabilities and rights to all tax refunds relating to operations prior to
the closing date of the Acquisition. Accordingly, the statements of assets to
be acquired and liabilities to be assumed do not reflect current or prior
period income tax receivables or payables. The income tax provisions included
in the statements of income have been determined as if the Defense Business
were a separate taxpayer.
The components of the provisions for income taxes were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
United States................................. $60,561 $37,189 $32,413
Foreign....................................... 2,305 7,694 825
State and local............................... 5,366 3,489 2,706
------- ------- -------
Total current............................... 68,232 48,372 35,944
Deferred:
United States................................. (2,598) 8,435 19,838
State and local............................... (65) 316 750
------- ------- -------
Total deferred.............................. (2,663) 8,751 20,588
------- ------- -------
Provision for income taxes...................... $65,569 $57,123 $56,532
======= ======= =======
The effective tax rate was different from the United States statutory rate for
the reasons set forth below:
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Computed tax at statutory rate.................. $61,238 $52,149 $54,357
Effect of U.S. state income taxes............... 3,424 2,584 2,496
Effect of non-U.S. rates........................ 783 2,613 280
Research and experimentation tax credits........ (290) (579) (957)
Other........................................... 414 356 356
------- ------- -------
Provision for income taxes...................... $65,569 $57,123 $56,532
======= ======= =======
</TABLE>
The income tax provisions were calculated based upon the following components
of income before income taxes:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States income............................ $170,618 $134,480 $153,747
Foreign Income.................................. 4,348 14,518 1,559
-------- -------- --------
Total......................................... $174,966 $148,998 $155,306
======== ======== ========
</TABLE>
E-17
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK OPTIONS
Employees of the Defense Business have stock options outstanding under the
Texas Instruments 1996 Long-Term Incentive Plan, approved by TI stockholders on
April 18, 1996. Options are also outstanding under the 1984 and 1988 Stock
Option Plans and the Texas Instruments Long-Term Incentive Plan; however, no
further options may be granted under these plans. Under all these stockholder-
approved plans, the exercise price per share may not be less than 100 percent
of the fair market value on the date of the grant. Substantially all of the
options have a 10-year term and do not become exercisable until after eight
years, although exercisability may be accelerated to the extent that earnings
per share goals are achieved. Under the terms of the Acquisition as they
pertain to these plans, unvested options held by employees of the Defense
Business will be canceled and replaced with Raytheon Company options. At
December 31, 1996, 279,363 options held by employees of the Defense Business
were unvested.
Employees of the Defense Business also have stock options outstanding under
an Employees Stock Option Purchase Plan approved by TI stockholders in 1988.
The plan provides for options to be offered to all eligible employees in
amounts based on a percentage of the employee's prior year's compensation.
Options granted become exercisable 14 months, and expire not more than 27
months, from the date of grant. Under the terms of the Acquisition, options
under this plan will not be converted to options of the Buyer.
Stock option transactions related to the Defense Business were as follows:
<TABLE>
<CAPTION>
LONG-TERM
INCENTIVE EMPLOYEES
AND WEIGHTED- STOCK WEIGHTED
STOCK AVERAGE OPTION AVERAGE
OPTION EXERCISE PURCHASE EXERCISE
PLANS PRICE PLAN PRICE
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Balance at Dec. 31, 1993................. 504,300 $17.33 143,025 $29.87
Granted................................ 222,500 35.32 195,796 41.07
Forfeited.............................. -- -- (70,852) 40.42
Expired................................ -- -- -- --
Exercised.............................. (147,600) 19.28 (86,144) 27.89
-------- ------ -------- ------
Balance at Dec. 31, 1994................. 579,200 $23.74 181,825 $38.75
Granted................................ 261,450 35.65 275,367 59.32
Forfeited.............................. (4,400) 33.63 (18,838) 54.41
Expired................................ -- -- -- --
Exercised.............................. (153,600) 20.97 (120,974) 37.62
-------- ------ -------- ------
Balance at Dec. 31, 1995................. 682,650 $28.85 317,380 $56.10
Granted................................ 232,500 45.88 232,880 56.32
Forfeited.............................. (4,850) 26.16 (99,512) 58.55
Expired................................ -- -- -- --
Exercised.............................. (17,800) 25.80 (122,074) 51.13
-------- ------ -------- ------
Balance at Dec. 31, 1996................. 892,500 $34.58 328,674 $57.36
======== ====== ======== ======
</TABLE>
In accordance with the terms of APB No. 25, the Defense Business has recorded
no compensation expense for TI stock option awards to employees of the Defense
Business. As required by SFAS No. 123, the following disclosures of
hypothetical values for stock option awards are provided below.
E-18
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The weighted-average grant-date value of options granted during 1996 was
estimated to be $18.47 under the Long-Term Incentive Plans (Long-Term Plans)
and $12.10 under the Employees Stock Option Purchase Plan (Employees Plan).
These values were estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions: expected dividend yields of 1.48%
(Long-Term Plans) and 1.21% (Employees Plan), expected volatility of 39%, risk-
free interest rates of 5.42% (Long-Term Plans) and 6.15% (Employees Plan); and
expected lives of 6 years (Long-Term Plans) and 1.5 years (Employees Plan). Had
compensation expense been recorded based on these hypothetical values, the
Defense Business' 1996 net income would have been $105.6 million. A similar
computation for 1995 would have resulted in net income of $90.1 million.~
Because options vest over several years and additional option grants are
expected, the effects of these hypothetical calculations are not likely to be
representative of similar future calculations.
The balance of options at December 31, 1996 for the Long-Term Plans and Stock
Option Plans includes 768,700 options held by current employees and 123,800
options held by employees who retired effective December 31, 1996. Summarized
information about stock options outstanding under the Long-Term Plans and Stock
Option Plans at December 31, 1996 for current employees of the Defense Business
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- ------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
- --------------- -------------- ----------- --------- --------------- --------
<S> <C> <C> <C> <C> <C>
$16.41 to 22.38 141,100 3.7 Years $18.65 141,100 $18.65
27.38 to 45.88 627,600 7.9 38.16 348,237 33.70
- --------------- ------- --------- ------ ------- ------
$16.41 to 45.88 768,700 7.1 $34.58 489,337 $29.36
</TABLE>
13. CONTINGENT LIABILITIES
The Defense Business is subject to various lawsuits, claims and proceedings
arising out of the normal conduct of business. TI management believes the
disposition of matters which are pending or asserted will not have a material
adverse effect on the financial statements of the Defense Business.
The Defense Business is included among a number of U.S. defense contractors
which are currently the subject of U.S. government investigations regarding
alleged procurement irregularities. The Defense Business is unable to predict
the outcome of the investigations at this time or to estimate the kinds or
amounts of claims or other actions that could be instituted against the Defense
Business. Under present government procurement regulations, such investigations
could lead to a government contractor's being suspended or debarred from
eligibility for awards of new government contracts. In the current environment,
even matters that seem limited to disputes about contract interpretation can
result in criminal prosecution. While criminal charges against contractors have
resulted from such investigations, the Defense Business does not believe such
charges would be appropriate in its case and has not, at any time, lost its
eligibility to enter into government contracts or subcontracts under these
regulations.
14. JOINT VENTURE
The Defense Business and Lockheed Martin Corporation ("LMC") have formed an
unincorporated contractual joint venture ("Joint Venture") to act as the prime
contractor for a contract with the US Army Missile Command to design and
produce antitank weapon systems. The Defense Business and LMC share profits and
losses from the Joint Venture in approximate relationship to the work effort
expended by each company. The Defense Business recognized revenue and profit,
respectively, from the Joint Venture of $71.6 million and
E-19
APPENDIX E
<PAGE>
DEFENSE BUSINESS
OF TEXAS INSTRUMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$14.5 million in 1996, $30.4 million and $5.3 million in 1995, and $12.4
million and $1.3 million in 1994. See also Note 2.
15. SPECIAL ACTIONS
Income before provision for income taxes for 1996 includes the effect of a
fourth quarter pretax charge of $32 million for voluntary and involuntary
severance actions. These actions were essentially completed by year-end 1996
and affected approximately 700 employees of the Defense Business. The pretax
charge included approximately $5.6 million associated with a curtailment and
settlement for Defense Business employees under the pension and retiree
healthcare benefit plans. Accrued severance remaining at December 31, 1996 for
these actions amounted to approximately $17.1 million.
E-20
APPENDIX E
<PAGE>
[LOGO OF RAYTHEON APPEARS HERE]
Dear Stockholder:
We propose to merge with the defense electronics business of Hughes
Electronics Corporation, a wholly owned subsidiary of General Motors
Corporation. The combined company will be named "Raytheon Company."
YOUR BOARD OF DIRECTORS UNANIMOUSLY URGES YOU TO APPROVE THE MERGER.
We want to merge with Hughes' defense business now because we think it will
help us to remain competitive in the U.S. defense industry. The marked decline
since the end of the Cold War in the U.S. defense procurement budget and, at
best, level defense spending projections for the next several years has already
spurred many of our competitors to merge. These budget reductions have
significantly altered the competitive landscape. As a result, industry
participants have been forced to increase economies of scale and operating
efficiencies in order to remain cost-competitive and technologically
innovative.
We believe that after the merger is completed, Raytheon will be able to
compete more successfully in this changing environment and maintain its
position as a leading contractor in what we strongly believe is the best
segment of the defense business for us--defense electronics. We also believe
that the merger will provide greater opportunities for long-term growth and
will allow us to provide greater returns to our stockholders.
As a result of the merger and our recent acquisition of the defense business
of Texas Instruments, you will have a stake in the nation's third largest
defense contractor. The combined company will also be a multi-industry, global
enterprise with established commercial businesses in aircraft, engineering and
construction and commercial electronics. In addition, Raytheon has the proven
ability to apply defense technologies in non-defense areas such as air traffic
control, wireless communications and environmental monitoring.
The merger is an exciting opportunity for our company and an important step
toward enabling us to compete most effectively in the 21st century. We look
forward to the challenges ahead.
Sincerely,
Dennis J. Picard
Chairman and Chief Executive Officer
DETACH HERE RTH3
[X] PLEASE MARK
VOTE 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 RAYTHEON COMPANY RECOMMENDS STOCKHOLDERS CONSENT TO
THE PROPOSAL BELOW.
- --------------------------------------------------------------------------------
1. APPROVAL OF THE MERGER OF RAYTHEON COMPANY WITH HE WITHHOLD
HOLDINGS, INC. AND ADOPTION OF THE MERGER CONSENT CONSENT ABSTAIN
AGREEMENT.
THE APPROVAL OF THE MERGER AND RELATED TRANSACTIONS, [_] [_] [_]
INCLUDING THE CONSUMMATION OF THE MERGER AND THE
CONSUMMATION OF THE OTHER TRANSACTIONS AND EVENTS
CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE
ADOPTION OF THE MERGER AGREEMENT.
PLEASE SIGN EXACTLY AS NAME(S)
APPEARS HEREON. JOINT OWNERS SHOULD
EACH SIGN PERSONALLY. WHEN SIGNING AS
EXECUTOR, ADMINISTRATOR, CORPORATION
OFFICER, ATTORNEY, AGENTS, TRUSTEE,
GUARDIAN OR IN OTHER REPRESENTATIVE
CAPACITY, PLEASE STATE YOUR FULL
TITLE AS SUCH.
Signature: ____________ Date: ______ Signature: ____________ Date: ___
<PAGE>
C O N S E N T
DETACH HERE
RAYTHEON COMPANY
CONSENT ACTION OF STOCKHOLDERS WITHOUT A MEETING
REVOCABLE CONSENT SOLICITED ON BEHALF OF RAYTHEON COMPANY
The undersigned, a common stockholder of Raytheon Company, acting with
respect to all of the shares of Common Stock, par value $1.00 per share
("Raytheon Common Stock"), held by the undersigned on October 14, 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 furnished herewith to
all stockholders of Raytheon Company who held shares of 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 Raytheon 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 Merger is conditioned upon receiving the consent of the
holders of a majority of the voting power of all outstanding shares of
Raytheon Common Stock. Unless previously revoked, this consent will be
effective when and if delivered along with consents representing the
percentage of shares indicated in the immediately preceding sentence to
Raytheon Company (but no sooner than 20 business days following the mailing of
the Solicitation Statement/Prospectus to Raytheon stockholders).
PLEASE SIGN AND DATE ON REVERSE SIDE
