SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): July 11, 1997
RAYTHEON COMPANY
(Exact name of registrant as specified in its charter)
Delaware 1-2833 04-1760395
(State of Incorporation) (Commission File (IRS Employer
Number) Identification
Number)
141 Spring Street
Lexington, Massachusetts 02173
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 862-6600<PAGE>
Item 2. Acquisition or Disposition of Assets.
As previously reported, on July 11, 1997, the
Registrant consummated the acquisition of the Defense
Systems and Electronics business ("TI Defense") of Texas
Instruments Incorporated. The consideration paid by the
Registrant in connection with the purchase of TI Defense
was $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 acquisition (and not including an additional payment of
$75 million in respect of a related assignment and license
of certain related intellectual property).
In connection with the closing of the acquisition, the
Registrant issued a press release, a copy of which is attached
hereto as Exhibit 99.1 and is specifically incorporated herein
by reference.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
(a) Financial Statements of the Businesses Acquired.
The audited statement of assets to be acquired and li-
abilities to be assumed of TI Defense as of December 31,
1996 and December 31, 1995 and the related statements of
income and cash flows for each of the three years in the
period ended December 31, 1996, were previously filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K,
dated May 23, 1997, and are hereby incorporated herein by
reference.
The unaudited statements of assets to be acquired and li-
abilities to be assumed of TI Defense as of March 31, 1997
and the related statements of income and cash flows for
each of the three months ended March 31, 1997 and March
31, 1996, were previously filed as Exhibit 99.4 to the
Company's Current Report on Form 8-K, dated May 23, 1997,
and are hereby incorporated herein by reference.
(b) Pro Forma Financial Information.
Raytheon Company pro forma condensed combined statement of
financial condition at March 30, 1997, and pro forma con-
densed combined statements of earnings for the twelve
months ended December 31, 1996, and for the three months
ended March 30, 1997, reflecting (a) Raytheon-TI Defense
and (b) Raytheon-TI Defense-Hughes Defense were previously
filed as Exhibit 99.3 to the Company's Current Report on<PAGE>
Form 8-K, dated May 23, 1997, and are hereby incorporated
herein by reference.
(c) Exhibits. The following exhibits are filed as part
of this report:
99.1 Press release, dated July 11, 1997.
99.2 Raytheon Company Current Report on Form 8-K, dated
May 23, 1997.<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned here-
unto duly authorized.
Dated: July 22, 1997
RAYTHEON COMPANY
By /s/ Thomas D. Hyde
Vice President and
General Counsel<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
99.1 Press release, dated July 11, 1997.
99.2 Raytheon Company Current Report on Form 8-K,
dated May 23, 1997.<PAGE>
RAYTHEON
_______________
FOR IMMEDIATE RELEASE News Release
Bob McWade
C-2393 7/11/97
(617) 860-2846
http://www.raytheon.com
RAYTHEON CLOSES TEXAS INSTRUMENTS TRANSACTION
LEXINGTON, Mass., (July 11, 1997) Raytheon Company
announced today that it has completed its acquisition of the
Texas Instruments' defense business.
Raytheon announced in January that it had reached
agreement to purchase the assets of Texas Instruments' defense
operations for $2.95 billion. The company received Justice
Department approval of the transaction on July 2nd. Raytheon
also announced in January that it had entered into agreements
with Hughes Electronics to bring about a merger between Hughes'
defense operations and Raytheon. That transaction is valued at
$9.5 billion.
Dennis J. Picard, Raytheon's chairman and chief executive
officer, said, "The industry has changed substantially in the
short period of time between Justice Department approval and
today's closing of the Texas Instruments' transaction.
Completing the TI deal today, and Hughes by the end of the
year, will help Raytheon to compete effectively in a rapidly
consolidating industry," he said.
"Raytheon will then have the necessary size and scope to
compete against other, larger firms with leadership positions
in key defense electronics markets," Mr. Picard said.
-more-<PAGE>
C-2393...2
Texas Instruments is a premier supplier of advanced
defense systems, including precision-guided weapons, airborne
radar, night vision systems and electronic warfare systems.
The addition of TI's business brings Raytheon's annualized
revenues to approximately $14 billion, defense electronics
revenues to approximately $7 billion, and defense electronics
backlog to approximately $9.3 billion (all on 1996 pro-forma
basis).
Raytheon Company, headquartered in Lexington, Mass., is a
$12.3 billion international high technology company which
operates in four business areas: commercial and defense
electronics, engineering and construction, aircraft and major
appliances. Raytheon celebrates its 75th anniversary this
year.
end
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): March 14, 1997
RAYTHEON COMPANY
(Exact name of registrant as specified in its charter)
Delaware 1-2833 04-1760395
(State of Incorporation) (Commission File (IRS Employer
Number) Identification
Number)
141 Spring Street
Lexington, Massachusetts 02173
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 862-6600<PAGE>
ITEM 5. OTHER EVENTS.
As previously disclosed in Raytheon Company's
("Raytheon") current report on Form 8-K dated January 6, 1997,
Raytheon and Texas Instruments Incorporated ("Texas Instru-
ments") entered into a definitive agreement pursuant to which
Raytheon agreed to purchase substantially all of the assets of,
and to assume substantially all of the liabilities related to,
the Defense Systems and Electronics business of Texas Instru-
ments ("TI Defense"), for $2.95 billion in cash, subject to
certain adjustments (the "Asset Purchase"). Consummation of
the Asset Purchase is subject to certain conditions, including
the expiration or termination of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended ("HSR Act"). On March 14, 1997, the parties received
a request from the Department of Justice ("DOJ") for further
information in connection with its review of the transaction.
Raytheon and Texas Instruments certified substantial compliance
with the request on May 5, 1997 and May 16, 1997, respectively.
The waiting period under the HSR Act will expire on June 5, 1997
unless such period is earlier terminated by the DOJ or the period
is extended by agreement of the parties. Raytheon expects the
transaction to close in the second quarter of 1997.
In Raytheon's current report on Form 8-K dated Janu-
ary 16, 1997, Raytheon also announced that Raytheon and HE
Holdings, Inc. ("HEH"), an indirect, wholly owned subsidiary of
General Motors Corporation ("GM"), have entered into a defini-
tive agreement to merge (the "Merger Agreement"), with the com-
bined company to be named Raytheon Company (the "Merger").
Prior to the Merger, GM and certain of its affiliates will con-
summate certain transactions, including a spin-off of HEH
(which will then consist primarily of the aerospace and defense
systems businesses ("Hughes Defense") of Hughes Electronics
Corporation, the parent corporation of HEH) to GM stockholders.
The Merger is subject to satisfaction of various conditions,
including the expiration or termination of the applicable
waiting period under the HSR Act. On April 26, 1997, the parties
received a request for further information from the DOJ in
connection with its review of the proposed Merger. Both parties
are currently working to comply with the request. The Merger is
also subject to certain other conditions, including certain
regulatory approvals and the approval of stockholders of both
companies. The transaction is expected to close in the third
quarter of 1997.
Certain audited financial information for (a) TI
Defense and (b) Hughes Defense as well as unaudited pro forma
combined condensed financial information for (c) Raytheon-TI
Defense after giving effect to the Asset Purchase and Raytheon-
TI Defense-Hughes Defense after giving effect to both the Asset
Purchase and the Merger is set forth under Item 7(c) below as
Exhibits 99.1, 99.2, and 99.3, respectively. In addition certain
interim financial information for TI Defense and Hughes Defense
is set forth in Exhibits 99.4 and 99.5, respectively.<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
99.1 The audited statement of assets to be acquired
and liabilities to be assumed of TI Defense as
of December 31, 1996 and December 31, 1995 and
the related statements of income and cash flows
for each of the three years in the period ended
December 31, 1996.
99.2 The audited combined balance sheet of Hughes
Defense as of December 31, 1996 and December 31,
1995 and the related combined statements of
income and parent company's net investment and
combined statement of cash flows for each of the
three years in the period ended December 31, 1996.
99.3 Raytheon Company pro forma condensed combined
statement of financial condition at
March 30, 1997, and pro forma condensed
combined statements of earnings for the
twelve months ended December 31, 1996, and
for the three months ended March 30 1997,
reflecting (a) Raytheon-TI Defense and
(b) Raytheon-TI Defense-Hughes Defense.
99.4 The unaudited statements of assets to be acquired
and liabilities to be assumed of TI Defense as of
March 31, 1997 and the related statements of income
and cash flows for each of the three months ended
March 31, 1997 and March 31, 1996.
99.5 The unaudited combined balance sheet of Hughes
Defense as of March 31, 1997 and December 31, 1996,
and the related combined statement of income and
parent Company's net investment and combined
statement of cash flows for the three months
ended March 31, 1997 and March 31, 1996.<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned here-
unto duly authorized.
Dated: May 23, 1997
RAYTHEON COMPANY
By /s/ Thomas D. Hyde
Thomas D. Hyde
Vice President and
General Counsel<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
99.1 The audited statement of assets to be
acquired and liabilities to be assumed
of TI Defense as of December 31, 1996
and December 31, 1995 and the related
statements of income and cash flows for
each of the three years in the period
ended December 31, 1996.
99.2 The audited combined balance sheet of
Hughes Defense as of December 31, 1996
and December 31, 1995 and the related
combined statements of income and parent
company's net investment and combined
statement of cash flows for each of the
three years in the period ended Decem-
ber 31, 1996.
99.3 Raytheon Company pro forma condensed
combined statement of financial
condition at March 30, 1997, and
pro forma condensed combined statements
of earnings for the twelve months ended
December 31, 1996, and for the three
months ended March 30, 1997, reflecting
(a) Raytheon-TI Defense and (b) Raytheon-TI
Defense-Hughes Defense.
99.4 The unaudited statements of assets to be
acquired and liabilities to be assumed of
TI Defense as of March 31, 1997 and the
related statements of income and cash flows
for each of the three months ended
March 31, 1997 and March 31, 1996.
99.5 The unaudited combined balance sheet of
Hughes Defense as of March 31, 1997 and
December 31, 1996, and the related combined
statement of income and parent Company's net
investment and combined statement of cash
flows for the three months ended March 31,
1997 and March 31, 1996.<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the use of our report dated February 18, 1997, with
respect to the financial statements of the Defense Business of
Texas Instruments Incorporated included in this Current Report on
Form 8-K of Raytheon Company.
We also consent to the incorporation by reference in the
Registration Statements of Raytheon Company and Subsidiaries
Consolidated on Form S-8 (File Nos. 2-55841, 2-87308, 2-93903, 2-
93871, 33-3720, 33-3723, 33-5650, 33-10811, 33-14165, 33-15242, 33-
15396, 33-15397, 33-15398, 33-21454, 33-21741, 33-22211, 33-23449,
33-23751, 33-24695, 33-49041, 33-49033, and 333-22969) and on Form
S-3 (File Nos. 33-49045, 33-49269, and 33-59241) of our report
dated February 18, 1997, with respect to the financial statements
of the Defense Business of Texas Instruments Incorporated included
in this Current Report on Form 8-K of Raytheon Company.
/s/ Ernst & Young LLP
Dallas, Texas
May 20, 1997
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statements of Raytheon Company on Form S-8 (File Nos. 2-55841, 2-
66470, 2-67270, 2-87308, 2-93903, 2-93871, 33-3720, 33-3723, 33-
5650, 33-10811, 33-14165, 33-15242, 33-15396, 33-15397, 33-15398,
33-21454, 33-21741, 33-22211, 33-23449, 33-23751, 33-24695, 33-
49041, 33-49043, 333-22969, 33-60635) and on Form S-3 (File Nos.
33-49045, 33-49269, and 33-59241) of our report dated March 21,
1997, appearing in this current report on Form 8-K of Raytheon
Company dated on or about May 22, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Los Angeles, California
May 22, 1997
<PAGE>
EXHIBIT 99.1
Financial Statements
Defense Business
of Texas Instruments Incorporated
Years ended December 31, 1996, 1995 and 1994
with Report of Independent Auditors<PAGE>
Defense Business
of Texas Instruments Incorporated
Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Auditors............................ 1
Audited Financial Statements
Statements of Assets to be Acquired and
Liabilities to be Assumed............................... 2
Statements of Income...................................... 3
Statements of Cash Flows.................................. 4
Notes to Financial Statements............................. 5
2<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
3<PAGE>
<TABLE>
Defense Business
of Texas Instruments Incorporated
Statements of Assets to be Acquired and Liabilities to be
Assumed
(In thousands of dollars)
<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
========== =========
See accompanying notes.
</TABLE>
4<PAGE>
<TABLE>
Defense Business
Of Texas Instruments Incorporated
Statements of Income
(In thousands of dollars)
<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
========== ========== =========
See accompanying notes.
</TABLE>
5<PAGE>
<TABLE>
Defense Business
Of Texas Instruments Incorporated
Statements of Cash Flows
(In thousands of dollars)
<CAPTION>
Years ended December 31
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Cash flows from operating activities:
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 $ - $ - $ -
========= ========= ========
See accompanying notes.
</TABLE>
6<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
7<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
1. BASIS OF PRESENTATION (continued)
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 approxi-
mated $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 manage-
ment system wherein cash receipts are transferred to and cash
disbursements are funded by TI. Since cash and cash equiva-
lents 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.
2. ACCOUNTS RECEIVABLE
DECEMBER 31
1996 1995
-------- --------
(In Thousands)
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
======== ========
Accounts Receivable from commercial customers include amounts
receivable under subcontracts with government prime contrac-
tors. 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.
8<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
3. INVENTORIES
DECEMBER 31
1996 1995
-------- --------
(In Thousands)
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
========== ========
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 deter-
mined under the learning curve concept, which anticipates a
predictable decrease in unit costs as tasks and production
techniques become more efficient through repetition. Produc-
tion 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.
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost less accumu-
lated depreciation. Depreciation is computed primarily using
the sum-of-the-years-digits method for buildings and improve-
ments 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.
9<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
4. PROPERTY, PLANT, AND EQUIPMENT (CONTINUED)
Depreciable December 31
Lives 1996 1995
---------- ------ ------
(In Thousands)
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
========= =========
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
DECEMBER 31 DECEMBER 31
1996 1995
---------- ----------
(In Thousands)
Goodwill $40,407 $ 46,204
Other assets 31 258
-------- ---------
$ 40,438 $ 46,462
========= =========
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.
10<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31
1996 1995
---- ----
(In Thousands)
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
========= ========
7. FINANCIAL INSTRUMENTS AND RISK CONCENTRATION
As of December 31, 1996 and 1995, the Defense Business had for-
ward currency exchange contracts outstanding of $22.1 million
and $88.9 million, respectively, to hedge specific firm commit-
ments for multi-year product sale transactions denominated in
pound sterling. The carrying amounts and current market settl-
ement 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 re-
ceivable. 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.
11<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
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:
1996 1995 1994
---- ---- ----
Cost 38% 32% 27%
Firm-fixed-price 55% 64% 65%
Fixed-price-incentive 7% 4% 8%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
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.
12<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
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.
13<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
10. PROFIT SHARING AND RETIREMENT PLANS (CONTINUED)
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.
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.
14<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
10. PROFIT SHARING AND RETIREMENT PLANS (CONTINUED)
Pension expense of the Defense Business includes the following
components:
1996 1995 1994
-----------------------
(In Thousands)
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
======== ======== ========
The funded status of the TI plan relating to employees of the
Defense Business was as follows:
December 31
1996 1995
-----------------------
(In Thousands)
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)
========= ========
The projected benefit obligations for 1996 and 1995 were deter-
mined using assumed discount rates of 7.25% and 7.0%, respec-
tively, 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%.
15<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
10. PROFIT SHARING AND RETIREMENT PLANS (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:
1996 1995 1994
--------------------
(In Thousands)
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
======= ======== ========
16<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
10. PROFIT SHARING AND RETIREMENT PLANS (CONTINUED)
The funded status of the TI plan relating to Defense Business
employees was as follows:
December 31
1996 1995
-----------------------
(In Thousands)
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)
========= =========
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%.
11. INCOME TAXES
The operations of the Defense Business are included in the con-
solidated 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 ac-
quired 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.
17<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
11. INCOME TAXES (CONTINUED)
The components of the provisions for income taxes were as fol-
lows:
1996 1995 1994
----------------------------
(In Thousands)
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:
1996 1995 1994
----------------------------
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
======= ======= =======
18<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
11. INCOME TAXES (CONTINUED)
The income tax provisions were calculated based upon the
following components of income before income taxes:
1996 1995 1994
-------------------------
(In Thousands)
United States income $ 170,618 $134,480 $ 153,747
Foreign Income 4,348 14,518 1,559
--------- --------- ---------
Total $ 174,966 $ 148,998 $ 155,306
========= ========= =========
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 out-
standing 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.
19<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
12. STOCK OPTIONS (CONTINUED)
Stock option transactions related to the Defense Business were
as follows:
LONG-TERM
INCENTIVE EMPLOYEES
AND WEIGHTED- STOCK WEIGHTED
STOCK AVERAGE OPTION AVERAGE
OPTION EXERCISE PURCHASE EXERCISE
PLANS PRICE PLAN PRICE
----------------------------------------
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
========================================
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.
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 esti-
mated 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.
20<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
12. STOCK OPTIONS (CONTINUED)
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:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- NUMBER WEIGHTED
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE AT DEC. 31, EXERCISE
EXERCISE PRICES DEC. 31, 1996 LIFE PRICE 1996 PRICE
- ------------------------------------------------------------------------------
$ 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
==============================================================================
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 regula-
tions, such investigations could lead to a government contrac-
tor'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.
21<PAGE>
Defense Business
of Texas Instruments Incorporated
Notes to Financial Statements
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 $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.
22
<PAGE>
EXHIBIT 99.2
THE DEFENSE BUSINESS OF
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 AND
INDEPENDENT AUDITORS' REPORT<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Defense Business of Hughes Electronics Corporation:
We have audited the Combined Balance Sheet of the Defense Business
of Hughes Electronics Corporation and subsidiaries (the Defense
Business) as of December 31, 1996 and 1995 and the related
Combined Statement of Income and Parent Company's Net Investment
and Combined Statement of Cash Flows for each of the three years
in the period ended December 31, 1996. These financial statements
are the responsibility of the Defense Business' 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 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.
As discussed in Note 2 to the combined financial statements,
effective January 1, 1994 the Defense Business changed its method
of accounting for postemployment benefits.
/s/ Deloitte & Touche LLP
March 21, 1997<PAGE>
<TABLE>
THE DEFENSE BUSINESS OF
HUGHES ELECTRONICS CORPORATION
COMBINED STATEMENT OF INCOME AND
PARENT COMPANY'S NET INVESTMENT
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Millions)
<CAPTION>
Years Ended December 31,
----------------------------
1996 1995 1994
----------------------------------------------------------------
<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
----------------------------------------------------------------
Reference should be made to the Notes to Combined Financial Statements.
</TABLE>
1<PAGE>
<TABLE>
THE DEFENSE BUSINESS OF
HUGHES ELECTRONICS CORPORATION
COMBINED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
(Dollars in Millions)
<CAPTION>
December 31,
---------------
ASSETS 1996 1995
----------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 59.7 $ 15.7
Accounts and notes receivable (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 CONTINGENCIES
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
-----------------------------------------------------------------
Reference should be made to the Notes to Combined Financial Statements.
</TABLE>
2<PAGE>
<TABLE>
THE DEFENSE BUSINESS OF
HUGHES ELECTRONICS CORPORATION
COMBINED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Millions)
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
-----------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
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 and other 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)
(Distributions to) contributions from
Parent Company (136.1) 173.2 (354.8)
-----------------------------------------------------------------
NET CASH (PROVIDED BY) USED IN 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
-----------------------------------------------------------------
Reference should be made to the Notes to Combined Financial
Statements.
</TABLE>
3<PAGE>
THE DEFENSE BUSINESS OF
HUGHES ELECTRONICS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
On January 16, 1997, HE Holdings, Inc., a wholly owned subsidiary
of Hughes Electronics Corporation (Hughes), General Motors Corpo-
ration (GM), the parent of Hughes, and Raytheon Company
(Raytheon) entered into various agreements (such agreements are
referred to herein as the Merger Agreements) pursuant to which
the defense business of Hughes (the Defense Business) will be
spun-off to holders of GM's common stocks, followed immediately
by the tax-free merger of the Defense Business with Raytheon.
This transaction is subject to, among other things, the approval
of GM's $1-2/3 par value and Class H stockholders, the approval
of Raytheon's stockholders and the receipt of various regulatory
approvals.
The Defense Business is not a legal entity. The combined finan-
cial statements present the financial position, results of opera-
tions and cash flows of the Defense Business, which consists pri-
marily of operations included in the Aerospace and Defense
Systems segment of Hughes, certain other businesses identified in
the Merger Agreements and certain Hughes Corporate assets,
liabilities, income and expenses attributable to the Defense
Business. The combined financial statements do not include cer-
tain other defense operations of Hughes which will not be merged
with Raytheon, consisting principally of the defense business of
Hughes currently reported in the Hughes Telecommunications and
Space segment. All transactions and balances between the enti-
ties included in the combined financial statements have been
eliminated. All Defense Business amounts due from or payable to
other Hughes businesses, excluding amounts included in loans pay-
able to affiliate, have been reported in Parent Company's Net
Investment.
The combined financial statements include allocations of corpo-
rate expenses from Hughes including research and development,
general management, human resources, financial, legal, tax, qual-
ity, communications, marketing, international, employee benefits
and other miscellaneous services. These costs and expenses have
been charged to the Defense Business 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; how-
ever, they do not necessarily equal the costs that the Defense
Business would have incurred on a stand-alone basis. The finan-
cial information included herein may not necessarily reflect the
financial position, results of operations and cash flows of the
Defense Business on a standalone basis in the future.
The Defense Business participates in a centralized cash manage-
ment system wherein cash receipts are transferred to and cash
disbursements are funded by Hughes daily. Accordingly, the Com-
bined Balance Sheet includes only cash and cash equivalents held
by the Defense Business, 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.
The Defense Business operates in one segment: the development,
production and support of advanced electronics systems including
missile, airborne radar and communications, information, training
and simulation, command and control, torpedoes and sonar, elec-
tro-optical, air traffic control, and guidance and control.
4<PAGE>
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 gener-
ally 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 in-
curred 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 the Defense Business and by Hughes on behalf
of the Defense Business 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 on behalf of the Defense Business
amounted to $226.6 million, $299.0 million and $209.1 million in
1996, 1995 and 1994, respectively.
5<PAGE>
ACCOUNTS RECEIVABLE AND CONTRACTS IN PROCESS
Accounts receivable principally are related to long-term con-
tracts 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 prog-
ress payments applied. Engineering, tooling, manufacturing, and
applicable overhead costs, including administrative, research and
development, and selling expenses, are charged to costs and ex-
penses when incurred. Contracts in process include amounts
relating to contracts with long production cycles, and $87.3 mil-
lion 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 adjust-
ments. Under certain contracts with the U.S. Government, prog-
ress payments are received based on costs incurred on the respec-
tive contracts. Title to the inventories related to such
contracts (included in contracts in process) vests with the U.S.
Government.
INVENTORIES
Inventories are stated at the lower of cost or market, princi-
pally using the average cost method.
Major Classes of Inventories
(Dollars in Millions) 1996 1995
-----------------------------------------------------------------
Productive material and supplies $ 63.5 $ 75.6
Work in process and finished goods 274.2 215.7
-----------------------------------------------------------------
Total $337.7 $291.3
------------------------------------------------------------------
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. The acquisition
of HAC was accounted for as a purchase. The excess of the pur-
chase price over the net tangible assets acquired, $4,244.7 mil-
lion, was assigned to intangible assets, primarily goodwill. The
portion of such intangible assets and related amortization at-
tributable to the Defense Business has been reflected in the
accompanying combined financial statements.
Intangible assets are amortized using the straight-line method
over periods not exceeding 40 years. Recoverability is periodi-
cally evaluated by assessing whether the unamortized carrying
amount can be recovered over its remaining life through undis-
counted cash flows generated by underlying tangible assets.
6<PAGE>
INCOME TAXES
The Defense Business, along with other Hughes businesses and sub-
sidiaries, joins with GM in filing a consolidated U.S. federal
income tax return. Current and deferred income taxes are
computed by Hughes and allocated to the Defense Business
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 has paid the Defense
Business' share of the consolidated income tax liability. The
income taxes that would have been paid by the Defense Business if
it were a separate taxpayer but were not paid under Hughes'
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 $103.6 million in 1994.
FINANCIAL INSTRUMENTS
Hughes enters into foreign exchange-forward contracts on behalf
of the Defense Business to reduce the Defense Business' exposure
to fluctuations in foreign exchange rates. Such foreign ex-
change-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 cur-
rency commitments.
FOREIGN CURRENCY
Substantially all of the Defense Business' foreign operations
have determined the local currency to be their functional cur-
rency. 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 trans-
lated at the average rates in effect during the year. The re-
lated translation adjustments are included in the foreign cur-
rency translation adjustment in the Combined Statement of Income
and Parent Company's Net Investment. Foreign currency transac-
tion net gains and losses included in the combined operating
results were not material in all years presented.
MARKET CONCENTRATIONS
Sales under United States Government contracts were approximately
70%, 71% and 74% of net sales in 1996, 1995 and 1994, respec-
tively. No single United States Government program accounted for
more than 10% of revenues.
7<PAGE>
NEW ACCOUNTING STANDARDS
Effective January 1, 1996, Hughes adopted SFAS No. 121, Account-
ing 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 iden-
tifiable 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 account-
ing standard did not have a material effect on the Defense Busi-
ness' combined operating results or financial position.
Effective January 1, 1994, Hughes adopted SFAS No. 112, Employ-
ers' Accounting for Postemployment Benefits. The Statement
requires accrual of the costs of benefits provided to former or
inactive employees after employment, but before retirement. The
unfavorable cumulative effect on the Defense Business of adopting
this Standard was $7.1 million, net of income taxes of $4.4 mil-
lion. The charge primarily related to extended disability bene-
fits which are accrued on a service-driven basis.
NOTE 3: RELATED PARTY TRANSACTIONS
The following table summarizes the significant related party
transactions between the Defense Business and other GM and Hughes
entities:
(DOLLARS IN MILLIONS) 1996 1995 1994
-------------------------------------------------------------------
REVENUES $ 400.0 $ 273.6 $ 219.1
Costs and expenses:
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
Imputed interest was charged at a rate of 3.6% to the Defense
Business based on the Defense Business' average adjusted net
operating assets for the years ended 1996, 1995 and 1994.
NOTE 4: PROPERTY - NET
ESTIMATED
USEFUL
LIVES
(DOLLARS IN MILLIONS) (YEARS) 1996 1995
------------------------------------------------------------------
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
-----------------------------------------------------------------
8<PAGE>
NOTE 5: NOTES AND LOANS PAYABLE AND LONG-TERM DEBT AND
CAPITALIZED LEASES
(DOLLARS IN MILLIONS) 1996 1995
--------------------------------------------------------------
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
----------------------------------------------------------------
At December 31, 1996, loans payable to affiliate, a subsidiary
of GM, consists of $82.9 million with a maturity date of July
15, 1997, of which $34.9 million bears interest at a rate which
approximates the London Interbank Offered Rate (LIBOR) plus
0.10% and the remaining $48.0 million bears interest at a rate
which approximates LIBOR plus 0.625%. At December 31, 1996, all
foreign bank debt was denominated in British pounds sterling,
bearing interest at rates ranging from 5.9% to 7.1%, with
maturity dates from 1997 to 2003.
Annual maturities of long-term debt and capitalized leases are
$1.4 million in 1997, $2.4 million in 1998, $2.5 million in
1999, $2.8 million in 2000, $3.1 million in 2001, and $23.6
million thereafter.
Property with a net book value of $14.8 million at December 31,
1996 was pledged as collateral under such debt.
NOTE 6: ACCRUED LIABILITIES
(DOLLARS IN MILLIONS) 1996 1995
--------------------------------------------------------------
Payrolls and others 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
--------------------------------------------------------------
9<PAGE>
NOTE 7: INCOME TAXES
The income tax provision consisted of the following:
(DOLLARS IN MILLIONS) 1996 1995 1994
--------------------------------------------------------------------
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*
--------------------------------------------------------------------
* Excluding effect of accounting change.
Income before income taxes included the following components:
(DOLLARS IN MILLIONS) 1996 1995 1994
--------------------------------------------------------------------
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
--------------------------------------------------------------------
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:
(DOLLARS IN MILLIONS) 1996 1995 1994
--------------------------------------------------------------------
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
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)
--------------------------------------------------------------------
Total Income Tax Provision $ 239.3 $ 235.4 $ 226.2*
--------------------------------------------------------------------
* Excluding effect of accounting change.<PAGE>
Temporary differences and carryforwards which gave rise to
deferred tax assets and liabilities at December 31, 1996 and 1995
were as follows:
1996 1995
----------------- ----------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
(DOLLARS IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES
-----------------------------------------------------------------------
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
-----------------------------------------------------------------------
No provision has been made for U.S. Federal income taxes to be
paid on the portion of the undistributed earnings of foreign sub-
sidiaries 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.
10<PAGE>
At December 31, 1996, the Defense Business 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 carryfor-
wards.
NOTE 8: RETIREMENT AND INCENTIVE PLANS
Certain employees of the Defense Business and other Hughes busi-
nesses participate in bargaining and non-bargaining defined bene-
fit retirement plans (the Plans) maintained by Hughes. These
Plans are available to substantially all full-time employees of
the Defense Business. 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 the Defense Business have not been
separately determined and are not included in the Combined Balance
Sheet. However, the fair value of plan assets exceeds the
accumulated plan benefit obligations related to these Plans. In
addition, employees of the Defense Business and other Hughes
businesses participate in certain other postretirement and
postemployment benefit plans, principally health and life insur-
ance plans, which are unfunded. The accumulated postretirement
and postemployment benefit obligations related to employees of the
Defense Business have not been separately determined and are not
included in the Combined Balance Sheet. The Defense Business
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, respec-
tively.
Certain other Defense Business employees (principally foreign
employees and those employed by the businesses acquired in the
CAE-Link and Magnavox Electronic Systems Company acquisitions -
see Note 10) are covered by contributory and non-contributory
defined benefit retirement plans, where benefits are based on
years of service and compensation earned during a specified period
of time before retirement. The net pension cost, assets and
liabilities related to these plans are not significant.
Certain eligible employees of the Defense Business 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 nonqualified options
generally expire 10 years from the dates of grant and are subject
to earlier termination under certain conditions.
Employees of the Defense Business also participate in other Hughes
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 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 the Defense Business and comprehended a reduction
of the Defense Business worldwide employment, a major facilities
consolidation, and a reevaluation of certain business lines that
no longer met the Defense Business' strategic objectives.
Restructuring costs of $75.4 million, $140.8 million, and $184.4
million attributable to the Defense Business were charged against
the reserve during 1996, 1995, and 1994, respectively. The
remaining liability attributable to the Defense Business 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 the next year.
11<PAGE>
NOTE 10: ACQUISITIONS AND DIVESTITURES
In December 1996, the Defense Business announced that it had
reached an agreement to acquire the Marine Systems Division of
Alliant Techsystems, Inc. for $141.0 million. The Marine Systems
Division is a leader in lightweight torpedo manufacturing and the
design and manufacturing of underwater surveillance, sonar, and
mine warfare systems. The acquisition was completed in the first
quarter of 1997. Also in 1996, the Defense Business acquired an
enterprise with operations that complement existing technological
capabilities for $28.7 million.
In February 1995, the Defense Business 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, the Defense Business acquired all of the stock of
Magnavox Electronic Systems Company (Magnavox) for $382.4 million.
Magnavox is a leading supplier of military tactical commu-
nications, 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 the Defense Business from their respective
acquisition dates. These acquisitions did not have a material
impact on the operating results of the Defense Business. 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 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 enters into transactions
utilizing financial instruments with off-balance sheet risk on
behalf of the Defense Business to reduce the Defense Business'
exposure to fluctuations in foreign exchange rates. The primary
class of derivatives used is foreign exchange-forward contracts.
These instruments involve, to varying degrees, elements of credit
risk in the event a counterparty should default and market risk as
the instruments are subject to rate and price fluctuations.
Credit risk is managed through the periodic monitoring and
approval of financially sound counterparties. Market risk is
mitigated because the derivatives are used to hedge underlying
transactions. Cash receipts or payments on these contracts nor-
mally occur at maturity. Hughes holds derivatives on behalf of
the Defense Business 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 uses these agreements on behalf of the Defense
Business to hedge risk of changes in foreign currency exchange
rates associated with certain firm commitments denominated in
foreign currency.
The total notional amount of foreign exchange-forward contracts
entered into by Hughes on behalf of the Defense Business at
December 31, 1996 and 1995, was approximately $23.1 million and
$31.0 million, respectively. Such open contracts extend for
periods averaging six months.
12<PAGE>
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 the
Defense Business 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 the Defense Business 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 estimated fair value of open contracts held
by Hughes on behalf of the Defense Business which were in a net
gain position, was $1.2 million and $0.1 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 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. 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, approxi-
mately 85% of the costs incurred under the agreement are attri-
butable to the Defense Business. The contract is cancelable by
Hughes with substantial early termination penalties.
Minimum future commitments under operating leases having noncan-
celable 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, the
Defense Business is contingently liable under standby letters of
credit and bonds in the amount of $211.8 million and $242.6 mil-
lion at December 31, 1996 and 1995, respectively. In the Defense
Business' past experience, no material claims have been made
against these financial instruments.
The Defense Business is subject to potential liability under gov-
ernment regulations and various claims and legal actions which are
pending or may be asserted against it. The aggregate ultimate
liability of the Defense Business under these government regula-
tions, and under these claims and actions, was not determinable at
December 31, 1996. In the opinion of Hughes and Defense Business
management, such liability is not expected to have a material
adverse effect on the Defense Business' combined operations or
financial position.
13<PAGE>
NOTE 14: EXPORT SALES
Export sales from the U.S. were as follows:
(DOLLARS IN MILLIONS) 1996 1995 1994
---------------------------------------------------------------
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
----------------------------------------------------------------
14
<PAGE>
EXHIBIT 99.3
PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The following pro forma combined condensed financial
statements have been prepared by the Corporation's management from its
historical consolidated financial statements and from the historical
financial statements of Texas Instruments defense operations (TI Defense)
and Hughes Electronics defense operations (Hughes Defense). The
pro forma combined condensed statements of earnings reflect adjustments as
if the transactions had occurred on January 1, 1996. The pro forma
combined condensed balance sheet reflects adjustments as if the
transactions had occurred on March 30, 1997. See "Note 1 -- Basis of
Presentation." The pro forma adjustments described in the accompanying
notes are based upon preliminary estimates and certain assumptions that
management of the Corporation believes are reasonable in such
circumstances.
The pro forma combined condensed financial statements should be read
in conjunction with the historical consolidated financial statements of
the Corporation (Raytheon Financial Statements) and the related notes
thereto and with the historical financial statements of TI Defense and
Hughes Defense and the related notes thereto.
The pro forma combined condensed financial statements are
not necessarily indicative of what the financial position or results of
operations actually would have been if the transactions 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 the transactions, which the
company expects to realize commencing in the first year of operation.
In January 1997, Raytheon entered into definitive agreements to
purchase the assets of Texas Instruments' (TI) defense operations for
$2.95 billion in cash and to merge with Hughes Electronics' defense
operations, with the combined company to be called Raytheon. The Hughes
transaction 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 the
merged company. (Refer to Note R of the Raytheon Financial Statements
for a full description of the Hughes transaction).
The two transactions are subject to regulatory approvals, including Hart-
Scott-Rodino antitrust review, with the Hughes transaction also subject to a
favorable ruling by the Internal Revenue Service and approval by Raytheon,
General Motors $1 2/3 par value and Class H stockholders.<PAGE>
<TABLE>
PRO FORMA COMBINED CONDENSED
STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE)
<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)(2c) 11,169 5,216 (18)(3c) 16,430
(12)(2d) (95)(3d)
69 (2g) 187 (3g)
(52)(2e) (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 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(2f) 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)(2h) 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
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
/TABLE
<PAGE>
<TABLE>
PRO FORMA COMBINED CONDENSED
STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 30, 1997
(IN MILLIONS, EXCEPT PER SHARE)
<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 $ 2,899 $ 400 $ 3,299 $ 1,674 $ 4,973
-------- ------- ------ ------- ------- ------ ---------
COST OF SALES 2,221 309 (2)(2c) 2,537 1,377 (6)(3c) 3,924
(3)(2d) (24)(3d)
17 (2g) 47 (3g)
(5)(2e) (7)(3e)
AMORTIZATION OF PUSH-DOWN GOODWILL 25 (25)(3C) 0
ADMINISTRATION AND SELLING EXPENSES 260 28 288 91 379
RESEARCH AND DEVELOPMENT EXPENSES 79 18 97 35 132
SPECIAL CHARGES 0 0 0 0
---- -- --- --- --- --- ---
OPERATING INCOME 339 45 (7) 377 146 15 538
INTEREST EXPENSE 69 69 25 (25)(3i) 69
INTEREST INCOME (6) (6) (6)
ACQUISITION INTEREST EXPENSE 50(2f) 50 75 (3f) 125
OTHER (INCOME) EXPENSE (2) 1 (1) (5) (6)
--- -- --- ---- --- --- ---
INCOME BEFORE TAX 278 44 (57) 265 126 (35) 356
FEDERAL AND FOREIGN INCOME TAXES 95 17 (20)(2h) 92 54 (6)(3h) 140
--- -- --- --- -- --- ---
NET INCOME $ 183 $ 27 $ (37) $ 173 $ 72 $ (29) $ 216
-------- ------- -------- ------- ------- -------- ---------
EARNINGS PER COMMON SHARE
OUTSTANDING SHARES $ 0.78 $ 0.73 $ 0.64
FULLY DILUTED $ 0.77 $ 0.72 $ 0.63
AVERAGE COMMON SHARES
OUTSTANDING 236 236 103 339
FULLY DILUTED 239 239 103 342
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
/TABLE
<PAGE>
<TABLE>
PRO FORMA COMBINED CONDENSED
BALANCE SHEET AS OF MARCH 30, 1997
----------------------------------
(IN MILLIONS)
-------------
<CAPTION>
HISTORICAL
HISTORICAL HISTORICAL RECLASSI- PRO FORMA PRO FORMA HUGHES PRO FORMA PRO FORMA
RAYTHEON TI DEFENSE FICATIONS ADJUSTMENTS COMBINED DEFENSE ADJUSTMENTS COMBINED
-------- --------- --------- ----------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
CASH & MARKETABLE SECURITIES $ 134 $ 134 $ 57 $ (57)(3b) $ 134
ACCOUNTS RECEIVABLE 844 251 (221)(2i) 874 690 1,564
CONTRACTS IN PROCESS 2,817 436 (2i) (85)(2b,d) 3,168 1,664 (190)(3b) 4,642
INVENTORIES 1,709 245 (215)(2i) 1,739 408 2,147
OTHER 422 2 424 321 745
----- --- --- ----- --- --- ----- -----
TOTAL CURRENT ASSETS 5,926 498 (85) 6,339 3,140 (247) 9,232
PROPERTY, PLANT AND EQUIPMENT, 1,853 315 2,168 1,107 9 (3b) 3,284
NET COST IN EXCESS OF NET ASSETS
ACQUIRED 3,051 43 (43)(2b) 5,778 2,970 (2,970)(3b) 13,263
2,727 (2b) 7,485 (3b)
PENSION ASSET 1,109 (3b) 1,109
OTHER ASSETS 666 1 66(2b) 733 139 214 (3b) 1,086
----- --- ----- --- --- ----- -----
TOTAL ASSETS $ 11,496 $ 857 $2,665 $15,018 $7,356 $5,600 $27,974
=========== ====== ====== ======= ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
NOTES PAYABLE AND CURRENT $ 2,403 $ 740(2a) $ 3,143 $ 100 $2,310 (3a) $ 5,553
PORTION OF LONG-TERM DEBT
ADVANCE PAYMENTS 414 414 388 802
ACCOUNTS PAYABLE 1,165 215 1,380 298 1,678
OTHER 965 53 78(2b) 1,096 882 547 (3b) 2,525
----- --- ----- --- --- ----- -----
TOTAL CURRENT LIABILITIES 4,947 268 818 6,033 1,668 $2,857 $10,558
LONG-TERM DEBT AND CAPITALIZED
LEASES 1,499 2,250(2a) 3,749 31 2,130 (3a) 5,910
OTHER 333 186 519 305 900 (3b) 1,724
STOCKHOLDERS' EQUITY:
COMMON STOCK AT PAR 236 236 103 (3a) 339
ADDITIONAL PAID-IN-CAPITAL 285 285 4,962 (3a) 5,247
AND OTHER ADJUSTMENTS
RETAINED EARNINGS 4,196 403 (403) 4,196 5,352 (5,352)(3b) 4,196
----- --- ----- --- --- ----- -----
TOTAL STOCKHOLDERS' EQUITY 4,717 403 (403) 4,717 5,352 (287) 9,782
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 11,496 $ 857 $2,665 $15,018 $7,356 $5,600 $27,974
=========== ===== ====== ======= ====== ====== =======
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS<PAGE>
NOTES TO 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 the Corporation,
TI Defense and Hughes Defense for the year ended December 31, 1996 and
for the three months ended March 30, 1997, with pro forma adjustments as
if the transactions had taken place on January 1, 1996. The pro
forma combined condensed balance sheet presents the historical balance
sheets of the Corporation, TI Defense and Hughes Defense as of March 30,
1997, with pro forma adjustments as if the transactions had been
consummated as of March 30, 1997, in transactions accounted for as
purchases in accordance with generally accepted accounting principles.
Certain reclassifications have been made to the historical financial
statements of the Corporation, 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 transaction
(dollars in millions, except per share data):
(a) To record the Exchange Consideration at Closing:
Purchase Price $2,950
(Assumed financing of $740 variable rate
short-term and $2,250 fixed rate medium- and
long-term at an aggregate interest rate
of 6.31% including acquisition costs of $40)
(b) To adjust the assets and liabilities to their
estimated fair values:
Net assets of TI Defense at March 30, 1997 $ 403
Contracts in process valuation adjustments (85)
Provision for the estimated exit costs
of integrating acquired operations (78)
Deferred tax benefits 66
Costs in excess of net assets of acquired business 2,727
Acquisition costs (40)
Elimination of TI Defense goodwill (43)
======
$2,950
(c) Adjustment to eliminate the amortization of
intangible assets of TI Defense which would not
have been incurred if the transaction 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 the Corporation's
normal profit on its efforts to complete such contracts, and
other contract valuation adjustments.<PAGE>
-2-
(e) Elimination of $32 million of non-recurring employee related
costs and $20 million of non-recurring corporate
allocations from the parent of TI Defense as a result of
the transaction for the year ended December 31, 1996 and
$5 million of non-recurring corporation allocations for
the three months ending March 30, 1997.
(f) Adjustments which represent additional estimated
interest expense resulting from the use of borrowings
to finance the transaction and incremental interest on
Raytheon's pre-transaction variable rate borrowings to
reflect the change in credit rating as a result of the
transaction.
(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. The Corporation expects that
any subsequent adjustment would not materially
effect the combined pro forma results.
(h) The estimated tax effect on the applicable pro forma
adjustments.
(i) Certain reclassifications have been made to conform
the TI Defense historical financial statements to
the pro forma combined condensed financial statement
presentation.
3. PRO FORMA ADJUSTMENTS - HUGHES DEFENSE
The following adjustments give pro forma effect to the transaction
(dollars in millions, except per share data):
(a) To record the Exchange Consideration at Closing:
Purchase Price ($9,500 less acquired debt of $120) $9,380
Assumed financing is based on the price per share
of the Corporation's stock at the announcement date of
the merger:
Equity - 103 million shares at assumed market
value of $49.17 totals $5,065
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 borrowing of
$2,310 and fixed rate medium- and long-
term of $2,130 at an aggregate
interest rate of 6.37%<PAGE>
-3-
(b) To adjust the assets and liabilities to their
estimated fair values:
Net assets of Hughes Defense at March 30, 1997 $5,352
Additional assets to be recorded in the transaction 57
Additional liabilities to be recorded in the transaction (105)
Cash not included in the transaction (57)
Contracts in process valuation adjustments (190)
Accrue for future lease cost in excess of fair
market value (254)
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 882
To include the liability for post-retirement
benefits other than pensions (366)
Deferred tax benefits 166
Costs in excess of net assets of acquired business 7,485
Acquisition costs (125)
Elimination of Hughes Defense goodwill (2,970)
======
$9,380
(c) Adjustment to eliminate the amortization of intangible
assets of Hughes Defense which would not have been
incurred if the transaction 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 the Corporation's
normal profit on its efforts to complete such
contracts.
(e) Elimination of $29 million of non-recurring corporate
allocations from the parent of Hughes Defense as a
result of the transaction for the year ended December
31, 1996 and $7 million for the three months ended
March 30, 1997.
(f) Adjustments which represent additional estimated
interest expense resulting from the use of borrowings
to finance the transaction and incremental interest
on Raytheon's pre-transaction variable rate borrowings
to reflect the change in credit rating as a result of the
transaction.
(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. The Corporation expects
that any subsequent adjustment would not materially effect 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 paid is subject to adjustment based on
the price of the Corporation's stock at the closing.<PAGE>
EXHIBIT 99.4
Defense Business
of Texas Instruments Incorporated
Statements of Assets to be Acquired and Liabilities to be Assumed
(In thousands of dollars)
(unaudited)
March 31, 1997
--------------
ASSETS
Current assets:
Accounts receivable $ 250,430
Inventories (net of progress billings) 245,036
Prepaid expenses 2,161
---------------
Total current assets 497,627
Property, plant, and equipment, at cost 768,402
Less accumulated depreciation (453,028)
---------------
Property, plant and equipment (net) 315,374
Other assets 43,531
---------------
Total assets $ 856,532
---------------
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses 215,081
Accrued retirement costs - current 53,012
---------------
Total current liabilities 268,093
Deferred Credits 5,810
Accrued retirement costs 180,049
---------------
Total liabilities 453,952
---------------
Net assets $ 402,580
---------------<PAGE>
Defense Business
of Texas Instruments Incorporated
Statements of Income
(In thousands of dollars)
(unaudited)
THREE MONTHS ENDED
MARCH 31
1997 1996
-----------------------------
Net revenues $ 399,659 $ 406,115
Operating costs and expenses:
Costs of revenues 308,918 303,557
Marketing, general, and
administrative 28,069 31,606
Research and development 18,045 20,134
-----------------------------
Total 355,032 355,297
-----------------------------
Profit from operations 44,627 50,818
Other expense (net) (440) (848)
-----------------------------
Income before provision for income
taxes 44,187 49,970
Provision for income taxes 16,872 18,734
-----------------------------
Net income $ 27,315 $ 31,236<PAGE>
Defense Business
of Texas Instruments Incorporated
Statements of Cash Flows
(In thousands of dollars)
(unaudited)
THREE MONTHS ENDED
MARCH 31
1997 1996
-----------------------------
Cash flows from operating activities:
Net income $ 27,315 $ 31,236
Depreciation 20,803 17,163
Deferred income taxes (2,787) (761)
(Increase) decrease in working capital:
Accounts receivable 27,624 22,037
Inventories (23,887) (88,756)
Prepaid expenses (1,076) (285)
Accounts payable and accrued expenses (19,335) (60,580)
Accrued retirement costs (491) 4,233
Increase (decrease) in noncurrent accrued 7,805 4,064
retirement costs
Other (22,923) 5,073
-----------------------------
Net cash provided by (used in) operating
activities 13,048 (66,576)
Cash flows from investing activities:
Additions to property, plant and
equipment (10,074) (19,092)
-----------------------------
Net cash used in investing activities (10,074) (19,092)
Cash flows from financing activities:
Net transfers (to) from Texas
Instruments (2,974) 85,668
-----------------------------
Net cash provided by (used in) financing
activities (2,974) 85,668
Net increase (decrease) in cash and
cash equivalents - -
Cash and cash equivalents at beginning
of period - -
-----------------------------
Cash and cash equivalents at end of
period $ - $ -
=============================
<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 March 31, 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 periods shown.
Inventories as of March 31, 1997 were comprised of the following (in
thousands):
Raw material and purchased parts $103,082
Long-term contracts in process 362,975
Finished goods 3,137
-------------
Total $469,194
Less progress billings (224,158)
-------------
Inventories (net of progress billings) $245,036
=============<PAGE>
EXHIBIT 99.5
THE DEFENSE BUSINESS OF
HUGHES ELECTRONICS CORPORATION
COMBINED STATEMENT OF INCOME AND
PARENT COMPANY'S NET INVESTMENT
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
Three months ended March 31,
----------------------------
(Dollars in Millions) 1997 1996
========================================================================
REVENUES
Net Sales $ 1,674.5 $ 1,527.4
Other income (loss) - net 4.9 (3.1)
------------------------------------------------------------------------
TOTAL REVENUES 1,679.4 1,524.3
------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales and other operating charges,
exclusive of items listed below 1,366.3 1,235.6
Selling, general, and administrative expenses 92.6 80.8
Depreciation and amortization 35.9 32.8
Amortization of GM purchase accounting
adjustments related to Hughes Aircraft Company 25.3 25.3
Interest expense 25.6 22.0
------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 1,545.7 1,396.5
------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 133.7 127.8
Income taxes 61.5 59.3
------------------------------------------------------------------------
NET INCOME 72.2 68.5
------------------------------------------------------------------------
PARENT COMPANY'S NET INVESTMENT, BEGINNING OF
PERIOD 4,823.0 4,680.2
Net contributions from Parent Company 459.1 255.7
Change in foreign currency translation adjustment (2.5) (4.4)
------------------------------------------------------------------------
PARENT COMPANY'S NET INVESTMENT, END OF PERIOD $ 5,351.8 $ 5,000.0
========================================================================
Reference should be made to the Notes to Combined Financial Statements.<PAGE>
THE DEFENSE BUSINESS
OF HUGHES ELECTRONICS CORPORATION
COMBINED BALANCE SHEET
MARCH 31, 1997 AND DECEMBER 31, 1996
(Amounts in Millions) (Unaudited)
-----------------------------------------------------------------------
March 31, December 31,
ASSETS 1997 1996
========================================================================
CURRENT ASSETS
Cash and cash equivalents $ 56.7 $ 59.7
Accounts and notes receivable (less allowances) 690.3 612.7
Contracts in process, less advances and progress
payments of $960.5 and $956.2 1,663.8 1,581.2
Inventories 408.1 337.7
Deferred income taxes 273.4 285.3
Prepaid expenses 47.4 31.1
------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,139.7 2,907.7
------------------------------------------------------------------------
Property - Net 1,107.4 1,085.1
Intangible Assets, net of amortization
of $1,299.1 and 1,268.5 2,970.4 2,907.4
Investments and Other Assets - principally at
cost (less allowances) 138.9 128.2
------------------------------------------------------------------------
TOTAL ASSETS $ 7,356.4 $ 7,028.4
========================================================================
LIABILITIES AND PARENT COMPANY'S NET INVESTMENT
========================================================================
CURRENT LIABILITIES
Accounts payable $ 298.3 $ 278.3
Advanced on contracts 388.0 396.8
Notes and loans payable 99.6 94.5
Accrued liabilities 881.7 1,119.4
------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,667.6 1,889.0
------------------------------------------------------------------------
LONG-TERM DEBT AND CAPITALIZED LEASES 31.3 34.4
------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS 179.5 174.4
------------------------------------------------------------------------
DEFERRED INCOME TAXES 126.2 107.6
------------------------------------------------------------------------
PARENT COMPANY'S NET INVESTMENT 5,351.8 4,823.0
------------------------------------------------------------------------
TOTAL LIABILITIES AND PARENT COMPANY'S
NET INVESTMENT $ 7,356.4 $ 7,028.4
========================================================================
Reference should be made to the Notes to Combined Financial Statements.<PAGE>
THE DEFENSE BUSINESS OF
HUGHES ELECTRONICS CORPORATION
COMBINED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
Three months ended March 31,
----------------------------
(Dollars in Millions) 1997 1996
========================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 72.2 $ 68.5
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 35.9 32.8
Amortization of GM purchase accounting
adjustments related to Hughes Aircraft
Company 25.3 25.3
Deferred income taxes and other 30.5 (20.4)
Change in other operating assets and liabilities
Accounts receivable (63.1) 23.5
Contracts in process (73.6) (274.2)
Inventories (69.9) (24.9)
Accounts payable 15.3 (15.5)
Advances on contracts (8.8) (1.3)
Accrued and other liabilities (239.6) (35.7)
Other (25.6) 7.9
------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (301.4) (214.0)
========================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in companies, net of cash acquired (143.3) (28.7)
Expenditures for property (30.0) (28.6)
Proceeds from disposal of property 7.7 6.5
Decrease in notes receivable 2.9 14.7
------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (162.7) (36.1)
========================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in notes and loans payable 5.1 14.3
Increase in long-term debt 7.4 17.5
Decrease in long-term debt (10.5) (7.3)
Contributions from Parent Company 459.1 255.7
------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 461.1 280.2
========================================================================
Net (decrease) increase in cash and cash equivalents (3.0) 30.1
Cash and cash equivalents at beginning of the period 59.7 15.7
------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 56.7 $ 45.8
========================================================================
Reference should be made to the Notes to Combined Financial Statements.<PAGE>
THE DEFENSE BUSINESS OF HUGHES ELECTRONICS CORPORATION
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, HE Holdings, Inc., a wholly owned
subsidiary of Hughes Electronics Corporation (Hughes),
General Motors Corporation (GM), the parent of Hughes, and
Raytheon Company (Raytheon) entered into various agreements
(such agreements are referred to herein as the Merger
Agreements) pursuant to which the defense business of Hughes
(the Defense Business) will be spun-off to holders of GM's
common stocks, followed immediately by the tax-free merger of
the Defense Business with Raytheon. This transaction is
subject to, among other things, the approval of GM's $1 2/3
par value and Class H stockholders, the approval of
Raytheon's stockholders and the receipt of various regulatory
approvals.
The Defense Business is not a legal entity. The combined
financial statements present the financial position, results
of operations and cash flows of the Defense Business, 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 Corporate assets, liabilities, income and expenses
attributable to the Defense Business. The combined financial
statements do not include certain other defense operations of
Hughes which will not be merged with Raytheon, consisting
principally of the defense business of Hughes currently
reported in the Hughes Telecommunications and Space segment.
All transactions and balances between the entities included
in the combined financial statements have been eliminated.
All Defense Business amounts due from or payable to other
Hughes 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 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 the
Defense Business 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;
however, they do not necessarily equal the costs that the
Defense Business would have incurred on a stand-alone basis.
The financial information included herein may not necessarily
reflect the financial position, results of operations and
cash flows of the Defense Business on a standalone basis in
the future.<PAGE>
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market,
principally using the average cost method, and are comprised
of the following:
March 31, December 31,
(Dollars in Millions) 1997 1996
=================================================================
Productive material and supplies $ 64.2 $ 63.5
Work in process and finished goods 343.9 274.2
-----------------------------------------------------------------
Total $ 408.1 $ 337.7
=================================================================
</TABLE>
