AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1997
REGISTRATION NO. 333-37223
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 95-1778500 3812
(STATE OR OTHER (I.R.S. EMPLOYER (PRIMARY STANDARD
JURISDICTION IDENTIFICATION NO.) INDUSTRIAL
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
7200 HUGHES TERRACE, LOS ANGELES, CALIFORNIA 90045-0066; (310) 568-7200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CHARLES S. REAM
HE HOLDINGS, INC.
7200 HUGHES TERRACE
LOS ANGELES, CALIFORNIA 90045-0066
(310) 568-7200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
WARREN G. ANDERSEN ROBERT S. OSBORNE, JOHN T. KUELBS FREDERICK S. GREEN
GENERAL MOTORS P.C. HE HOLDINGS, INC. WEIL, GOTSHAL &
CORPORATION KIRKLAND & ELLIS 7200 HUGHES MANGES LLP
3031 WEST GRAND 200 EAST RANDOLPH TERRACE 767 FIFTH AVENUE
BOULEVARD DRIVE LOS ANGELES, CA NEW YORK, NY 10153
DETROIT, MI 48202- CHICAGO, IL 60601- 90045-0066 (212) 310-8000
3091 6636 (310) 568-7200
(313) 556-5000 (312) 861-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the requisite consents are obtained pursuant to the
solicitation by General Motors Corporation referred to in the Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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LOGO
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. +
+REGISTRATION STATEMENTS RELATING TO THESE SECURITIES HAVE BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENTS +
+BECOME EFFECTIVE. THIS SOLICITATION STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE +
+AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE +
+ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION +
+OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY SOLICITATION STATEMENT/PROSPECTUS
SOLICITATION OF WRITTEN CONSENT OF
GENERAL MOTORS CORPORATION
COMMON STOCKHOLDERS
SUBJECT TO COMPLETION
THE HUGHES TRANSACTIONS
LOGO
WE ARE ASKING OUR COMMON STOCKHOLDERS TO APPROVE
THE FOLLOWING "HUGHES TRANSACTIONS" RELATING TO THE THREE PRINCIPAL BUSINESSES
OF OUR HUGHES ELECTRONICS SUBSIDIARY.
DEFENSE ELECTRONICS
WE PROPOSE TO SPIN OFF OUR DEFENSE ELECTRONICS BUSINESS, APPROXIMATELY
53.7% TO OUR CLASS H COMMON STOCKHOLDERS AND 46.3% TO OUR $1 2/3 COMMON
STOCKHOLDERS (ESTIMATED BASED ON RECENT STOCK PRICES). IMMEDIATELY AFTER THE
SPIN-OFF, THIS BUSINESS WILL MERGE WITH RAYTHEON COMPANY.
AUTOMOTIVE ELECTRONICS
WE PROPOSE TO TRANSFER OUR AUTOMOTIVE
ELECTRONICS BUSINESS FROM HUGHES ELECTRONICS TO
GENERAL MOTORS. AS A RESULT, THE APPROXIMATELY
25.6% TRACKING STOCK INTEREST IN THIS BUSINESS
CURRENTLY HELD BY OUR CLASS H COMMON STOCKHOLDERS
WILL IN EFFECT BE ALLOCATED TO OUR $1 2/3 COMMON
STOCKHOLDERS.
TELECOMMUNICATIONS AND SPACE
WE PROPOSE TO RECAPITALIZE OUR CLASS H COMMON
STOCK INTO A NEW TRACKING STOCK INTEREST OF
APPROXIMATELY 25.6% IN OUR TELECOMMUNICATIONS AND
SPACE BUSINESS. THIS BUSINESS WILL ALSO BE
PROVIDED WITH A SUBSTANTIAL AMOUNT OF NEW CAPITAL
FUNDING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE HUGHES TRANSACTIONS OR THE NEW CLASS
H COMMON STOCK OR THE CLASS A COMMON STOCK TO BE ISSUED PURSUANT TO THIS
SOLICITATION STATEMENT/PROSPECTUS. THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT PASSED UPON THE FAIRNESS OR MERITS OF THE HUGHES TRANSACTIONS OR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS SOLICITATION
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS SOLICITATION STATEMENT/PROSPECTUS IS , 1997.
UNTIL 25 DAYS AFTER THE DATE OF MAILING OF THIS SOLICITATION
STATEMENT/PROSPECTUS, ALL DEALERS EFFECTING TRANSACTIONS IN CLASS A COMMON
STOCK OR NEW GM CLASS H COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
PAGE
----
CHAPTER 1: INTRODUCTION................................................... 1
INTRODUCTION TO THE HUGHES TRANSACTIONS................................. 2
SUMMARY FINANCIAL INFORMATION........................................... 9
RECENT DEVELOPMENTS..................................................... 21
CHAPTER 2: RISK FACTORS................................................... 22
RISK FACTORS RELATING TO THE HUGHES TRANSACTIONS........................ 23
RISK FACTORS RELATING TO THE BUSINESS OF NEW HUGHES ELECTRONICS......... 26
RISK FACTORS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL STRUCTURE. 28
ADDITIONAL RISK FACTORS REGARDING NEW GM CLASS H COMMON STOCK........... 30
RISK FACTORS REGARDING NEW RAYTHEON AFTER THE RAYTHEON MERGER........... 32
CHAPTER 3: THE HUGHES TRANSACTIONS
AND THE RAYTHEON MERGER................................................... 34
SPECIAL FACTORS......................................................... 35
DESCRIPTION OF THE HUGHES TRANSACTIONS.................................. 89
DESCRIPTION OF THE RAYTHEON MERGER...................................... 101
SEPARATION AND TRANSITION ARRANGEMENTS.................................. 123
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS................................. 135
RECENT DEVELOPMENTS..................................................... 137
GENERAL MOTORS PRO FORMA CONSOLIDATED CAPITALIZATION.................... 138
INTRODUCTION TO THE FINANCIAL AND BUSINESS REVIEWS OF
HUGHES DEFENSE, DELCO AND HUGHES TELECOM............................... 140
HUGHES DEFENSE SELECTED COMBINED HISTORICAL FINANCIAL DATA.............. 141
HUGHES DEFENSE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 142
BUSINESS OF HUGHES DEFENSE.............................................. 146
DELCO SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA......... 154
DELCO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....... 155
DELCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................. 159
BUSINESS OF DELCO....................................................... 163
HUGHES TELECOM SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL
DATA................................................................... 170
HUGHES TELECOM UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS............................................................. 171
HUGHES TELECOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 178
BUSINESS OF HUGHES TELECOM.............................................. 183
RAYTHEON SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA...... 197
OVERVIEW OF RAYTHEON BUSINESS........................................... 198
i TABLE OF CONTENTS
TABLE OF CONTENTS
PAGE
----
CHAPTER 5: NEW RAYTHEON................................................. 200
NEW RAYTHEON UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS.......................................................... 201
OVERVIEW OF NEW RAYTHEON BUSINESS.................................... 208
NEW RAYTHEON MANAGEMENT.............................................. 210
NEW DEBT OF HUGHES DEFENSE TO BE ASSUMED BY NEW RAYTHEON............. 214
CHAPTER 6: CAPITAL STOCK................................................ 215
COMPARISON OF GM CLASS H COMMON STOCK, NEW GM CLASS H COMMON STOCK
AND CLASS A COMMON STOCK............................................ 216
CONSIDERATIONS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL
STRUCTURE........................................................... 226
GM CLASS H COMMON STOCK.............................................. 230
NEW GM CLASS H COMMON STOCK.......................................... 234
NEW RAYTHEON CAPITAL STOCK........................................... 239
CHAPTER 7: CONSENT SOLICITATION AND CERTAIN OTHER MATTERS............... 248
SOLICITATION OF WRITTEN CONSENT OF GM'S COMMON STOCKHOLDERS.......... 249
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
GENERAL MOTORS...................................................... 252
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE..................... 253
ESTIMATED FEES AND EXPENSES.......................................... 254
LEGAL MATTERS........................................................ 255
EXPERTS.............................................................. 255
WHERE YOU CAN FIND MORE INFORMATION.................................. 256
GLOSSARY................................................................ 258
APPENDICES
APPENDIX A GM Spin-Off Merger Agreement
Exhibit A: Article Fourth of the GM Amended and Restated
Certificate of Incorporation, After Giving Effect to the
GM Spin-Off Merger
APPENDIX B Fairness Opinions
Merrill Lynch Fairness Opinion
Salomon Brothers Fairness Opinion
Goldman Sachs Fairness Opinion
APPENDIX C Hughes Defense Combined Financial Statements
APPENDIX D Delco Combined Financial Statements
APPENDIX E Hughes Telecom Combined Financial Statements
ii TABLE OF CONTENTS
1 CHAPTER 1: INTRODUCTION
CHAPTER 1
INTRODUCTION
PAGE
----
INTRODUCTION TO THE HUGHES TRANSACTIONS........................... 2
The Hughes Transactions......................................... 2
Raytheon Stock Price............................................ 3
New Raytheon Common Stock....................................... 4
The Distribution Ratio.......................................... 4
Delco Transfer.................................................. 5
New GM Class H Common Stock..................................... 5
No Recapitalization Into GM $1 2/3 Common Stock................. 6
Tax Matters..................................................... 6
Board Recommendation............................................ 6
Risk Factors.................................................... 7
Stockholder Litigation.......................................... 7
Timing and Approvals............................................ 7
Consent Mechanics............................................... 7
The Issuers..................................................... 8
Additional Information.......................................... 8
SUMMARY FINANCIAL INFORMATION..................................... 9
Overview........................................................ 9
Hughes Electronics.............................................. 9
Purchase Accounting Adjustments................................. 10
Certain Historical and Per Share Information ................... 11
General Motors Selected Consolidated Historical Financial Data.. 13
Hughes Electronics Summary Consolidated Financial Data.......... 15
Hughes Defense Summary Combined Financial Data.................. 17
Delco Summary Combined Historical and Pro Froma Financial Data.. 18
Hughes Telecom Summary Combined Historical and Pro Forma
Financial Data................................................. 19
Raytheon Summary Combined Historical and Pro Forma Financial
Data........................................................... 20
RECENT DEVELOPMENTS............................................... 21
General Motors.................................................. 21
Hughes Electronics.............................................. 21
Raytheon........................................................ 21
INTRODUCTION
We have highlighted selected information in this Introduction. However, it
may not contain all of the information that is important to you. We urge you to
read the entire document (including the Appendices) and the documents
incorporated by reference. The Glossary provides definitions for certain
capitalized terms.
We have calculated several important values for illustrative purposes in this
document based on the October 10, 1997 closing price of Raytheon Common Stock
of $57.88 per share (the "Recent Raytheon Stock Price"). These calculated
values include the percentage of Class A Common Stock that will be distributed
to holders of each class of GM common stock, the indicated value of the Class A
Common Stock to be distributed, the amount of debt that Hughes Defense will be
permitted to have when it is spun off and the amount of new capital to be made
available to Hughes Telecom. These calculations are illustrative only and will
change based on changes in the market price of Raytheon Common Stock between
now and the closing.
We also refer throughout this document to the tracking stock interest of the
GM Class H Common Stockholders in the earnings of our Hughes Electronics
subsidiary as being approximately 25%. This percentage amount, which we call
the "Class H Fraction," changes depending on the number of shares of GM Class H
Common Stock outstanding at any time. For most calculations in this document
which use the Class H Fraction, we have used the Class H Fraction as of
September 30, 1997 (approximately 25.6%).
INTRODUCTION TO THE HUGHES TRANSACTIONS
THE HUGHES TRANSACTIONS
We are proposing three related transactions to enhance the value of the
businesses operated by our Hughes Electronics subsidiary. We need your consent
in order to accomplish these "Hughes Transactions."
(1) HUGHES DEFENSE
We propose to spin off the defense electronics business of Hughes Electronics
to our common stockholders. We call this business "Hughes Defense." Immediately
after the spin-off, Hughes Defense will merge with Raytheon Company. Based on
the Recent Raytheon Stock Price, these transactions have an indicated value of
approximately $9.9 billion.
The merged company will be the nation's third largest defense company and
the largest provider of defense electronics in the world. The merger should
enable it to compete more effectively in the U.S. defense industry, where
significant consolidation has been occurring. We call the merged company
"New Raytheon."
GM common stockholders will receive all of the Class A Common Stock of
Hughes Defense, representing approximately 30% of the common stock of New
Raytheon after the merger. This stock has an indicated value of approxi-
mately $5.9 billion based on the Recent Raytheon Stock Price. Approximately
53.7% of the Class A Common Stock would be distributed to GM Class H Common
Stockholders and approximately 46.3% would be distributed to GM $1 2/3 Com-
mon Stockholders based on the Recent Raytheon Stock Price.
Hughes Defense will be permitted to have approximately $3.9 billion of
debt when it is spun off. Substantially all of the proceeds of this debt
will be made available as new capital for Hughes Telecom. The obligation to
repay this debt, however, will remain with New Raytheon (in which GM's com-
mon stockholders will have an approximately 30% equity interest).
The indicated transaction value of approximately $9.9 billion consists of
the sum of (1) the value of the Class A Common Stock to be distributed to
GM's common stockholders and (2) the amount of debt that Hughes Defense is
permitted to have at the time of the spin-off. We believe that this amount
represents a substantial premium to the enterprise value of Hughes Defense
under its current ownership structure.
(2) DELCO ELECTRONICS
We propose to transfer Delco Electronics, our automotive electronics business,
from Hughes
2 CHAPTER 1: INTRODUCTION
Electronics to General Motors. The tracking stock interest in Delco's earnings
that is currently held by GM Class H Common Stockholders will in effect be
allocated to holders of GM $1 2/3 Common Stock.
By transferring Delco to General Motors, we will be able to fully inte-
grate it with our Delphi Automotive Systems business. That should enable
these businesses to participate more effectively in a component industry
trend toward integrated automotive systems.
To compensate GM Class H Common Stockholders for the transfer of Delco
and other effects of the Hughes Transactions, we have allocated an amount
of Class A Common Stock to them which is more than the approximately 25.6%
that reflects their current tracking stock interest in Hughes Defense. The
allocation of Class A Common Stock to the GM Class H Common Stockholders is
approximately 53.7% based on the Recent Raytheon Stock Price.
(3) HUGHES TELECOM
We propose to make about $3.9 billion of new capital funding available to
the telecommunications and space business of Hughes Electronics, which we
call "Hughes Telecom," and to recapitalize the GM Class H Common Stock into
a new tracking stock interest in that business.
Hughes Telecom will receive about $3.9 billion in cash from new debt bor-
rowed by Hughes Defense before it is spun off to our common stockholders.
This capital funding will enhance Hughes Telecom's ability to take advan-
tage of growth opportunities in the expanding global telecommunications
market. Hughes Telecom expects that its immediate use of approximately $3.0
billion of the capital funding will be to repay indebtedness, including ap-
proximately $1.7 billion owed to General Motors in connection with Hughes
Telecom's acquisition of PanAmSat Corporation in May 1997. We also believe
that Hughes Telecom will benefit from having its senior management focused
on a single principal area of business.
Each share of GM Class H Common Stock will become a share of New GM Class
H Common Stock. As a result, the current approximately 25.6% tracking stock
interest of GM Class H Common Stockholders in Hughes Electronics will be-
come an equivalent tracking stock interest in the business of Hughes
Telecom, which will be operated after the Hughes Transactions by a GM sub-
sidiary we call "New Hughes Electronics."
RAYTHEON STOCK PRICE
Changes in the market price of Raytheon common stock will affect several
calculations relevant to the transactions.
First, we have used the Recent Raytheon Stock Price ($57.88 per share on
October 10, 1997) for illustrative calculations of the amount of the Class
A Common Stock to be distributed to the holders of each class of GM common
stock and the value of those distributions.
Second, under our agreement with Raytheon, changes in Raytheon's stock
price within a "collar" range will affect the amount of debt that Hughes
Defense is permitted to have when it is spun off, and thus the amount
available as capital for Hughes Telecom.
The actual amount of permitted debt and the allocation of Class A Common
Stock between the two classes of GM common stockholders will depend on the
average stock price of Raytheon during a specified period prior to the closing
of the Hughes Transactions. The Recent Raytheon Stock Price is not necessarily
indicative of this average price or the market value of Raytheon common stock
at the time of or after the closing of the transactions.
The collar range for Raytheon's stock price is between $44.42 and $54.29 per
share. If the price of Raytheon Common Stock is within the collar (which it was
in January 1997 when the agreement was entered into with Raytheon), the amount
of debt that Hughes Defense is permitted to have will be adjusted so that the
total transaction value will be $9.5 billion. Raytheon stock prices above
$54.29 per share would result in transaction values higher than $9.5 billion,
while Raytheon stock prices below $44.42 per share would result in transaction
values less than $9.5 billion.
Based on the Recent Raytheon Stock Price, the Class A Common Stock
distributed in the spin-off would be worth approximately $5.9 billion and
Hughes Defense would be allowed to have $3.9 billion of debt. Accordingly, the
transaction would have a current indicated value to General Motors and its
common stockholders of approximately $9.9 billion.
3 CHAPTER 1: INTRODUCTION
The following table shows a range of illustrative Raytheon Common Stock
prices and how they affect the total value of the transaction:
RAYTHEON VALUE OF HUGHES TOTAL
COMMON CLASS A DEFENSE INDICATED
STOCK PRICE COMMON STOCK DEBT VALUE
- ----------- ------------ ------- ---------
($ BILLIONS, EXCEPT STOCK PRICE)
$65 $6.7 $3.9 $10.6
60 6.2 3.9 10.1
55 5.6 3.9 9.5
50 5.1 4.4 9.5
45 4.6 4.9 9.5
40 4.1 4.9 9.0
GM's common stockholders will directly receive the value of the Class A
Common Stock, which will be distributed to them in the spin-off of Hughes
Defense. In addition, our stockholders will benefit from the new debt borrowed
by Hughes Defense before the spin off because the proceeds (up to $4.0 billion)
will be made available to Hughes Telecom to fund growth opportunities in the
telecommunications and space business. All of our common stockholders will have
a continuing interest in that business. If Hughes Defense borrows more than
$4.0 billion of new debt, the additional proceeds will be made available to
General Motors, in which case an appropriate adjustment will be made in the
amount of Class A Common Stock to be distributed to each class of GM common
stockholders.
NEW RAYTHEON COMMON STOCK
In the spin-off, GM's common stockholders will receive Class A Common Stock
of Hughes Defense. In the merger of Hughes Defense and Raytheon, this stock
will remain outstanding as Class A Common Stock of New Raytheon (except that
fractional shares will be sold for cash) and Raytheon's common stockholders
will receive Class B Common Stock of New Raytheon.
The Class A Common Stock will represent approximately 30% of the outstanding
equity value of New Raytheon. The Class B Common Stock will represent the
remaining approximately 70% of the outstanding equity value. With respect to
the election of directors of New Raytheon, the Class A Common Stockholders will
possess 80.1% of the voting power. The Class B Common Stockholders will possess
the remaining 19.9% of the voting power in the election of directors. Each
class will vote separately as to all other matters. Except as to voting rights,
the Class A Common Stock and Class B Common Stock will be identical.
This dual class capital structure of New Raytheon was necessary in order for
General Motors to obtain an IRS letter ruling to the effect that the spin-off
of Hughes Defense will be tax-free to General Motors and its common
stockholders for U.S. federal income tax purposes.
THE DISTRIBUTION RATIO
We will distribute a total of 102,630,503 shares of Class A Common Stock to
our common stockholders. Based on the Recent Raytheon Stock Price, we estimate
that approximately 53.7% of these shares will be distributed to GM Class H
Common Stockholders and approximately 46.3% will be distributed to GM $1 2/3
Common Stockholders. We refer to the relationship between these amounts as the
"Distribution Ratio."
The Distribution Ratio is a formula that depends on certain variables that
cannot be known precisely until the closing of the Hughes Transactions. The
most significant of these variables is the average closing market price of
Raytheon Common Stock during a specified period shortly before the closing. See
"Special Factors--The Distribution Ratio" in Chapter 3.
In setting the Distribution Ratio, the GM Board determined that GM Class H
Common Stockholders should receive a portion of the Class A Common Stock equal
to the Class H Fraction to reflect their current tracking stock interest in
Hughes Defense plus an additional amount of Class A Common Stock to compensate
them for relinquishing their current tracking stock interest in Delco and for
the other net effects of the Hughes Transactions.
The GM Board determined that the additional amount of Class A Common Stock to
be issued to Class H Common Stockholders should have a value equal to $6.5
billion multiplied by the percentage amount of the GM Class H Common
Stockholders' tracking stock interest in Hughes Electronics (i.e., the "Class H
Fraction") immediately before the
4 CHAPTER 1: INTRODUCTION
closing. Based on the approximately 25.6% tracking stock interest of GM Class H
Common Stockholders as of September 30, 1997, this additional Class A Common
Stock should have a value of $1.665 billion, subject to being increased by
approximately 25.6% of the amount of any proceeds of Hughes Defense debt made
available to General Motors as described above.
The number of additional shares of Class A Common Stock needed in order to
deliver $1.665 billion of additional value to the GM Class H Common
Stockholders will be determined by valuing each share at the average closing
market price of Raytheon Common Stock during a specified period before this
closing. Based on the Recent Raytheon Stock Price, this would result in the
distribution of 28,774,346 additional shares of Class A Common Shares to the GM
Class H Common Stockholders.
This would result in a distribution of a total of approximately 53.7% of the
Class A Common Stock to GM Class H Common Stockholders. The balance of 46.3%
would be distributed to GM $1 2/3 Common Stockholders.
The following table illustrates the effect the Hughes Transactions would have
on the ownership interests of a holder of one share of each class of GM common
stock, if the relevant market price of Raytheon Common Stock were equal to the
Recent Raytheon Stock Price.
EXAMPLE OF EXAMPLE OF
OWNERSHIP OWNERSHIP
BEFORE THE AFTER THE
HUGHES TRANSACTIONS HUGHES TRANSACTIONS
------------------- -------------------
One share of GM $1 2/3 One share of GM $1 2/3
Common Stock Common Stock
AND
0.06725 shares of Class A
Common Stock with an
indicated market value
of $3.89.
----------------
One share of GM One share of New GM
Class H Common Stock Class H Common Stock
AND
0.53747 shares of Class A
Common Stock with an
indicated market value
of $31.11.
For a table showing the illustration of the Class A Common Stock between the
two classes of GM common stock based on a range of Raytheon Common Stock
prices, see "Special Factors--The Distribution Ratio" in Chapter 3.
DELCO TRANSFER
Delco will be transferred from Hughes Electronics to General Motors so that
it can be more fully integrated with Delphi. As a result of this transfer,
Delco's financial performance will not be tracked by the New GM Class H Common
Stock. In effect, the tracking stock interest in Delco's earnings that is
currently held by GM Class H Common Stockholders will be allocated to holders
of GM $1 2/3 Common Stock.
We believe that the integration of Delco's automotive electronics capability
with Delphi's systems and components expertise will create a premier global
automotive systems supplier. The combination will allow us to compete more
effectively in markets worldwide by developing new electronically enhanced
vehicle systems. We expect these systems to have improved functionality, lower
cost and higher quality. Delco will also gain access to Delphi's customer base.
In addition, the integration should allow these businesses to achieve
structural cost savings.
The GM Board took the transfer of Delco into account when it determined the
Net Transaction Effect which reflects the additional amount of Class A Common
Stock that GM Class H Common Stockholders should receive in addition to the
approximately 25.6% of such stock that reflects their current tracking stock
interest in Hughes Defense. In so doing, the GM Board considered the benefits
of the integration of Delco and Delphi. Thus, we believe that the Delco
valuation considerations used in determining the Distribution Ratio reflect a
substantial premium to the enterprise value of Delco under the current Hughes
Electronics and GM ownership structure.
NEW GM CLASS H COMMON STOCK
Like the current GM Class H Common Stockholders, the holders of New GM Class
H
5 CHAPTER 1: INTRODUCTION
Common Stock will be stockholders of General Motors, not of Hughes Electronics.
The New GM Class H Common Stock will represent a 25.6% tracking stock interest
in New Hughes Electronics (based on the Class H Fraction as of September 30,
1997), which will have one principal business: Hughes Telecom. This will be a
more focused investment than the existing GM Class H Common Stock, which
currently represents an approximately 25.6% tracking stock interest in the
three principal businesses of Hughes Electronics: Hughes Defense, Delco and
Hughes Telecom.
The current policy of the GM Board is to pay a quarterly dividend of $0.25
per share on the existing GM Class H Common Stock. Because New Hughes
Electronics contemplates retaining future earnings for the development of its
business, General Motors does not anticipate that it will initially pay any
cash dividends on the New GM Class H Common Stock.
The GM Certificate of Incorporation will be amended to delete provisions
relating to the existing GM Class H Common Stock and to add new provisions
setting forth the terms of the New GM Class H Common Stock. The terms of the
New GM Class H Common Stock are described in "Chapter 6: Capital Stock."
In connection with its determination of the terms of the New GM Class H
Common Stock, the GM Board reviewed its policies and practices with respect to
its dual-class common stock capital structure and adopted a policy statement
regarding certain capital stock matters. This policy statement is effective
upon the closing of the Hughes Transactions and covers certain transactions
involving General Motors and New Hughes Electronics and the relationship
between dividends (if any) to be paid by New Hughes Electronics to General
Motors and by General Motors to the New GM Class H Common Stockholders. This
policy statement is set forth under "Considerations Relating to GM's Dual-Class
Common Stock Capital Structure" in Chapter 6.
NO RECAPITALIZATION INTO GM $1 2/3 COMMON STOCK
The Hughes Transactions will not result in a recapitalization of GM Class H
Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio as currently
provided for under certain circumstances in the GM Certificate of
Incorporation. As part of the Hughes Transactions, the GM Certificate of
Incorporation will be amended to eliminate any possible application of the
recapitalization provision to the Hughes Transactions. Even absent this
amendment, there is substantial uncertainty as to whether the recapitalization
provision would apply absent this amendment. By voting in favor of the Hughes
Transactions, you will in effect be waiving any application of the provision to
the Hughes Transactions.
TAX MATTERS
For U.S. federal income tax purposes, the Hughes Transactions and the
Raytheon Merger will be tax-free to you as GM's common stockholders (other than
with respect to cash you will receive instead of fractional shares of Class A
Common Stock) and to General Motors. We have received an IRS letter ruling
confirming that the spin-off of Hughes Defense and the separation of Hughes
Telecom from Hughes Defense (which is required in order to prepare Hughes
Defense for the spin-off) will be tax-free. New tax rules applicable to certain
corporate spin-offs signed into law by President Clinton on August 5, 1997 will
not apply to the Hughes Transactions under the transition provisions enacted as
part of this legislation.
All GM common stockholders will be required to attach information to their
U.S. federal income tax return for the year in which the spin-off of Hughes
Defense occurs in order to show that the spin-off of Hughes Defense is tax-
free. General Motors will provide this information to you after the Hughes
Transactions and Raytheon Merger have been completed.
BOARD RECOMMENDATION
The GM Board has carefully reviewed the Hughes Transactions with the active
participation of its Capital Stock Committee, which consists entirely of
independent directors. We have received opinions from two independent
investment banking firms, Merrill Lynch and Salomon Brothers, as to the
fairness, from a financial point of view, to each class of GM common
stockholders of the consideration to
6 CHAPTER 1: INTRODUCTION
be provided to General Motors and its subsidiaries and to each class of our
common stockholders in the Hughes Transactions. We have also received an
opinion from a third investment banking firm, Goldman Sachs, as to the fairness
of the aggregate consideration in the Raytheon Merger to Hughes Defense, Hughes
Electronics, General Motors, GM $1 2/3 Common Stockholders and GM Class H
Common Stockholders taken as a whole.
The full text of the investment bank opinions, which in each case set forth
the assumptions made, matters considered and limitations on the review
undertaken in connection with the opinions, are included in Appendix B to this
document. WE URGE YOU TO READ THESE OPINIONS CAREFULLY.
BASED ON THE FOREGOING, THE GM BOARD HAS DETERMINED THAT THE HUGHES
TRANSACTIONS ARE IN THE BEST INTERESTS OF GENERAL MOTORS AND ITS COMMON
STOCKHOLDERS AND ARE FAIR TO THE HOLDERS OF BOTH CLASSES OF GM COMMON STOCK.
THE GM BOARD HAS UNANIMOUSLY APPROVED THE HUGHES TRANSACTIONS AND RECOMMENDS
THAT GM COMMON STOCKHOLDERS APPROVE THE HUGHES TRANSACTIONS BY EXECUTING AND
RETURNING THE ENCLOSED CONSENT.
RISK FACTORS
There are significant challenges and risks involved in each of the business
strategies addressed by the Hughes Transactions. These risks include
uncertainties about achieving the expected synergies and benefits from the
merger of Hughes Defense and Raytheon and from the integration of Delco and
Delphi. There are also risks associated with separating the three businesses of
Hughes Electronics. These and other risks are addressed in "Chapter 2: Risk
Factors."
STOCKHOLDER LITIGATION
Nine lawsuits were filed in Delaware Chancery Court after we announced the
Hughes Transactions in January 1997. Each suit purports to be a class action
brought on behalf of specified holders of GM Class H Common Stock against the
defendants, who are General Motors and its directors. The lawsuits allege that
the defendants have breached and are continuing to breach their contractual and
fiduciary duties to specified holders of GM Class H Common Stock by proposing
and pursuing the Hughes Transactions, which plaintiffs contend would unfairly
benefit General Motors to the detriment of such holders.
The lawsuits seek injunctions against the Hughes Transactions (or any other
disposition of Hughes Defense in the absence of a recapitalization of the GM
Class H Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio) and
compensatory damages.
TIMING AND APPROVALS
We are working towards completing the Hughes Transactions as soon as
possible. We expect to complete the Hughes Transactions before the end of 1997.
We will not complete the Hughes Transactions unless we obtain the approval of
the holders of:
. a majority of the outstanding shares of GM $1 2/3 Common Stock, voting as a
separate class; and
. a majority of the outstanding shares of GM Class H Common Stock, voting as a
separate class.
Only GM's common stockholders who held shares on October 15, 1997 are
entitled to vote on the Hughes Transactions.
You are not being asked to approve the Raytheon Merger, which has already
been approved by Hughes Electronics as the sole stockholder of Hughes Defense.
However, if GM's common stockholders do not approve the Hughes Transactions,
the Raytheon Merger will not occur. Completion of the Hughes Transactions is
also conditioned upon the approval of the Raytheon Merger by Raytheon's common
stockholders.
7 CHAPTER 1: INTRODUCTION
CONSENT MECHANICS
Please complete, date, sign and return the enclosed consent as soon as
possible. Your consent is important regardless of the number of shares that you
own.
YOU SHOULD NOT SEND YOUR STOCK CERTIFICATES WITH THE CONSENT CARD ENCLOSED
WITH THIS DOCUMENT. YOU WILL RECEIVE FURTHER CORRESPONDENCE AFTER THE
TRANSACTIONS HAVE BEEN COMPLETED.
You can revoke your consent at any time prior to the approval of the Hughes
Transactions. This will occur as soon as consents representing the requisite
stockholder approvals described above are delivered to General Motors, so long
as this is at least 20 business days from the date this document is mailed to
stockholders.
Revocations can be made by filing with the Secretary of General Motors either
a written notice stating that you would like to revoke your consent or another
written consent bearing a later date. Revocations should be sent to the
Secretary of General Motors at the following address:
General Motors Corporation
General Motors Building
3044 West Grand Boulevard
Detroit, Michigan 48202-3091
Attention: Secretary
THE ISSUERS
The New GM Class H Common Stock will be issued by General Motors. GM's
principal executive offices are located at 100 Renaissance Center, Detroit,
Michigan 48243-7301 (Telephone Number (313) 556-5000).
As of the Record Date, directors and executive officers of General Motors
(and their affiliates) together held less than 1% of the outstanding shares of
GM $1 2/3 Common Stock and less than 1% of the outstanding shares of GM Class H
Common Stock. To our knowledge, all of such persons currently intend to vote in
favor of the Hughes Transactions.
The Class A Common Stock to be distributed in the spin-off will be issued by
a subsidiary of Hughes Electronics which is named HE Holdings, Inc. We refer to
HE Holdings, Inc. as "Hughes Defense" because it will own and operate the
defense electronics business of Hughes Electronics at the time it is spun off
to GM's common stockholders and merged with Raytheon.
The principal executive offices of Hughes Defense are currently located at
7200 Hughes Terrace, Los Angeles, California 90045-0066 (Telephone Number (310)
568-7200). Upon the consummation of the Raytheon Merger, the principal
executive offices of New Raytheon will be located at 141 Spring Street,
Lexington, Massachusetts 02173 (Telephone Number (617) 862-6600).
ADDITIONAL INFORMATION
For additional information about the Hughes Transactions, including information
about how to complete and return your consent, please contact:
Morrow & Co., Inc.
909 Third Avenue, 20th Floor
New York, New York 10022
Banks and Brokers Call Toll Free:
1-800-662-5200
All others Call Toll Free:
1-800-566-9058
8 CHAPTER 1: INTRODUCTION
SUMMARY FINANCIAL INFORMATION
OVERVIEW
We are providing the following summary financial information to assist you in
your analysis of the financial aspects of the Hughes Transactions. You should
read this information in conjunction with the consolidated financial statements
(including the notes thereto) and Management's Discussion and Analysis in the
GM 1996 Form 10-K, including information about Hughes Electronics in Exhibit 99
to that document. See "Where You Can Find More Information" in Chapter 7.
Information about General Motors and Hughes Electronics for each of the
calendar years set forth below is derived from their respective consolidated
financial statements for those years, which have been audited by Deloitte &
Touche LLP, independent public accountants. The information about the three
principal businesses of Hughes Electronics is derived from their respective
combined financial statements. Their audited combined financial statements are
included in the Appendices to this document, but their combined financial
statements for other dates and periods have not been audited. Also, the
financial information about General Motors with its financing and insurance
operations on an equity basis is unaudited.
Information about General Motors, Hughes Electronics and the three principal
businesses of Hughes Electronics for each of the six-month periods shown in the
tables is derived from their respective unaudited financial statements for
those periods. In the opinion of management, those statements reflect all
adjustments (consisting only of normal recurring items) that are necessary to
fairly present the financial information for those periods. However, the
results for interim periods are not necessarily indicative of results which may
be expected for any other interim or full year period.
Some of the information below is presented on a pro forma basis to give
effect to the Hughes Transactions and to other specified transactions. Pro
forma information is not necessarily indicative of future financial position or
operating results.
HUGHES ELECTRONICS
Hughes Electronics currently has three primary business segments: Aerospace
and Defense Systems, Automotive Electronics and Telecommunications and Space.
In 1996, these segments represented, respectively, 40%, 33% and 26% of Hughes
Electronics' revenues and 44%, 41% and 16% of Hughes Electronics' operating
profit (excluding purchase accounting adjustments related to GM's acquisition
of Hughes Aircraft in 1985). Operations reported as Corporate and Other
represented approximately 1% of revenues and reported an operating loss of
$14.2 million.
The Hughes Transactions involve all three primary business segments of Hughes
Electronics, as well as the operations reported as Corporate and Other. The
Hughes Reorganization includes a number of preliminary transactions necessary
to separate the three primary business segments of Hughes Electronics, and the
operations reported as Corporate and Other, into Hughes Defense, Delco and
Hughes Telecom. See "Description of the Hughes Transactions--General--Hughes
Reorganization" and "Separation and Transition Arrangements" in Chapter 3.
After giving effect to the Hughes Reorganization, (1) Hughes Defense generally
will consist of businesses currently reported in the Aerospace and Defense
Systems segment of Hughes Electronics, (2) Delco generally will consist of
businesses currently reported in the Automotive Electronics segment of Hughes
Electronics and (3) Hughes Telecom generally will consist of businesses
currently reported in the Telecommunications and Space segment and Corporate
and Other.
The separate financial statements of Hughes Defense, Delco and Hughes Telecom
contained in this document have been prepared in accordance with generally
accepted accounting principles and reflect the
CHAPTER 1: INTRODUCTION
9
businesses to be included in each after giving effect to the Hughes
Reorganization. Hughes Electronics corporate assets and liabilities have been
included in the separate financial statements to the extent identifiable to
individual business units. The separate financial statements also include
allocations of corporate expenses from Hughes Electronics. Such allocations are
based either on actual usage or on allocation methodologies which comply with
U.S. government cost accounting standards.
PURCHASE ACCOUNTING ADJUSTMENTS
The acquisition of Hughes Aircraft by General Motors in 1985 was accounted
for by General Motors as a purchase for financial accounting purposes. As a
result, General Motors recorded goodwill and other intangible assets of
approximately $4.2 billion. This amount is being amortized over periods of up
to 40 years, resulting in an annual earnings charge that is currently
approximately $122 million. We refer to these annual charges as purchase
accounting adjustments. As currently provided in the GM Certificate of
Incorporation, the earnings attributable to GM Class H Common Stock for
purposes of determining the amount available for the payment of dividends on GM
Class H Common Stock specifically exclude such adjustments. A significant
portion of these adjustments, which are currently charged against the earnings
available for the payment of dividends on GM $1 2/3 Common Stock, will be
eliminated as a result of the Hughes Transactions. The GM Certificate of
Incorporation, as proposed to be amended in the GM Spin-Off Merger, will also
provide that, in calculating the amount available for payment of dividends on
New GM Class H Common Stock (which amount will also be used to calculate
earnings per share of New GM Class H Common Stock), the remaining purchasing
accounting adjustments applicable to the telecommunications and space business
of Hughes Electronics will not be charged against the earnings of New Hughes
Electronics.
The Hughes Electronics Summary Consolidated Financial Data (Including
Purchase Accounting Adjustments) presented below include the application of
such purchase accounting adjustments, which are further described in Notes 1
and 7 to Hughes Electronics' Consolidated Financial Statements in Exhibit 99 to
the GM 1996 Form 10-K. More specifically, amortization and disposal of
intangible assets associated with GM's purchase of Hughes Aircraft amounted to
$122.3 million in 1996, $159.5 million in 1995 and $123.8 million in 1994, and
$61.2 million for both of the six month periods ended June 30, 1997 and June
30, 1996. Such amounts were excluded from the earnings available for the
payment of dividends on GM Class H Common Stock and were charged against the
earnings available for the payment of dividends on GM $1 2/3 Common Stock.
Unamortized purchase accounting adjustments associated with GM's purchase of
Hughes Aircraft were $2,723.5 million, $2,845.8 million and $3,005.3 million at
December 31, 1996, 1995 and 1994, respectively, and $2,662.3 million and
$2,784.6 million at June 30, 1997 and 1996, respectively. In order to assist
you in understanding and analyzing Hughes Electronics' financial results, the
Hughes Electronics Summary Consolidated Financial Data (Excluding Purchase
Accounting Adjustments) do not give effect to such purchase accounting
adjustments.
In addition, the separate financial statements of Hughes Defense and Hughes
Telecom reflect the application of the foregoing purchase accounting
adjustments applicable to each of Hughes Defense and Hughes Telecom. The
separate financial statements of Hughes Telecom exclude such purchase
accounting adjustments from the pro forma calculation of earnings available for
the payment of dividends on New GM Class H Common Stock, consistent with the
provisions of the GM Certificate of Incorporation as proposed to be amended in
the Hughes Transactions.
CHAPTER 1: INTRODUCTION
10
CERTAIN HISTORICAL AND PER SHARE INFORMATION
GM COMMON STOCK HISTORICAL PER SHARE DATA
This table shows historical per share information for each of the two classes
of GM common stock. We calculated book value per share based on the liquidation
rights of each class, which are described under "GM Class H Common Stock" in
Chapter 6.
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS YEAR ENDED
ENDED JUNE 30, 1997 DECEMBER 31, 1996
-------------------- ------------------
GM $1 GM
GM $1 2/3 GM CLASS H 2/3 CLASS H
--------- ---------- -------- ---------
Book value per share.................... $29.99 $14.99 $27.95 $13.97
Cash dividends per share................ 1.00 0.50 1.60 0.96
Earnings per share from continuing
operations attributable to common
stocks................................. 4.98 1.94 6.07 2.88
GM COMMON STOCK PRO FORMA PER SHARE DATA
This table shows pro forma information for each class of GM common stock
giving effect to the Hughes Transactions and the May 1997 merger of the
satellite services operations of Hughes Telecom and PanAmSat, which we refer to
as the "PanAmSat Merger."
The earnings per share of New Class H Common Stock in the table reflect only
that portion of New Hughes Electronics' earnings for the respective periods
that would have been available for the payment of dividends on the New GM Class
H Common Stock under the GM Certificate of Incorporation as proposed to be
amended. See "New GM Class H Common Stock--GM Certificate of Incorporation
Provisions Regarding Dividends" in Chapter 6. We calculated the pro forma book
value per share at June 30, 1997 based on the liquidation rights of each class
of stock under the GM Certificate of Incorporation as proposed to be amended.
For such purpose, we have assumed that the per share liquidation unit of the
New GM Class H Common Stock is 0.50, which is the same as for the GM Class H
Common Stock. See "Chapter 6: Capital Stock." We did not calculate the pro
forma book value per share at December 31, 1996.
AS OF AND FOR THE
SIX MONTHS AS OF AND FOR THE
ENDED JUNE 30, YEAR ENDED
1997 DECEMBER 31, 1996
------------------ ------------------
GM $1 NEW GM GM $1 NEW GM
2/3 CLASS H 2/3 CLASS H
-------- --------- -------- ---------
Book value per share..................... $27.93 $13.97 -- --
Cash dividends per share................. 1.00 -- $1.60 $ --
Earnings per share from continuing
operations attributable to common
stocks.................................. 4.63 0.16 5.90 0.31
RAYTHEON COMMON STOCK HISTORICAL PER SHARE DATA
This table shows historical per share information for Raytheon Common Stock.
We have derived this information from the "Raytheon Selected Combined
Historical and Pro Forma Financial Data" in Chapter 4.
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS YEAR ENDED
ENDED JUNE 29, 1997 DECEMBER 31, 1996
------------------- -----------------
Book value per share...................... $20.64 $19.46
Cash dividends per share.................. 0.40 0.80
Earnings per share........................ 1.66 3.21
CHAPTER 1: INTRODUCTION
11
CHAPTER 1: INTRODUCTION
NEW RAYTHEON COMMON STOCK PRO FORMA PER SHARE DATA
This table shows pro forma per share information for each of the two proposed
classes of New Raytheon common stock. We have derived the information in this
table from the "New Raytheon Unaudited Pro Forma Combined Condensed Financial
Statements" in Chapter 5.
This table gives effect to (1) the Hughes Transactions, (2) the merger of
Raytheon with Hughes Defense and (3) Raytheon's July 1997 acquisition of the
defense business of Texas Instruments, which we refer to as the "Texas
Instruments Defense Acquisition." We calculated the pro forma book value per
share at June 29, 1997 by dividing the pro forma book value of the net assets
of New Raytheon by the number of shares of New Raytheon Common Stock expected
to be outstanding upon consummation of the Hughes Defense Spin-Off and the
Raytheon Merger. We did not calculate the pro forma book value per share at
December 31, 1996.
AS OF AND FOR THE
SIX MONTHS AS OF AND FOR THE
ENDED JUNE 29, YEAR ENDED
1997 DECEMBER 31, 1996
----------------- ------------------
CLASS A CLASS B CLASS A CLASS B
-------- -------- -------- --------
Book value per share...................... $29.33 $29.33 -- --
Earnings per share........................ 1.32 1.32 $ 2.65 $ 2.65
GM COMMON STOCK PRO FORMA EQUIVALENT PER SHARE INFORMATION
This table shows pro forma information for each of GM's two classes of common
stock on a per share equivalent basis. We calculated the pro forma amounts for
each class of stock on the basis of (1) the number of shares of Class A Common
Stock to be distributed to that class pursuant to the Distribution Ratio
(estimated based on the Recent Raytheon Stock Price and the respective number
of shares of GM common stock outstanding on June 30, 1997) and (2) the Class A
Common Stock pro forma information as set forth in the table of New Raytheon
Common Stock Pro Forma Per Share Data immediately above. We also calculated
book value per share based on the liquidation rights of each class under the GM
Certificate of Incorporation as proposed to be amended. For such purpose, we
have assumed that the per share liquidation unit of the New GM Class H Common
Stock is 0.50, which is the same as for the GM Class H Common Stock. See
"Chapter 6: Capital Stock."
AS OF AND FOR
THE
SIX MONTHS
ENDED JUNE
30, 1997
-------------
NEW GM
GM $1 CLASS
2/3 H
------ ------
Book value per share of General Motors............................ $27.93 $13.97
Book value per share of New Raytheon.............................. 1.94 15.90
AS OF AND
FOR THE
SIX MONTHS AS OF AND FOR THE
ENDED JUNE YEAR ENDED
30, 1997 DECEMBER 31, 1996
------------ ------------------
NEW GM
GM $1 CLASS GM $1 NEW GM
2/3 H 2/3 CLASS H
----- ------ -------- ---------
Earnings per share from continuing operations
of General Motors............................. $4.63 $0.16 $5.90 $0.31
Earnings per share of New Raytheon............. 0.09 0.72 0.18 1.44
12
GENERAL MOTORS SELECTED
CONSOLIDATED HISTORICAL FINANCIAL DATA
The table below sets forth historical financial information about (1) General
Motors on a consolidated basis and (2) General Motors with its financing and
insurance operations presented on an equity basis.
General Motors financial statements have not been presented on a pro forma
basis to give effect to the Hughes Transactions. This is because the ongoing
effect of the Hughes Transactions on GM's overall financial condition and
results of operations will not be material. However, the Hughes Transactions
will initially increase GM's consolidated net liquidity by an amount equal to
any proceeds of new Hughes Defense debt, reduced by costs incurred in
connection with the Hughes Transactions, which are currently estimated to be
approximately $100 million.
AS OF AND FOR THE SIX AS OF AND FOR THE
MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
--------------------- ---------------------------------------------
1997 1996 1996 1995 1994 1993 1992 (A)
---------- ---------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS:
Total net sales and
revenues.............. $ 87,387 $ 84,022 $164,069 $160,272 $148,499 $132,991 $127,378
---------- ---------- -------- -------- -------- -------- --------
Costs and expenses..... 81,308 79,586 158,120 151,923 141,401 130,562 130,440
Plant closings expense
(adjustments) and
provisions for other
restructurings........ 80 -- (727) -- -- 950 1,237
---------- ---------- -------- -------- -------- -------- --------
Total costs and
expenses............. 81,388 79,586 157,393 151,923 141,401 131,512 131,677
---------- ---------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before cumulative
effect of accounting
changes............... 3,894 2,896 4,953 6,033 4,866 1,777 (3,222)
---------- ---------- -------- -------- -------- -------- --------
Net income (loss)...... $ 3,894 $ 2,906 $ 4,963 $ 6,881 $ 4,901 $ 2,466 $(23,498)
---------- ---------- -------- -------- -------- -------- --------
EARNINGS (LOSS) PER
SHARE ATTRIBUTABLE TO
COMMON STOCKS:
GM $1 2/3 Common Stock
per share from
continuing operations
before cumulative
effect
of accounting changes.. $ 4.98 $ 3.58 $ 6.07 $ 7.14 $ 5.74 $ 1.68 $ (5.33)
---------- ---------- -------- -------- -------- -------- --------
Net earnings (loss) per
share attributable to
GM $1 2/3 Common Stock. $ 4.98 $ 3.57 $ 6.06 $ 7.21 $ 5.15 $ 2.13 $ (38.28)
---------- ---------- -------- -------- -------- -------- --------
Income per share from
discontinued operations
attributable to GM
Class E Common Stock... $ -- $ 0.04 $ 0.04 $ 1.96 $ 1.71 $ 1.51 $ 1.33
---------- ---------- -------- -------- -------- -------- --------
Net earnings (loss) per
share attributable to
GM Class H Common
Stock.................. $ 1.94 $ 1.55 $ 2.88 $ 2.77 $ 2.62 $ 2.30 $ (2.29)
---------- ---------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and marketable
securities............ $ 21,017 $ 18,364 $ 22,262 $ 16,018 $ 15,331 $ 17,369 $ 14,533
---------- ---------- -------- -------- -------- -------- --------
Total assets........... 231,905 212,897 222,142 213,663 191,145 182,388 184,287
---------- ---------- -------- -------- -------- -------- --------
Notes and loans
payable............... 89,918 80,756 85,300 81,222 72,545 69,747 81,767
---------- ---------- -------- -------- -------- -------- --------
Stockholders' equity... 24,031 20,860 23,418 23,346 12,824 5,598 6,226
---------- ---------- -------- -------- -------- -------- --------
Cumulative amount
available for payment
of dividends
GM $1 2/3 Common Stock. $ 22,986 $ 20,758 $ 22,081 $ 12,475 $ 9,014 $ 4,870 $ 3,488
GM Class E Common
Stock................. -- -- -- 10,672 3,752 3,244 2,546
GM Class H Common
Stock................. 3,465 3,096 3,245 2,909 2,169 1,887 1,583
---------- ---------- -------- -------- -------- -------- --------
Total................. $ 26,451 $ 23,854 $ 25,326 $ 26,056 $ 14,935 $ 10,001 $ 7,617
========== ========== ======== ======== ======== ======== ========
CHAPTER 1: INTRODUCTION
13
AS OF AND FOR THE SIX AS OF AND FOR THE
MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
--------------------- ---------------------------------------------
1997 1996 1996 1995 1994 1993 1992 (A)
---------- ---------- -------- -------- -------- -------- --------
CASH DIVIDENDS PER
SHARE:
GM $1 2/3 Common Stock. $ 1.00 $ 0.80 $ 1.60 $ 1.10 $ 0.80 $ 0.80 $ 1.40
---------- ---------- -------- -------- -------- -------- --------
GM Class E Common
Stock................. -- $ 0.30 $ 0.30 $ 0.52 $ 0.48 $ 0.40 $ 0.36
---------- ---------- -------- -------- -------- -------- --------
GM Class H Common
Stock................. $ 0.50 $ 0.48 $ 0.96 $ 0.92 $ 0.80 $ 0.72 $ 0.72
---------- ---------- -------- -------- -------- -------- --------
GM OPERATIONS WITH
FINANCING AND INSURANCE
OPERATIONS ON AN EQUITY
BASIS:
OPERATING RESULTS:
Total net sales and
revenues.............. $ 77,198 $ 74,854 $145,427 $143,754 $134,888 $119,803 $113,489
---------- ---------- -------- -------- -------- -------- --------
Costs and expenses..... 73,993 72,291 142,938 138,294 129,383 118,449 117,289
Plant closings expense
(adjustments) and
provisions for other
restructurings........ 80 -- (727) -- -- 950 1,237
---------- ---------- -------- -------- -------- -------- --------
Total costs and
expenses............. 74,073 72,291 142,211 138,294 129,383 119,399 118,526
---------- ---------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before cumulative
effect of accounting
changes............... 3,894 2,896 4,953 6,033 4,859 1,777 (3,504)
---------- ---------- -------- -------- -------- -------- --------
Net income (loss)...... $ 3,894 $ 2,906 $ 4,963 $ 6,881 $ 4,901 $ 2,466 $(23,498)
---------- ---------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and marketable
securities............ $ 14,917 $ 13,039 $ 16,962 $ 10,241 $ 10,232 $ 9,891 $ 7,386
---------- ---------- -------- -------- -------- -------- --------
Total assets........... 140,696 129,935 135,262 130,644 118,860 115,160 115,422
---------- ---------- -------- -------- -------- -------- --------
Long-term debt and
capitalized leases.... 6,155 5,439 5,390 4,280 5,198 5,861 6,495
---------- ---------- -------- -------- -------- -------- --------
Stockholders' equity... 24,031 20,860 23,418 23,346 12,824 5,598 6,226
---------- ---------- -------- -------- -------- -------- --------
- ------------
(a) General Motors adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1, 1992.
The unfavorable cumulative effect of adopting SFAS No. 106 was $20.7
billion, or $33.38 per share, attributable to GM $1 2/3 Common Stock and
$150 million, or $2.08 per share, attributable to GM Class H Common Stock.
Also, effective January 1, 1992, Hughes Electronics changed its revenue
recognition policy for certain commercial businesses. The unfavorable
effect of this change on 1992 earnings was $33 million, or $0.05 per share,
attributable to GM $1 2/3 Common Stock, and $7 million, or $0.10 per share,
attributable to GM Class H Common Stock.
CHAPTER 1: INTRODUCTION
14
HUGHES ELECTRONICS SUMMARY CONSOLIDATED FINANCIAL DATA
The tables below set forth historical financial information about Hughes
Electronics on a consolidated basis. The first table presents the information
about Hughes Electronics including the effect of the purchase accounting
adjustments described under "Purchase Accounting Adjustments" above. The second
table presents the information about Hughes Electronics excluding the effect of
those purchase accounting adjustments.
HUGHES ELECTRONICS SUMMARY CONSOLIDATED FINANCIAL DATA
(INCLUDING PURCHASE ACCOUNTING ADJUSTMENTS)
AS OF AND FOR THE
SIX MONTHS AS OF AND FOR THE
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 (B) 1996 (B) 1995 (B) 1994 1993 1992 (A)
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS:
Net sales............... $ 8,393.8 $ 7,646.2 $15,744.1 $14,714.3 $14,062.3 $13,450.2 $12,169.0
Other income--net....... 500.0 136.4 116.8 48.6 37.1 67.3 128.1
--------- --------- --------- --------- --------- --------- ---------
Total Revenues......... 8,893.8 7,782.6 15,860.9 14,762.9 14,099.4 13,517.5 12,297.1
--------- --------- --------- --------- --------- --------- ---------
Cost and Expenses....... 7,757.6 6,817.2 14,161.0 13,054.5 12,447.0 12,023.3 12,423.8
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft ....... 61.2 61.2 122.3 123.4 123.8 123.8 123.8
--------- --------- --------- --------- --------- --------- ---------
Total Costs and
Expenses.............. 7,818.8 6,878.4 14,283.3 13,177.9 12,570.8 12,147.1 12,547.6
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes and
minority interests..... 1,075.0 904.2 1,577.6 1,585.0 1,528.6 1,370.4 (250.5)
Income taxes (credit)... 385.3 363.7 605.7 645.6 572.8 572.6 (77.2)
Minority interests in
net losses of
subsidiaries........... 25.7 16.6 57.0 8.9 -- -- --
Cumulative effect of
accounting change...... -- -- -- -- (30.4) -- (872.1)
--------- --------- --------- --------- --------- --------- ---------
Net Income (loss)....... 715.4 557.1 1,028.9 948.3 925.4 797.8 (1,045.4)
========= ========= ========= ========= ========= ========= =========
Adjustment to exclude
the effects of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 61.2 61.2 122.3 159.5 123.8 123.8 123.8
Earnings (loss) used for
computation of
available separate
consolidated net income
of Hughes.............. $ 776.6 $ 618.3 $ 1,151.2 $ 1,107.8 $ 1,049.2 $ 921.6 $ (921.6)
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per
share attributable to
GM Class H Common
Stock.................. $ 1.94 $ 1.55 $ 2.88 $ 2.77 $ 2.62 $ 2.30 $ (2.29)
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,308.5 $ 1,000.1 $ 1,161.3 $ 1,139.5 $ 1,501.8 $ 1,008.7 $ 702.7
Current assets.......... 7,530.2 7,219.2 7,079.0 6,810.8 6,243.6 5,714.3 5,546.8
Total assets............ 21,145.2 16,282.0 16,480.1 15,974.4 14,850.5 14,117.1 14,209.2
Current liabilities..... 4,525.4 4,223.5 4,199.6 4,308.8 3,548.1 3,549.1 3,854.4
Long-term debt and
capitalized leases..... 2,405.8 107.6 34.5 258.8 353.5 416.8 711.0
Stockholders' equity.... 9,699.6 8,894.7 9,179.9 8,525.7 7,975.8 7,328.1 6,815.0
OTHER DATA:
Depreciation and
amortization........... $ 372.8 $ 322.4 $ 682.6 $ 611.1 $ 594.0 $ 627.3 $ 610.9
Capital expenditures.... 361.5 397.8 840.2 820.3 746.3 580.0 558.5
- ------------
(a) Includes the effect of a pre-tax restructuring charge of $1,237.0 million.
(b) Certain amounts have been reclassified to conform with the June 30, 1997
presentation.
CHAPTER 1: INTRODUCTION
15
HUGHES ELECTRONICS UNAUDITED SUMMARY CONSOLIDATED FINANCIAL DATA
(EXCLUDING PURCHASE ACCOUNTING ADJUSTMENTS)
AS OF AND FOR THE
SIX MONTHS AS OF AND FOR THE
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 (B) 1996 (B) 1995 (B) 1994 1993 1992 (A)
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS:
Net sales............... $ 8,393.8 $ 7,646.2 $15,744.1 $14,714.3 $14,062.3 $13,450.2 $12,169.0
Other income--net....... 500.0 136.4 116.8 84.7 37.1 67.3 128.1
--------- --------- --------- --------- --------- --------- ---------
Total Revenue.......... 8,893.8 7,782.6 15,860.9 14,799.0 14,099.4 13,517.5 12,297.1
--------- --------- --------- --------- --------- --------- ---------
Cost and Expenses....... 7,757.6 6,817.2 14,161.0 13,054.5 12,447.0 12,023.3 12,423.8
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes and
minority interests..... 1,136.2 965.4 1,699.9 1,744.5 1,652.4 1,494.2 (126.7)
Income taxes (credit)... 385.3 363.7 605.7 645.6 572.8 572.6 (77.2)
Minority interests in
net losses of
subsidiaries........... 25.7 16.6 57.0 8.9 -- -- --
Cumulative effect of
accounting change...... -- -- -- -- (30.4) -- (872.1)
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) used for
computation of
available separate
consolidated net
income................. 776.6 618.3 1,151.2 1,107.8 1,049.2 921.6 (921.6)
========= ========= ========= ========= ========= ========= =========
Earnings (loss) per
share attributable to
GM Class H Common
Stock.................. $ 1.94 $ 1.55 $ 2.88 $ 2.77 $ 2.62 $ 2.30 $ (2.29)
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,308.5 $ 1,000.1 $ 1,161.3 $ 1,139.5 $ 1,501.8 $ 1,008.7 $ 702.7
Current assets.......... 7,530.2 7,219.2 7,079.0 6,810.8 6,243.6 5,714.3 5,546.8
Total assets............ 18,482.9 13,497.4 13,756.6 13,128.6 11,845.2 10,988.0 10,956.3
Current liabilities..... 4,525.4 4,223.5 4,199.6 4,308.8 3,548.1 3,549.1 3,854.4
Long-term debt and
capitalized leases..... 2,405.8 107.6 34.5 258.8 353.5 416.8 711.0
Stockholders' equity.... 7,037.3 6,110.1 6,456.4 5,679.9 4,970.5 4,199.0 3,562.1
OTHER DATA:
Depreciation and
amortization........... $ 311.6 $ 261.2 $ 560.3 $ 487.7 $ 470.2 $ 503.5 $ 487.1
Capital expenditures.... 361.5 397.8 840.2 820.3 746.3 580.0 558.5
- ------------
(a) Includes the effect of a pre-tax restructuring charge of $1,237.0 million.
(b) Certain amounts have been reclassified to conform with the June 30, 1997
presentation.
CHAPTER 1: INTRODUCTION
16
HUGHES DEFENSE SUMMARY COMBINED FINANCIAL DATA
The table below sets forth historical financial information about Hughes
Defense. As discussed under "Overview" above, the financial statements of
Hughes Defense reflect the business operations that will be included in Hughes
Defense after giving effect to the Hughes Reorganization. You should read this
information in conjunction with Hughes Defense's Combined Financial Statements
(including the notes thereto) included in Appendix C to this document.
AS OF AND FOR THE
SIX MONTHS AS OF AND FOR THE
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------------
1997 1996 1996 1995 1994 1993 1992 (A)
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
OPERATING RESULTS:
Net sales............... $3,413.3 $3,053.1 $6,382.7 $5,921.8 $5,896.0 $6,353.5 $5,503.8
Other income, net....... 13.3 4.5 9.1 43.0 22.5 24.7 45.2
-------- -------- -------- -------- -------- -------- --------
Total Revenues......... 3,426.6 3,057.6 6,391.8 5,964.8 5,918.5 6,378.2 5,549.0
-------- -------- -------- -------- -------- -------- --------
Cost and Expenses....... 3,118.3 2,765.5 5,770.3 5,309.5 5,314.5 5,605.1 5,836.8
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 50.6 50.6 101.3 101.3 101.3 101.3 101.3
-------- -------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 3,168.9 2,816.1 5,871.6 5,410.8 5,415.8 5,706.4 5,938.1
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... 257.7 241.5 520.2 554.0 502.7 671.8 (389.1)
Income taxes (credit)... 118.5 111.1 239.3 235.4 226.2 293.9 (182.9)
Cumulative effect of
accounting changes..... -- -- -- -- (7.1) -- (268.5)
-------- -------- -------- -------- -------- -------- --------
Net Income (loss)....... $ 139.2 $ 130.4 $ 280.9 $ 318.6 $ 269.4 $ 377.9 $ (474.7)
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 81.6 $ 29.2 $ 59.7 $ 15.7 $ 58.7 $ 1.6 $ 9.1
Current assets.......... 3,167.2 3,060.1 2,907.7 2,880.0 2,462.0 2,529.3 2,692.9
Total assets............ 7,382.3 7,175.5 7,028.4 7,025.9 6,249.1 6,548.6 7,012.9
Current liabilities..... 1,665.2 1,835.6 1,889.0 1,959.9 1,604.9 1,814.9 1,624.0
Long-term debt and
capitalized leases..... 33.3 48.7 34.4 49.7 57.6 83.9 38.0
Parent Company's net
investment............. 5,372.5 4,939.6 4,823.0 4,680.2 4,198.2 4,278.3 4,801.0
OTHER DATA:
Depreciation and
amortization........... $ 126.7 $ 116.8 $ 246.6 $ 240.5 $ 265.5 $ 295.9 $ 303.5
Capital expenditures.... $ 68.8 $ 55.4 $ 178.3 $ 99.4 $ 174.1 $ 119.8 $ 88.1
- ------------
(a) Includes the effect of a pre-tax restructuring charge of $833.1 million.
CHAPTER 1: INTRODUCTION
17
DELCO SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
The table below sets forth historical and pro forma financial information
about Delco. As discussed under "Overview" above, the financial statements of
Delco reflect the business operations that will be included in Delco after
giving effect to the Hughes Reorganization. You should read this information in
conjunction with Delco's Combined Financial Statements (including the notes
thereto) included in Appendix D to this document.
The columns of pro forma information give effect to the Hughes Transactions
as if they had occurred at the beginning of the respective periods as to
operating results data, and as of June 30, 1997 as to the balance sheet data,
but do not give effect to the planned integration of Delco and Delphi after
consummation of the Hughes Transactions.
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------
PRO PRO
FORMA FORMA
1997(A) 1997 1996 1996(A) 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
OPERATING RESULTS:
Net sales............... $2,904.2 $2,904.2 $2,916.0 $5,560.1 $5,560.1 $5,757.2 $5,560.7 $4,808.1 $4,143.5
Other income, net....... 13.8 103.8 89.7 32.4 202.4 195.6 150.6 114.7 158.7
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues......... 2,918.0 3,008.0 3,005.7 5,592.5 5,762.5 5,952.8 5,711.3 4,922.8 4,302.2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Cost and Expenses. 2,628.0 2,628.0 2,524.0 4,901.9 4,901.9 4,869.0 4,751.6 4,219.3 3,695.1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 290.0 380.0 481.7 690.6 860.6 1,083.8 959.7 703.5 607.1
Income taxes............ 107.6 141.0 183.3 261.4 325.8 411.3 364.7 280.5 209.8
Cumulative effect of
accounting changes..... -- -- -- -- -- -- (35.2) -- (478.4)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income.............. $ 182.4 $ 239.0 $ 298.4 $ 429.2 $ 534.8 $ 672.5 $ 559.8 $ 423.0 $ (81.1)
======== ======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 31.0 $ 221.8 $ 756.9 $ 741.0 $ 926.1 $1,243.2 $ 773.2 $ 571.3
Current assets.......... 1,087.5 4,031.3 3,583.1 3,858.0 3,276.2 2,813.0 2,146.9 1,691.2
Total assets............ 2,448.2 5,592.0 5,510.7 5,464.1 5,186.4 4,842.4 4,205.9 3,779.8
Current liabilities..... 714.5 714.5 894.5 734.2 767.9 927.9 786.6 673.5
Parent Company's net
investment............. 585.9 3,779.7 3,580.2 3,662.1 3,402.1 2,949.4 2,566.7 2,288.3
OTHER DATA:
Depreciation and
amortization........... $ 113.6 $ 101.2 $ 204.4 $ 155.6 $ 145.0 $ 152.0 $ 125.6
Capital expenditures.... $ 71.9 $ 103.0 $ 196.5 $ 264.1 $ 165.7 $ 149.2 $ 266.1
- ------------
(a) Pro forma balance sheet data as of December 31, 1996 and pro forma other
data have not been determined.
CHAPTER 1: INTRODUCTION
18
HUGHES TELECOM SUMMARY COMBINED HISTORICAL
AND PRO FORMA FINANCIAL DATA
The table below sets forth historical and pro forma financial information
about Hughes Telecom. As discussed under "Overview" above, the financial
statements of Hughes Telecom reflect the business operations that will be
included in Hughes Telecom after giving effect to the Hughes Reorganization.
You should read this information in conjunction with Hughes Telecom's Combined
Financial Statements (including the notes thereto) included in Appendix E to
this document.
The columns of pro forma operating results information for the year ended
December 31, 1996 and for the six months ended June 30, 1997 give effect to the
PanAmSat Merger and to the Hughes Transactions as if they had occurred at the
beginning of the respective periods. The pro forma balance sheet data as of
June 30, 1997 include the PanAmSat Merger which occurred in May 1997 and give
effect to the Hughes Transactions as if they had occurred as of June 30, 1997.
AS OF AND FOR THE SIX AS OF AND FOR THE YEARS
MONTHS ENDED JUNE 30, ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------
PRO PRO
FORMA FORMA
1997(A) 1997 1996 1996(A) 1996 1995 1994 1993 1992(B)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS:
Net sales............... $2,354.8 $2,235.2 $1,831.4 $4,280.7 $4,099.6 $3,243.0 $2,773.5 $2,263.8 $2,282.2
Other income (expense),
net.................... (11.9) 477.8 104.5 74.9 74.9 (32.4) (10.0) 160.6 39.0
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues......... 2,342.9 2,713.0 1,935.9 4,355.6 4,174.5 3,210.6 2,763.5 2,424.4 2,321.2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Cost and Expenses....... 2,227.8 2,184.2 1,728.9 4,079.3 3,943.6 3,192.2 2,678.2 2,155.6 2,266.6
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 10.6 10.6 10.6 21.0 21.0 27.2 21.2 21.2 21.2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 2,238.4 2,194.8 1,739.5 4,100.3 3,964.6 3,219.4 2,699.4 2,176.8 2,287.8
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
minority interests..... 104.5 518.2 196.4 255.3 209.9 (8.8) 64.1 247.6 33.4
Income taxes (credit)... 51.6 213.3 84.7 144.8 100.0 (10.4) 20.6 94.7 6.1
Minority interests in
(income) losses of
subsidiaries........... 0.9 21.9 15.4 (8.0) 52.6 4.6 -- -- --
Cumulative effect of
accounting changes..... -- -- -- -- -- -- (2.3) -- (112.8)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income (loss)....... 53.8 $326.8 $ 127.1 102.5 $ 162.5 $ 6.2 $ 41.2 152.9 (85.5)
======== ======== ======== ======== ======== ======== ========
Adjustment to exclude
the effects of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 10.6 21.0
-------- --------
Earnings used for
computation of
available separate
consolidated net income
of Hughes Telecom...... $ 64.4 $ 123.5
======== ========
Earnings per share
attributable to New GM
Class H Common Stock... $ 0.16 $ 0.31
======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $2,564.5 $ 342.8 $ 5.6 $ 6.7 $ 7.6 $ 5.8 $ 10.2 $ 6.4
Current assets.......... 4,454.8 2,195.1 1,417.9 1,535.7 1,242.9 1,175.9 1,120.5 1,339.5
Total assets............ 11,869.2 9,177.1 4,243.4 4,479.2 4,047.7 3,662.7 3,222.3 3,100.2
Current liabilities..... 1,383.8 1,301.3 1,132.5 1,281.7 958.2 933.9 816.3 836.6
Long-term debt.......... 706.3 2,372.5 -- -- -- -- 1.5 125.6
Minority interests...... 643.1 643.1 53.9 21.6 40.2 -- -- --
Redeemable preferred
stock of a subsidiary.. 401.5 401.5 -- -- -- -- -- --
Parent Company's net
investment............. 7,358.9 3,610.9 2,538.1 2,491.6 2,608.9 2,301.0 1,973.3 1,752.3
OTHER DATA:
Depreciation and
amortization........... $ 129.4 $ 99.8 $ 218.5 $ 209.2 $ 163.0 $ 138.3 $ 145.0
Capital expenditures.... $ 220.2 $ 237.1 $ 451.4 $ 446.5 $ 400.4 $ 276.1 $ 187.0
- --------
(a) Pro forma balance sheet data as of December 31, 1996 and pro forma other
data have not been determined.
(b) Includes the effect of a pre-tax restructuring charge of $156.6 million.
CHAPTER 1: INTRODUCTION
19
RAYTHEON SUMMARY COMBINED HISTORICAL
AND PRO FORMA FINANCIAL DATA
The table below sets forth historical and pro forma financial information
about Raytheon. This information should be read in conjunction with Raytheon's
Consolidated Financial Statements (including the notes thereto) which are
incorporated into this document by reference.
We derived the consolidated historical financial data for each of the
calendar years 1992 through 1996 from the consolidated financial statements of
Raytheon audited by Coopers & Lybrand L.L.P., independent public accountants.
We derived the Raytheon consolidated historical financial data as of and for
the six-month periods ended June 29, 1997 and June 30, 1996 from the unaudited
financial statements of Raytheon for such periods included in Raytheon's Form
10-Q dated August 13, 1997, which is incorporated into this document by
reference. In the opinion of Raytheon management, the unaudited consolidated
historical financial statements reflect all adjustments (consisting of only
normal recurring items) that are necessary for the fair presentation of
financial position and results of operations for such periods.
The columns of pro forma operating results information for the year ended
December 31, 1996 and for the six months ended June 29, 1997 give effect to the
Hughes Transactions, the Raytheon Merger and the Texas Instruments Defense
Acquisition as if they had occurred at the beginning of the respective periods.
The pro forma balance sheet data as of June 29, 1997 give effect to the
transactions as if they had occurred as of that date. We did not calculate pro
forma balance sheet data as of December 31, 1997.
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------- --------------------------------------------------------------------
PRO FORMA
JUNE 29, JUNE 29, JUNE 30, PRO FORMA
1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- --------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS:
Net Sales............... $10,461 $ 6,223.9 $ 5,914.4 $20,514 $12,330.5 $11,804.2 $10,097.7 $9,334.1 $9,121.7
Costs and Expenses...... 9,736 5,631.7 5,318.5 19,114(a) 11,247.0(a) 10,612.5(b) 9,197.8(c) 8,286.8 8,165.7
Income before Taxes..... 725 592.2 595.9 1,400(a) 1,083.5(a) 1,191.7(b) 899.9(c) 1,047.3 956.0
Income Taxes............ 277 199.3 200.0 499 322.3 399.2 303.0 354.3 320.9
Net Income.............. 448 392.9 395.9 901(a) 761.2(a) 792.5(b) 596.9(c) 693.0 635.1
Earnings per common
share.................. 1.32 1.66 1.66 2.65(a) 3.21(a) 3.25(b) 2.26(c) 2.56 2.36
Dividend declared per
common share........... 0.40 0.40 0.80 0.75 0.738 0.70 0.663
BALANCE SHEET DATA:
Cash and marketable
securities............. $ 181 $ 181.3 $ 212.3 $ 138.8 $ 210.3 $ 202.2 $ 190.2 $ 88.8
Current assets.......... 9,444 6,177.5 6,147.5 5,603.9 5,275.2 4,985.5 4,609.2 3,775.8
Total assets............ 28,281 11,843.1 11,620.9 11,126.1 9,840.9 7,395.4 7,257.7 6,015.1
Current Liabilities..... 10,006 5,136.1 5,427.0 4,691.8 3,690.4 3,283.1 2,800.3 2,136.8
Long-term debt.......... 6,650 1,496.6 1,496.1 1,500.5 1,487.7 24.5 24.4 25.3
Stockholders' Equity.... 9,943 4,877.5 4,337.5 4,598.0 4,292.0 3,982.2 4,297.9 3,843.2
OTHER DATA:
Depreciation and
amortization........... $ 193.0 $ 175.6 $ 368.9 $ 371.4 $ 304.2 $ 296.4 $ 302.1
Capital Expenditures.... $ 201.4 $ 203.9 $ 406.0 $ 328.6 $ 267.4 $ 256.1 $ 307.7
- --------
(a) Includes special charge of $34.0 million pre-tax, $22.1 million after-tax,
or $0.09 per share.
(b) Includes one-time gain of $8.0 million pre-tax, $5.2 million after-tax, or
$0.02 per share.
(c) Includes restructuring charge of $249.8 million pre-tax, $162.3 million
after-tax, or $0.61 per share.
CHAPTER 1: INTRODUCTION
20
RECENT DEVELOPMENTS
GENERAL MOTORS
[Selected third quarter financial information to come.]
HUGHES ELECTRONICS
[Selected third quarter financial information to come.]
RAYTHEON
SALE OF PORTIONS OF THE APPLIANCES BUSINESS
On September 10, 1997, Raytheon sold its home appliance, heating and air
conditioning and commercial cooking businesses to Goodman Manufacturing
Company, L.P. The total sale price was $550 million in cash, subject to
adjustment for certain changes in the net working capital of such businesses
between December 31, 1996 and the closing date of the transaction. In 1996,
these three businesses represented approximately 80% of the sales and 50% of
the operating income of Raytheon's Appliance Group. In addition, Raytheon has
realized approximately $200 million from the sale of receivables relating to
the businesses which were sold. Raytheon is retaining the commercial laundry
and electronics controls businesses of the Appliance Group, but is continuing
its strategic review of these remaining businesses. Proceeds from the sale of
the three Appliance Group businesses will be used to reduce debt incurred in
connection with the Texas Instruments Defense Acquisition. Raytheon believes
that the 1996 sales, operating income, net income and total assets of the
businesses sold were not material and does not expect the sale to have a
significant effect on results of operations.
TEXAS INSTRUMENTS DEFENSE ACQUISITION
On July 11, 1997, Raytheon purchased substantially all of the assets of, and
assumed substantially all the liabilities related to, Texas Instruments Defense
for an aggregate amount of $2.875 billion in cash. The purchase price is
subject to post-closing adjustments for certain changes in the net assets of
Texas Instruments Defense between September 30, 1996 and the closing date of
such purchase. In addition, Raytheon paid $75 million for an assignment and
license of certain related intellectual property. Texas Instruments Defense had
1996 sales of approximately $1.8 billion.
DEBT FINANCINGS
In connection with the Texas Instruments Defense Acquisition and in
contemplation of the Raytheon Merger, Raytheon arranged revolving credit
facilities with a syndicate of banks totaling $7.0 billion (collectively the
"Raytheon Facilities"). Of these, lines for $4.0 billion have a maturity of
five years and lines for $3.0 billion have a maturity of 364 days. Raytheon
incurred indebtedness in the amount of $2.95 billion under the Raytheon
Facilities in order to finance the Texas Instruments Defense Acquisition. The
Raytheon Facilities include covenants which require (1) repayment and reduction
of the outstanding commitment of such facilities or similar facilities with 75%
of the net cash proceeds from any capital markets financings and asset sales
for a period of two years from the closing date and (2) the ratio of total debt
to total capitalization not to exceed 65% until July 2, 2000, 60% from July 2,
2000 to January 1, 2002 and 55% thereafter. The Raytheon Facilities rank pari
passu with other senior unsecured indebtedness of Raytheon, including the
Raytheon Notes (as defined below), and, upon completion of the Raytheon Merger,
New Raytheon (including the debt incurred by Hughes Defense as described
herein).
On August 12, 1997, Raytheon completed a public offering of $3.0 billion
aggregate principal amount of notes offered with final maturities of three,
five, ten and thirty years (the "Raytheon Notes"). The net proceeds from the
sale of the Raytheon Notes were used primarily to reduce amounts outstanding
under the Raytheon Facilities and to refinance other debt incurred in the Texas
Instruments Defense Acquisition, including commercial paper borrowings.
Additional proceeds have been and will continue to be used by Raytheon for
capital expenditures, working capital requirements and general corporate
purposes.
CHAPTER 1: INTRODUCTION
21
CHAPTER 2
RISK FACTORS
PAGE
----
RISK FACTORS RELATING TO THE HUGHES TRANSACTIONS.................. 23
Ability of General Motors to Achieve Potential Benefits from the
Integration of Delco and Delphi................................ 23
Loss of Potential Availability of Hughes Defense Funds and
Assets......................................................... 24
Separation of Hughes Defense, Delco and Hughes Telecom.......... 24
Impact on Financial Position and Results of Operations.......... 25
RISK FACTORS RELATING TO THE BUSINESS OF NEW HUGHES ELECTRONICS... 26
No Assurance of Sufficient Funding for New Hughes Electronics... 26
New Hughes Electronics' Ability to Maintain Leading
Technological Capabilities..................................... 26
RISK FACTORS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL
STRUCTURE........................................................ 28
Potentially Diverging Interests of GM's Common Stockholders;
Fiduciary Duties of the GM Board............................... 28
GM Board Policies and Practices Are Subject to Change........... 28
New GM Class H Common Stockholders Have No Direct Interest in
New Hughes Electronics......................................... 28
Potential Recapitalization of New GM Class H Common Stock Into
GM $1 2/3 Common Stock......................................... 29
ADDITIONAL RISK FACTORS REGARDING NEW GM CLASS H COMMON STOCK..... 30
Changes in Nature of Tracking Stock Investment; Earnings
Volatility..................................................... 30
Market Volatility; No Assurance as to Market Price or
Performance of New GM Class H Common Stock..................... 30
No Current Cash Dividends on New GM Class H Common Stock........ 30
RISK FACTORS REGARDING NEW RAYTHEON AFTER THE RAYTHEON MERGER..... 32
Ability to Achieve Synergies from the Raytheon Merger;
Integration of Texas Instruments Defense....................... 32
Non-Defense Businesses of New Raytheon.......................... 32
Certain Limitations on Changes in Control of New Raytheon; New
Raytheon's Ability to Participate in Further Defense Industry
Consolidation.................................................. 32
22
CHAPTER 2: RISK FACTORS
RISK FACTORS
In addition to the other information set forth in this document, we urge you
to consider carefully each of the factors set forth below. Certain of the
following factors are relevant to both GM $1 2/3 Common Stockholders and GM
Class H Common Stockholders in connection with their consideration of the
Hughes Transactions and their investment in New Raytheon. Others are relevant
principally to GM Class H Common Stockholders in connection with their
investment in New GM Class H Common Stock. Finally, the factors relating to
non-consummation of the Hughes Transactions are relevant to both GM $1 2/3
Common Stockholders and GM Class H Common Stockholders.
While certain of the factors discussed below already exist with respect to
your investment in General Motors, such as the factors relating to the business
of New Hughes Electronics and those relating to GM's dual-class common stock
capital structure, you should give additional consideration to these factors in
determining whether to consent to the Hughes Transactions.
For information regarding forward-looking statements and information
contained in this document generally, see "Forward-Looking Information May
Prove Inaccurate" in Chapter 7.
RISK FACTORS RELATING TO THE HUGHES TRANSACTIONS
All of you (as GM common stockholders) should consider carefully each of the
following factors.
ABILITY OF GENERAL MOTORS TO ACHIEVE POTENTIAL BENEFITS FROM THE INTEGRATION
OF DELCO AND DELPHI
We are proposing to transfer Delco from Hughes Electronics to General Motors
in order to facilitate the integration of Delco's electronics capability with
Delphi's automotive systems and components expertise. We believe that the
combined Delco/Delphi entity will be better able to realign its product,
technical and manufacturing operations to address strategic objectives for
growth and competitiveness and will be able to compete more effectively in
markets worldwide by developing new electronically enhanced vehicle systems
with improved functionality, lower cost and higher quality. As a result, we
expect that Delco will be able to maintain a greater level of business with
GM's North American Operations ("GM NAO") than in the absence of the
combination and will have improved abilities to achieve and maintain non-GM NAO
sales due to access to a larger outside customer base. We also believe that
structural savings will accrue as a result of the full integration of Delco and
Delphi operations. We also expect General Motors to benefit from this
integration in its capacity as a manufacturer of automotive vehicles by virtue
of Delco/Delphi being a stronger supplier of automotive systems and components.
These potential benefits have been considered by the GM Board in determining
the Distribution Ratio, as described below under "Special Factors--Background
of the Hughes Transactions--Development of the Hughes Transactions and the
Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting" in Chapter
3.
Realization of these potential benefits, however, will depend, in part, on
GM's ability to effectively integrate the operations of Delco, which are
primarily focused on automotive electronics, and the operations of Delphi,
which are primarily focused on automotive systems and components. Although we
believe that the operations of Delco and Delphi will be complementary, there
can be no assurance that General Motors will not encounter difficulties in
merging the operations of Delco with those of Delphi or that the benefits
expected from the integration will be realized. The process of fully
integrating the businesses of Delco and Delphi may also require a
disproportionate amount of time and attention of GM's management, financial and
other resources. In addition, integrating the two operations may be made more
difficult initially by the necessity of coordinating geographically separated
organizations. If General Motors is not successful in integrating the
strategies and operations of Delco and Delphi or if the integrated operations
fail to achieve market acceptance, the combined business could be adversely
affected. For additional information regarding the integration of Delco and
Delphi, see "Special Factors--Purposes of the Hughes Transactions--Integration
of Delco and Delphi" in Chapter 3 and "--Background of the Hughes
Transactions--Development of the Hughes Transactions and the Raytheon Merger--
September 23, 1997 Capital Stock Committee Meeting" in Chapter 4.
CHAPTER 2: RISK FACTORS
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CHAPTER 2: RISK FACTORS
LOSS OF POTENTIAL AVAILABILITY OF HUGHES DEFENSE FUNDS AND ASSETS
Upon the consummation of the Hughes Transactions, neither General Motors nor
New Hughes Electronics will have any continued ownership interest in Hughes
Defense. Accordingly, neither General Motors nor New Hughes Electronics will
have access to the funds generated by Hughes Defense to fund GM's other
businesses (including the business of New Hughes Electronics) or to satisfy
other corporate needs, including in periods of economic downturn. Similarly, as
a result of the Hughes Defense Spin-Off, the equity and assets of Hughes
Defense will no longer be available to you as GM's common stockholders in the
event of the liquidation of General Motors. See "GM Class H Common Stock" in
Chapter 6.
Under the current dividend policies and practices of Hughes Electronics and
General Motors and since Hughes Defense is a subsidiary of Hughes Electronics,
Hughes Electronics and General Motors each retain a significant portion of the
funds generated by Hughes Defense. As described elsewhere in this document, the
earnings of Hughes Electronics (which include the earnings of Hughes Defense)
are used in calculating the dividends payable by General Motors to GM Class H
Common Stockholders and by Hughes Electronics to General Motors. The earnings
generated by Hughes Defense are currently available to, and have been used to,
fund Hughes Telecom's capital needs. Although we believe that the additional
funding made available to Hughes Telecom in connection with the Hughes
Transactions will enable it to take advantage of certain growth opportunities
in the telecommunications and space industry as contemplated by its current
business plan, there is no assurance that such funding will be adequate to
allow New Hughes Electronics to take advantage of other additional
opportunities which may arise in the future, to address competitive pressures
or to satisfy all of its long-term capital requirements. Moreover, it is not
possible at this time to determine whether, over the long term, such funding
will be more or less than that which would have been available from the
earnings of Hughes Defense had it not been spun off from General Motors.
SEPARATION OF HUGHES DEFENSE, DELCO AND HUGHES TELECOM
Under the current General Motors and Hughes Electronics ownership structure,
Hughes Defense, Delco and Hughes Telecom have each been able to benefit from
certain synergistic alliances and shared resources, such as, among other
things, shared development of and access to technology. The Hughes Transactions
involve, among other things, the reallocation and transfer of certain assets
and liabilities among Hughes Defense, Delco and Hughes Telecom. Although we
have determined that continued ownership of Hughes Defense is no longer
necessary for the execution of our business strategy (including our strategies
with respect to Hughes Telecom and Delco) and certain separation and
transitional arrangements (including technology sharing arrangements) will be
put in place in connection with the consummation of the Hughes Transactions,
there can be no assurance that the business of Hughes Telecom (which will be
conducted by New Hughes Electronics) will not be adversely affected by its
separation from Hughes Defense and Delco (including with respect to the
availability of sufficient funding to satisfy its future capital needs) or that
the business of Delco will not be adversely affected by its separation from
Hughes Defense and Hughes Telecom. In particular, there can be no assurance
that Delco and Hughes Telecom will be able to attain the same level of
synergistic benefits through the various technology sharing and other
separation and transitional arrangements described elsewhere in this document
as would be obtained through continued GM ownership of Hughes Defense
(including the benefits of the electronic and systems integration capabilities
of Hughes Defense). For additional information regarding the separation of
these businesses, see "Description of the Hughes Transactions" in Chapter 3.
In addition, Hughes Defense has benefited directly from its status as a
wholly owned subsidiary of General Motors through access to, among other
things, GM's worldwide corporate purchasing process and related services. While
certain separation and transitional arrangement will provide Hughes Defense
with some access to GM's worldwide purchasing process and related services
following the Hughes Defense Spin-Off, there can be no assurance that Hughes
Defense's access to such services will be sustained at the same level or
provide the same benefits. Moreover, Hughes Defense will no longer benefit from
such access following the termination of such arrangements. Furthermore, there
can be no assurance that the purchasing benefits available to New Raytheon will
be similar to those available to General Motors. See "Separation and Transition
Arrangements--
24
CHAPTER 2: RISK FACTORS
Summary of Other Agreements Contemplated by the Master Separation Agreement--
Corporate Purchasing" in Chapter 3.
IMPACT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS
Following the Hughes Defense Spin-Off, General Motors will no longer own any
of Hughes Defense and, accordingly, GM's consolidated balance sheet will
reflect decreased net assets and net liabilities, resulting in an overall
reduction in GM stockholders' equity of approximately $0.6 billion to $1.6
billion (based on the Recent Raytheon Stock Price and the net assets of Hughes
Defense at June 30, 1997, the overall reduction in GM stockholders' equity is
estimated to be approximately $1.5 billion). Although we expect that the Hughes
Transactions will initially increase GM's net liquidity as a result of the
proceeds from the new indebtedness to be incurred by Hughes Defense prior to
the Hughes Defense Spin-Off, we do not expect the Hughes Transactions to have
an ongoing material impact on GM's overall credit rating, financial condition
or results of operations (including with respect to its gross margin
percentage, operating margin percentage, net margin percentage and debt-to-
equity ratio). However, there can be no assurance that the Hughes Transactions,
in combination with other transactions, operating results and market conditions
will not result in a lower credit rating or weaker financial condition than in
the absence of the Hughes Transactions. For additional information, see
"Description of the Hughes Transactions--Accounting Treatment" in Chapter 3.
For a discussion of the impact of the Hughes Transactions on the amounts
available to pay dividends on GM common stocks, see "New GM Class H Common
Stock--GM Certificate of Incorporation Provisions Regarding Dividends" in
Chapter 6.
25
CHAPTER 2: RISK FACTORS
RISK FACTORS RELATING TO THE BUSINESS OF NEW HUGHES ELECTRONICS
Although the following factors are currently applicable to the
telecommunications and space business of Hughes Electronics, all of you (as GM
common stockholders) should consider carefully each of the following factors in
the particular context of the Hughes Transactions.
NO ASSURANCE OF SUFFICIENT FUNDING FOR NEW HUGHES ELECTRONICS
As explained elsewhere in this document, the telecommunications and space
industry is experiencing a period of rapid expansion and change, providing
participants with many opportunities for strategic growth as well as vigorous
competition. We expect the global telecommunications services market to
continue to grow due to the high demand for communications infrastructure and
the opportunities created by industry deregulation. In this environment, many
of Hughes Telecom's competitors are committing substantial capital to capture
market opportunities and, in many instances, are forging alliances to acquire
or maintain market leadership. Therefore, key success factors include access to
capital and financial flexibility in order to take advantage of new market
opportunities, respond to competitive pressures and react quickly to other
major changes in the marketplace.
Our strategy with respect to Hughes Telecom is to leverage its leadership
position in satellite technology to be a leader with emerging
telecommunications products and services. This strategy will require
substantial investments of capital over the next several years. As part of the
Hughes Transactions, GM Class H Common Stock (which currently tracks the
financial performance of Hughes Electronics, a diversified corporation which
conducts three principal businesses: defense electronics, automotive
electronics and telecommunications and space) will be recapitalized into New GM
Class H Common Stock (which will track the financial performance of New Hughes
Electronics, which will continue the telecommunications and space business of
Hughes Electronics). As a result, under the current dividend policies and
practices of Hughes Electronics and General Motors, after the Hughes
Transactions, New Hughes Electronics will no longer have access to the
businesses of Hughes Defense and Delco, which have been used in the past to
fund Hughes Telecom, as potential sources of funding to satisfy its capital
needs. Although approximately $3.9 billion of the proceeds of the debt of
Hughes Defense will be used to provide an infusion of equity into Hughes
Telecom, there can be no assurance that New Hughes Electronics' total capital
requirements over the long term will not exceed such amount due to, among other
things, presently unanticipated growth opportunities, changes in the
competitive environment and cash needs which may arise in connection with
certain post-closing adjustments as described elsewhere herein. See "Special
Factors--The Distribution Ratio--Post-Closing Payment" and "Separation and
Transition Arrangements--Summary of Master Separation Agreement--Post-Closing
Adjustment Between New Hughes Electronics and New Raytheon" in Chapter 3.
Although we currently expect that the debt of New Hughes Electronics will be
rated investment grade after the completion of the Hughes Transactions, there
can be no assurance that New Hughes Electronics will be able to satisfy its
capital requirements in the future, whether through access to the capital
markets or otherwise, including with respect to funding potentially available
through General Motors. A shortfall in such funding and inability to access the
capital markets could prevent completion of some or all components of New
Hughes Electronics' strategy and impair its ability to react to changes in its
markets. The ability of New Hughes Electronics to raise capital will be
influenced by, among other things, GM's overall financial condition and rating
objectives.
See "Special Factors--Purposes of the Hughes Transactions--Enhance Growth
Potential of Hughes Telecom" in Chapter 3 and "Hughes Telecom Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business of Hughes Telecom" in Chapter 4.
NEW HUGHES ELECTRONICS' ABILITY TO MAINTAIN LEADING TECHNOLOGICAL CAPABILITIES
After the Hughes Transactions, the ability of New Hughes Electronics to
maintain leading technological capabilities will have a greater impact on the
New GM Class H Common Stock than the ability of Hughes
26
CHAPTER 2: RISK FACTORS
Telecom to do so has on the existing GM Class H Common Stock as a result of the
fact that New GM Class H Common Stock will represent a more focused investment
in less diversified businesses. The telecommunications and space industry is
characterized by rapid technological advances and innovations. There can be no
assurance that one or more of the technologies currently utilized or under
development by Hughes Telecom, or any technologies that may be developed or
utilized by New Hughes Electronics after the Hughes Transactions, may not
become obsolete, or that planned products or services will still be in demand
by the time they are offered. Competitors of New Hughes Electronics may have or
obtain access to proprietary technologies that are perceived by the market as
being superior to, or more desirable than, the technologies of New Hughes
Electronics.
New Hughes Electronics' operating results will depend to a significant extent
on its ability to continue to introduce new products and services successfully
on a timely basis and to reduce costs of existing products and services. The
success of new product development is dependent on many factors, including
proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of competitors and market
acceptance. There can be no assurance that New Hughes Electronics will
successfully identify new product or service opportunities and develop and
bring new products and services to market in a timely manner, or that products
or technologies developed by others will not render New Hughes Electronics'
product and service offerings obsolete or noncompetitive. No assurance can be
given that any of the technologies on which Hughes Telecom is currently
focusing its research and development investments will achieve acceptance in
the marketplace, and the lack of such market acceptance could have a material
adverse effect on New Hughes Electronics' future competitive position and
results of operations.
For additional information, see "Business of Hughes Telecom" in Chapter 4.
27
CHAPTER 2: RISK FACTORS
RISK FACTORS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL STRUCTURE
Although the following factors are currently applicable to your investment in
General Motors, all of you (as GM common stockholders) should consider
carefully each of the following factors in the particular context of the Hughes
Transactions.
POTENTIALLY DIVERGING INTERESTS OF GM'S COMMON STOCKHOLDERS; FIDUCIARY DUTIES
OF THE GM BOARD
General Motors will continue to have a dual-class common stock structure
after the Hughes Transactions. As described below under "Considerations
Relating to GM's Dual-Class Common Stock Capital Structure" in Chapter 6, the
existence of two classes of common stock with separate dividend rights as
provided for in the GM Certificate of Incorporation, both in its current form
and as proposed to be amended in the Hughes Transactions, can give rise to
potential divergences between the interests of the holders of each of the
separate classes of GM common stock with respect to various intercompany
transactions and other matters. Because General Motors is incorporated in
Delaware, the laws of Delaware govern the duties of the GM Board. Under
Delaware law, the GM Board owes an equal fiduciary duty to all holders of GM
common stock and must act with due care and on an informed basis in the best
interests of General Motors and all such stockholders regardless of class.
General Motors is not aware of any judicial precedent directly addressing the
manner in which these fiduciary duties would be applied in the context of a
capital structure involving multiple classes or series of capital stock which
include terms designed to reflect the separate financial performance of
specified businesses. The GM Board, in the discharge of its fiduciary duties,
will continue to oversee, principally through its Capital Stock Committee, the
policies, programs and practices of General Motors which may impact the
potentially divergent interests of the two classes of GM common stock,
including the policy statement regarding certain capital stock matters as
described below under "Considerations Relating to GM's Dual-Class Common Stock
Capital Structure--New GM Board Policy Statement" in Chapter 6.
GM BOARD POLICIES AND PRACTICES ARE SUBJECT TO CHANGE
In connection with its determination of the terms of the New GM Class H
Common Stock to be issued in the Hughes Transactions, the GM Board reviewed its
policies and practices with respect to its dual-class common stock structure
and adopted, subject to the consummation of the Hughes Transactions, a policy
statement as to certain capital stock matters, including transactions between
General Motors and New Hughes Electronics and the relationship between
dividends (if any) to be paid by New Hughes Electronics to General Motors and
by General Motors to the New GM Class H Common Stockholders. See
"Considerations Relating to GM's Dual-Class Common Stock Capital Structure--New
GM Board Policy Statement" in Chapter 6. While the GM Board has no present
intention to modify or rescind this policy statement, there can be no assurance
in this regard and the policy statement as well as other policies and practices
may be modified or rescinded at any time and from time to time by the GM Board
and the GM Board may adopt additional policies, practices or policy statements,
in each case without the approval of GM's common stockholders. Any such action
would be taken by the GM Board in a manner consistent with its fiduciary duties
under applicable law to holders of both classes of GM common stock and based on
its reasonable business judgment that such decision is in the best interests of
General Motors and all its common stockholders.
NEW GM CLASS H COMMON STOCKHOLDERS HAVE NO DIRECT INTEREST IN NEW HUGHES
ELECTRONICS
Although New GM Class H Common Stock will be a tracking stock relating to New
Hughes Electronics, New GM Class H Common Stockholders will continue to be
stockholders of General Motors (not New Hughes Electronics) and, accordingly,
will continue to have no direct rights in the equity or assets of New Hughes
Electronics, but rather will have rights in the equity and assets of General
Motors (which will include 100% of the stock of New Hughes Electronics). The
provisions in the GM Certificate of Incorporation, as proposed to be amended in
the Hughes Transactions, defining the amounts which may be used to pay
dividends on each class of GM common stock will not result in a physical
segregation of the assets of General Motors or New Hughes Electronics, nor will
it result in the establishment of separate accounts or dividend or liquidation
preferences
28
CHAPTER 2: RISK FACTORS
with respect to such assets for the benefit of the holders of either of the
separate classes of GM common stock. See "Considerations Relating to GM's Dual-
Class Common Stock Capital Structure" and "New GM Class H Common Stock" in
Chapter 6.
POTENTIAL RECAPITALIZATION OF NEW GM CLASS H COMMON STOCK INTO GM $1 2/3
COMMON STOCK
Under the GM Certificate of Incorporation, as proposed to be amended in the
Hughes Transactions, all outstanding shares of New GM Class H Common Stock may
be recapitalized as shares of GM $1 2/3 Common Stock at a 120% exchange ratio
at any time after December 31, 2002 in the sole discretion of the GM Board, as
described below under "New GM Class H Common Stock--Recapitalization" in
Chapter 6. Any such recapitalization would significantly change both the form
and nature of the investment of holders of New GM Class H Common Stock. We
cannot predict the impact on the market prices of the GM $1 2/3 Common Stock or
the New GM Class H Common Stock of GM's ability to effect any such
recapitalization or the effect, if any, that the exercise by General Motors of
this recapitalization right would have on the market price of either or both
classes of GM common stock. Consistent with the GM Certificate of
Incorporation, as proposed to be amended in the Hughes Transactions, applicable
corporate law and the new GM Board policy statement referred to above, the GM
Board may submit from time to time to the GM common stockholders for their
consideration and approval one or more alternative transactions on terms
different from those provided for by the provisions concerning recapitalization
of New GM Class H Common Stock at a 120% exchange ratio or by the policy
statement. The Hughes Transactions and GM's split-off of Electronic Data
Systems Corporation in 1996 are examples of such alternative proposals. See
"Considerations Relating to GM's Dual-Class Common Stock Capital Structure" and
"New GM Class H Common Stock" in Chapter 6.
29
CHAPTER 2: RISK FACTORS
ADDITIONAL RISK FACTORS REGARDING NEW GM CLASS H COMMON STOCK
If you are a GM Class H Common Stockholder, you will receive shares of New GM
Class H Common Stock in the Hughes Transactions and should therefore consider
carefully the following factors.
CHANGES IN NATURE OF TRACKING STOCK INVESTMENT; EARNINGS VOLATILITY
Pursuant to the Hughes Transactions, GM Class H Common Stock, which tracks
the financial performance of Hughes Electronics, will be recapitalized and
converted into a new class of common stock of General Motors, New GM Class H
Common Stock, which will track the financial performance of New Hughes
Electronics. Because New Hughes Electronics will have significantly different
characteristics than Hughes Electronics on a consolidated basis prior to the
Hughes Transactions, including with respect to margins, cash flow, investment
needs, competitive environment and future growth prospects, there can be no
assurance that the returns on New GM Class H Common Stock will in any way
correspond to the historical returns on GM Class H Common Stock. In addition,
because New GM Class H Common Stock will track the financial performance of
only one of the three primary businesses comprising Hughes Electronics prior to
the Hughes Transactions, and because of the nature and characteristics of the
telecommunications and space business, the earnings per share of New GM Class H
Common Stock are expected to be substantially less than the historical earnings
per share of GM Class H Common Stock and may be subject to significantly
greater volatility. As a result of the foregoing, there can be no assurance
that the public market for New GM Class H Common Stock will be similar to the
public market which currently exists for GM Class H Common Stock.
For 1996, we reported earnings per share attributable to GM Class H Common
Stock of $2.88. In contrast, the pro forma earnings per share attributable to
New GM Class H Common Stock calculated as described herein based on the 1996
net income of New Hughes Electronics is $0.31. The pro forma earnings per share
of New Raytheon Class A Common Stock calculated as described herein for the
year ended December 31, 1996 is $2.65. Although holders of GM Class H Common
Stock will receive one share of New GM Class H Common Stock for each share of
GM Class H Common Stock they hold at the time the Hughes Transactions are
completed, they will receive only a fractional share of Class A Common Stock
for each such share (approximately 0.53747 based on the Recent Raytheon Stock
Price). Pro forma information is not necessarily indicative of future operating
results.
MARKET VOLATILITY; NO ASSURANCE AS TO MARKET PRICE OR PERFORMANCE OF NEW GM
CLASS H COMMON STOCK
In anticipation of and immediately following the consummation of the Hughes
Transactions, it is possible that a significant percentage of existing GM Class
H Common Stockholders may liquidate their holdings of GM Class H Common Stock
or New GM Class H Common Stock, as applicable, due to certain fundamental
differences in the nature of the New GM Class H Common Stock as compared to the
GM Class H Common Stock. If the market experiences heavy trading in the initial
period following the Hughes Transactions due to this turnover, trading prices
of the New GM Class H Common Stock may be volatile. Ultimately, the value of
each share of New GM Class H Common Stock will be principally determined in the
trading markets and could be influenced by many factors, including the terms of
the New GM Class H Common Stock, the earnings and financial position of New
Hughes Electronics, the growth and expansion of New Hughes Electronics'
business, investors' expectations of New Hughes Electronics' prospects, trends
and uncertainties affecting the telecommunications and space industry as a
whole, issuances and repurchases of New GM Class H Common Stock, GM's
consolidated results of operations and financial condition and general economic
and other conditions. There can be no assurance as to the market for, or market
price of, New GM Class H Common Stock following the completion of the Hughes
Transactions.
NO CURRENT CASH DIVIDENDS ON NEW GM CLASS H COMMON STOCK
The payment of dividends on the GM Class H Common Stock is subject to the
policies and practices of the GM Board. The current dividend policy of the GM
Board is to pay quarterly dividends on GM Class H Common Stock, when, as and if
declared by the GM Board, at an annual rate equal to approximately 35% of
30
the Available Separate Consolidated Net Income of Hughes Electronics for the
prior year. Notwithstanding the current dividend policy of the GM Board, the
quarterly dividend paid on GM Class H Common Stock of $0.25 per share during
the first and second quarters of 1997 and $0.24 per share during each quarter
of 1996 was based on an annual rate higher than 35% of the Available Separate
Consolidated Net Income of Hughes Electronics for the preceding year. See "GM
Class H Common Stock--Dividend Policy" in Chapter 6.
Following the consummation of the Hughes Transactions, the payment of
dividends on the New GM Class H Common Stock will also be subject to the
policies and practices of the GM Board. As described elsewhere in this
document, the GM Board does not currently intend to initially pay cash
dividends on New GM Class H Common Stock. Following the completion of the
Hughes Transactions, future earnings (if any) from the telecommunications and
space business of New Hughes Electronics will be retained for the development
of that business. The GM Board has adopted a policy statement regarding certain
capital stock matters, including with respect to the relationship between any
dividends that may be paid by New Hughes Electronics to General Motors as its
sole stockholder and dividends to be paid by General Motors on the New GM Class
H Common Stock. See "Considerations Relating to GM's Dual-Class Common Stock
Capital Structure--New GM Board Policy Statement" in Chapter 6. The GM Board
reserves the right to reconsider from time to time its policies and practices
regarding dividends on New GM Class H Common Stock and to increase or decrease
the dividends paid on New GM Class H Common Stock on the basis of GM's
consolidated financial position, including liquidity, and other factors,
including the earnings and consolidated results of operations and financial
condition of New Hughes Electronics. See "New GM Class H Common Stock--Dividend
Policy" in Chapter 6.
31 CHAPTER 2: RISK FACTORS
RISK FACTORS REGARDING NEW RAYTHEON AFTER THE RAYTHEON MERGER
All of you (as GM common stockholders) will receive shares of Class A Common
Stock in the Hughes Defense Spin-Off and, upon the consummation of the Raytheon
Merger, will be stockholders of New Raytheon. As stockholders of New Raytheon,
you will continue to be subject to a number of business risks relating to the
defense electronics industry which already exist in connection with your
interest in Hughes Defense, such as the possibility of reductions or changes in
the U.S. defense budget, recent consolidation trends in the defense industry
and risks relating to U.S. government contracts. In addition to these existing
business risks, all of you should consider carefully each of the following
factors.
ABILITY TO ACHIEVE SYNERGIES FROM THE RAYTHEON MERGER; INTEGRATION OF TEXAS
INSTRUMENTS DEFENSE
The Raytheon Merger involves the integration of two companies previously
operated independently, with separate operations and management. The recent
acquisition by Raytheon of Texas Instruments Defense provides additional
integration challenges. While this integration is necessary to the future
profitability of New Raytheon, New Raytheon may encounter difficulties or may
not realize the full benefits expected from such integration. The Raytheon
Merger and the Texas Instruments Defense Acquisition will require, among other
things, integration of the Raytheon, Hughes Defense and Texas Instruments
Defense organizations, business infrastructures and products in a way that
enhances the performance of the combined businesses. The challenges posed by
these transactions include the integration of numerous geographically separated
manufacturing facilities and research and development centers. The success of
this transition to an integrated entity will be significantly influenced by New
Raytheon's ability to retain key employees, to integrate differing management
structures and to realize anticipated cost synergies, all of which will require
significant management time and resources. Any material delays or unexpected
costs incurred in connection with such integration could have a material
adverse effect on New Raytheon's business, operating results or financial
condition. New Raytheon management currently anticipates that such integration
will result in New Raytheon taking a restructuring charge in 1997, although the
amount of such charge is not currently determinable.
NON-DEFENSE BUSINESSES OF NEW RAYTHEON
Although Raytheon's principal business is the design, manufacture and
servicing of advanced electronic devices, equipment and systems for
governmental and commercial customers, Raytheon also has significant operations
in the engineering and construction, aircraft and appliances businesses. As a
result, after the consummation of the Raytheon Merger, a portion of each Class
A Common Stockholder's investment will be in these non-defense businesses. Each
of these businesses has significantly different characteristics than the
businesses of General Motors and Hughes Electronics, including with respect to
margins, competitive environment and future growth prospects. For example, the
engineering and construction business is subject to risks relating to the
uncertainty of international growth, significant start-up costs and the
cyclical nature of the engineering and construction industry and the aircraft
business is subject to risks relating to the intensely competitive aircraft
industry, product liability issues and the U.S. Federal Aviation Administration
approval and certification process. In light of these and other risks relating
to the non-defense businesses of New Raytheon, there can be no assurance that
the financial performance of any of these businesses will match the performance
of the businesses of General Motors, Hughes Electronics, Hughes Defense or the
defense business of New Raytheon. See "Recent Developments--Raytheon" in
Chapter 4 and "Overview of New Raytheon Business" in Chapter 5.
CERTAIN LIMITATIONS ON CHANGES IN CONTROL OF NEW RAYTHEON; NEW RAYTHEON'S
ABILITY TO PARTICIPATE IN FUTURE DEFENSE INDUSTRY CONSOLIDATION
The New Raytheon Certificate of Incorporation and the New Raytheon By-Laws
will contain certain provisions, such as a classified board of directors, a
provision prohibiting stockholder action by written consent, a provision
prohibiting stockholders from calling special meetings and a provision
authorizing the New Raytheon Board to consider factors other than stockholders'
short-term interests in evaluating an offer
32 CHAPTER 2: RISK FACTORS
CHAPTER 2: RISK FACTORS
involving a change in control, which are not present in the GM Certificate of
Incorporation or the GM By-Laws. Such provisions could have the effect of
delaying, deferring or preventing a change in control of New Raytheon or the
removal of New Raytheon management, of deterring potential acquirors from
making an offer to stockholders of New Raytheon and of limiting any opportunity
to realize premiums over prevailing market prices for New Raytheon Common Stock
in connection therewith. The New Raytheon Rights Agreement, which also has no
equivalent at General Motors, could have the same effect. See "New Raytheon
Capital Stock" and "Comparison of GM Class H Common Stock, New GM Class H
Common Stock and Class A Common Stock" in Chapter 6.
Furthermore, in order to preserve the tax-free status of the Hughes Defense
Spin-Off, the Hughes Telecom Spin-Off and the Raytheon Merger, New Raytheon
will be subject to certain covenants under the Spin-Off Separation Agreement
which will prohibit New Raytheon from entering into or permitting (to the
extent that New Raytheon has the right to prohibit) certain transactions and
activities, in each case unless General Motors has, in its sole and absolute
discretion, which discretion shall be exercised in good faith solely to
preserve the tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom
Spin-Off and the Raytheon Merger, determined that such transactions and
activities would not jeopardize the tax-free status of any of the foregoing.
Such transactions and activities include (1) certain acquisition transactions,
stock issuance transactions and stock buyback transactions for two years
following the Raytheon Merger; (2) certain recapitalizations, reincorporations
and similar transactions affecting the rights and privileges of New Raytheon
Common Stock; and (3) certain amendments or changes to the New Raytheon
Certificate of Incorporation or the New Raytheon By-Laws for three years
following the Raytheon Merger. Such prohibitions, to which General Motors and
Hughes Defense are not subject, could have the effect of delaying, deferring or
preventing a change in control of New Raytheon and of limiting the opportunity
to realize premiums over prevailing market prices for New Raytheon Common Stock
in connection therewith during the period of their applicability. In addition,
although the opportunities to participate in defense industry consolidation
have become fewer as consolidation has progressed, such prohibitions could also
have the effect of delaying, deferring, hindering or preventing New Raytheon's
ability to take advantage of opportunities that do arise during the period of
such prohibitions' applicability, including transactions such as a merger of
equals or acquisitions financed by New Raytheon Capital Stock.
For additional information regarding these prohibitions, see "Separation and
Transition Arrangements--Summary of Spin-Off Separation Agreement--Preservation
of Tax-Free Status of the Hughes Transactions and the Raytheon Merger" in
Chapter 3. See also "New Raytheon Capital Stock" and "Comparison of GM Class H
Common Stock, New GM Class H Common Stock and Class A Common Stock" in Chapter
6.
33
CHAPTER 3
THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
PAGE
----
SPECIAL FACTORS................................................... 35
Purposes of the Hughes Transactions.............................. 35
Alternatives to the Hughes Transactions.......................... 37
Background of the Hughes Transactions............................ 40
The Distribution Ratio........................................... 57
Recommendations of the Capital Stock Committee and the GM Board;
Fairness of the Hughes Transactions............................. 61
Hughes Transactions Fairness Opinions: Merrill Lynch and Salomon
Brothers........................................................ 68
Requisite Stockholder Approval of the Hughes Transactions........ 83
Certain U.S. Federal Income Tax Considerations Relating to
Certain of the Hughes Transactions.............................. 83
Certain U.S. Federal Income Tax Considerations Relating to the
Raytheon Merger................................................. 86
Stockholder Litigation Relating to the Hughes Transactions....... 88
DESCRIPTION OF THE HUGHES TRANSACTIONS............................ 89
General.......................................................... 89
GM Spin-Off Merger Agreement..................................... 92
Allocation of Hughes Defense Debt Proceeds; Hughes Telecom
Funding......................................................... 97
No Recapitalization at a 120% Exchange Ratio..................... 97
Stockholder Approval of the Hughes Transactions.................. 98
No Appraisal Rights.............................................. 99
Certain U.S. Federal Income Tax Considerations................... 99
Certain Litigation............................................... 99
Accounting Treatment............................................. 99
Regulatory Requirements.......................................... 99
Sales to General Motors.......................................... 100
DESCRIPTION OF THE RAYTHEON MERGER................................ 101
General.......................................................... 101
Raytheon Merger Agreement........................................ 103
Implementation Agreement......................................... 113
GM Stockholder Approval Not Required for the Raytheon Merger..... 116
Approvals by the Capital Stock Committee and the GM Board;
Fairness of the Raytheon Merger................................. 117
Raytheon Merger Fairness Opinion: Goldman Sachs ................. 117
Certain U.S. Federal Income Tax Considerations................... 122
Accounting Treatment............................................. 122
SEPARATION AND TRANSITION ARRANGEMENTS............................ 123
Introduction..................................................... 123
Summary of Master Separation Agreement........................... 123
Summary of Spin-off Separation Agreement......................... 126
Summary of Tax Sharing Agreement................................. 130
Summary of Other Agreements Contemplated by the Master Separation
Agreement....................................................... 131
CHAPTER 3: THE HUGHES TRANSACTIONS AND
34 THE RAYTHEON MERGER
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
SPECIAL FACTORS
PURPOSES OF THE HUGHES TRANSACTIONS
The Hughes Transactions are designed to address certain strategic challenges
facing each of the three principal businesses of Hughes Electronics and to
enhance the long-term value of these businesses to General Motors and its
common stockholders. The immediate impetus for the timing of the Hughes
Transactions is the major consolidation taking place in the U.S. defense
industry and the significant opportunities for Hughes Defense presented by the
proposed merger with Raytheon.
The Hughes Transactions are intended to accomplish three principal business
objectives:
. Enable Hughes Defense to participate in U.S. defense industry consolidation
by merging with Raytheon, thereby achieving the critical mass that will be
necessary to continue to compete effectively in the defense industry;
. Better position Delco and Delphi to participate in the automotive
electronics industry trend toward integrated automotive systems procurement
by facilitating the combination of Delco and Delphi; and
. Enhance the growth potential of Hughes Telecom in the expanding global
telecommunications market through additional funding and more focused
senior management.
Each of these business objectives is discussed in greater detail below.
SPIN-OFF OF HUGHES DEFENSE AND THE RAYTHEON MERGER
The first purpose of the Hughes Transactions is to facilitate Hughes
Defense's participation in the U.S. defense industry consolidation through the
consummation of the Raytheon Merger. In the period during which Hughes Defense
has been an indirect, wholly owned subsidiary of General Motors, the U.S.
defense industry has experienced major consolidation. This industry
consolidation is the result of a decline since 1986 in the U.S. defense budget
and declining defense spending projections for the next several years. The
procurement portion of the U.S. defense budget, which has historically been a
primary revenue source for Hughes Defense, has declined steadily from
approximately $88.0 billion in 1986 to approximately $48.0 billion in 1996, and
is expected to grow only nominally in the near future. The nature of
competition for defense business also has been shifting and is increasingly
based on systems capabilities, market presence, cost structure and influence
due to the size and scope of the contractor and its workforce. Defense industry
participants have viewed consolidation on a major scale as the only viable way
to increase product and systems scope and achieve increasing economies of scale
in an overall market that is not expected to experience significant growth in
the future.
With the July 1997 announcement of the planned merger of Lockheed Martin
Corporation ("Lockheed Martin") and Northrop Grumman Corporation ("Northrop
Grumman"), the major consolidation of the U.S. defense industry has entered its
final stage. This industry consolidation has resulted in the development of two
principal tiers of defense industry participants: the defense industry
"giants," such as Lockheed Martin, Raytheon (assuming the completion of its
merger with Hughes Defense) and The Boeing Company ("Boeing"), and the "niche"
players with annual revenues ranging from $1 billion to $5 billion. Among the
industry "giants," various strategies are currently being pursued. For example,
Lockheed Martin is vertically integrated within the defense industry, having
extensive capabilities in both "platforms" (such as military aircraft, space
launch vehicles and satellites) as well as defense electronics systems. In
contrast, Raytheon and Boeing have taken a more horizontal approach, focusing
primarily on platforms and defense electronics systems, respectively. All three
companies, however, are continuing to shape their portfolios and divest non-
core businesses while seeking to establish international alliances and
targeting occasional acquisitions.
The Raytheon Merger is intended to allow Hughes Defense to maintain a leading
position in the consolidating U.S. defense industry. We believe that the
combined businesses of Hughes Defense and Raytheon will represent a strong and
viable competitor in the defense electronics industry that will be in a
position to implement business synergies for the benefit of the two companies,
their stockholders and their principal defense electronics customer, the U.S.
government. For information regarding the Raytheon Merger, see "Description of
the Raytheon Merger" below.
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
In the context of these changes in the U.S. defense industry, we have been
required during the last several years to spend increasing amounts of board,
management and staff time and other resources on Hughes Defense and the
strategic challenges it currently faces. The Hughes Defense Spin-Off will also
allow us to allocate resources currently devoted to Hughes Defense to our core
automotive and other businesses.
INTEGRATION OF DELCO AND DELPHI
The second business purpose of the Hughes Transactions is to facilitate the
integration of Delco with Delphi. Automobile manufacturers are increasingly
moving toward integrated automotive systems procurement from a limited number
of suppliers. Manufacturers, including GM's North American Operations ("GM
NAO"), also are expected to continue to press their suppliers to accelerate the
introduction of new technology and otherwise to aggressively pursue cost
reductions. In connection with their ongoing long-term review and assessment of
Delco and Delphi and their business strategies, General Motors and Hughes
Electronics believe that in order to remain competitive in this industry
environment Delco and Delphi must possess the capabilities to produce high
quality and low cost fully integrated "systems" designs, as well as the
capabilities to manufacture high quality components at continuously lower
costs. Although Delco has strong capabilities and market position in various
electronic and electro-mechanical components, General Motors and Hughes
Electronics have determined that Delco will need to gain access to and
strengthen its capabilities in the integration of complete systems which
incorporate separate systems and components in powertrain, ride and handling,
cockpit and control and communications.
The transfer of Delco from Hughes Electronics to General Motors will position
the combined Delco/Delphi business to compete more effectively in the changing
market for automotive electronics by allowing General Motors to integrate more
fully Delco's electronics capability with Delphi's automotive systems and
components expertise. The integration of these operations is intended to
accelerate GM's ability to compete aggressively in high-growth markets
worldwide by developing new electronically enhanced vehicle systems with
improved functionality, lower cost and higher quality. The combined
Delco/Delphi entity will be better able to realign its product, technical and
manufacturing operations to address strategic objectives for growth and
competitiveness.
We expect that the integration of Delco and Delphi will enable Delco to be
more competitive with respect to its market share with GM NAO as a result of
its redesign of key automotive electronics systems and its introduction of
lower cost design solutions. GM NAO will benefit directly from these redesigned
automotive systems. In addition, we expect Delco to improve its capability to
achieve and maintain additional non-GM NAO sales due to its access to a larger
outside customer base. Significant structural savings are also expected to
accrue to the combined company as a result of the full integration of the two
companies.
Once the integration of Delco and Delphi is completed and we have
demonstrated the competitiveness of the combined operations, General Motors
will be able to consider the future timing of a possible partial public
offering of the combined business operations. General Motors has no present
intention to make any such offering. Business judgments regarding completion of
the integration of Delco and Delphi and satisfactory demonstration of the
competitiveness of the combined operations will be made by the GM President's
Council based upon relevant business considerations. The timing and substance
of such business judgments will depend on many subjective factors such as,
among other things, achievement by Delphi/Delco of synergies in line with
expectations, the ability of the combined businesses to sustain a satisfactory
level of market share increases based on the competitiveness of the technology,
price and quality of its products, satisfactory reductions in administrative
overhead, globalization of its operations, continued strong prospects for
growth in revenues and operating profit and other relevant factors relating to
the overall competitiveness of the businesses of Delphi/Delco.
In September 1997, Ford Motor Company ("Ford") announced its intention to
reorganize its component operations into a unit called "Visteon." Ford's
objectives with respect to Visteon appear to be similar to GM's
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
strategy with respect to the integration of Delco and Delphi, and include,
among other things, increasing sales to other original equipment manufacturers
("OEMs") while also driving efficiencies by increasing outsourcing of Ford's
automotive business. It is not clear at this time how this will change the
competitive environment for the combined Delco/Delphi entity over time. On the
one hand, Visteon will likely be pursuing sales to many of the same OEMs
targeted by the combined Delco/Delphi entity. On the other hand, however,
Delco/Delphi may have the opportunity to sell to Ford as a result of its
outsourcing initiatives.
ENHANCE GROWTH POTENTIAL OF HUGHES TELECOM
The third business purpose of the Hughes Transactions is to enhance the
ability of Hughes Telecom to take advantage of growth opportunities. The
telecommunications industry is experiencing a period of rapid expansion and
change, providing industry participants with many opportunities for strategic
growth as well as vigorous competition. We expect the global telecommunications
services market to continue to grow due to the high demand for communications
infrastructure and the opportunities created by industry deregulation. In this
environment, many of Hughes Telecom's competitors are committing substantial
capital to capturing market opportunities and to entering into strategic
alliances to acquire or maintain and strengthen market leadership. This market
will therefore remain intensely competitive and key success factors for
participants will include possession of advanced technological capability,
speed in introducing new products and services so as to capture first mover
advantages, product differentiation, including access to local and
international content, strength in partnering/strategic alliances, ability to
react quickly to rapid industry change and financial flexibility.
Hughes Electronics' strategy with respect to the Hughes Telecom business is
to leverage its leadership position in satellite technology to become a leader
in emerging telecommunications markets for products and services. This strategy
requires a significant investment of capital in Hughes Telecom.
General Motors and Hughes Electronics currently believe that Hughes Telecom
is the Hughes Electronics business which offers the greatest long-term growth
potential. By retaining ownership of Hughes Telecom, General Motors and its
stockholders will retain the ability to participate in this rapidly growing
industry. The Hughes Transactions and the Raytheon Merger, by providing funding
to Hughes Telecom, will help to enable New Hughes Electronics to take advantage
of growth opportunities in the telecommunications and space marketplace. The
Hughes Transactions will also enable New Hughes Electronics to focus its board,
management and staff time and other resources solely on the telecommunications
and space business.
We currently believe that continued ownership of the telecommunications and
space business of Hughes Electronics in a tracking stock structure will not
prevent New Hughes Electronics from executing certain types of strategic
alliances where needed to assist it to continue to compete effectively and to
grow its business. Continued ownership of the telecommunications and space
business of Hughes Electronics in a tracking stock structure also will provide
General Motors with the flexibility in the future to issue New Hughes
Electronics tracking stock in a tax-efficient manner. The New GM Class H Common
Stock will provide its holders with a more focused investment in the Hughes
Electronics' telecommunications and space business than the existing GM Class H
Common Stock.
Achievement of each of the foregoing business objectives is dependent on
numerous factors in addition to the consummation of the Hughes Transactions,
many of which are beyond the control of General Motors, Hughes Defense, Delco
and Hughes Telecom. Accordingly, there can be no assurance as to whether and to
what extent any of such objectives will in fact be achieved if the Hughes
Transactions are consummated.
ALTERNATIVES TO THE HUGHES TRANSACTIONS
Before deciding to proceed with the Hughes Transactions, General Motors and
Hughes Electronics considered several strategic alternatives involving each of
the three Hughes Electronics businesses in an attempt to address the strategic
challenges and accomplish the business objectives outlined above under "--
Purposes of
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
the Hughes Transactions." In considering these strategic alternatives, we
focused on whether such alternatives were in the best interests of General
Motors and its common stockholders, the effect of such alternatives on each
class of GM's common stockholders and the potential of such alternatives to
maximize value for GM common stockholders.
As a preliminary matter, the GM Board was advised by GM management that any
strategic transaction involving Hughes Defense could result in a level of
corporate and stockholder tax so high that it would make the transaction
uneconomic unless it were accomplished on a tax-free basis. Accordingly, the GM
Board determined that any potential strategic transactions involving Hughes
Electronics or any of its three principal businesses should be structured so as
to generally be tax-free for U.S. federal income tax purposes to General Motors
and its stockholders. See "Description of the Hughes Transactions--Certain
Federal Income Tax Considerations Relating to Certain of the Hughes
Transactions" below.
In addition, the GM Board was advised by GM management that certain issues
would arise if any strategic transaction were to result in a recapitalization
of GM Class H Common Stock into GM $1 2/3 Common Stock at a 120% exchange
ratio, as currently provided for under certain circumstances in the GM
Certificate of Incorporation. These issues included substantial dilution that
would likely reduce the value of the GM $1 2/3 Common Stock, including the new
stock of that class to be issued to GM Class H Common Stockholders in any such
recapitalization; the substantial change that would result in the form and
nature of the investment of GM Class H Common Stockholders, who would have
their tracking stock investment in Hughes Electronics replaced with a
conventional stock interest in all of GM's operations (rather than with a
conventional stock interest in New Raytheon and a more focused tracking stock
interest in Hughes Telecom as in the Hughes Transactions); and the loss of GM's
flexibility to issue equity interests relating to Hughes Telecom without
incurring corporate-level tax. See "--Alternatives to the Hughes Transactions--
Hughes Telecom" below. The GM Board also noted certain practical difficulties
and uncertainties involving the application of the recapitalization provision
in the context of a complex series of strategic transactions. Accordingly, and
in light of the substantial benefits that any contemplated strategic
transactions would be expected to have for the holders of both classes of GM
common stock, the GM Board determined that it would be in the best interests of
all of GM's common stockholders to structure any potential strategic
transactions involving Hughes Electronics or any of its three principal
businesses so as not to result in a recapitalization of GM Class H Common Stock
into GM $1 2/3 Common Stock. See "Description of the Hughes Transactions--No
Recapitalization at a 120% Exchange Ratio" below.
After review and consideration of the alternatives described below, the GM
Board concluded that, in the context of the opportunities presented by the
Raytheon Merger, the Hughes Transactions, taken as a whole, represented the
best strategic alternative for Hughes Electronics and its three businesses.
HUGHES DEFENSE
As described below under "Background of the Hughes Transactions--Development
of the Hughes Transactions and the Raytheon Merger," Hughes Electronics
determined that in order to address the strategic challenges facing its defense
electronics business and preserve stockholder value, it would pursue a
strategic combination between Hughes Defense and another significant player in
the defense industry. To do so, we considered two principal alternatives for
Hughes Defense which would allow it to participate in the consolidation of the
U.S. defense industry in a significant manner:
. a spin-off of Hughes Defense to GM's common stockholders in the absence of
a pre-arranged merger; and
. the acquisition of another significant player in the U.S. defense industry
under the existing GM and Hughes Electronics ownership structure.
A spin-off of Hughes Defense in the absence of a pre-arranged merger would
have better positioned Hughes Defense to effectuate its strategic objective of
participation in the ongoing U.S. defense industry consolidation by separating
Hughes Defense from General Motors. It would allow both General Motors and
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
Hughes Electronics to focus their board, management and staff time and other
resources on their remaining businesses. However, the opportunity currently
presented by the Raytheon Merger achieves these benefits while offering
additional advantages as well. Coupling the spin-off of Hughes Defense with the
Raytheon Merger afforded us the ability to proactively select an appropriate
merger partner well suited to Hughes Defense and provided management with the
ability to influence the strategic direction and future growth of the combined
entity, thus helping to ensure GM's common stockholders the highest long-term
value for their interest in Hughes Defense. Moreover, because of the time
required to spin off Hughes Defense, there was a significant risk that, as the
consolidation of the U.S. defense industry proceeded, the parties suitable to
combine with the free-standing Hughes Defense would undertake to pursue other
strategic transactions and, as a result, be unwilling or unable to enter into a
strategic transaction with Hughes Defense when it was a free-standing entity.
Also, in light of the ongoing consolidation taking place in the U.S. defense
industry, a spin-off of Hughes Defense in the absence of a pre-arranged merger
could expose Hughes Defense as a potential takeover target for parties who
might not offer a desirable strategic fit or provide an opportunity to realize
synergies that could optimize Hughes Defense's potential long-term value for
the benefit of GM's common stockholders. Consequently, we decided to pursue a
spin-off of Hughes Defense as part of a pre-arranged merger transaction.
We also considered from time to time the ability of Hughes Defense to execute
a large-scale defense industry acquisition under the existing General Motors
and Hughes Electronics ownership structure. We do not believe that such a
substantial acquisition is currently a viable alternative. The use of GM's
capital resources to effect an acquisition in an industry other than that of
GM's core automotive and other businesses would divert resources and management
focus and would therefore not be in the best interests of General Motors or its
common stockholders. In addition, potential merger partners in the defense
industry have expressed an unwillingness in preliminary discussions to enter
into a combination with Hughes Defense as long as General Motors owns any
material interest in Hughes Defense. Further, although GM Class H Common Stock
is currently considered to be a feasible alternative for use in funding smaller
acquisitions, we do not believe it is a viable currency for funding larger
acquisitions.
DELCO
In light of the industry-wide shift in focus from components to systems
sourcing and the continuous drive by manufacturers, including GM NAO, for
aggressive cost reductions, we considered two possible alternatives to the
Hughes Transactions to effect a strategic alliance between and more fully
integrate the operations of Delco and Delphi:
. the contribution of all or a significant portion of Delphi operations to
Hughes Electronics; and
. the formation of one or more joint ventures between Delco and Delphi.
In light of other available alternatives, we determined that a contribution
of all or a significant portion of Delphi operations to Hughes Electronics
would not be in the best interests of the GM Class H Common Stockholders
because such a transaction would materially alter the fundamental character of
GM Class H Common Stock by changing it from a tracking stock relating to the
defense electronics, automotive electronics and telecommunications businesses
to a tracking stock predominantly relating to an automotive components business
with materially different characteristics and long-term prospects. We also
determined that contributing only a portion of Delphi's business to Hughes
Electronics would not be in the best interests of General Motors and its common
stockholders because it would not permit the full realization of the benefits
to be gained from integrating Delco and Delphi.
We also considered the formation of one or more joint ventures in which
Delphi and Delco would each contribute certain assets to form one or more new
automotive components companies. Although this alternative would combine the
businesses, we determined that this alternative was less attractive than the
transfer of Delco from Hughes Electronics to General Motors. The formation of
joint ventures would result in a complicated ownership and organizational
structure that would not fully promote realization of potential synergies
between
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
Delco and Delphi, and thus would not maximize the potential value for GM's
common stockholders. In addition, in light of the tracking stock nature of GM
Class H Common Stock, Hughes Electronics' ownership of a joint venture could
cause confusion in the capital markets and, as a result, adversely impact the
price of GM Class H Common Stock. Finally, joint ventures would limit GM's
overall strategic flexibility, thus hindering the full realization of the goals
of integration.
HUGHES TELECOM
The principal alternative we considered for Hughes Telecom was a spin-off of
all or a portion of the Hughes Telecom business to GM's common stockholders
(possibly in connection with an initial public offering). We believe that a
spin-off of Hughes Telecom would not be in the best interests of General Motors
or its common stockholders at the present time for several reasons. First, we
believe that Hughes Telecom represents an attractive investment for General
Motors and its stockholders since it is the Hughes Electronics business which
currently offers the greatest growth potential. Both classes of GM's common
stockholders will participate in this growth through their ownership of GM
common stock. Second, a spin-off of Hughes Telecom at this time could have
potentially adverse implications for the credit ratings of General Motors and
GMAC because it would further reduce GM's book equity and its funding
flexibility. Based largely on the importance attributed to GM's credit ratings
by GM management, particularly in order to prepare for any potential downturns
in the automotive industry, General Motors and Hughes Electronics had
previously determined that they would not take any strategic action relating to
the businesses of Hughes Electronics if any of GM's principal ratings agencies
would lower GM's credit ratings as a result of such action. Third, a spin-off
of Hughes Telecom generally would reduce GM's strategic flexibility, including
the elimination of its ability to issue equity interests relating to Hughes
Telecom, such as the New GM Class H Common Stock, without incurring corporate
level tax. The proceeds of any such equity issuance could be used to provide
funding for Hughes Telecom or other GM businesses. Any negative impacts on
General Motors from credit rating downgrades and reduced flexibility are also
likely to affect negatively the interests of stockholders in General Motors.
Fourth, we believe that Hughes Telecom derives a financial benefit from having
a parent corporation that is capable of supporting its operations, either by
providing short-term loans (such as occurred in connection with the PanAmSat
Merger) or by providing new capital (in which case an appropriate adjustment
would be made to the Class H Fraction).
After examining the alternatives described above, General Motors concluded
that the Hughes Transactions offered the most comprehensive solution to the
strategic challenges and business objectives described above in "--Purposes of
the Hughes Transactions."
BACKGROUND OF THE HUGHES TRANSACTIONS
GM'S ACQUISITION OF HUGHES AIRCRAFT
General Motors organized Hughes Electronics in 1985 in connection with its
acquisition of Hughes Aircraft from the Howard Hughes Medical Institute
("HHMI"). In that transaction, General Motors paid HHMI approximately $2.7
billion in cash and delivered to HHMI 100 million shares of newly-created GM
Class H Common Stock. In connection with the Hughes Aircraft acquisition,
Hughes Aircraft and Delco (then consisting of GM's Delco Electronics division,
the instrument and display systems business unit of GM's AC Spark Plug
division, and Delco Systems Operations) were contributed to Hughes Electronics.
There were two principal reasons for GM's contribution of Delco to Hughes
Electronics, whose earnings were to be the basis for dividend payments on the
GM Class H Common Stock. First, from a financial perspective, the contribution
allowed General Motors to reduce the amount of cash otherwise required to be
paid to HHMI in order to acquire Hughes Aircraft. Moreover, the value
attributed to Delco by HHMI and General Motors in connection with the Hughes
Aircraft acquisition reflected a price/earnings multiple which was higher than
that attributed to GM's overall earnings and more consistent with multiples
applied to other automotive component manufacturers. Second, from an
operational perspective, the contribution of Delco to Hughes Electronics was
intended to facilitate the exploitation of Hughes Aircraft's electronics
experience and
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
technology for the benefit of Delco. General Motors expected this combination
to be particularly important as the electronic content of cars and trucks
increased, with new electronic systems to improve driveability, fuel economy,
safety, comfort and emissions control and enhanced information, communications
and entertainment systems. While a portion of such synergies have been
identified and realized, especially in the areas of automotive safety and
security products, General Motors believes that it is now positioned to attain
any additional synergistic benefits through alternative mechanisms such as the
various technology sharing and other separation and transitional arrangements
which will be put in place in connection with the Hughes Transactions. For a
description of some of these arrangements, see "Separation and Transition
Arrangements--Summary of Other Agreements Contemplated by the Master Separation
Agreement" below. We therefore have determined that ownership of Hughes Defense
is not necessary for General Motors to obtain for Delco the benefits of the
electronic and systems integration capabilities of Hughes Defense.
DEVELOPMENT OF THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
The Hughes Transactions arise out of the convergence of several initiatives
undertaken by General Motors and Hughes Electronics to assess and enhance the
long-term value of each of Hughes Electronics' three businesses to General
Motors and its common stockholders. However, the immediate impetus for the
timing of the Hughes Transactions is the major consolidation taking place in
the U.S. defense industry and the significant opportunities for Hughes Defense
presented by the Raytheon Merger.
Largely in response to the developing consolidation of the U.S. defense
industry, General Motors and Hughes Electronics engaged from time to time
during the past few years in preliminary discussions with other defense
companies regarding possible strategic transactions involving Hughes Defense.
Beginning in the fall of 1995, Hughes Electronics management personnel and
financial, legal, tax, accounting and other advisors met from time to time as
part of an intensive assessment of the strategic objectives of each of the
three principal businesses of Hughes Electronics and to consider legal, tax and
accounting issues that would be presented by any transaction or series of
transactions involving these businesses that might be proposed. Hughes
Electronics determined in late 1995 that it must develop certain strategies
with respect to its defense electronics business in order to address strategic
challenges and preserve stockholder value. Accordingly, Hughes Electronics
identified and considered four strategic alternatives with respect to Hughes
Defense:
. Continue existing business strategy.
. Pursue selective acquisitions of smaller defense businesses.
. Proactively pursue a merger or other significant business combination.
. Exit the defense electronics business.
In connection with its evaluation of these strategic alternatives, Hughes
Electronics considered the strategic value of various combinations of Hughes
Defense with one of several other defense industry participants. After careful
consideration of each of these alternatives, Hughes Electronics determined that
a strategy of proactively pursuing a combination of Hughes Defense with the
defense business of another significant industry participant represented the
best alternative in order to maximize stockholder value with respect to Hughes
Defense. In addition, Hughes Electronics determined to continue to pursue
selective acquisitions of smaller defense businesses.
During this period, Hughes Electronics also began to consider various
strategic alternatives for Delco and Hughes Telecom, as described above under
"Purposes of the Hughes Transactions." Hughes Electronics determined that
pursuing a combination of Hughes Defense with another defense industry
participant would be consistent with its strategies with respect to Delco
(i.e., to integrate the business operations of Delco and Delphi) and Hughes
Telecom (i.e., to enhance Hughes Telecom's growth potential).
During 1995, Hughes Electronics engaged in informal discussions at the senior
management level with Loral Corporation ("Loral") regarding the feasibility of
a strategic combination of Hughes Defense with the
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
defense business of Loral. There was no discussion of price or potential
structure for such a combination. Such discussions ended in late 1995 and prior
to the announcement of Lockheed Martin's agreement to acquire Loral on January
7, 1996.
In early 1996, General Motors and Hughes Electronics began to consider and
assess various alternative structures for a transaction or series of
transactions involving Hughes Defense and the other principal businesses of
Hughes Electronics. Although Hughes Electronics also continued to pursue
selective acquisitions, Hughes Electronics management believed that Lockheed
Martin's acquisition of Loral's defense business in early 1996 rendered the
pursuit of selective acquisitions ineffective as a long-term business strategy
for Hughes Defense. Hughes Electronics management determined that a strategic
combination with a significant industry participant was required because
Lockheed's acquisition of Loral's defense business significantly changed the
profile of the defense industry by increasing the size, and the related
economies of scale and operating efficiencies, necessary to compete effectively
for government contracts.
Beginning in early 1996, Hughes Electronics engaged in discussions with
Raytheon regarding a combination of Raytheon's defense business with Hughes
Defense. Potential structures for such a combination, tax issues (including
whether to seek an IRS ruling or to rely instead on an opinion of tax counsel)
and timing issues were discussed. In April 1996, General Motors terminated such
discussions in order to focus on other strategic activities. Hughes Electronics
and Raytheon recommenced discussions regarding a possible combination in late
July 1996. Negotiations continued through November 20, 1996, when both parties
agreed to terminate such negotiations and pursue other alternatives after they
were unable to reach agreement on senior management for the combined company.
In October 1996, Hughes Defense began to participate in the auction process
for the Texas Instruments Defense business. On January 6, 1997, Raytheon
announced its plans to acquire the Texas Instruments Defense business for
approximately $3.0 billion in cash.
Following the termination of discussions with Raytheon in November 1996,
General Motors and Hughes Electronics initiated preliminary discussions with
Northrop Grumman regarding a possible transaction involving Hughes Defense. On
November 23, 1996, Raytheon made a proposal, on an unsolicited basis, for a
strategic transaction with Hughes Defense. Raytheon's new proposal was
discussed by GM management and Hughes Electronics management and their
respective advisors. GM management and Hughes Electronics management then
determined to recommend that the GM Board establish a process for soliciting
appropriate merger proposals for Hughes Defense, including from Raytheon and
Northrop Grumman.
December 1, 1996 Hughes Electronics Board Meeting. At the December 1, 1996
meeting of the Hughes Electronics Board, Hughes Electronics management
presented an update of recent developments in connection with various
discussions regarding the possible combination of Hughes Defense with another
defense industry participant, including the recent termination of discussions
with Raytheon and Raytheon's new unsolicited proposal to merge with Hughes
Defense. Following discussion of these and related matters, the Hughes
Electronics Board determined to recommend that the GM Board implement a process
to solicit merger proposals for Hughes Defense from a selected group of
potential merger partners and develop definitive terms relating to a strategic
transaction involving Hughes Defense, subject to the subsequent approval of the
Hughes Electronics Board and the GM Board. As noted above, Hughes Electronics
had for some time been reviewing and assessing the strategic challenges facing
each of its three principal businesses and it had for some time been
contemplated that any transaction involving Hughes Defense would be a part of a
series of transactions involving each of the Hughes Electronics businesses.
December 2, 1996 Capital Stock Committee Meeting. At the December 2, 1996
meeting of the Capital Stock Committee, GM management and Hughes Electronics
management presented information regarding the termination in early November
1996 of discussions with Raytheon, the unsolicited proposal to merge with
Hughes Defense which was submitted by Raytheon, a recommended procedure for
soliciting merger proposals for Hughes Defense from a selected group of
potential merger partners, the estimated financial results of
42
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
various alternative structures for any such merger transaction, a proposed
timetable for performing due diligence and receiving merger proposals based on
comparable non-financial terms and the implications of Hughes Electronics'
interest in acquiring Texas Instruments Defense. The Capital Stock Committee
discussed these and other related matters and considered the proposed process
for overseeing the development of a potential spin-off of Hughes Defense,
including the formation of a special committee of the GM Board to oversee the
process, to be comprised of the members of the Capital Stock Committee and the
GM directors who also serve on the Hughes Electronics Board. The Capital Stock
Committee determined to recommend to the GM Board that such a committee be
established.
December 2, 1996 GM Board Meeting. At its meeting on the same day, which was
attended by all but one of GM's directors, the GM Board received a report of
the matters discussed at the Capital Stock Committee held earlier that day and
directed GM management to analyze further the business, financial, tax and
legal issues relating to the contemplated transactions (including matters
relating to the fairness of the transactions to the holders of both classes of
GM common stock) for the purposes of developing specific terms of a proposed
transaction that would accomplish the goals of the contemplated transactions.
For the reasons described above under "Special Factors--Alternatives to the
Hughes Transactions," the GM Board also determined that it would not propose
any transaction or series of transactions that would result in the
recapitalization of GM Class H Common Stock into GM $1 2/3 Common Stock at the
120% exchange ratio as provided for under
certain circumstances in the GM Certificate of Incorporation. The GM Board then
authorized the implementation of a process to be managed by a joint GM
management and Hughes Electronics management team, in consultation with their
respective financial, legal and other advisors, to solicit expressions of
interest in a tax-free merger involving Hughes Defense from defense industry
participants who might constitute an appropriate merger partner for Hughes
Defense. The GM Board also established the special committee recommended by the
Capital Stock Committee, designated as the "Hughes Defense Spin-Off Committee,"
composed of John G. Smale, Thomas H. Wyman, John H. Bryan, Ann D. McLaughlin,
Edmund T. Pratt and Dennis Weatherstone. The GM Board authorized the Hughes
Defense Spin-Off Committee, during the periods between meetings of the GM
Board, to exercise all powers and authority of the GM Board in connection with
a spin-off or other strategic transaction involving the defense electronics
business of Hughes Electronics and related transactions and other matters.
Soliciting a Merger Partner for Hughes Defense. In connection with the
process of soliciting a merger partner for Hughes Defense, the joint management
team was assisted by financial and legal advisors, Goldman Sachs and Weil,
Gotshal & Manges LLP, who had previously been engaged on behalf of General
Motors and Hughes Electronics in connection with the prior discussions with
Raytheon. The joint management team also received support from the financial,
legal and tax staffs of General Motors and Hughes Electronics and from GM's
legal and tax counsel, Kirkland & Ellis, who also had previously been engaged
on behalf of General Motors in connection with the prior discussions with
Raytheon. In addition, the joint management team received assistance from
Deloitte & Touche LLP on accounting issues and due diligence analyses of
prospective merger partners.
The joint management team, based on advice from Goldman Sachs and antitrust
and tax advisors, determined that certain participants in the defense industry
either could not or would not participate in the Hughes Defense bid
solicitation process for antitrust, tax or other reasons. As a result, the
joint management team invited four parties, Boeing, McDonnell Douglas
Corporation ("McDonnell Douglas"), Raytheon and Northrop Grumman, to
participate in the bid process. Boeing elected not to participate, explaining
that it did not embrace the concept of vertical integration and thus was not
interested in a strategic combination with a defense electronics systems
provider such as Hughes Defense. Subsequently, the joint management team met
with and provided access to information about Hughes Defense to McDonnell
Douglas, Raytheon and Northrop Grumman. Each was provided a term sheet and
draft agreements for its review. The term sheet and draft agreements included
certain features intended to ensure that the Hughes Defense Spin-Off and the
subsequent merger would be tax-free to General Motors and its stockholders and
provided for a transaction structure substantially similar to that eventually
contained in the agreements signed with Raytheon. The parties were asked to
submit proposals by December 13, 1996.
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THE RAYTHEON MERGER
Proposals were submitted by Raytheon and Northrop Grumman on the date
requested and Northrop Grumman increased the value of its proposal in a
subsequent revised submission on December 17, 1996. McDonnell Douglas failed to
submit a proposal and, on December 15, 1996, announced an agreement to be
acquired by Boeing. Raytheon submitted two separate proposals. The first
proposal was to merge Hughes Defense with the defense business of Raytheon,
with a total value estimated to be approximately $8.3 billion (based on prior
estimates of synergies) to General Motors and its common stockholders,
comprised of debt of Hughes Defense and 45% of the common stock of the new
company. The second proposal was to merge Hughes Defense with Raytheon, with a
total value of approximately $8.5 billion to General Motors and its common
stockholders (subject to a "collar" mechanism designed to preserve the value of
the transaction to General Motors and its common stockholders), comprised of
debt of Hughes Defense and 30% of the common stock of the new company. Northrop
Grumman's proposal, as revised, was to form a new company which would assume
$3.8 billion debt of Hughes Defense and in which GM's common stockholders would
own 45-50% of the common stock of the new company. The Northrop Grumman
proposal did not contain a "collar" mechanism. Based on the then-current market
price of Northrop Grumman's common stock, the revised proposal submitted on
December 17 was valued at approximately $8.3 billion.
December 17, 1996 Hughes Defense Spin-Off Committee Meeting. On December 17,
1996, the Hughes Defense Spin-Off Committee received a report from C. Michael
Armstrong, Chairman and Chief Executive Officer of Hughes Electronics, that
Raytheon and Northrop Grumman had submitted proposals to merge with Hughes
Defense immediately after a spin-off of Hughes Defense from General Motors. The
Hughes Defense Spin-Off Committee reviewed and considered the proposals. Upon
the recommendation of GM management and Hughes Electronics management and the
Hughes Electronics Board, the Hughes Defense Spin-Off Committee authorized the
joint management team to continue the negotiation process with both Raytheon
and Northrop Grumman, setting January 6, 1997 as the deadline to receive from
each company a final proposal for a strategic transaction involving Hughes
Defense. The Hughes Defense Spin-Off Committee discussed several factors that
it could consider in evaluating the proposals, including the terms of the
proposed transaction, the likelihood of completing the proposed transaction and
the certainty of the valuation of the consideration offered in connection with
the proposed transaction, particularly with regard to the long-term value of
any equity in the combined company.
Further discussions were held with each of Raytheon and Northrop Grumman and
their respective financial advisors and each party was provided with further
due diligence opportunities regarding Hughes Defense. During this period, the
joint management team and its advisors also conducted due diligence reviews of
Raytheon and Northrop Grumman. In addition, the joint management team's legal
advisors discussed the draft agreements with each party and distributed revised
drafts of the proposed agreements. Each party was asked to submit a final
proposal not later than January 6, 1997.
Final Merger Proposals Received. On January 6, 1997, each of Raytheon and
Northrop Grumman submitted revised proposals with respect to the proposed
merger with Hughes Defense, including comments on the proposed agreements.
Raytheon submitted only one revised proposal, in which Hughes Defense would
merge with Raytheon, with a total value (as estimated by Raytheon at the time)
of approximately $9.0 billion to General Motors and its common stockholders,
with GM's common stockholders owning approximately 30% of the common stock of
the combined company. The basic structure of such proposal was substantially
the same as the structure of the Raytheon Merger and the relevant portions of
the Hughes Transactions proposed in this document. Northrop Grumman's revised
proposal was for the new company to assume $4.475 billion debt of Hughes
Defense and for GM's common stockholders to own approximately 50% of the common
stock of the new company.
On January 6 and 7, 1997, the joint management team, working together with
its financial, tax and legal advisors, reviewed each party's submission and
discussed the proposals with each party and its advisors in an attempt to seek
clarification with respect to certain matters. These matters included, among
other things, total value of the proposals, the treatment of stock options held
by Hughes Defense employees and, in the case of Northrop Grumman, the addition
of a "collar" mechanism to its proposal. Based on these discussions, as
44
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
requested by the joint management team, each of Raytheon and Northrop Grumman
submitted final proposals to General Motors and Hughes Electronics on the
evening of January 8, 1997. The final proposals of Raytheon and Northrop
Grumman were substantially comparable, other than with respect to the total
value of the consideration offered (which consisted, in each case, of a
combination of common stock in the new company and debt, protected by an equity
collar) and the percentage of the equity interest of GM's common stockholders
in the combined company. Based on the market value of the equity and the debt
of each proposal, Raytheon's final proposal was valued at approximately $9.5
billion, with GM's common stockholders owning approximately 30% of the common
stock of the combined company, and Northrop Grumman's final proposal was valued
at approximately $9.3 billion, with GM's common stockholders owning
approximately 50% of the common stock of the combined company.
On January 8 and 9, 1997, the joint management team, in consultation with its
financial, legal, tax and other advisors, reviewed and discussed the final
proposals of Raytheon and Northrop Grumman. The joint management team also had
additional discussions with Raytheon regarding its final proposal, including
the definitive agreements included as part of its final proposal. Based
principally upon (1) the greater indicated value of the aggregate debt and
equity components of Raytheon's proposal as compared to that of Northrop
Grumman and (2) the joint management team's assessment that the strategic
combination of Hughes Defense with Raytheon on the terms proposed had greater
potential to produce a financially strong defense electronics business
competitive across a broader range of market segments than would a combination
with Northrop Grumman, the joint management team determined to recommend that
Raytheon be selected as the merger partner for Hughes Defense, subject to the
ability to resolve with Raytheon the remaining open issues, including, among
other things, the conditions under which a break-up fee would be payable.
January 10, 1997 GM President's Council Meeting. On January 10, 1997, the GM
President's Council, GM's senior policy-making management body, met to discuss
and consider the final proposals of Raytheon and Northrop Grumman. For
additional information regarding the GM President's Council, including the
identity of the current members, see the definition of "GM President's Council"
in the Glossary. At such meeting, the joint management team presented its
recommendation that Raytheon be selected as the merger partner for Hughes
Defense. Goldman Sachs held discussions with the GM President's Council
concerning Raytheon and Northrop Grumman and their respective merger proposals,
including certain relevant valuation considerations. Legal counsel presented a
summary of the status of the documentation and tax counsel reviewed certain tax
considerations and presented its views on the two proposals. After discussion,
the GM President's Council concurred with the joint management team's
conclusion and determined that it would make a recommendation to the Hughes
Defense Spin-Off Committee that General Motors and Hughes Electronics proceed
with negotiations regarding the spin-off of Hughes Defense and the subsequent
merger of Hughes Defense with Raytheon (assuming that an acceptable resolution
could be reached with Raytheon regarding the few remaining open items
(discussed below)).
January 10, 1997 Hughes Defense Spin-Off Committee Meeting. Following the GM
President's Council meeting on January 10, 1997, there was a meeting of the
Hughes Defense Spin-Off Committee, at which John F. Smith, Jr., Chairman, Chief
Executive Officer and President of General Motors, presented the recommendation
of the GM President's Council described above. Mr. Smith reported that, in
concurring with the recommendation of the joint management team, the GM
President's Council considered information discussed by GM management and
Hughes Electronics management and their respective financial and legal
advisors, including the terms of the proposals, valuation matters, certain
financial data and potential synergies. After discussion, the Hughes Defense
Spin-Off Committee authorized the management team to negotiate exclusively with
Raytheon to reach a satisfactory resolution of the remaining open items. The
remaining open items included, among other things, certain matters relating to
the prompt finalization of the legal documentation for the proposed
transaction, the composition of the board of directors and certain board
committees of the post-merger company and confidentiality with respect to the
proposed transaction with Hughes Defense.
On January 10, 1997, the joint management team received a communication from
Raytheon clarifying the remaining open items with respect to its proposal.
Thereafter, the joint management team and its advisors
45
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
negotiated with Raytheon the final terms of its merger proposal, resolved all
outstanding issues and finalized the related definitive agreements.
January 16, 1997 Hughes Defense Spin-Off Committee Meeting. At the January
16, 1997 meetings of the Hughes Defense Spin-Off Committee, the Hughes
Electronics Board, the Capital Stock Committee and the GM Board, GM management
and Hughes Electronics management reported their respective recommendations
that General Motors proceed with the Hughes Transactions and the Raytheon
Merger. The principal discussion of these matters took place during the meeting
of the Hughes Defense Spin-Off Committee. All of the members of the Hughes
Electronics Board and all members of the GM Board were invited to attend this
meeting. The meeting was attended by all members of the Hughes Defense Spin-Off
Committee (which included all members of the Capital Stock Committee and all
members of the GM Board who also served as members of the Hughes Electronics
Board), by all other members of the Hughes Electronics Board and by certain
other members of the GM Board. The meeting was also attended by representatives
of Weil, Gotshal & Manges LLP, legal counsel to the Capital Stock Committee and
legal counsel to Hughes Electronics in connection with the Raytheon Merger, and
Kirkland & Ellis, legal and tax counsel to General Motors. At this meeting, the
Hughes Defense Spin-Off Committee discussed and considered the series of
related transactions comprising the Hughes Transactions, including their
effects on the three businesses of Hughes Electronics and on the holders of the
two classes of GM common stock, and the merger of Hughes Defense with Raytheon.
Thomas Wyman, Chairman of the Hughes Defense Spin-Off Committee, initially
observed that the meeting would be based on certain written materials that had
been previously delivered to all members of the GM Board, including management
reports on the proposed transactions, certain financial information and other
materials from GM's financial and legal advisors. Mr. Wyman then described the
process by which the Hughes Defense Spin-Off Committee would review in detail
the proposed transactions and vote upon a recommendation that would then be
considered by the Hughes Electronics Board, the Capital Stock Committee and the
GM Board in successive meetings.
Mr. Smith outlined the series of related transactions that comprise the
Hughes Transactions and summarized their effects on the three businesses of
Hughes Electronics and on holders of the two classes of GM common stock. Mr.
Smith explained that both classes of GM common stock would receive shares of
Hughes Defense in the Hughes Defense Spin-Off in accordance with the
Distribution Ratio to be discussed by Mr. Finnegan following Mr. Smith's
presentation. In addition, the GM $1 2/3 Common Stockholders would gain from
the operational synergies resulting from the combination of Delco and Delphi,
while GM $1 2/3 Common Stockholders and GM Class H Common Stockholders would
benefit from an infusion of cash into Hughes Telecom. Mr. Smith explained that
the Hughes Transactions were expected to produce these results without creating
any material tax liability for U.S. federal income tax purposes to General
Motors and its stockholders.
John D. Finnegan, Vice President and Treasurer of General Motors, presented a
detailed review of the Hughes Transactions, and explained that the proposed
merger with Raytheon was conditioned on the independence of Hughes Defense
immediately prior to the merger and that the Hughes Defense Spin-Off was
intended to satisfy this condition. Mr. Finnegan noted the following underlying
economic conditions and strategic considerations that favored the Hughes
Transactions: Hughes Defense's need to participate in the continuing
consolidation of the U.S. defense industry, the benefits to Delco of
integration with Delphi to develop full in-house systems capability and Hughes
Telecom's potential for growth and related requirement for significant
investment. Mr. Finnegan described several principal benefits resulting from
the Hughes Transactions, including the receipt of cash by Hughes Telecom to
help meet its expected capital requirements, the organizational flexibility
that would permit additional reorganization of the businesses comprising Delco
and Delphi and the increased focus of the New GM Class H Common Stock on the
telecommunications and space business of Hughes Electronics.
Mr. Finnegan noted that GM management recommended that the Distribution Ratio
be set shortly before the distribution of consent solicitation materials
relating to the Hughes Transactions in order to reflect then current business
and financial information and market data. He explained that the Distribution
Ratio would be
46
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
set at a level that would (1) enable the GM Board to conclude that, as of the
date of the determination of the Distribution Ratio, the Hughes Transactions,
taken as a whole, are in the best interests of General Motors and its common
stockholders and fair to the holders of each class of GM common stock, and (2)
enable each of GM's financial advisors in connection with the Hughes
Transactions, Merrill Lynch and Salomon Brothers, to provide a written opinion
as to the fairness, from a financial point of view, to each class of GM common
stockholders of the consideration to be provided to General Motors and its
subsidiaries and to each class of GM common stockholders in the Hughes
Transactions. For additional information regarding these fairness opinions,
which were delivered to the GM Board on October 6, 1997, see "--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers" below.
Copies of the Merrill Lynch Fairness Opinion and the Salomon Brothers Fairness
Opinion, in each case setting forth the assumptions made, matters considered
and limitations of the review undertaken, are attached as part of Appendix B to
this document.
Mr. Finnegan also described certain studies being conducted by GM management
with respect to the possibility of realigning the businesses of Delco and
Delphi into two companies and considering various ownership structures for
these businesses. Mr. Finnegan then summarized the principal features of the
Hughes Defense Spin-Off and the Raytheon Merger, including certain
characteristics of the capital stock of the combined company and their
importance for obtaining tax-free treatment of the proposed transactions for
U.S. federal income tax purposes, and described certain conditions precedent to
proceeding with the Hughes Transactions. He also discussed the anticipated
accounting treatment, the effect of the Hughes Transactions on GM's credit
ratings and the anticipated reaction of the investment community to the Hughes
Transactions.
Mr. Armstrong then presented information relating to the proposed merger of
Raytheon with Hughes Defense, including the strategic planning efforts relating
to Hughes Defense which ultimately led to the proposed merger with Raytheon.
Mr. Armstrong described the economic conditions in the defense industry which
had earlier led Hughes Defense to pursue a selective acquisition strategy. He
explained that, as major industry consolidation increased, a more substantial
transaction involving Hughes Defense appeared desirable. Mr. Armstrong then
reviewed the prior discussions with Raytheon regarding the possibility of a
merger between Hughes Defense and Raytheon, but noted that these discussions
were unsuccessful. Mr. Armstrong then explained that industry conditions,
Hughes Defense's strategic interest in pursuing a more substantial transaction
and the discussion with Raytheon had led GM management and Hughes Electronics
management, with the approval of the Hughes Electronics Board, the Capital
Stock Committee and the GM Board, to initiate a competitive bidding process to
find an appropriate merger partner for Hughes Defense. In connection with this
discussion, Mr. Armstrong described certain significant terms of the final
merger proposals received from Raytheon and Northrop Grumman, including the
assumption of all real estate and environmental liabilities by the combined
company and the participation on the combined company's initial board of
directors of persons associated with Hughes Electronics or General Motors.
A representative of Goldman Sachs then presented a financial analysis of the
two merger proposals. See "Description of the Raytheon Merger--Raytheon Merger
Fairness Opinion: Goldman Sachs" below. A representative of Goldman Sachs
presented advice regarding the merger of Raytheon with Hughes Defense and
delivered its written opinion addressed to the GM Board, the Hughes Electronics
Board and the board of directors of Hughes Defense that, as of such date, on
the basis of and subject to the assumptions, limitations and other matters set
forth in the opinion, the Aggregate Consideration (as defined in the Goldman
Sachs Fairness Opinion) was fair to the GM Group (as defined in the Goldman
Sachs Fairness Opinion) as a whole. A copy of the Goldman Sachs Fairness
Opinion, which sets forth the assumptions made, matters considered and
limitations of the review undertaken, is attached as part of Appendix B to this
document.
Charles H. Noski, who at the time was Vice Chairman and Chief Financial
Officer of Hughes Electronics, then summarized the key terms of the proposed
merger to which both potential merger partners had agreed, which included the
principal conditions to closing, the continuation of current employee benefits
through 1998 and the grounds for assigning technology to the combined company
(or retaining such technology within New Hughes Electronics for its exclusive
use or for licensing to the combined company for shared use). Mr. Noski and Mr.
Armstrong described the proposed treatment of Hughes Research Labs, which would
be owned jointly
47
by the combined company and New Hughes Electronics. Mr. Noski also explained
that all owned and leased assets currently used in the business of Hughes
Defense, including the Hughes Electronics corporate headquarters, and all
environmental liabilities relating to such business would be assumed by Hughes
Defense as part of the proposed transactions. He then stated that the draft
merger agreement with Raytheon provided for a list of directors for the
combined company, which included three individuals associated with Hughes
Electronics or General Motors, and that the combined company would add an
individual associated with Hughes Electronics to its management council for its
defense business and establish two joint management-level committees, which
would be staffed by personnel formerly associated with Raytheon, Hughes Defense
and Texas Instruments Defense, responsible for managing the transition and
integration of the various businesses. For additional information regarding the
management of New Raytheon and the New Raytheon Board, see "New Raytheon
Management--Directors and Executive Officers" in Chapter 5.
Mr. Armstrong presented a comparison of the merger proposals received from
Raytheon and Northrop Grumman on the basis of the offered price, the long-term
competitive position of the combined company, the business portfolio and
financial profile of each potential merger partner, the benefits arising from
the combination of each potential merger partner with Hughes Defense and the
strength of each potential merger partner's management team. Mr. Armstrong
noted that there were no material differences between the contract terms
offered by each potential merger partner, but that the price offered by
Raytheon was higher than that offered by Northrop Grumman. Based on the
foregoing, he then reported that the management of Hughes Electronics
recommended that Raytheon be selected as the merger partner for Hughes Defense.
Mr. Smith then commented that the GM President's Council had been kept well-
informed about the process of obtaining and pursuing the proposals for a
strategic transaction involving Hughes Defense, had authorized further
negotiations with Raytheon at the appropriate time and agreed with the
recommendation of Hughes Electronics management.
Mr. Wyman observed that all members of the Hughes Defense Spin-Off Committee
had been given pertinent information and ample opportunity for review and to
request additional information during the process of development of the
Raytheon Merger proposal and that the Hughes Defense Spin-Off Committee was
satisfied that it had been thoroughly briefed on the matter.
Representatives of Merrill Lynch and Salomon Brothers, financial advisors to
General Motors in connection with the contemplated transactions, made a joint
presentation regarding the values created by the Hughes Transactions and the
issues to be considered in establishing the Distribution Ratio that would
permit each financial advisor to deliver a fairness opinion with respect to the
Hughes Transactions. Materials used in connection with this presentation have
been filed as an exhibit to the Schedule 13E-3. Each of Merrill Lynch and
Salomon Brothers separately concluded that, after considering all of the
factors it deemed appropriate, absent a material change in conditions as they
existed on the date of the meeting, the GM Board could reasonably expect to be
able to establish such a Distribution Ratio.
Representatives from Weil, Gotshal & Manges LLP, as counsel to the Capital
Stock Committee, reviewed the fiduciary duties of the GM Board in connection
with its consideration of the Hughes Transactions and the Raytheon Merger and
its obligation to act in the best interests of General Motors and all of its
common stockholders, both procedurally and substantively.
After considering the foregoing matters, the Hughes Defense Spin-Off
Committee determined to recommend to the GM Board that it approve and authorize
both the Hughes Transactions, subject to the GM Board's subsequent
determination of the Distribution Ratio, and the Raytheon Merger. The Hughes
Defense Spin-Off Committee did not make a specific determination with respect
to the fairness of the Hughes Transactions, which determination was reserved
for the GM Board.
January 16, 1997 Hughes Electronics Board Meeting. In conjunction with the
meeting of the Hughes Defense Spin-Off Committee on January 16, 1997, the
Hughes Electronics Board met to discuss and consider the matters discussed at
the Hughes Defense Spin-Off Committee meeting. This meeting was attended by all
members of the Hughes Electronics Board.
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
48
After considering these matters, the Hughes Electronics Board determined that
it would recommend to the Capital Stock Committee that it approve and authorize
both the Hughes Transactions, subject to the GM Board's subsequent
determination of a Distribution Ratio, and the Raytheon Merger.
January 16, 1997 Capital Stock Committee Meeting. The Capital Stock Committee
met on January 16, 1997, immediately after the meetings of the Hughes Defense
Spin-Off Committee and the Hughes Electronics Board, to discuss and consider
the matters discussed at the Hughes Defense Spin-Off Committee meeting, which
had been attended by all members of the Capital Stock Committee.
After considering these matters, the Capital Stock Committee determined that
it would recommend to the GM Board that it approve and authorize both the
Hughes Transactions, subject to the GM Board's subsequent determination of a
Distribution Ratio, and the Raytheon Merger.
January 16, 1997 GM Board Meeting. The GM Board met on January 16, 1997,
immediately after the meeting of the Capital Stock Committee, to discuss and
consider the matters discussed at the Hughes Defense Spin-Off Committee
meeting, which had been attended by all but one of the members of the GM Board.
Hughes Electronics management, the Hughes Electronics Board, GM management, the
Hughes Defense Spin-Off Committee and the Capital Stock Committee each
recommended that the GM Board approve and authorize both the Hughes
Transactions, subject to the GM Board's subsequent determination of the
Distribution Ratio, and the Raytheon Merger.
After considering these matters, the GM Board unanimously determined that the
Hughes Transactions, taken as a whole, are in the best interests of General
Motors and its common stockholders, subject to the GM Board's subsequent
determination of a Distribution Ratio that would (1) enable the GM Board to
conclude that, as of the date of the determination of the Distribution Ratio,
the Hughes Transactions, taken as a whole, are in the best interests of General
Motors and its common stockholders and fair to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders and (2) enable each of
Merrill Lynch and Salomon Brothers to provide to the GM Board a written opinion
as to the fairness, from a financial point of view, to both classes of GM
common stockholders of the consideration to be provided to General Motors and
its subsidiaries and to each class of GM common stockholders in the Hughes
Transactions. For additional information regarding these fairness opinions,
which were delivered to the GM Board on October 6, 1997, see "--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers" below.
Accordingly, the GM Board approved and authorized the Hughes Transactions,
subject to the GM Board's subsequent approval of the definitive terms of the
transactions and determination of a Distribution Ratio that satisfies the
condition described above. The GM Board then directed management, in
consultation with its financial, legal, tax and other advisors, to develop for
the GM Board's further review and consideration the remaining definitive terms
of the Hughes Transactions, including a Distribution Ratio that satisfies the
condition described above.
After considering the foregoing matters, the GM Board also determined that
Raytheon's merger proposal was in the best interests of General Motors and its
stockholders. Accordingly, the GM Board approved the selection of Raytheon as
the merger partner for Hughes Defense and approved the Raytheon Merger.
Immediately following the January 16, 1997 GM Board meeting, Hughes Defense
and Raytheon entered into the Raytheon Merger Agreement and General Motors and
Raytheon entered into the Implementation Agreement. For information regarding
these agreements, see "Description of the Raytheon Merger--Raytheon Merger
Agreement" and "--Implementation Agreement" below. Immediately after the
execution of these agreements, the parties publicly announced the Hughes
Transactions and the Raytheon Merger.
Subsequent Events. During the months following the January 16, 1997 GM Board
meeting, GM management and Hughes Electronics management, subject to the
oversight of the Capital Stock Committee, worked with their financial, legal,
tax and other advisors to develop recommendations for the definitive terms of
the Hughes Transactions, including a methodology for the determination of the
Distribution Ratio. Among other things, GM management and Hughes Electronics
management reviewed the business plans relating to
CHAPTER 3: THE HUGHES TRANSACTIONS AND
49 THE RAYTHEON MERGER
each of the three principal businesses of Hughes Electronics, discussed and
developed the methodology for determining the Distribution Ratio, developed the
proposed terms of the New GM Class H Common Stock, reviewed certain policies of
the GM Board and developed a recommended policy statement regarding certain
capital stock matters. During this period, the Capital Stock Committee and the
GM Board received periodic updates from GM management regarding the Hughes
Transactions.
September 23, 1997 Capital Stock Committee Meeting. On September 23, 1997,
the Capital Stock Committee (with all but three members in attendance) met for
the purpose of reviewing and considering the business plans of Delco and Hughes
Telecom and the proposed definitive terms of the Hughes Transactions, including
the terms of the New GM Class H Common Stock and the Distribution Ratio
formula, as developed by GM management and Hughes Electronics management, and
receiving an update regarding certain regulatory and other matters relating to
the Hughes Transactions. A meeting of the Hughes Electronics Board was held in
conjunction with this meeting, with all but one member in attendance. In
addition, all members of the GM Board were invited to attend; all but seven
members were able to do so.
At this meeting, Mr. Armstrong and Roxanne S. Austin, Senior Vice President
and Chief Financial Officer of Hughes Electronics, together with certain other
members of Hughes Electronics management, presented a 1998-2001 business plan
of Hughes Telecom as it would be configured following the completion of the
Hughes Transactions. This represented an update of the business plan for this
sector of Hughes Electronics' business that had previously been presented to
the GM Board. Mr. Eddy Hartenstein, President, DIRECTV Enterprises, Inc.,
presented information regarding the DIRECTV business, including the effects of
increased competition on market share and financial results. Ms. Austin
provided the Capital Stock Committee with an overview of the Hughes Telecom
business plan. She then expressed Hughes Electronics management's current
expectation that, following the completion of the Hughes Transactions, New
Hughes Electronics would initially be adequately capitalized to execute its
business plan. Ms. Austin explained that the equity received by Hughes Telecom
in the form of a cash infusion in connection with the consummation of the
Hughes Transactions would provide New Hughes Electronics with the means to
accomplish its base business plan objectives.
Michael Burns, General Manager, Delco, then presented information regarding
the 1998-2002 business plan of Delco, as it is currently configured, and a
supplemental analysis of the benefits anticipated from 1998 through 2007 in
connection with the planned integration of Delco and Delphi following
consummation of the Hughes Transactions. The Delco business plan as presented
had been developed by Delco management and reviewed and approved by both Hughes
Electronics management and the GM President's Council. Both Hughes Electronics
management and GM management reported to the Capital Stock Committee that they
considered this business plan to be realistic and reasonably achievable. The
analysis of the anticipated benefits of the integration, including the benefits
to both Delco and Delphi, had been developed jointly by the managements of
Delco and Delphi and also had been reviewed and approved by Hughes Electronics
management and the GM President's Council.
With respect to the anticipated benefits from the planned integration of
Delco and Delphi, Mr. Burns reported that, according to studies undertaken
jointly by Delco management and Delphi management, significant savings were
expected to accrue from the integration of Delco and Delphi as a result of
enhanced systems capability of the combined business operations. The
combination would also provide Delco with access to a larger non-GM NAO
customer base. In light of the lead time for selling and incorporating new
electronics, Delco's business plan does not reflect significant financial
benefits from the integration until sometime after the year 2000. However,
certain structural cost savings were expected to be realized more promptly as a
result of reduced management needs for the combined operations, consolidated
marketing/customer teams, finance staff and human resources and consolidated
management in manufacturing plants. In addition, the integration is
expected to provide Delco with access to Delphi's larger non-GM NAO customer
base, resulting in greater growth of this portion of Delco's business. Mr.
Burns also noted that the operational benefits from a complete integration of
Delco and Delphi were expected to enable Delco to maintain a greater share of
the worldwide
CHAPTER 3: THE HUGHES TRANSACTIONS AND
50 THE RAYTHEON MERGER
market for supplying automotive electronics, both to GM NAO and to other
customers, as well as to permit Delco to provide products and systems at higher
profit margins, than would otherwise be the case.
Mr. Burns also reported on the expected benefits to Delphi from the
integration with Delco. It was believed that the integration would produce
additional sales opportunities for Delphi for products and systems having
further electrical/electronics integration but that there would be no effect on
GM NAO or aftermarket sales. Incremental non-GM NAO sales were expected to
begin sometime after the year 2000. In concluding his presentation, Mr. Burns
noted the importance to Delco's business of gaining the systems capabilities
which the integration with Delphi was anticipated to provide.
Following the business plan presentations, Ms. Austin and Mr. Finnegan made
presentations on the Hughes Transactions. First, Ms. Austin presented an
overview of the Hughes Transactions, including a brief summary of the principal
elements of the planned transactions, and provided the Capital Stock Committee
with an update regarding the status of various regulatory and other matters
relating to the Hughes Transactions. In particular, Ms. Austin stated that the
IRS Ruling had been obtained in July 1997 and that arrangements for clearance
of the Raytheon Merger under the Hart-Scott-Rodino Act were expected to be
reached soon. She then noted that, at the time of the initial approval of the
Hughes Transactions in January 1997, determinations regarding certain of the
terms of the Hughes Transactions had been deferred for later consideration by
the GM Board. Ms. Austin identified the principal terms of the Hughes
Transactions which required final authorization and approval by the GM Board,
which included the proposed terms of the New GM Class H Common Stock, the
application of the proceeds of the indebtedness to be incurred by Hughes
Defense prior to the Hughes Defense Spin-Off and the determination of the
Distribution Ratio.
Ms. Austin noted that a substantial portion of the value of the Hughes
Transactions to holders of GM Class H Common Stock would be represented by the
New GM Class H Common Stock. She reported that, in developing the proposed
terms for the New GM Class H Common Stock, GM management and Hughes Electronics
management began with the terms of the existing GM Class H Common Stock and
made changes in response to issues which had been raised by investors from time
to time, balanced by considerations related to the tax treatment of such stock
and maintaining flexibility for General Motors. In addition, GM management and
Hughes Electronics management and their advisors reviewed and considered the
terms of other publicly traded tracking stocks. She then reviewed the
differences in the voting and liquidation rights and recapitalization
provisions between the proposed terms of the New GM Class H Common Stock and
the terms of the GM Class H Common Stock. See "Comparison of GM Class H Common
Stock, New GM Class H Common Stock and Class A Common Stock" and "New GM Class
H Common Stock" in Chapter 6. Ms. Austin explained that the principal
differences in the stock terms were developed in order to balance the interests
of the GM Class H Common Stockholders and the GM $1 2/3 Common Stockholders and
to preserve the tax treatment of the New GM Class H Common Stock as a stock of
General Motors. Ms. Austin also described a proposed policy statement regarding
certain capital stock matters to be adopted by the GM Board, subject to the
consummation of the Hughes Transactions. See "Considerations Relating to GM's
Dual Class Common Stock Capital Structure--New GM Board Policy Statement" in
Chapter 6. She then described the recommendation of GM management and Hughes
Electronics management that, following the completion of the Hughes
Transactions, earnings from the telecommunications and space business of New
Hughes Electronics be retained for the development of that business and that,
as a result, dividends were not initially expected to be paid by New Hughes
Electronics to General Motors. Accordingly, it was recommended by GM management
and Hughes Electronics management that dividends not be paid initially on the
New GM Class H Common Stock.
Mr. Finnegan then reviewed the principal elements of the Hughes Transactions
and the Raytheon Merger and discussed the indicated value, based on recent
trading prices of Raytheon Common Stock, of the Hughes Defense Spin-Off and the
Raytheon Merger to General Motors and its common stockholders. See "Description
of the Hughes Transactions" and "Description of the Raytheon Merger" below. Mr.
Finnegan noted that the total indicated value of the transactions represents a
substantial premium to the enterprise value of Hughes Defense under the current
Hughes Electronics and GM ownership structure.
Mr. Finnegan then explained that the allocation of the Class A Common Stock
to be distributed to GM's common stockholders in the Hughes Defense Spin-Off
between the GM $1 2/3 Common Stockholders and the
CHAPTER 3: THE HUGHES TRANSACTIONS AND
51 THE RAYTHEON MERGER
GM Class H Common Stockholders in accordance with the Distribution Ratio would
be an important element of the fairness of the Hughes Transactions to the
holders of both classes of GM's common stock. He explained that, in accordance
with the proposed Distribution Ratio, the GM Class H Common Stockholders as a
whole would receive an amount of the Class A Common Stock which represents
their current approximately 25% tracking stock interest in Hughes Defense plus
an additional amount in order to reflect the net effect on them of all other
aspects of the Hughes Transactions, principally the transfer of Delco to
General Motors (which would result in the elimination of their tracking stock
interest in Delco). Similarly, the GM $1 2/3 Common Stockholders as a whole
would receive a distribution of the Class A Common Stock which represents less
than their current approximately 75% interest in Hughes Defense in order to
reflect the net effect on them of all other aspects of the Hughes Transactions,
principally the transfer of Delco to General Motors.
Mr. Finnegan then reviewed the GM Board's January 1997 decision to reserve
for later determination the Distribution Ratio. He noted that the key elements
in determining the Distribution Ratio were the value of the combined Hughes
Defense/Raytheon, the value of Delco and the value effects of all other aspects
of the Hughes Transactions and that the GM Board should also consider, among
the other things, stockholder expectations regarding the Hughes Transactions.
With respect to the combined Hughes Defense/Raytheon, Mr. Finnegan stated that
the value was based upon the market price of Raytheon Common Stock. He reported
that GM's financial advisors had completed due diligence and were expected to
conclude that the use of the market price was supportable. With respect to
Delco, he reported that customary valuation methodologies had been utilized, as
would be described in greater detail. He noted that the value of the other
factors (which would be reviewed later) were more directional than
quantifiable. He also reported that, as to Hughes Telecom, the proportional
interests of stockholders would not change and that GM's financial advisors
would report on their assessment as to the business and funding plans of Hughes
Telecom as they related to New Hughes Electronics' financial strength.
Mr. Finnegan then explained that, because certain amounts relevant to the
Distribution Ratio would not be known until the closing of the Hughes
Transactions, the proposed Distribution Ratio would be expressed as a formula
which accounts for certain variable factors, rather than as a fixed number of
shares to be distributed to each class of stockholders. He then described the
proposed Distribution Ratio formula, including the Net Transaction Effect Base
Amount and the Net Transaction Effect, and explained how each component of the
formula operated. The Distribution Ratio and its components are described in
detail in "--The Distribution Ratio" below.
Mr. Finnegan noted that the value ascribed to Delco would be a key element in
determining the Distribution Ratio. Mr. Armstrong then commented on the
preparation of the Delco business plan presented to the Capital Stock Committee
earlier in the meeting. He explained that the Delco business plan was prepared
by Delco in a "bottom-up" manner to reflect goals believed to be realistic and
reasonably achievable by Delco management; the plan was then reviewed and
approved by Hughes Electronics management, the GM President's Council and the
Hughes Electronics Board. He further noted that the Delco business plan was not
prepared with a view to influencing the valuation of Delco in favor of either
class of GM's common stockholders. Mr. Finnegan then described the valuation
methodologies being employed by each of Merrill Lynch and Salomon Brothers to
consider the value of Delco, including the use of the Delco business plan and
the Delco/Delphi integration analysis in connection with the valuation process.
He explained that Merrill Lynch and Salomon Brothers had been provided with
full access to Delco management throughout the valuation process and described
the independent valuations of Delco undertaken by Merrill Lynch and Salomon
Brothers. Mr. Finnegan explained that he believed Merrill Lynch and Salomon
Brothers employed the same techniques within the framework of the independent
methodologies used by their respective firms. Mr. Finnegan explained that these
procedures were consistent with standard industry practice. Mr. Finnegan noted
that the Delco valuation considerations used in determining the proposed
Distribution Ratio reflect a substantial premium to the enterprise value of
Delco under the current Hughes Electronics and GM ownership structure. The
valuations of Delco (including the valuation techniques utilized) by each of
Merrill Lynch and Salomon Brothers are described below under "--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers."
CHAPTER 3: THE HUGHES TRANSACTIONS AND
52 THE RAYTHEON MERGER
Mr. Finnegan then described certain other factors to be considered in
determining the Distribution Ratio formula and the Net Transaction Effect Base
Amount. He explained that acquisition goodwill allocated to Hughes Defense (in
an amount currently requiring amortization charges at the rate of approximately
$100 million per year) would be included in the value of the net assets of
Hughes Defense at the time of the Hughes Defense Spin-Off and thus would no
longer result in a charge to earnings attributable to GM $1 2/3 Common
Stockholders. He further explained that the Hughes Defense Spin-Off would
generate a substantial one-time gain, which could have an incremental effect on
the profit sharing payout under GM's collective bargaining agreements for the
year in which the Hughes Transactions are consummated. (The Hughes Defense
Spin-Off will not necessarily result in an equivalent effect on the payout to
plan participants because numerous other factors may affect GM's pre-tax net
income for the entire calendar year.) He noted, however, GM management's
current expectation that this incremental payment would be largely offset on a
net present value basis by the reduction in future profit sharing payments
resulting from the elimination of Hughes Defense earnings. Mr. Finnegan noted
the benefits anticipated from the elimination of the perceived discount
attributed to GM Class H Common Stockholders' current tracking stock interest
in Hughes Defense and the potential benefit to GM NAO (as a customer of Delco)
of the cost savings expected to result from the integration of Delco and
Delphi. He further explained that the Hughes Transactions would facilitate GM's
component strategy by providing electronic systems integration capability. Mr.
Finnegan then reviewed anticipated stockholder reactions to the announcement of
the definitive terms of the Hughes Transactions and current analysts'
assessments as to the value of Delco.
Mr. Finnegan then presented information relating to the value of the Hughes
Transactions to the GM $1 2/3 Common Stockholders and the value of the Hughes
Transactions to the GM Class H Common Stockholders, including an illustration
of the Distribution Ratio formula. He explained that the total value provided
to GM Class H Common Stockholders in the Hughes Transactions would consist
principally of the value of the Class A Common Stock to be distributed to such
stockholders plus the value of the New GM Class H Common Stock. He further
explained that the total benefit of the Hughes Transactions to GM $1 2/3 Common
Stockholders would consist principally of the value of the distribution of
Class A Common Stock to such holders, offset in part by some dilution of the
earnings per share of GM $1 2/3 Common Stock in 1998, as well as the benefits
derived from the transfer of Delco from Hughes Electronics to General Motors so
that its operations could be integrated with those of Delphi. In addition, he
explained that both classes of GM common stockholders would benefit from GM's
investment in Hughes Telecom, which would receive additional funding in
connection with the Hughes Transactions to better enable it to meet its capital
requirements over the business planning horizon.
Mr. Armstrong then reviewed the status of the Hughes Transactions and
discussed the anticipated timing of the consummation of the Hughes
Transactions. He explained that, subject to stockholder approval and the
satisfaction of certain other conditions, the Hughes Transactions were
currently expected to be completed in December 1997.
Upon the recommendation of Hughes Electronics management, the Hughes
Electronics Board approved each of the Hughes Telecom and Delco business plans.
After reviewing and discussing these business plans and the other matters
discussed at the meeting, including the proposed Distribution Ratio formula and
the anticipated determination of the Net Transaction Effect Base Amount, the
Capital Stock Committee approved the use of the Delco business plan and the
Delco/Delphi integration analysis in the determination of the Distribution
Ratio. See "The Distribution Ratio" and "Recommendations of the Capital Stock
Committee and the GM Board; Fairness of the Transactions" below.
October 1, 1997 GM President's Council Meeting. On October 1, 1997, the GM
President's Council met to discuss and consider the definitive terms of the
Hughes Transactions, including the proposed terms of New GM Class H Common
Stock, the Distribution Ratio formula, the determination of the Net Transaction
Effect Base Amount and related matters. The GM President's Council received an
update from GM management and Hughes Electronics management and legal counsel
regarding the status of various regulatory and other matters relating to the
Hughes Transactions. The GM President's Council then considered and discussed
the matters
CHAPTER 3: THE HUGHES TRANSACTIONS AND
53 THE RAYTHEON MERGER
considered and discussed at the Capital Stock Committee meeting on September
23, 1997. After discussion, the GM President's Council determined to recommend
to the GM Board for approval definitive terms of the Hughes Transactions,
including principally the adoption of the Distribution Ratio formula and a
determination that the amount of the Net Transaction Effect Base Amount be $6.5
billion multiplied by the fraction representing the tracking stock interest of
GM Class H Common Stockholders (i.e., the "Class H Fraction") at the time of
the Hughes Defense Spin-Off.
October 6, 1997 Hughes Electronics Board Meeting. On October 6, 1997, the
Hughes Electronics Board met in a joint session with the GM Board to discuss
and consider the definitive terms of the Hughes Transactions. The meeting was
attended by all members of the Hughes Electronics Board. The presentations made
and the other matters discussed at this meeting are described below as part of
the description of the October 6, 1997 meeting of the GM Board. After
considering the definitive terms of the Hughes Transactions as presented at the
meeting, the Hughes Electronics Board approved all elements of the Hughes
Transactions and related transactions requiring its approval and recommended to
the GM Board that it approve the definitive terms of the Hughes Transactions.
October 6, 1997 Capital Stock Committee Meeting. On October 6, 1997, the
Capital Stock Committee, in conjunction with the GM Board meeting held that
day, met to discuss and consider the definitive terms of the Hughes
Transactions. All members were in attendance, as were the officers of General
Motors who are members of the GM Board (Messrs. Smith and Pearce), certain
other officers of General Motors, a member of the GM Legal Staff and
representatives of the Capital Stock Committee's outside counsel. Also present
for part of the meeting were representatives of Merrill Lynch, Salomon Brothers
and Goldman Sachs and Mr. Armstrong, Chairman and Chief Executive of Hughes
Electronics. Among other things, the Capital Stock Committee confirmed with the
representatives of Merrill Lynch, Salomon Brothers and Goldman Sachs their
complete access to information and to the managements of Hughes Electronics and
General Motors in connection with their assignments and the independence of
their financial advice. The Capital Stock Committee also confirmed with Mr.
Armstrong the full participation of the management of Hughes Electronics in the
process of developing the terms of the Hughes Transactions and the
recommendation of Hughes Electronics management that the GM Board approve the
Hughes Transactions as proposed. The Capital Stock Committee also considered,
among other things, the presentations concerning the Hughes Transactions that
had been made to the GM Board earlier that day and in the past by GM management
and by each of Merrill Lynch, Salomon Brothers and Goldman Sachs, the
recommendations of GM management, Hughes Electronics management and the Hughes
Electronics Board, and the prior deliberations of the Capital Stock Committee.
Based on the foregoing, the Capital Stock Committee determined to recommend to
the GM Board (1) approval of the Distribution Ratio formula and the Net
Transaction Effect as described herein, (2) establishment of the terms of the
New GM Class H Common Stock and adoption of the GM Board policy statement as
described herein and (3) determination that the Hughes Transactions and the
Raytheon Merger are in the best interests of General Motors and its common
stockholders, fairly take into account the interests of the holders of each
class of GM common stock and are fair to the holders of both classes of GM
common stock and, accordingly, approve and authorize the Hughes Transactions.
October 6, 1997 GM Board Meeting. The GM Board met on October 6, 1997, in a
joint session with the Hughes Electronics Board, to discuss and consider the
definitive terms of the Hughes Transactions. This regular meeting of the GM
Board was attended by all members of the GM Board as well as by members of GM
management and Hughes Electronics management and representatives of Goldman
Sachs, Merrill Lynch, Salomon Brothers, Kirkland & Ellis and Weil, Gotshal &
Manges LLP.
Mr. Smith commenced the meeting by providing an overview of the Hughes
Transactions, including a description of the anticipated benefits to each class
of GM stockholders. Mr. Finnegan then reviewed various aspects of the Hughes
Transactions and the Raytheon Merger, covering substantially the same matters
that he had addressed at the meeting of the Capital Stock Committee on
September 23, 1997. See "--September 23, 1997 Capital Stock Committee Meeting"
above. Mr. Finnegan also discussed the indicated value of the Raytheon Merger
and the valuation of Delco, including the expected benefits from the
Delco/Delphi
CHAPTER 3: THE HUGHES TRANSACTIONS AND
54 THE RAYTHEON MERGER
integration, noting that the value of the integration benefits was important to
the valuations of Delco prepared by GM's financial advisors, Merrill Lynch and
Salomon Brothers. In addition, Mr. Finnegan also reviewed management's strategy
for GM's components business and discussed the Hughes Defense debt proceeds
that would be made available to Hughes Telecom as new capital.
Mr. Finnegan reviewed tax matters relating to the transactions, including an
IRS letter ruling that had been received in July 1997. See "--Certain U.S.
Federal Income Tax Considerations Relating to Certain of the Hughes
Transactions" below.
Mr. Finnegan next reviewed pertinent accounting matters. He reported that the
Hughes Defense Spin-Off would result in an approximately $4.0 billion to $5.0
billion accounting gain and a reduction in GM stockholders' equity of
approximately $0.6 billion to $1.6 billion. He also reported on the anticipated
effect on incremental profit sharing amounts which may be payable under GM's
collective bargaining agreements. (The Hughes Defense Spin-Off will not
necessarily result in an equivalent effect on the payout to plan participants
because numerous other factors may affect GM's pre-tax net income for the
entire calendar year.) From an earnings per share perspective, he noted that
the Hughes Transactions were expected to be slightly dilutive (approximately
$0.05 per share) in 1998 and neutral in 1999 for the GM $1 2/3 Common Stock and
that the earnings per share for the New GM Class H Common Stock would not be
comparable to that for the GM Class H Common Stock.
Mr. Finnegan next discussed the amounts that would be legally available for
the payment of dividends on GM's common stocks after the Hughes Transactions
under the GM Certificate of Incorporation as proposed to be amended in the
Hughes Transactions. See "New GM Class H Common Stock--GM Certificate of
Incorporation Provisions Regarding Dividends" in Chapter 6. He stated that
management recommended that, immediately after the closing of the Hughes
Transactions, the amounts available for the payment of dividends on GM $1 2/3
Common Stock and New GM Class H Common Stock equal, respectively, the amounts
available for the payment of dividends on GM $1 2/3 Common Stock and GM Class H
Common Stock immediately before the closing of the Hughes Transactions, less
the net reduction in GM stockholders' equity resulting from the Hughes
Transactions (as determined for financial reporting purposes), which he
estimated to be approximately $1.7 billion, with such net reduction allocated
to the two classes of GM common stock in proportion to their respective
derivative interests in the earnings of Hughes Electronics at the time of
closing. The GM Board discussed the appropriateness of this allocation in the
context of the Hughes Transactions.
Mr. Finnegan also reviewed the GM Board's earlier determination to structure
the Hughes Transactions so as not to result in a recapitalization of GM Class H
Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio as currently
provided for under certain circumstances in the GM Certificate of
Incorporation. See "--No Recapitalization at a 120% Exchange Ratio."
Mr. Finnegan then discussed the Distribution Ratio, addressing substantially
the same matters that he had addressed at the meeting of the Capital Stock
Committee on September 23, 1997. See "--September 23, 1997 Capital Stock
Committee Meeting" above. In this presentation, he noted management's
recommendation that $6.5 billion be the amount to be multiplied by the Class H
Fraction in order to arrive at the Net Transaction Effect. He stated that this
recommendation was made after discussions between GM management and Hughes
Electronics management and was based on, among other things, the range of
values for Delco calculated by GM's financial advisors, Merrill Lynch and
Salomon Brothers. He also stated that management considered that the factors
pertinent to determining the Net Transaction Effect other than the valuation of
Delco for purposes of the transfer of Delco to General Motors were varied in
their effects upon the GM $1 2/3 Common Stockholders and GM Class H Common
Stockholders and difficult to quantify but, taken as a whole, directionally
suggested that using in the Distribution Ratio formula an amount above the mid-
point of the financial advisors' Delco valuation ranges would be appropriate.
Ms. Austin then reported on matters related to the business plan of Hughes
Telecom and the financial position of New Hughes Electronics, addressing
substantially the same matters that she had addressed at the meeting of the
Capital Stock Committee on September 23, 1997. See "--September 23, 1997
Capital Stock
CHAPTER 3: THE HUGHES TRANSACTIONS AND
55 THE RAYTHEON MERGER
Committee Meeting" above. She also reported that management expected Hughes
Telecom to use the proceeds of the debt to be incurred by Hughes Defense prior
to its spin-off (currently estimated to be approximately $3.9 billion) to repay
$1.725 billion borrowed from General Motors in connection with the PanAmSat
Merger and to repay commercial paper borrowing of Hughes Electronics, estimated
to be $1.3 billion at the time of the closing of the Hughes Transactions. She
reported management's view that the remaining cash and ordinary course
borrowing capacity would provide New Hughes Electronics with adequate capital
to execute its business plan. See "--Allocation of Hughes Defense New Debt
Proceeds; Hughes Telecom Funding" below. She also indicated that cash needs
beyond those reflected in the base business plan, such as for large strategic
acquisitions, would require access to additional funding.
Ms. Austin then described the proposed terms for the New GM Class H Common
Stock and the recommendation of management that the GM Board adopt a policy
statement regarding certain capital stock matters, addressing substantially the
same matters that she had addressed at the meeting of the Capital Stock
Committee on September 23, 1997. See "--September 23, 1997 Capital Stock
Committee Meeting" above.
Mr. Armstrong and John J. Higgins, General Counsel of Hughes Electronics,
reported on matters related to the merger with Raytheon, including the status
of antitrust clearance efforts and the GM personnel and Hughes Electronics
personnel who would serve as directors of New Raytheon after the completion of
the Raytheon Merger.
A representative of Goldman Sachs confirmed its opinion concerning the
Raytheon Merger delivered at the January 16, 1997 meeting of the GM Board to
the effect that, subject to the assumptions, limitations and other matters set
forth in its written opinion, the Aggregate Consideration to be provided in the
Raytheon Merger was fair to the GM Group as a whole. See "--January 16, 1997
Hughes Defense Spin-Off Committee Meeting" above and "Description of the
Raytheon Merger--Raytheon Merger Fairness Opinion: Goldman Sachs" below. It is
a condition to GM's obligation to complete the Hughes Transactions that the
Goldman Sachs Fairness Opinion not be withdrawn.
Mr. Gottschalk summarized the pending litigation regarding the Hughes
Transactions that had been filed against General Motors and its directors. See
"--Stockholder Litigation Relating to the Hughes Transactions" below. A
representative of Weil, Gotshal & Manges LLP then discussed certain matters
relating to the fiduciary duties of the GM Board to the holders of both classes
of GM common stock in connection with its consideration of the definitive terms
for the Hughes Transactions. In this regard, he reviewed the process that
management and the GM Board had followed in developing the terms of the Hughes
Transactions and that, among other things, the Hughes Transactions had been
structured so as to be conditioned on approval from the holders of each class
of GM common stock.
Representatives of Merrill Lynch reviewed with the GM Board their valuation
of Delco and advice with respect to the Hughes Transactions and the Raytheon
Merger, presenting certain materials that have been filed as an exhibit to the
Schedule 13E-3 filed by General Motors. Merrill Lynch also provided its written
opinion to the GM Board that, as of October 6, 1997 and on the basis of and
subject to the assumptions, limitations and other matters set forth therein,
taking into account all relevant aspects of the Hughes Transactions and the
Raytheon Merger, the consideration to be provided to General Motors and its
subsidiaries and the GM $1 2/3 Common Stockholders and the GM Class H
Stockholders in the Hughes Transactions was fair from a financial point of view
to the GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders. A
copy of the Merrill Lynch Fairness Opinion, which sets forth the assumptions
made, the matters considered and limitations on the review undertaken in
connection with the opinion, is included in Appendix B to this document and is
incorporated in this document by reference. For further information about the
Merrill Lynch Fairness Opinion and related presentation to the GM Board, see
"--Hughes Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers"
below. It is a condition to GM's obligation to complete the Hughes Transactions
that the Merrill Lynch Fairness Opinion not be withdrawn.
Representatives of Salomon Brothers reviewed with the GM Board their
valuation of Delco and advice with respect to the Hughes Transactions and the
Raytheon Merger, presenting certain materials that have been filed as an
exhibit to the Schedule 13E-3 filed by General Motors. Salomon Brothers also
provided its written opinion to the GM Board that, as of October 6, 1997 and on
the basis of and subject to the assumptions,
CHAPTER 3: THE HUGHES TRANSACTIONS AND
56 THE RAYTHEON MERGER
limitations and other matters set forth therein, taking into account all
relevant aspects of the Hughes Transactions and the Raytheon Merger, the
consideration to be provided to General Motors and its subsidiaries and the GM
$1 2/3 Common Stockholders and the GM Class H Stockholders in the Hughes
Transactions was fair from a financial point of view to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders. A copy of the Salomon
Brothers Fairness Opinion, which sets forth the assumptions made, the matters
considered and limitations on the review undertaken in connection with the
opinion, is included in Appendix B to this document and is incorporated in this
document by reference. For further information about the Salomon Brothers
Fairness Opinion and related presentation to the GM Board, see "--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers" below. It
is a condition to GM's obligation to complete the Hughes Transactions that the
Salomon Brothers Fairness Opinion not be withdrawn.
Mr. Smith then reported the unanimous recommendation of the GM President's
Council that the GM Board approve the definitive terms of the Hughes
Transactions as presented at the meeting, including the Distribution Ratio
formula, the Net Transaction Effect, the allocation of the proceeds of the new
Hughes Defense indebtedness, the terms of the New GM Class H Common Stock and
the GM Board policy statement as discussed herein.
Mr. Armstrong commented on the business and financial outlook for New Hughes
Electronics. The Hughes Electronics Board then took the action described above.
See "--October 6, 1997 Hughes Electronics Board Meeting." The GM Board then
recessed for the meeting of the Capital Stock Committee described above. See
"--October 6, 1997 Capital Stock Committee Meeting."
Following such recess, Mr. Wyman, as chairman of the Capital Stock Committee,
presented the recommendation of the Capital Stock Committee on the Hughes
Transactions as described above. See "--October 6, 1997 Capital Stock Committee
Meeting."
Mr. Losh then reported on the expected timing for completing the Hughes
Transactions and the Raytheon Merger and GM's plans for filing a registration
statement with the SEC and issuing a press release regarding the GM Board's
approval of the Distribution Ratio and the other definitive terms of the Hughes
Transactions.
Mr. Gottschalk then reviewed the resolutions presented to the directors for
their consideration in connection with approving the definitive terms of the
Hughes Transactions as described at the meeting, including the Distribution
Ratio formula, the Net Transaction Effect, the allocation of the proceeds of
the new Hughes Defense indebtedness, the terms of the New GM Class H Common
Stock and the GM Board policy statement, a determination of fairness, approval
of the principal agreements and transactions, the amount to be allocated to
each class of common stock for the payment of dividends, a recommendation on
the Hughes Transactions to GM common stockholders and the establishment of a
special committee of the GM Board to act, as may be appropriate, on matters
concerning the transactions between meetings of the GM Board.
After considering the matters discussed and considered at the meeting, the GM
Board unanimously determined that the Hughes Transactions and the Raytheon
Merger, taken as a whole, are in the best interests of General Motors and its
common stockholders, fairly take into account the interests of each class of GM
common stockholders, and are fair to the GM $1 2/3 Common Stockholders and the
GM Class H Common Stockholders. Accordingly, the GM Board unanimously approved
and authorized the Hughes Transactions and determined to recommend to the
common stockholders of General Motors that they execute consents approving the
Hughes Transactions, including the adoption of the GM Spin-Off Merger
Agreement.
THE DISTRIBUTION RATIO
GENERAL
We use the term "Distribution Ratio" to refer to the relationship between the
amount of Class A Common Stock of Hughes Defense to be distributed to the
holders of each of the two classes of GM common stock.
CHAPTER 3: THE HUGHES TRANSACTIONS AND
57 THE RAYTHEON MERGER
Establishing an appropriate formula to express the Distribution Ratio was an
important element in the GM Board's determination that the Hughes Transactions,
taken as a whole, are fair to the holders of both classes of GM common stock.
The Distribution Ratio is designed to provide GM Class H Common Stockholders
with an amount of Class A Common Stock of Hughes Defense that is appropriate to
reflect not only their current tracking stock interest in Hughes Defense
(approximately 25.6%, based on the Class H Fraction as of September 30, 1997)
but also the net effect on them of all other aspects of the Hughes
Transactions, principally the transfer of Delco to General Motors, which will
result in the earnings of Delco no longer being tracked by the New GM Class H
Common Stock. The balance of the Class A Common Stock of Hughes Defense will be
distributed to the GM $1 2/3 Common Stockholders and will reflect both their
current interest in Hughes Defense (approximately 74.4%, based on the Class H
Fraction as of September 30, 1997) and the net effect on them of all other
aspects of the Hughes Transactions, principally the transfer of Delco to
General Motors.
DISTRIBUTION RATIO: KNOWN ELEMENTS
Two of the elements of the Distribution Ratio are known at this time:
(1) The total amount of Class A Common Stock of Hughes Defense to be
distributed to all GM common stockholders. The Raytheon Merger Agreement
provides that this amount shall be 102,630,503 shares.
(2) The total amount to be multiplied by the Class H Fraction in order to
determine the additional amount of Class A Common Stock that would fairly
compensate the GM Class H Common Stockholders for the transfer of Delco and
all other aspects of the Hughes Transactions. On October 6, 1997, the GM
Board determined this total amount to be $6.5 billion. Accordingly,
assuming a Class H Fraction of 25.6%, the additional Class A Common Stock
would have a value of $1.665 billion. We refer to this amount as the "Net
Transaction Effect Base Amount." In the event that any proceeds of Hughes
Defense debt are made available to General Motors, the Net Transaction
Effect Base Amount will be increased by the amount of such proceeds
multiplied by the Class H Fraction. We refer to the result of that
adjustment as the "Net Transaction Effect." If no debt proceeds are made
available to General Motors, the Net Transaction Effect will be the same as
the Net Transaction Effect Base Amount.
For a description of the process and methodology utilized by the GM Board in
determining the Net Transaction Effect Base Amount, see "Background of the
Hughes Transactions--Development of the Hughes Transactions and the Raytheon
Merger--September 23, 1997 Capital Stock Committee Meeting" above.
DISTRIBUTION RATIO: VARIABLE ELEMENTS
Certain elements of the Distribution Ratio cannot be known precisely until
the closing of the Hughes Transactions. For this reason, the Distribution Ratio
is expressed as a formula that will depend on the final values of the variable
elements, although we have used certain assumptions about these values in the
discussion and illustrations below.
There are three variable elements of the Distribution Ratio:
(1) The "Class H Fraction" on the closing date of the Hughes Transactions.
The Class H Fraction expresses the number of shares of GM Class H
Common Stock outstanding at any time as a percentage of the Class H
Dividend Base and reflects the amount of tracking stock interest that
the GM Class H Common Stockholders have in the earnings of Hughes
Electronics and its three principal
businesses. The Class H Fraction was 25.6% on September 30, 1997,
although we have sometimes referred to it in this document as
"approximately 25%." Although it may vary, we do not expect this
fraction to change significantly between now and the closing. The Class
H Dividend Base is the
CHAPTER 3: THE HUGHES TRANSACTIONS AND
58 THE RAYTHEON MERGER
denominator of the fraction that is used in the GM Certificate of
Incorporation to allocate the earnings of Hughes Electronics between
GM's two classes of common stock for dividend purposes. The Class H
Dividend Base was initially established in connection with GM's
acquisition of Hughes Aircraft in 1985 and has been adjusted to reflect
subsequent stock splits and stock issuances. It is a number (currently
about 400 million) that notionally reflects 100% of the tracking stock
interest in Hughes Electronics, of which about 25.6% has been issued in
the form of GM Class H Common Stock.
(2) The per share value of the Class A Common Stock of Hughes Defense to be
distributed to GM common stockholders. This amount will determine how
many shares of that stock are needed in order to provide the GM Class H
Common Stockholders with additional value equal to the Net Transaction
Effect. The GM Board believes that the market value of the Raytheon
Common Stock near the closing date will be the best indicator of the
value of the Class A Common Stock to be distributed to GM common
stockholders. We refer to this amount on a per share basis as the
"Class A Share Value." The Class A Share Value will be measured as the
average closing market price of the Raytheon Common Stock during the
30-day period ending on the fifth day before the consummation of the
Raytheon Merger. This is the same valuation formula that is used in the
Raytheon Merger Agreement to determine the amount of debt that Hughes
Defense may have at the time of the Raytheon Merger. However, the Class
A Share Value will be determined without giving effect to the collar
adjustment used in connection with the Raytheon Merger. We have used
the Recent Raytheon Stock Price for illustrative calculations in this
document, but it is not necessarily indicative of the Class A Share
Value.
(3) The amount, if any, of cash proceeds from debt incurred by Hughes
Defense that will be made available to General Motors rather than used
to fund the capital needs of Hughes Telecom. The GM Board has
determined that the proceeds of Hughes Defense debt incurred prior to
the Hughes Defense Spin-Off will be retained by Hughes Telecom up to
the first $4.0 billion, with any debt proceeds over that amount being
used to repay amounts owed to Delco. Since Delco is being transferred
to General Motors as part of the Hughes Transactions, any debt proceeds
so applied will be made available to General Motors. The amount of new
debt that Hughes Defense may incur prior to the closing is
limited by the Raytheon Merger Agreement and varies based on the market
price of Raytheon Common Stock and the amount of other debt of Hughes
Defense at the time of its spin-off from General Motors. If the Raytheon
Common Stock maintains its current stock price through the closing and
based on our estimates of other Hughes Defense debt, the amount of
Hughes Defense new debt will be approximately $3.9 billion, so all of
the debt proceeds will be retained by Hughes Telecom and none will be
made available to General Motors. In that event, as explained above, no
adjustment will be made to the Net Transaction Effect Base Amount, which
accordingly will be the same as the Net Transaction Effect. For a
description of the total amount of debt proceeds that will be available,
see "Description of the Raytheon Merger--Raytheon Merger Agreement--
Covenants--Indebtedness" below. The Raytheon Merger Agreement refers to
this amount as the "Intercompany Payment Amount." If the Intercompany
Payment Amount exceeds $4.0 billion, the Net Transaction Effect would be
calculated by adding to the Net Transaction Effect Base Amount an amount
equal to such excess multiplied by the Class H Fraction.
DISTRIBUTION RATIO
For purposes of this discussion and illustration, we have assumed that (1)
the Class A Share Value is equal to the Recent Raytheon Stock Price ($57.88 per
share on October 10, 1997), (2) the Class H Fraction is 25.6% and (3) there
will be no existing indebtedness of Hughes Defense at the time of the Hughes
Defense Spin-Off. As a result of the assumed Class A Share Value, no proceeds
of new Hughes Defense debt will be made available to General Motors and
therefore the Net Transaction Effect will be equal to the Net Transaction
Effect Base Amount. We have used these amounts for illustrative purposes only.
CHAPTER 3: THE HUGHES TRANSACTIONS AND
59 THE RAYTHEON MERGER
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
In applying the Distribution Ratio formula, we first determine the
appropriate number of shares of Class A Common Stock to be distributed to the
holders of GM Class H Common Stock. We refer to this amount as the "Class H
Distribution." The number of shares to be distributed to the GM $1 2/3 Common
Stockholders is then determined by subtracting the Class H Distribution from
the total number of shares of Class A Common Stock to be distributed. We refer
to this amount as the "$1 2/3 Distribution." The "Distribution Ratio" expresses
the relationship between the Class H Distribution and the $1 2/3 Distribution.
Using the terms defined above, the Class H Distribution and the $1 2/3
Distribution can be calculated as follows:
. Class H Distribution = 102,630,503 times Class H Fraction
plus
(Net Transaction Effect divided by Class A Share Value)
. $1 2/3 Distribution = 102,630,503 minus Class H Distribution
The Class H Distribution has two components. One component is intended to
provide GM Class H Common Stockholders with a portion of the Class A Common
Stock equivalent to the amount of their current tracking stock interest in
Hughes Defense. Accordingly, this amount is equal to the total amount of Class
A Common Stock multiplied by the Class H Fraction on the closing date. Based on
the current Class H Fraction, this component would be 102,630,503 times 25.6%,
or 26,294,176 shares.
The second component of the Class H Distribution is intended to provide the
GM Class H Common Stockholders with an additional amount of Class A Common
Stock having a value equal to the Net Transaction Effect. This amount is
calculated by first multiplying $6.5 billion by the Class H Fraction to obtain
the Net Transaction Effect ($1.665 billion based on the current Class H
Fraction) and then dividing the Net Transaction Effect by the Class A Share
Value. Accordingly, based on the assumptions stated above, the Class H
Distribution would include an additional number of shares of Class A Common
Stock equal to $1.665 billion divided by $57.88, or 28,774,346 shares.
Based on the assumptions stated above, the Class H Distribution would be
equal to the sum of the two components, amounting to 55,068,522 shares of Class
A Common Stock in total, and 0.53747 shares of Class A Common Stock per share
of GM Class H Common Stock. Accordingly, the Class H Distribution would amount
to approximately 53.7% of the total distribution of Class A Common Stock to GM
common stockholders.
The $1 2/3 Distribution would be equal to the total number of shares of Class
A Common Stock minus the Class H Distribution. Accordingly, the $1 2/3
Distribution would be equal to 102,630,503 minus 55,068,522, or 47,561,981
shares of Class A Common Stock in total, and 0.06725 shares of Class A Common
Stock per share of GM $1 2/3 Common Stock. This would amount to approximately
46.3% of the total distribution of Class A Common Stock to GM common
stockholders.
ILLUSTRATIVE CALCULATIONS
The following table sets forth illustrative calculations of the Distribution
Ratio and the per share distributions of Class A Common Stock to be made to
each class of GM common stock based on various average closing prices of
Raytheon Common Stock, which would determine the Class A Share Value for
purposes of the Distribution Ratio formula. In each case, the illustrations are
based on the Class H Fraction as of September 30, 1997 (approximately 25.6%)
and assume that there will be no existing indebtedness of Hughes Defense (other
than the new debt) at the time of the Hughes Defense Spin-Off. For information
about recent closing prices of Raytheon Common Stock, see "Description of the
Raytheon Merger--Raytheon Merger Agreement" below. The table does not give
effect to the treatment of fractional shares in the Raytheon Merger, which
provides that fractional shares of Class A Common Stock will be converted into
Class B Common Stock and sold for cash, with the proceeds being distributed to
the owners of such fractional shares.
60
As described above, to the extent the proceeds of the new debt incurred by
Hughes Defense exceed $4.0
billion, such excess will be made available to General Motors and the
Distribution Ratio will be adjusted. We currently estimate that no debt
proceeds will be available to General Motors unless the Class A Share Value is
$53.59 or less and that the maximum amount of proceeds that could be made
available to General Motors is $0.9 billion (when the Class A Share Value is at
the bottom of the collar ($44.42 or below)).
PER SHARE $1 2/3 PER SHARE CLASS H
DISTRIBUTION RATIO: DISTRIBUTION: DISTRIBUTION: ---
AGGREGATE AGGREGATE NUMBER OF VALUE OF NUMBER OF VALUE OF
$1 2/3 CLASS H CLASS A CLASS A CLASS A CLASS A
CLASS A SHARE VALUE PERCENTAGE PERCENTAGE SHARES SHARES SHARES SHARES
- ------------------- ---------- ---------- --------- -------- --------- --------
$70.00 51.2% 48.8% 0.07429 $5.20 0.48882 $34.22
$68.00 50.5% 49.5% 0.07330 $4.98 0.49565 $33.70
$66.00 49.8% 50.2% 0.07226 $4.77 0.50290 $33.19
$64.00 49.0% 51.0% 0.07114 $4.55 0.51059 $32.68
$62.00 48.2% 51.8% 0.06995 $4.34 0.51878 $32.16
$60.00 47.3% 52.7% 0.06869 $4.12 0.52752 $31.65
$58.00 46.4% 53.6% 0.06733 $3.91 0.53686 $31.14
$57.88 46.3% 53.7% 0.06725 $3.89 0.53747 $31.11
$56.00 45.4% 54.6% 0.06589 $3.69 0.54687 $30.62
$54.00 44.3% 55.7% 0.06433 $3.47 0.55762 $30.11
$52.00 42.4% 57.6% 0.06151 $3.20 0.57705 $30.01
$50.00 40.1% 59.9% 0.05817 $2.91 0.60013 $30.01
$48.00 37.6% 62.4% 0.05455 $2.62 0.62513 $30.01
$46.00 34.9% 65.1% 0.05061 $2.33 0.65231 $30.01
$44.00 32.2% 67.8% 0.04667 $2.05 0.67951 $29.90
$42.00 30.2% 69.8% 0.04375 $1.84 0.69965 $29.39
$40.00 27.9% 72.1% 0.04054 $1.62 0.72180 $28.87
POST-CLOSING PAYMENT
The determination by the GM Board of the Net Transaction Effect is based on,
among other things, valuations of Delco which were based, in part, on a
December 31, 1997 projected balance sheet for Delco (which excluded all assets
and liabilities related to Delco Systems Operations, which has historically
been reported in Hughes Electronics' Aerospace and Defense Systems segment but
is being transferred to General Motors in connection with the Hughes
Reorganization as described under "Business of Delco" in Chapter 4). Within
approximately four months following the closing of the Hughes Transactions,
General Motors will prepare a balance sheet for Delco as of the closing date on
a basis consistent with such December 31, 1997 projected balance sheet. To the
extent that this closing balance sheet reflects "net investment amount" of
Delco different from the "net investment amount" of Delco as reflected on the
December 31, 1997 projected balance sheet by an amount exceeding $50 million, a
payment will be made from New Hughes Electronics to General Motors, or from
General Motors to New Hughes Electronics, as appropriate, to compensate for the
amount of such difference in excess of $50 million. For such purposes, "net
investment amount" means total assets less total liabilities, excluding cash
and cash equivalents, notes receivable from Hughes Electronics and all balances
related to Delco Systems Operations. In addition, the closing date balance
sheet "net investment amount" will exclude the effects of accounting changes,
extraordinary items and one time non-recurring gains or losses.
This adjustment will in no way affect the number of shares of Class A Common
Stock distributed to GM $1 2/3 Common Stockholders or to GM Class H Common
Stockholders in the Hughes Defense Spin-Off.
RECOMMENDATIONS OF THE CAPITAL STOCK COMMITTEE AND THE GM BOARD; FAIRNESS OF
THE HUGHES TRANSACTIONS
As described elsewhere in this document, throughout 1996, General Motors and
Hughes Electronics considered the strategic challenges facing each of the three
principal businesses of Hughes Electronics and
CHAPTER 3: THE HUGHES TRANSACTIONS AND
61 THE RAYTHEON MERGER
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
assessed various alternative structures for a transaction or series of
transactions involving these businesses. See "--Alternatives to the Hughes
Transactions" and "--Background to the Hughes Transactions" above.
At its December 2, 1996 meeting, the Capital Stock Committee considered,
among other things, the proposed process for overseeing the development of the
terms of transactions which would enable the Hughes Electronics businesses to
address such challenges, including the formation of a special committee of the
GM Board to oversee the process. At its meeting on the same day, the GM Board
reviewed its determination that it would not propose a transaction or series of
transactions that would result in the recapitalization of GM Class H Common
Stock into GM $1 2/3 Common Stock at the 120% exchange ratio as provided for
under certain circumstances in the GM Certificate of Incorporation. See "No
Recapitalization at a 120% Exchange Ratio" below. The GM Board also authorized
the implementation of a process to be managed by a joint GM management and
Hughes Electronics management team, in consultation with their financial, legal
and other advisors, to solicit expressions of interest in a tax-free merger
involving Hughes Defense. At this time, the GM Board established the Hughes
Defense Spin-Off Committee to oversee the process.
From December 2, 1996 until January 16, 1997, the joint management team,
under the oversight of the Hughes Defense Spin-Off Committee and the Capital
Stock Committee, solicited expressions of interest in a tax-free merger
involving Hughes Defense and developed the proposed terms of the Hughes
Transactions, including certain features intended to ensure that the Hughes
Defense Spin-Off and the subsequent merger of Hughes Defense with another
industry participant would be tax-free to General Motors and its stockholders.
The joint management team received significant support from its financial,
legal, tax and other advisors in connection with the competitive bidding
process and negotiated separately with Raytheon and Northrop Grumman concerning
a merger transaction involving Hughes Defense prior to recommending Raytheon as
the merger partner.
On January 16, 1997, after discussion and consideration of the Hughes
Transactions and related matters as described above, each of the Hughes
Electronics Board, the Hughes Defense Spin-Off Committee and the Capital Stock
Committee recommended that the GM Board approve and authorize the Hughes
Transactions, subject to the GM Board's subsequent approval of the definitive
terms of the transactions and determination of a Distribution Ratio that would
enable the GM Board to conclude that the Hughes Transactions, taken as a whole,
were fair to both classes of GM common stockholders and enable Merrill Lynch
and Salomon Brothers to deliver the Merrill Lynch Fairness Opinion and the
Salomon Brothers Fairness Opinion, respectively. Thereafter, the GM Board
unanimously approved and authorized the Hughes Transactions, subject to the GM
Board's subsequent approval of the definitive terms of the transactions,
including the determination of a Distribution Ratio satisfying the condition
described above.
The Capital Stock Committee, in connection with its January 16, 1997
determination to recommend that the GM Board approve and authorize the Hughes
Transactions, subject to the GM Board's subsequent approval of the definitive
terms of the transactions (including an appropriate Distribution Ratio),
considered a number of factors, including, among others, the presentations made
to and discussions held at the January 16, 1997 meeting of the Hughes Defense
Spin-Off Committee (which had been attended by all members of the Capital Stock
Committee and all but one of the members of the GM Board). These presentations
included the presentation by representatives of Goldman Sachs (including its
written opinion that, as of January 16, 1997, the aggregate consideration
provided in the Raytheon Merger to Hughes Defense, Hughes Electronics, General
Motors, the GM $1 2/3 Common Stockholders and the GM Class H Common
Stockholders as a whole in connection with the Raytheon Merger was fair to such
group) and the presentations by representatives of Merrill Lynch and
representatives of Salomon Brothers relating to the values created by the
Hughes Transactions and the factors and issues to be considered in establishing
a Distribution Ratio that would permit each financial advisor to deliver a
fairness opinion with respect to the Hughes Transactions (including their
separate conclusions, after considering all factors each deemed appropriate,
that, absent a material change in conditions as they existed on such date, the
GM Board could reasonably be expected to be able to establish such a
Distribution Ratio).
62
Upon the recommendation of the Capital Stock Committee, as well as the
recommendations of the Hughes Electronics Board and the Hughes Defense Spin-Off
Committee, and considering the background, oversight, deliberations and views
of the Capital Stock Committee and the Hughes Defense Spin-Off Committee with
respect to the development of the terms of the Hughes Transactions and the
process by which Raytheon was selected as the merger partner for Hughes
Defense, the GM Board approved and authorized the Hughes Transactions, subject
to its subsequent approval of the definitive terms of the transactions
(including the Distribution Ratio), and the subsequent merger of Hughes Defense
with Raytheon.
In addition to and without limiting the foregoing, in approving and
authorizing the Hughes Transactions, subject to the development by management
and approval by the GM Board of the definitive terms of the Hughes
Transactions, the GM Board considered: (1) the reports, presentation and
recommendation of GM's executive management regarding the Hughes Transactions
and the Raytheon Merger, (2) the final merger proposals by Raytheon and
Northrop Grumman regarding a transaction involving Hughes Defense, (3) the
recommendation of GM management and Hughes Electronics management that General
Motors proceed with the Hughes Transactions, (4) the recommendation of GM
management and Hughes Electronics management that Raytheon be selected as the
merger partner for Hughes Defense, (5) the presentations by representatives of
Merrill Lynch and representatives of Salomon Brothers regarding the values
created by the Hughes Transactions and the factors and issues to be considered
in establishing a Distribution Ratio that would permit the delivery by each of
Merrill Lynch and Salomon Brothers of a fairness opinion with respect to the
Hughes Transactions (including their separate conclusions, after considering
all factors each deemed appropriate, that, absent a material change in
conditions as they existed on such date, the GM Board could reasonably be
expected to be able to establish such a Distribution Ratio), (6) the
presentation and written opinion of Goldman Sachs as to the fairness of the
aggregate consideration to be provided in the Raytheon Merger to Hughes
Defense, Hughes Electronics, General Motors, the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders as a whole, (7) the recommendation by
the Hughes Electronics Board that General Motors proceed with the Hughes
Transactions, (8) the background, oversight, deliberations and views of the
Hughes Defense Spin-Off Committee with respect to the Hughes Transactions and
the selection of a merger partner for Hughes Defense and its recommendation
that Raytheon be selected as the merger partner for Hughes Defense and that the
Raytheon Merger be approved, (9) the background, oversight, deliberations and
views of the Capital Stock Committee with respect to the Hughes Transactions
and its recommendation that the Hughes Transactions be approved, (10) the
information previously reviewed and the prior deliberations of the GM Board
concerning the Hughes Transactions and the Raytheon Merger and (11) the other
matters reported on at the January 16, 1997 meetings of the Hughes Defense
Spin-Off Committee, the Hughes Electronics Board, the Capital Stock Committee
and the GM Board. See "--Background to the Hughes Transactions--Development of
the Hughes Transactions and the Raytheon Merger" above.
In approving the Hughes Transactions in January 1997, the GM Board had
reserved the determination of the Distribution Ratio and the other definitive
terms of the Hughes Transactions for a future time, deciding to make such
decision closer to the time when the Hughes Transactions were to be submitted
for stockholder approval. By delaying its determination of the Distribution
Ratio, the GM Board sought to shorten the interval of time between the
determination of the Distribution Ratio and the time the Hughes Transactions
would be consummated, thus reducing the likelihood of material changes in the
factors contributing to the determination of the Distribution Ratio that might
occur in the marketplace or otherwise during such interval.
From January 16 until October 6, 1997, the Capital Stock Committee and the GM
Board received updates from GM management and Hughes Electronics management and
legal counsel regarding the status of the Hughes Transactions, including the
development of the definitive terms of the transactions and the status of
various regulatory and other approvals required to be obtained in order to
consummate the transactions. On September 23, 1997, the Capital Stock Committee
met to review the development of the definitive terms of the Hughes
Transactions, including the Distribution Ratio formula and the terms of the New
GM Class H Common Stock. At this meeting, the Capital Stock Committee approved
the use of the Delco business plan and the related analysis of the anticipated
benefits of the planned Delco/Delphi integration in the determination of the
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
63
Net Transaction Effect Base Amount for use in the Distribution Ratio. See "--
Background of the Hughes Transactions--Development of the Hughes Transactions
and the Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting"
above.
On October 6, 1997, after discussion and consideration of the Hughes
Transactions, the Distribution Ratio and related matters, the Capital Stock
Committee recommended that the GM Board approve and authorize the definitive
terms of the Hughes Transactions, including the Distribution Ratio formula and
the Net Transaction Effect Base Amount in an amount equal to $6.5 billion
multiplied by the Class H Fraction as of the time of the Hughes Defense Spin-
Off. In making such determination, the Capital Stock Committee reviewed and
considered, among other things, the Hughes Telecom business plan, the Delco
business plan and the supplemental analysis of the benefits anticipated to be
realized from the integration of Delco and Delphi, the proposed terms of the
New GM Class H Common Stock and the related proposed GM Board policy statement
regarding certain capital stock matters, the recommended Distribution Ratio
formula and the Net Transaction Effect and the reports, presentations and
recommendation of GM management and Hughes Electronics management regarding
these and other matters relating to the Hughes Transactions. See "Background to
the Hughes Transactions--Development of the Hughes Transactions and the
Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting" above.
Thereafter, on October 6, 1997, the GM Board unanimously determined that the
Hughes Transactions, including the Distribution Ratio formula and the Net
Transaction Effect Base Amount in an amount equal to $6.5 billion multiplied by
the Class H Fraction as of the time of the Hughes Defense Spin-Off, are in the
best interests of General Motors and you (its common stockholders) and are fair
to the GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders.
Accordingly, the GM Board approved the definitive terms of the Hughes
Transactions. On the same date, Merrill Lynch delivered the Merrill Lynch
Fairness Opinion and Salomon Brothers delivered the Salomon Brothers Fairness
Opinion.
In reviewing the definitive terms of the Hughes Transactions and the fairness
of the Hughes Transactions, the GM Board considered the Distribution Ratio
formula, including the determination of the Net Transaction Effect, to be an
important element in establishing the fairness of the Hughes Transactions to
the holders of both classes of GM common stock. In considering the Distribution
Ratio formula, the GM Board determined that the GM Class H Common Stockholders
as a whole should receive an amount of the Class A Common Stock which
represents their current tracking stock interest in Hughes Defense plus an
additional amount in order to reflect the net effect of all other aspects of
the Hughes Transactions, principally the transfer of Delco to General Motors
(which would result in the elimination of their tracking stock interest in
Delco). Similarly, the GM Board determined that GM $1 2/3 Common Stockholders
as a whole should receive an amount of the Class A Common Stock which
represents less than their current interest in Hughes Defense in order to
reflect the net effect of all other aspects of the Hughes Transactions,
principally the transfer of Delco to General Motors (which would result in the
transfer to such holders of the tracking stock interest in Delco currently held
by GM Class H Common Stockholders). Thus, in determining an appropriate ratio
for the distribution of the Class A Common Stock between the two classes of GM
common stockholders as part of the Hughes Transactions, the GM Board considered
all relevant aspects of the Hughes Transactions affecting the rights and
interests of each class of GM common stockholders.
The GM Board attributed substantial importance to the valuation of Delco
(including the benefits anticipated to be realized as a result of the
integration of Delco and Delphi) in the determination of the amount of the Net
Transaction Effect to be used in the Distribution Ratio formula and,
ultimately, in considering the fairness of the Hughes Transactions to the
holders of each class of GM common stock. In determining the value to be
ascribed to Delco for purposes of setting the Distribution Ratio, the GM Board
placed substantial reliance on the Delco business plan and the supplemental
analysis of the benefits anticipated to be realized from the integration of
Delco and Delphi, as prepared jointly by the managements of Delco and Delphi
and approved by Hughes Electronics management and GM management. In this
regard, the assessments by Hughes Electronics management and GM management that
such business plan and supplemental analysis were realistic and reasonably
achievable, and the Capital Stock Committee's approval of their use for
purposes of the valuation of Delco in determining the amounts of Class A Common
Stock to be distributed to the holders of each class of
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
64
GM common stock, was important. In reaching its determination, the GM Board
also placed principal reliance on the presentations by representatives of
Merrill Lynch and representatives of Salomon Brothers to the GM Board at its
October 6, 1997 meeting and noted that the Delco valuation considerations used
in determining the Distribution Ratio reflect a substantial premium to the
enterprise value of Delco under the current Hughes Electronics and GM ownership
structure. As described further below under "Hughes Transactions Fairness
Opinions: Merrill Lynch and Salomon Brothers," GM's financial advisors, Merrill
Lynch and Salomon Brothers, each presented information to the GM Board
regarding their calculations of a range of values for Delco based on several
valuation methodologies, including discounted cash flow (reflecting both Delco
as a stand-alone entity and giving effect to the integration of Delco and
Delphi), transaction comparables (reflecting prices paid, including multiples
and premiums, in numerous acquisitions of OEM suppliers and other relevant
transactions) and publicly traded comparables (reflecting public trading market
price of other OEM suppliers). The GM Board did not separately consider the net
book value, liquidation value or certain other forms of going concern value of
Delco.
In considering the other aspects of the Hughes Transactions affecting the
rights and interests of each class of GM common stockholders, the GM Board
placed substantial reliance on the presentations by GM management and
representatives of Merrill Lynch and Salomon Brothers, as described above under
"Background of the Hughes Transactions--Development of the Hughes Transactions
and the Raytheon Merger--October 6, 1997 GM Board Meeting." The GM Board
considered that the factors other than the value of Delco in the context of the
transfer of Delco from Hughes Electronics to General Motors were largely
directional rather than quantifiable, including GM management's assessment that
such factors suggested that it would be appropriate to set the Net Transaction
Effect Base Amount above the mid-point of the financial advisors' calculations
of ranges for the value of Delco. For a description of these ranges, see
"Hughes Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers"
below.
In determining the additional amount of Class A Common Stock to be provided
to GM Class H Common Stockholders in the Hughes Defense Spin-Off in order to
compensate them for the Net Transaction Effect, the GM Board decided that the
current market price of Raytheon Common Stock would be the best indicator of
the value of the shares of Class A Common Stock. This was based, in part, on
the conclusions of GM's financial advisors that, based on their due diligence
reviews of Hughes Defense and Raytheon, the use of the market price was
supportable. Based on the recommendation of GM management, the GM Board
determined to value Class A Common Stock for purposes of the Distribution Ratio
using the same valuation formula as used under the Raytheon Merger Agreement
for purposes of determining the amount of debt which Hughes Defense could have
at the time of the Raytheon Merger, except that no collar was placed on the
determination of this price. The collar mechanism utilized under the Raytheon
Merger Agreement was considered to be an arbitrary and inappropriate limitation
for these purposes.
In reviewing the fairness of the Hughes Transactions, the GM Board also
considered the indicated value to General Motors and its common stockholders of
the Hughes Defense Spin-Off and the Raytheon Merger. See "Description of the
Raytheon Merger--Indicated Value of the Hughes Defense Spin-Off and the
Raytheon Merger to General Motors and Its Common Stockholders" below. In this
regard, the GM Board placed substantial reliance on the Goldman Sachs Fairness
Opinion described below under "Description of the Raytheon Merger--Raytheon
Merger Fairness Opinion: Goldman Sachs" and noted that the total indicated
value of the transactions represents a substantial premium to the enterprise
value of Hughes Defense under the current General Motors and Hughes Electronics
ownership structure.
In addition, the GM Board considered the business and financial outlook for
New Hughes Electronics, including the assessment of Hughes Electronics
management that, following the completion of the Hughes Transactions, New
Hughes Electronics will be adequately capitalized to execute its business plan
as a result of the initial cash infusion of approximately $3.9 billion of the
proceeds of the new Hughes Defense debt coupled with borrowing capacity. See
"Allocation of Hughes Defense Debt Proceeds; Hughes Telecom Funding" below. In
this regard, the GM Board also placed reliance on the fact that Merrill Lynch
and Salomon Brothers noted that the new funding of approximately $3.9 billion
to $4.0 billion to be provided to Hughes Telecom in connection with the Hughes
Transactions, when added to current cash and borrowing capacity, would provide
CHAPTER 3: THE HUGHES TRANSACTIONS AND
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65
adequate funding and financial flexibility for Hughes Telecom to pursue its
current business plan. See "Hughes Transactions Fairness Opinions: Merrill
Lynch and Salomon Brothers--October Presentation" below. In connection with its
consideration of the business and financial outlook for New Hughes Electronics,
the GM Board noted the indication by Hughes Electronics management that cash
needs beyond those reflected in the base business plan, such as for large
strategic acquisitions, would require access to additional funding. The GM
Board also considered the benefits to New Hughes Electronics of having its
senior management focused on a single principal area of business.
The GM Board also considered the fact that the proposed definitive terms of
the Hughes Transactions satisfied the condition established by the GM Board as
to the tax-free nature of the transactions. The GM Board attributed substantial
importance to the satisfaction of this condition in the context of the recently
enacted tax legislation which provides that, under certain circumstances, a
corporation will recognize gain on the distribution of the stock of a
subsidiary in a spin-off transaction coupled with a pre-arranged merger
transaction. See "Certain U.S. Federal Income Tax Considerations Relating to
Certain of the Hughes Transactions--Certain Legislation" below. The GM Board
considered the fact that, if the Hughes Transactions are not consummated, any
future transactions involving Hughes Defense would be subject to these
legislative provisions and, if structured in a manner similar to the Hughes
Transactions, would likely cause General Motors and its common stockholders to
recognize taxable gain for U.S. federal income tax purposes if consummated.
Similarly, the GM Board considered the fact that the proposed definitive terms
of the Hughes Transactions satisfied the condition established by the GM Board
as to the absence of a recapitalization at a 120% exchange ratio.
The GM Board also considered the recommendations of GM management and Hughes
Electronics management with respect to the definitive terms of the Hughes
Transactions, as well as the recommendations of the Hughes Electronics Board
and the Capital Stock Committee. The GM Board also considered the oversight of
the Capital Stock Committee of the process of developing the definitive terms
of the Hughes Transactions.
With respect to the procedural fairness of the Hughes Transactions, the GM
Board placed substantial reliance on its determination that fair processes had
been implemented to develop the definitive terms of the Hughes Transactions and
the Raytheon Merger, including the oversight function of the Capital Stock
Committee and, in connection with the Raytheon Merger, the Hughes Defense Spin-
Off Committee. The GM Board considered the fact that the definitive terms of
the Hughes Transactions had been developed jointly by GM management and Hughes
Electronics management, working together with the advice and consultation of
their financial, legal, tax and other advisors, subject to the oversight of the
Capital Stock Committee. See "Background of the Hughes Transactions--
Development of the Hughes Transactions and Raytheon Merger" above. The GM Board
also considered the fact that the terms of the Raytheon Merger had been
developed as a part of a competitive process of soliciting a merger partner for
Hughes Defense, and that the final terms of the Raytheon Merger had been
developed through a process of vigorous arm's-length negotiation between
Raytheon and the joint management team, subject to the oversight of the Capital
Stock Committee and the Hughes Defense Spin-Off Committee, as described above
under "Background of the Hughes Transactions-- Development of the Hughes
Transactions and the Raytheon Merger." In addition, the GM Board considered
that the Hughes Transactions would be submitted for the separate approvals of
the holders of a majority of the outstanding shares of each class of GM common
stock, each voting as a separate class.
As noted above, the determination of the value to be ascribed to Delco for
purposes of setting the Distribution Ratio was considered by the GM Board to be
an important element in determining the fairness of the Hughes Transactions.
From a procedural point of view, the GM Board considered the "bottom up" manner
in which Delco management prepared the Delco business plan used in such
valuation, Hughes Electronics management's report that such plan was not
prepared with a view to influencing the valuation of Delco in favor of either
class of GM common stockholders and was deemed to be realistic and reasonably
achievable, the review and approval of such plan by Hughes Electronics
management, the Hughes Electronics Board and the GM President's Council and the
Capital Stock Committee's approval of the use of such plan, together with the
Delco/Delphi integration analysis, in the determination of the Distribution
Ratio.
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66
In determining the fairness of the Hughes Transactions, taken as a whole, to
the holders of both classes of GM common stock, the GM Board considered each of
the foregoing factors. The GM Board did not formally assign weights to specific
factors, but instead considered all factors together. The GM Board placed
principal reliance on its conclusion that the Distribution Ratio formula and
the Net Transaction Effect appropriately reflected the interests of the holders
of both classes of GM common stock and that certain strategic challenges faced
by each of the three principal businesses of Hughes Electronics would be
addressed through the Hughes Transactions without significant potential adverse
consequences for General Motors or its common stockholders.
The GM Board also attributed substantial importance to its determination that a
fair process had been developed and implemented for the development of the
definitive terms of the Hughes Transactions. In addition, with respect to the
fairness, from a financial point of view, to the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders of the consideration to be provided to
General Motors and its subsidiaries and to the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders in the Hughes Transactions, the GM Board
principally relied on the Merrill Lynch Fairness Opinion and the Salomon
Brothers Fairness Opinion and the presentations by representatives of Merrill
Lynch and representatives of Salomon Brothers to the GM Board. See "Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers" below.
In making its determination with respect to the fairness of the Hughes
Transactions, the GM Board did not specifically consider certain other factors
sometimes considered in determining the value of a transaction, such as
historical market prices of the GM Class H Common Stock, the net book values of
the Hughes Electronics businesses and the purchase prices paid by General
Motors (or its affiliates) for GM Class H Common Stock in recent open-market or
negotiated transactions, because such factors were not deemed relevant measures
of fair value in the context of the Hughes Transactions.
In addition to and without limiting the foregoing, in determining the
fairness of the definitive terms of the Hughes Transactions to the holders of
both classes of GM common stock, the GM Board considered: (1) the report,
presentation and recommendation of GM's executive management regarding the
Hughes Transactions, including the formula for the Distribution Ratio and the
Net Transaction Effect (including the determination of the Net Transaction
Effect Base Amount), (2) the recommendation of Hughes Electronics' executive
management regarding the Hughes Transactions, including the formula for the
Distribution Ratio and the Net
Transaction Effect (including the determination of the Net Transaction Effect
Base Amount), (3) the presentations by representatives of Merrill Lynch and
Salomon Brothers as to the fairness, from a financial point of view, to each
class of GM common stockholders of the consideration to be provided to General
Motors, its subsidiaries and each class of its common stockholders in the
Hughes Transactions, (4) the recommendation of the Capital Stock Committee that
the GM Board approve the definitive terms of the Hughes Transactions, including
the Distribution Ratio formula and the Net Transaction Effect (including the
determination of the Net Transaction Effect Base Amount) and determine that the
Hughes Transactions, taken as a whole, are in the best interests of General
Motors and its common stockholders and are fair to the holders of both classes
of GM common stock, (5) the background, oversight, deliberations and views of
the Capital Stock Committee with respect to the Hughes Transactions, (6) the
information previously reviewed and the prior deliberations of the GM Board
concerning the Hughes Transactions and (7) the other matters reported on,
considered and discussed at the September 23, 1997 Capital Stock Committee
meeting and the October 6, 1997 GM Board meeting. See "Background to the Hughes
Transactions--Development of the Hughes Transactions and the Raytheon Merger--
October 6, 1997 GM Board Meeting" above and "Hughes Transactions Fairness
Opinions: Merrill Lynch and Salomon Brothers" below.
BASED ON THE FOREGOING, THE GM BOARD HAS DETERMINED THAT THE HUGHES
TRANSACTIONS ARE IN THE BEST INTERESTS OF GENERAL MOTORS AND IN YOUR BEST
INTERESTS AS COMMON STOCKHOLDERS OF GENERAL MOTORS. THE GM BOARD HAS ALSO
DETERMINED THAT THE HUGHES TRANSACTIONS ARE FAIR TO THE HOLDERS OF BOTH CLASSES
OF GM'S COMMON STOCK. THE GM BOARD HAS UNANIMOUSLY APPROVED THE HUGHES
TRANSACTIONS AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE HUGHES TRANSACTIONS.
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67
HUGHES TRANSACTIONS FAIRNESS OPINIONS: MERRILL LYNCH AND SALOMON BROTHERS
JANUARY PRESENTATION
On January 16, 1997, Merrill Lynch and Salomon Brothers made a joint
presentation (the "January Presentation") to the GM Board regarding the Hughes
Transactions and the issues to be considered in establishing a ratio for the
distribution of Class A Common Stock between the two classes of GM common
stockholders that would enable each financial advisor to deliver a fairness
opinion with respect to the Hughes Transactions. Merrill Lynch and Salomon
Brothers each concluded that, after considering all factors it deemed
appropriate, absent a material change in conditions as they existed on the date
of the January Presentation, the GM Board could reasonably expect to be able to
establish such a distribution ratio. A description of the January Presentation
is set forth below.
Benefits Analysis. Merrill Lynch and Salomon Brothers identified certain
potential effects of the Hughes Transactions on General Motors and on the
holders of each class of GM common stock, including the benefits of the
Raytheon Merger, the synergies and overhead savings expected by managements of
Delco and Delphi to result from the Delco/Delphi Combination (as defined
below), the elimination of goodwill charges to General Motors and after-tax
profit sharing and transaction fees and expenses, which in the aggregate ranged
from $3.55 billion to $5.65 billion. In addition, Merrill Lynch and Salomon
Brothers reviewed with the GM Board, but did not quantify, the possible impact
of the Hughes Transactions on GM's credit rating, the benefits to General
Motors, as an original equipment manufacturer, from the Delco/Delphi
Combination, the potential stock price volatility of the New GM Class H Common
Stock and the reduction of the potential tracking stock discount then affecting
the GM Class H Common Stock.
Determination of Distribution Ratio. Merrill Lynch and Salomon Brothers
identified for the GM Board the issues to be considered in establishing a ratio
for the distribution of Class A Common Stock between the two classes of GM
common stockholders that would enable each of them to deliver to the GM Board a
fairness opinion with respect to the Hughes Transactions, including (1) the
valuation of Hughes Defense after taking into account the Hughes Defense Spin-
Off and the Raytheon Merger, (2) the valuation of Delco, including an
appropriate allocation of the net benefits of the Delco/Delphi Combination and
(3) all other aspects of the Hughes Transactions affecting the rights and
derivative interests of the two classes of GM common stockholders.
MERRILL LYNCH FAIRNESS OPINION
On October 6, 1997, Merrill Lynch delivered to the GM Board its written
opinion that, as of such date and based upon and subject to the assumptions,
limitations and other matters set forth therein, taking into account all
relevant aspects of the Hughes Transactions and the Raytheon Merger, the
consideration to be provided to General Motors and its subsidiaries and to the
GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders in the
Hughes Transactions was fair from a financial point of view to the GM $1 2/3
Common Stockholders and the GM Class H Common Stockholders.
THE FULL TEXT OF THE MERRILL LYNCH FAIRNESS OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS INCLUDED IN APPENDIX B TO THIS DOCUMENT AND IS
INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE MERRILL LYNCH FAIRNESS
OPINION SET FORTH IN THIS DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT THEREOF. YOU ARE URGED TO READ THE MERRILL LYNCH FAIRNESS OPINION
IN ITS ENTIRETY. No limitations were imposed by GM or the GM Board with respect
to the investigations made or procedures followed by Merrill Lynch in rendering
its opinion, except that Merrill Lynch was not authorized by General Motors or
the GM Board to solicit, nor did Merrill Lynch solicit, third-party indications
of interest with respect to a business combination or other extraordinary
transaction involving Hughes Electronics or any of its subsidiaries or assets.
CHAPTER 3: THE HUGHES TRANSACTIONS AND
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68
The Merrill Lynch Fairness Opinion was provided to the GM Board for its use
and benefit and is directed only to the fairness from a financial point of view
of the consideration to be provided to General Motors and its subsidiaries and
to the GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders in
the Hughes Transactions. The Merrill Lynch Fairness Opinion does not constitute
a recommendation to any common stockholder of General Motors as to whether such
stockholder should consent to the Hughes Transactions. The terms of the Hughes
Transactions were developed by the management of General Motors and Hughes
Electronics and were approved by the GM Board.
The summary set forth below does not purport to be a complete description of
the analyses underlying the Merrill Lynch Fairness Opinion, the October
Presentation (as defined below) or the Merrill Lynch October Presentation (as
defined below). The preparation of a fairness opinion is a complex analytic
process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Merrill Lynch did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Merrill
Lynch believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion.
In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
General Motors. Any estimates contained in the analyses performed by Merrill
Lynch are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the value of businesses or securities do not purport
to be appraisals or to reflect the prices at which such businesses or
securities might actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. In addition, as described above,
the Merrill Lynch Fairness Opinion, the October Presentation and the Merrill
Lynch October Presentation were among several factors taken into consideration
by the GM Board in making its determination to approve the Hughes Transactions.
Consequently, the Merrill Lynch analyses and the joint Merrill Lynch/Salomon
Brothers analyses described below should not be viewed as determinative of the
decision of the GM Board with respect to the fairness of the Hughes
Transactions.
In arriving at its opinion, Merrill Lynch, among other things: (1) reviewed
GM's Annual Reports, Forms 10-K and related financial information for the three
fiscal years ended December 31, 1996, and GM's Forms 10-Q and the related
unaudited financial information for the quarterly periods ended March 31, 1997
and June 30, 1997; (2) reviewed Raytheon's Annual Reports, Forms 10-K and
related financial information for the three fiscal years ended December 31,
1996, and Raytheon's Forms 10-Q and the related unaudited financial information
for the quarterly periods ended March 31, 1997 and June 30, 1997; (3) reviewed
Hughes Electronics' Annual Reports and related financial information for the
three fiscal years ended December 31, 1996; (4) reviewed certain information,
including historical financial data and financial projections, relating to the
business, earnings, cash flow, assets, liabilities and prospects of Hughes
Electronics, Hughes Defense, Delco, Hughes Telecom and Raytheon furnished to
Merrill Lynch by General Motors, Hughes Electronics and Raytheon, as the case
may be; (5) conducted discussions with members of senior management of General
Motors, Hughes Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom and
Raytheon concerning their respective businesses and prospects and their views
regarding the strategic rationale for, and the financial effects on General
Motors, Hughes Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom and
Raytheon of the Hughes Transactions, the combination of the operations of Delco
and Delphi that is expected by GM management to be implemented subsequent to
the consummation of the Hughes Transactions (the "Delco/Delphi Combination")
and the Raytheon Merger; (6) reviewed certain information, including financial
projections relating to the amount and timing of the revenue and cost savings
synergies and related expenses expected to result from the Raytheon Merger (the
"Raytheon Merger Expected Synergies"), furnished to Merrill Lynch by General
Motors, Hughes Electronics, Hughes Defense and Raytheon; (7) conducted
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
69
discussions with members of senior management of General Motors, Hughes
Electronics, Hughes Defense and Raytheon concerning the Raytheon Merger
Expected Synergies; (8) reviewed certain information, including financial
projections relating to the amount and timing of the revenue and cost savings
synergies and related expenses expected to result from the Delco/Delphi
Combination (the "Delco/Delphi Expected Synergies"), furnished to Merrill Lynch
by General Motors, Delco and Delphi; (9) conducted discussions with members of
senior management of General Motors, Delco and Delphi concerning the
Delco/Delphi Expected Synergies; (10) conducted discussions with members of
senior management of General Motors, Hughes Electronics and Hughes Telecom
concerning recent and pending regulatory changes in the telecommunications
industry, the
competitive environment of the telecommunications and space industry and the
need for Hughes Telecom to maintain the financial flexibility to enable Hughes
Telecom to respond to competitive challenges and to avail itself of potential
opportunities in such environment; (11) compared the results of operations of
Hughes Defense, Delco and Raytheon with those of certain companies that Merrill
Lynch deemed to be reasonably similar to Hughes Defense, Delco and Raytheon,
respectively; (12) considered the pro forma effects, including accounting,
profit sharing and other pro forma effects, on each of GM, Hughes Defense and
Hughes Telecom of the Hughes Transactions and the Raytheon Merger; (13)
reviewed the Raytheon Merger Agreement and exhibits thereto; (14) reviewed the
Implementation Agreement; (15) reviewed the form of the Master Separation
Agreement and exhibits thereto attached to the Implementation Agreement as
Exhibit B; (16) reviewed the form of the GM Spin-Off Merger Agreement attached
to the Implementation Agreement as Exhibit A; (17) reviewed the GM Certificate
of Incorporation and the GM By-Laws; (18) reviewed a draft dated October 2,
1997 of this document, including the text of Article Fourth of the GM
Certificate of Incorporation, as proposed to be amended in connection with the
GM Spin-Off Merger, and the new GM Board policy statement regarding GM's dual-
class common stock capital structure set forth therein; (19) reviewed the IRS
Ruling and the request to the IRS for such ruling; and (20) reviewed such other
financial studies and analyses and performed such other investigations and took
into account such other matters as Merrill Lynch deemed necessary, including
Merrill Lynch's assessment of general economic, market and monetary conditions.
In preparing the Merrill Lynch Fairness Opinion, Merrill Lynch relied on the
accuracy and completeness of all information supplied or otherwise made
available to it, discussed with or reviewed by or for it, or publicly
available, and Merrill Lynch did not assume any responsibility for
independently verifying such information or undertake an independent evaluation
or appraisal of the assets or liabilities of General Motors, Hughes
Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom and Raytheon and was
not furnished with any such evaluation or appraisal. In addition, Merrill Lynch
did not assume any obligation to conduct, nor did Merrill Lynch conduct, any
physical inspection of the properties or facilities of General Motors, Hughes
Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom or Raytheon. With
respect to the financial projections and the analyses of the Raytheon Merger
Expected Synergies and the Delco/Delphi Expected Synergies furnished to or
discussed with Merrill Lynch by General Motors, Hughes Electronics, Hughes
Defense, Delco, Delphi, Hughes Telecom and Raytheon, as the case may be,
Merrill Lynch assumed that they are reasonably prepared and reflect the best
currently available estimates and judgments of the managements of General
Motors, Hughes Electronics, Hughes Defense, Delco, Delphi, Hughes Telecom or
Raytheon as to the expected future financial performance of Hughes Electronics,
Hughes Defense, Delco, Hughes Telecom or Raytheon, and as to the Raytheon
Merger Expected Synergies and the Delco/Delphi Expected Synergies, as the case
may be. Merrill Lynch assumed that each of the Hughes Transactions and the
Raytheon Merger will be consummated in accordance with its terms. Merrill Lynch
also assumed that the Hughes Transactions will have the accounting treatment
set forth in this document. The Merrill Lynch Fairness Opinion is necessarily
based upon market, economic, financial and other conditions as they existed and
could be evaluated as of the date of the Merrill Lynch Fairness Opinion.
Merrill Lynch was not authorized by General Motors or the GM Board to solicit,
nor did it solicit, third-party indications of interest with respect to a
business combination or other extraordinary transaction involving Hughes
Electronics or any of its subsidiaries or assets. Merrill Lynch expressed no
opinion as to the prices at which either the New GM Class H Common Stock or the
GM $1 2/3 Common Stock will trade subsequent to the consummation of the Hughes
Transactions.
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70
As part of its investment banking business, Merrill Lynch is engaged
continually in the valuation of businesses and their securities in connection
with mergers and acquisitions and strategic transactions and for other
purposes. Merrill Lynch was retained by General Motors because Merrill Lynch is
an internationally recognized investment banking firm, with substantial
experience in complex strategic transactions, and because Merrill Lynch was
familiar with General Motors (including its capital structure) and Hughes
Electronics. Pursuant to an engagement letter dated November 22, 1996 (the
"Merrill Lynch Engagement Letter"), General Motors agreed to pay Merrill Lynch
fees of (1) $2,000,000 on the date of the Merrill Lynch Engagement Letter; (2)
$3,000,000 upon the announcement of the Hughes Transactions; (3) $5,000,000
upon the approval by the GM Board of either the Hughes Defense Spin-Off or the
transfer of Delco from Hughes Electronics to
GM (the "Delco Transfer"); (4) $5,000,000 upon consummation of the Hughes
Defense Spin-Off and (5) $5,000,000 upon consummation of the Delco Transfer.
General Motors also agreed to reimburse Merrill Lynch for its reasonable out-
of-pocket expenses incurred in connection with Merrill Lynch's activities under
the Merrill Lynch Engagement Letter, including the reasonable fees and
disbursements of its legal counsel, and to indemnify Merrill Lynch and certain
related persons and entities for certain liabilities, including liabilities
under securities laws, related to or arising out of its engagement.
Merrill Lynch has, in the past, provided financial advisory and financing
services to General Motors and its affiliates and Raytheon and may continue to
do so, and Merrill Lynch has received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of its business, Merrill
Lynch may actively trade shares of the GM $1 2/3 Common Stock, the GM Class H
Common Stock, the Raytheon Common Stock and other securities of General Motors
and Raytheon for its own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
Set forth below under "--October Presentation" and "--Merrill Lynch October
Presentation" is a summary of the analyses performed by Merrill Lynch in
connection with the preparation of the Merrill Lynch Fairness Opinion.
SALOMON BROTHERS FAIRNESS OPINION
Salomon Brothers has delivered its written opinion, dated October 6, 1997, to
the GM Board to the effect that, based upon and subject to the assumptions,
factors and limitations set forth therein, taking into account all relevant
aspects of the Hughes Transactions and the Raytheon Merger, as of such date,
the consideration to be provided to General Motors and its subsidiaries and to
GM's common stockholders in the Hughes Transactions is fair, from a financial
point of view, to the GM $1 2/3 Common Stockholders and to the GM Class H
Common Stockholders (the "Salomon Brothers Fairness Opinion").
The Salomon Brothers Fairness Opinion does not address the fairness of the
Raytheon Merger, which is addressed, to the extent specified therein, in the
Goldman Sachs Fairness Opinion. See "Description of the Raytheon Merger--
Raytheon Merger Fairness Opinion: Goldman Sachs" below. The Salomon Brothers
Fairness Opinion was provided to the GM Board for its use and benefit and is
directed only to the fairness from a financial point of view of the
consideration to be provided to General Motors and its subsidiaries and to the
GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders in the
Hughes Transactions. The Salomon Brothers Fairness Opinion does not address
General Motors' underlying business decision to effect the Hughes Transactions
or constitute a recommendation to any holder of GM $1 2/3 Common Stock or any
holder of GM Class H Common Stock as to how such holder should vote with
respect to the Hughes Transactions.
THE FULL TEXT OF THE SALOMON BROTHERS FAIRNESS OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON
THE REVIEW UNDERTAKEN, IS INCLUDED IN APPENDIX B TO THIS DOCUMENT AND IS
INCORPORATED INTO THIS DOCUMENT BY REFERENCE. THE SUMMARY OF THE SALOMON
BROTHERS FAIRNESS OPINION SET FORTH IN THIS DOCUMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT THEREOF. GM CLASS H COMMON STOCKHOLDERS
AND GM $1 2/3 COMMON STOCKHOLDERS ARE URGED
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
71
TO READ THE SALOMON BROTHERS FAIRNESS OPINION IN ITS ENTIRETY. NO LIMITATIONS
WERE IMPOSED BY GENERAL MOTORS OR THE GM BOARD WITH RESPECT TO THE
INVESTIGATIONS MADE OR PROCEDURES FOLLOWED BY SALOMON BROTHERS IN RENDERING ITS
OPINION, EXCEPT THAT SALOMON BROTHERS WAS NOT REQUESTED TO SOLICIT, AND
ACCORDINGLY DID NOT SOLICIT, ALTERNATIVE PROPOSALS WITH RESPECT TO THE
DISPOSITION OF, OR ANY OTHER EXTRAORDINARY TRANSACTION INVOLVING, ANY OF HUGHES
DEFENSE, DELCO OR HUGHES TELECOM.
This summary and the summary set forth below under "--October Presentation"
and "--Salomon Brothers October Presentation" does not purport to be a complete
description of the analyses performed by Salomon Brothers or of its
presentations to the GM Board. The preparation of financial analyses and
fairness opinions is a complex process involving subjective judgments as to the
significance and relevance of the
analyses and factors considered. Salomon Brothers made no attempt to assign
specific weights to particular analyses or factors considered, but rather made
qualitative judgments as to the significance and relevance of the analyses and
factors considered. Accordingly, Salomon Brothers believes that its analyses
(and the summary set forth above) must be considered as a whole, and that
selecting portions of such analyses and of the factors considered by Salomon
Brothers, without considering all of such analyses and factors, could create a
misleading or incomplete view of the processes underlying the analyses
conducted by Salomon Brothers and its opinion. With regard to the public
company analysis and the private market analysis summarized above, Salomon
Brothers selected comparable companies on the basis of various factors,
including the size of the public company and similarity of the line of
business; however, no public company or transaction utilized as a comparison is
identical to Delco, any business segment of Delco or the Hughes Transactions or
any component thereof. Accordingly, an analysis of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in the potential financial and operating characteristics
of the comparable companies and other factors in relation to the trading and
acquisition values of the comparable companies and transactions to which Delco
and the Hughes Transactions are being compared. In its analyses, Salomon
Brothers made numerous assumptions with respect to General Motors, Hughes
Defense, Delco, Delphi, Hughes Telecom and Raytheon, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of General Motors, Hughes
Defense, Delco, Delphi, Hughes Telecom and Raytheon. Any estimates contained in
Salomon Brothers' analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. Estimates of values of
companies do not purport to be appraisals or necessarily to reflect the prices
at which companies may actually be sold. Because such estimates are inherently
subject to uncertainty, none of General Motors, Hughes Defense, Delco, Delphi,
Hughes Telecom and Raytheon, Salomon Brothers or any other person assumes
responsibility for their accuracy.
In connection with rendering its opinion, Salomon Brothers reviewed and
analyzed, among other things, (1) a draft of this document; (2) the Raytheon
Merger Agreement; (3) the merger agreement pursuant to which the Hughes Defense
Spin-Off will be effected; (4) a draft version of the Master Separation
Agreement; (5) certain publicly available information concerning General Motors
and Hughes Electronics; (6) certain publicly available information concerning
Raytheon; (7) certain internal information, primarily financial in nature,
including forecasts concerning the business and operations of General Motors,
Hughes Defense, Delco, Delphi, and Hughes Telecom furnished by General Motors,
Hughes Defense, Delco, Delphi and Hughes Telecom for purposes of its analysis;
(8) certain other internal information, primarily financial in nature,
including forecasts concerning the business and operations of Raytheon
furnished to Salomon Brothers by Raytheon for purposes of its analysis; (9)
certain publicly available information concerning the trading of, and the
trading market for, the GM $1 2/3 Common Stock, the GM Class H Common Stock and
the Raytheon Common Stock; (10) the GM Certificate of Incorporation and the
amendments thereto contemplated as part of the Hughes Transactions; (11) the
Policy Statement to be adopted by the GM Board with respect to General Motors'
two classes of common stock upon issuance of the New GM Class H Common Stock;
(12) certain publicly available information with respect to certain other
companies that it believes to be comparable to each of Hughes Defense, Delco,
Hughes Telecom and Raytheon and the trading markets for certain of such other
companies' securities; (13) the IRS Ruling and the request for such ruling; and
(14) certain publicly available information concerning the nature
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
72
and terms of certain other transactions that Salomon Brothers considered
relevant to its inquiry. Salomon Brothers also considered such other
information, financial studies, analyses, investigations and financial,
economic and market criteria that it deemed relevant. Salomon Brothers also met
with certain officers and employees of General Motors, Hughes Defense, Delco,
Delphi, Hughes Telecom and Raytheon to discuss the foregoing as well as other
matters it deemed relevant.
In its review and analysis and in arriving at its opinion, Salomon Brothers
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it or publicly available and neither
attempted independently to verify nor assumed any responsibility for verifying
any of such information. Salomon Brothers did not conduct or assume any
responsibility for conducting a physical inspection of any of
the properties or facilities of Hughes Defense, Delco, Delphi, Hughes Telecom
or Raytheon, nor has it made or obtained or assumed any responsibility for
making or obtaining any independent evaluations or appraisals of any of such
properties or facilities. With respect to projections (including estimates of
projected revenue and cost synergies resulting from the Raytheon Merger and
from the Delco/Delphi integration), Salomon Brothers
assumed that they had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of the
respective companies as to the respective future financial performances of such
companies. Salomon Brothers expressed no view with respect to the accuracy or
completeness of such projections or the assumptions on which they were based.
Salomon Brothers assumed, based upon the advice of General Motors, that in
the absence of the other Hughes Transactions (or another transaction or series
of transactions resulting in the transfer of Delco from Hughes Electronics to
General Motors such that the tracking stock interest in the earnings of Delco
held by GM Class H Common Stockholders is reallocated to GM $1 2/3 Common
Stockholders), General Motors would be unable to realize fully the anticipated
benefits of the Delco/Delphi integration. Salomon Brothers also assumed that
the Hughes Transactions will be consummated on the terms described, and in
accordance with the timing contemplated, in this document and in accordance
with all applicable laws and the provisions of the GM Certificate of
Incorporation and other constituent instruments.
In conducting its analysis and arriving at its opinion, Salomon Brothers
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (1) the historical and
current financial position and results of operations of each of Hughes Defense,
Delco, Delphi, Hughes Telecom and Raytheon; (2) the business prospects of each
of Hughes Defense, Delco, Delphi, Hughes Telecom, Raytheon and New Raytheon;
(3) the historical and current market for the GM $1 2/3 Common Stock, the GM
Class H Common Stock, the Raytheon Common Stock, and for the equity securities
of certain other companies that it believes to be comparable to Hughes Defense,
Delco, Delphi, Hughes Telecom, Raytheon and New Raytheon; (4) the prospective
market for each of the New GM Class H Common Stock and the common stock of New
Raytheon following the Hughes Transactions; (5) the expected cost savings and
other financial synergies to be realized by General Motors as a result of the
Delco/Delphi integration; (6) the expected impact of the Hughes Transactions on
profit sharing payments from General Motors required under collective
bargaining agreements; and (7) the nature and terms of certain other
transactions that Salomon Brothers believes to be relevant. Salomon Brothers
took into account its assessment of general economic, market and financial
conditions and its knowledge of the defense, telecommunications and automotive
component industries as well as its experience in connection with similar
transactions and securities valuation generally. Salomon Brothers was not
requested to solicit, and accordingly did not solicit, alternative proposals
with respect to the disposition of, or any other extraordinary transaction
involving, any of Hughes Defense, Delco or Hughes Telecom.
Salomon Brothers is an internationally recognized investment banking firm
engaged, among other things, in the valuation of businesses and their
securities in connection with restructurings, mergers and acquisitions,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. General Motors selected
Salomon Brothers to act as its financial advisor on the basis of Salomon
Brothers' international
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
73
reputation. Salomon Brothers has previously rendered certain other investment
banking and financial advisory services to General Motors and its subsidiaries,
including Hughes Electronics, and to Raytheon, including advice with respect to
various acquisitions and capital market transactions, for which it received
substantial compensation. In the ordinary course of business, Salomon Brothers
may actively trade the debt and equity securities of General Motors (including
its subsidiaries) and Raytheon for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Pursuant to a letter agreement dated November 22, 1996 (the "Salomon Brothers
Engagement Letter"), General Motors engaged Salomon Brothers to act as its
financial advisor in connection with the Hughes Transactions. Pursuant to the
terms of the Salomon Brothers Engagement Letter, General Motors has already
paid Salomon Brothers $5 million and will be obligated to pay Salomon Brothers
additional fees of $15 million
in the event that the Hughes Transactions (or certain similar transactions) are
completed on or before December 31, 2000. General Motors has also agreed to
reimburse Salomon Brothers for its reasonable travel and other out-of-pocket
expenses incurred in connection with its engagement (including the reasonable
fees and disbursements of its counsel) and to indemnify Salomon Brothers
against certain liabilities and expenses relating to or arising out of its
engagement, including certain liabilities under the federal securities laws.
As noted under "Recommendations of the Capital Stock Committee and the GM
Board; Fairness of the Hughes Transactions," the Salomon Brothers Fairness
Opinion was only one of the many factors considered by the GM Board in
determining to approve the Hughes Transactions. The Distribution Ratio and
amount of the Class H Defense Distribution and of the $1 2/3 Defense
Distribution was determined by the GM Board, in consultation with its financial
advisors and other representatives, and was not established by such financial
advisors.
Set forth below under "--October Presentation" and "--Salomon Brothers
October Presentation" is a summary of the analyses performed by Salomon
Brothers in connection with the preparation of the Salomon Brothers Fairness
Opinion.
OCTOBER PRESENTATION
On October 6, 1997, Merrill Lynch and Salomon Brothers made a joint
presentation (the "October Presentation") to the GM Board regarding the Hughes
Transactions. A description of the October Presentation is set forth below. The
written presentations of Merrill Lynch and Salomon Brothers to the GM Board in
January and October 1997 have been filed as exhibits to the Schedule 13E-3
which was filed with the SEC with respect to the Hughes Transactions and copies
of these presentations in the forms filed with the SEC may be inspected and
copied, and obtained by mail, from the SEC as set forth under "Where You Can
Find More Information" in Chapter 7 and will be made available for inspection
and copying at the principal executive offices of General Motors Corporation at
General Motors Corporation, 100 Renaissance Center, Detroit, Michigan 48243-
7301 during regular business hours by any interested common stockholder of
General Motors or his or her representative who has been so designated in
writing.
Overview of Analyses. In reviewing the Hughes Transactions, Merrill Lynch and
Salomon Brothers noted that, as a result thereof, the GM Class H Common
Stockholders will (1) relinquish their approximately 25% tracking stock
interest in Hughes Defense but will receive approximately 25% of the Class A
Common Stock, which will reflect the benefits of the Hughes Defense Spin-Off
and the Raytheon Merger; (2) relinquish their approximately 25% tracking stock
interest in Delco (in addition to that percentage of any funding from Hughes
Defense transferred by Hughes Telecom to General Motors) but will receive
additional shares of Class A Common Stock to compensate them for the Net
Transaction Effect and (3) will maintain an approximately 25% tracking stock
interest in Hughes Telecom (which will have received approximately $3.9 to $4.0
billion in new funding) through their ownership of New GM Class H Common Stock.
Merrill Lynch and Salomon Brothers also noted that, as a result of the Hughes
Transactions, the GM $1 2/3 Common Stockholders will (1) relinquish
their approximately 75% tracking stock interest in Hughes Defense but will
receive, subject to clause (2)
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THE RAYTHEON MERGER
74
below, approximately 75% of the Class A Common Stock, which will reflect the
benefits of the Hughes Defense Spin-Off and the Raytheon Merger; (2) acquire
the approximately 25% tracking stock interest in Delco currently held by the GM
Class H Common Stockholders in exchange for shares of Class A Common Stock
transferred to the GM Class H Common Stockholders and (3) maintain an
approximately 75% tracking stock interest in Hughes Telecom through their
continued ownership of GM $1 2/3 Common Stock.
In connection with the October Presentation, Merrill Lynch and Salomon
Brothers each performed certain valuation analyses of Hughes Defense and New
Raytheon, as described below. In addition, Merrill Lynch and Salomon Brothers
identified for the GM Board, but did not quantify, certain effects of the
Hughes Transactions and the Raytheon Merger on the GM Class H Common
Stockholders which were not quantifiable, including (1) the ownership of an
asset-based investment in New Raytheon in lieu of a tracking stock interest in
Hughes Defense and Delco, (2) the potential tracking stock discount reflected
in New GM Class H Common Stock, (3) the terms of the New GM Class H Common
Stock that prevent the GM Board from electing to recapitalize the New GM Class
H Common Stock into GM $1 2/3 Common Stock until after December 31, 2002 and
that require such a recapitalization under certain circumstances and (4) the
voting, liquidation and dividend rights of the New GM Class H Common Stock as
compared to the GM Class H Common Stock. Merrill Lynch and Salomon Brothers
also identified for the GM Board, but did not quantify, certain effects of the
Hughes Transactions and the Raytheon Merger on the GM $1 2/3 Common
Stockholders which were not quantifiable, including (1) the ownership of an
asset-based investment in New Raytheon, (2) the ownership of a 100% interest in
the Delco/Delphi Combination, (3) the indirect benefits to General Motors, as
an original equipment manufacturer, of the improved products to be produced as
a result of the Delco/Delphi Combination, (4) that the consummation of the
Delco/Delphi Combination facilitates a possible partial initial public offering
of the combined company, (5) the potential tracking stock discount and
potential conglomerate discount reflected in their approximately 75% tracking
stock interest in Hughes Telecom, (6) the terms of the New GM Class H Common
Stock that prevent the GM Board from electing to recapitalize the New GM Class
H Common Stock into GM $1 2/3 Common Stock until after December 31, 2002 and
(7) the voting, liquidation and dividend rights of the New GM Class H Common
Stock as compared to the GM Class H Common Stock. Merrill Lynch and Salomon
Brothers noted that the new funding of approximately $3.9 billion to $4.0
billion to be received from Hughes Defense prior to the Hughes Defense Spin-
Off, when added to current cash and ordinary-course borrowing capacity, will
provide adequate funding and financial flexibility for Hughes Telecom to pursue
its current business plan. With respect to GM $1 2/3 Common Stockholders,
Merrill Lynch and Salomon Brothers also noted (1) that the management of
General Motors expected that the Hughes Defense Spin-Off may result in an
incremental profit sharing charge for 1997 of $236 million (although the gain
on the Hughes Defense Spin-Off will not necessarily result in a payout to plan
participants equivalent to that amount because numerous other factors may
affect GM's pre-tax net income for the entire calendar year), an amount which
Merrill Lynch and Salomon Brothers noted is approximately equal, on a net
present value basis, to the amount by which management of General Motors
expects future profit sharing payments to be reduced as a result of the
elimination of Hughes Defense's net contribution to GM's income and (2) that
the Hughes Transactions would result in the elimination of a $101 million
annual charge to GM's net earnings for goodwill related to the acquisition of
Hughes Defense.
Hughes Defense Comparable Public Companies Analysis. Merrill Lynch performed
a comparable public companies analysis pursuant to which it compared certain
publicly available historical financial and operating data, estimates of future
financial performance (based on First Call estimates and available equity
research analyst reports) and market statistics (calculated based upon closing
stock prices on September 26, 1997) of Litton Industries and Lockheed Martin,
both of which are publicly traded companies that Merrill Lynch deemed to be
engaged in businesses that are reasonably similar to Hughes Defense (together,
the "Merrill Lynch Hughes Defense Comparable Public Companies"). Historical
financial information used in connection with this analysis was as of the date
of the most recent financial statements publicly available for each company.
For each of the Merrill Lynch Hughes Defense Comparable Public Companies,
Merrill Lynch calculated multiples of (1) closing stock price to estimated 1998
earnings, (2) closing stock price to adjusted estimated 1998 earnings (which
eliminate from earnings the effects of amortization of intangible assets,
including goodwill), (3) market capitalization (which was defined, for purposes
of this analysis, as the market value of
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75
equity, plus debt minus cash ("net debt")) to estimated 1997 earnings before
interest, taxes, depreciation and amortization ("EBITDA") and (4) market
capitalization to estimated 1998 EBITDA. Such analysis yielded multiples of (1)
closing stock price to estimated 1998 earnings ranging from 14.6x to 15.8x, (2)
closing stock price to adjusted estimated 1998 earnings ranging from 12.3x to
12.8x, (3) market capitalization to estimated 1997 EBITDA ranging from 6.1x to
7.4x and (4) market capitalization to estimated 1998 EBITDA ranging from 6.9x
to 7.8x.
Salomon Brothers performed a similar comparable companies analysis using
financial information with respect to Boeing Company, General Dynamics, Litton
Industries, Lockheed Martin and Northrop Grumman (the "Salomon Brothers Hughes
Defense Comparable Companies"). Such analysis was based upon publicly available
company information, in the case of historical data, and brokerage research
reports reported by First Call, in the case of projected data.
Based upon its review, Salomon Brothers established, as of September 17,
1997, for each of the Salomon Brothers Hughes Defense Comparable Companies
multiples of firm value to last twelve months' ("LTM"), 1997 estimated and 1998
estimated EBITDA and earnings before interest and taxes ("EBIT") and LTM sales
revenue, and multiples of equity value to LTM, 1997 estimated and 1998
estimated earnings. The multiples obtained with respect to the Salomon Brothers
Hughes Defense Comparable Companies are as follows: (1) a range of implied
ratios of firm value to LTM EBITDA of 6.9x to 12.8x, with a median of 8.1x; (2)
a range of implied ratios of firm value to 1997 estimated EBITDA of 7.4x to
11.4x, with a median of 7.9x; (3) a range of implied ratios of firm value to
1998 estimated EBITDA of 6.8x to 9.7x, with a median of 7.7x; (4) a range of
implied ratios of firm value to LTM EBIT of 10.8x to 18.8x, with a median of
12.5x; (5) a range of implied ratios of firm value to 1997 estimated EBIT of
8.9x to 16.2x, with a median of 11.0x; (6) a range of implied ratios of firm
value to 1998 estimated EBIT of 8.5x to 11.2x, with a median of 10.3x; (7) a
range of implied ratios of equity value to LTM earnings of 16.4x to 27.2x, with
a median of 19.3x; (8) a range of implied ratios of equity value to 1997
estimated earnings of 14.2x to 23.5x, with a median of 17.5x; (9) a range of
implied ratios of equity value to 1998 estimated earnings of 12.6x to 16.7x,
with a median of 15.5x; (10) a range of implied ratios of equity value to
goodwill adjusted LTM earnings of 11.4x to 25.6x, with a median of 14.4x; (11)
a range of implied ratios of equity value to goodwill adjusted 1997 estimated
earnings of 9.3x to 22.3x, with a median of 13.8x; and (12) a range of implied
ratios of equity value to goodwill adjusted 1998 estimated earnings of 8.6x to
16.7x, with a median of 13.0x.
Applying these multiples to comparable data for Hughes Defense (which, in the
case of estimates of future financial performance including assumptions
regarding operations as a separate, stand-alone company, were provided to
Merrill Lynch and Salomon Brothers by management of Hughes Defense, Merrill
Lynch and Salomon Brothers derived a range of estimated enterprise value
(defined, for purposes of this analysis, as equity plus net debt) of Hughes
Defense of $6.2 billion to $7.2 billion, and a range of estimated implied
equity value (assuming net debt of $3.9 billion) of Hughes Defense of $2.3
billion to $3.3 billion.
No company used in the comparable public companies analysis was identical to
Hughes Defense. Accordingly, an analysis of the results of such a comparison is
not purely mathematical; rather, it involves complex considerations and
judgments concerning differences in historical and projected financial and
operating characteristics of the comparable companies and other factors that
could affect the public trading value of the comparable companies or company to
which they are being compared.
New Raytheon Pro Forma Comparable Public Companies Analysis. Merrill Lynch
and Salomon Brothers performed a comparable public companies analysis in which
they compared certain publicly available historical financial and operating
data, estimates of future financial performance (based on First Call estimates
and available equity research analyst reports) and market statistics
(calculated based upon closing stock prices on September 26, 1997) of Lockheed
Martin, Litton Industries and Boeing, all of which are publicly traded
companies that Merrill Lynch and Salomon Brothers deemed to be reasonably
similar to the businesses of New Raytheon (the "New Raytheon Comparable Public
Companies"). Historical financial information used in connection with this
analysis was as of the date of the most recent financial statements publicly
available for each company.
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76
For each of the New Raytheon Comparable Public Companies and New Raytheon
(using a representative stock price for Raytheon of $60 per share), Merrill
Lynch and Salomon Brothers calculated multiples of (1) closing stock price to
estimated 1998 earnings, (2) closing stock price to adjusted estimated 1998
earnings (which eliminate from earnings the effect of goodwill) and (3) market
capitalization (pro forma for recent acquisitions based on publicly available
information) to estimated 1998 EBITDA. Such analysis yielded multiples of (1)
closing stock price to estimated 1998 earnings of 15.7x for New Raytheon, 15.8x
for Lockheed Martin, 14.6x for Litton Industries and 16.3x for Boeing, (2)
closing stock price to adjusted estimated 1998 earnings of 12.6x for Raytheon,
12.3x for Lockheed Martin, 12.8x for Litton Industries and 15.9x for Boeing and
(3) market capitalization to estimated 1998 EBITDA of 9.4x for New Raytheon,
7.8x for Lockheed Martin, 6.9x for Litton Industries and 8.5x for Boeing.
Given the variety of businesses of New Raytheon, among other things, no
company used in the comparable public companies analysis was identical to New
Raytheon. Accordingly, an analysis of the results of such a comparison is not
purely mathematical; rather, it involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable companies or company to which they
are being compared.
Comparable Transactions Analysis. Merrill Lynch and Salomon Brothers reviewed
certain publicly available information regarding selected transactions (the
"Selected Transactions"). The Selected Transactions comprised the business
combinations involving Lockheed Martin and Northrop Grumman, Raytheon and Texas
Instruments, Boeing and McDonnell Douglas, and Lockheed Martin and Loral. For
each of the Selected Transactions and the Raytheon Merger, Merrill Lynch and
Salomon Brothers calculated the transaction value (defined, for purposes of
this analysis, as the offer price for stock or assets purchased plus assumed
net debt) as
a multiple of LTM EBITDA. Such analysis indicated that the transaction value as
a multiple of LTM EBITDA was 10.0x for Lockheed Martin/Northrop Grumman, 9.5x
for Raytheon/Texas Instruments, 10.3x for Boeing/McDonnell Douglas, 9.0x for
Lockheed Martin/Loral and an implied multiple for Hughes Defense of 11.0x in
the Raytheon Merger. Merrill Lynch and Salomon Brothers noted that the then-
current transaction value for Hughes Defense of $10.1 billion (assuming a per
share stock price of New Raytheon of $60) represented a 40% to 63% premium on
the range of estimated enterprise values, and an 87% to 169% premium on the
range of estimated implied equity values, of Hughes Defense.
MERRILL LYNCH OCTOBER PRESENTATION
On October 6, 1997, Merrill Lynch made a presentation (the "Merrill Lynch
October Presentation") to the GM Board regarding the Hughes Transactions. A
description of the Merrill Lynch October Presentation is set forth below.
Delco Comparable Public Companies Analysis. Merrill Lynch performed a
comparable public company analysis in which it compared certain publicly
available historical financial and operating data, estimates of future
financial performance (reflecting First Call estimates calendarized to December
year-end) and market statistics (calculated based upon closing stock prices on
September 26, 1997) of three categories of publicly traded companies that
Merrill Lynch deemed to be reasonably similar to Delco (collectively, the
"Delco Comparable Public Companies"). The first category of comparable public
companies (the "Comparable Systems Suppliers") comprised Borg-Warner Automotive
Inc., Dana Corp., Johnson Controls, Lear Corp., Magna International, Tower
Automotive and Walbro Corp. The second category of comparable public companies
(the "Comparable Non-Systems Suppliers") comprised Arvin, Breed Technologies
Inc., Donnelley Corp., Dura Automotive Systems, Excel, Gentex, Hayes Wheels
International Inc., Intermet Corp., MascoTech, Simpson Industries and Standard
Products. The third category of comparable public companies (the "Comparable
Conglomerates") comprised AlliedSignal, Eaton, ITT, Tenneco, Textron, TRW and
United Technologies. Historical financial information used in connection with
this analysis was as of the date of the most recent financial statements
publicly available for each company.
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77
For each of the Delco Comparable Public Companies, Merrill Lynch calculated
multiples of (1) closing stock price to estimated 1997 earnings, (2) closing
stock price to estimated 1998 earnings, (3) market capitalization to LTM
EBITDA, (4) market capitalization to estimated 1997 EBITDA, (5) market
capitalization to estimated 1998 EBITDA and (6) market capitalization to LTM
EBIT.
For the Comparable Systems Suppliers, such analysis yielded multiples
(excluding, in each case, multiples that Merrill Lynch considered anomalies) of
(1) closing stock price to estimated 1997 earnings ranging from 12.4x to 16.1x,
with a mean of 14.7x; (2) closing stock price to estimated 1998 earnings
ranging from 11.1x to 14.6x, with a mean of 13.0x; (3) market capitalization to
LTM EBITDA ranging from 5.0x to 7.9x, with a mean of 6.8x; (4) market
capitalization to estimated 1997 EBITDA ranging from 5.4x to 7.2x, with a mean
of 6.5x and (5) market capitalization to estimated 1998 EBITDA ranging from
5.3x to 6.8x, with a mean of 5.9x.
For the Comparable Non-Systems Suppliers, such analysis yielded multiples
(excluding, in each case, multiples that Merrill Lynch considered anomalies) of
(1) closing stock price to estimated 1997 earnings ranging from 10.4x to 15.6x,
with a mean of 13.4x; (2) closing stock price to estimated 1998 earnings
ranging from 9.3x to 14.2x, with a mean of 11.7x; (3) market capitalization to
LTM EBITDA ranging from 3.7x to 7.8x, with a mean of 6.1x; (4) market
capitalization to estimated 1997 EBITDA ranging from 3.7x to 8.4x, with a mean
of 5.5x and (5) market capitalization to estimated 1998 EBITDA ranging from
3.5x to 7.4x, with a mean of 5.2x.
For the Comparable Conglomerates, such analysis yielded multiples (excluding,
in each case, multiples that Merrill Lynch considered anomalies) of (1) closing
stock price to estimated 1997 earnings ranging from 14.2x to 15.9x, with a mean
of 15.2x; (2) closing stock price to estimated 1998 earnings ranging from 12.9x
to 14.5x, with a mean of 13.7x; (3) market capitalization to LTM EBITDA ranging
from 5.9x to 8.3x, with a
mean of 6.9x; (4) market capitalization to estimated 1997 EBITDA ranging from
5.5x to 8.3x, with a mean of 6.6x and (5) market capitalization to estimated
1998 EBITDA ranging from 5.0x to 7.6x, with a mean of 6.0x.
Applying these multiples to comparable data for Delco (which, in the case of
estimates of future financial performance, were provided to Merrill Lynch by
management of Delco), Merrill Lynch derived a range of implied enterprise value
of Delco. This analysis indicated that the estimated enterprise value of Delco
(including DSO) ranged from $4.4 billion to $5.4 billion.
No company utilized in the comparable public companies analysis was identical
to Delco. Accordingly, an analysis of the results of such a comparison is not
purely mathematical; rather, it involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable companies or company to which they
are being compared.
Comparable Transactions Analysis. Merrill Lynch reviewed certain publicly
available information regarding selected acquisitions completed from 1994 to
1996 (the "Selected Acquisitions"). The Selected Acquisitions comprised the
business combinations involving Autoliv and Morton International, Johnson
Controls and Prince Corporation, Lucas Industries and Varity, Robert Bosch Gmbh
and AlliedSignal, and Lucas Industries and Lake Center Industries.
For each of the Selected Acquisitions Merrill Lynch calculated, to the extent
information was publicly available, the transaction value as a multiple of (1)
LTM sales, (2) LTM EBITDA, (3) LTM EBIT, (4) estimated sales for the twelve
months following LTM ("LTM plus one"), (5) estimated LTM plus one EBITDA, (6)
LTM plus one EBIT, (7) estimated sales for the twelve months following LTM plus
one ("LTM plus two"), (8) LTM plus two EBITDA and (9) LTM plus two EBIT. Such
analysis yielded multiples of transaction value to (1) LTM sales ranging from
0.70x to 1.79x, with a mean of 1.16x, (2) LTM EBITDA ranging from 7.7x to 8.4x,
with a mean of 8.1x, (3) LTM EBIT ranging from 11.0x to 15.3x, with a mean of
13.3x, (4) estimated LTM plus one sales ranging from 0.68x to 1.76x, with a
mean of 1.09x, (5) estimated LTM plus one EBITDA ranging from 6.4x to 8.2x,
with a mean of 7.1x, (6) LTM plus one EBIT ranging from
CHAPTER 3: THE HUGHES TRANSACTIONS AND
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78
10.0x to 10.8x, with a mean of 10.4x, (7) estimated LTM plus two sales of
0.78x, (8) LTM plus two EBITDA of 6.1x and (9) LTM plus two EBIT of 9.0x. Based
on its professional judgment and expertise, Merrill Lynch selected the
following ranges of multiples, and applied such ranges to comparable data for
Delco (which, in the case of estimates of future financial performance, were
provided to Merrill Lynch by management of Delco): transaction value as a
multiple of (1) LTM EBITDA ranging from 7.5x to 8.5x, (2) LTM plus one EBITDA
ranging from 6.5x to 8.0x, (3) LTM plus one EBIT ranging from 10.0x to 11.0x
and (4) LTM sales ranging from 0.8x to 1.4x.
Merrill Lynch also reviewed certain publicly available information regarding
84 OEM supplier acquisitions completed from February 1994 to September 1997
(the "OEM Supplier Acquisitions"). For each of the OEM Supplier Acquisitions,
Merrill Lynch calculated, to the extent information was publicly available, (1)
the offer value as a multiple of (x) LTM net income and (y) last fiscal quarter
("LFQ") equity and (2) the
transaction value (which was defined, for purposes of this analysis, as the
offer value plus preferred equity at liquidation value, short-term debt, long-
term debt and minority interest, less cash and marketable securities and
exercisable options proceeds) as a multiple of (x) LTM EBITDA, (y) LTM EBIT and
(z) LTM sales. Such analysis yielded mean and median multiples (excluding, in
each case, multiples that Merrill Lynch considered anomalies) of (1) offer
value to (x) LTM net income of 16.0x and 16.2x, respectively, and (y) LFQ
equity of 3.17x and 2.51x, respectively, and (2) transaction value to (x) LTM
EBITDA of 7.31x and 7.14x, respectively; (y) LTM EBIT of 11.3x and 11.0x,
respectively, and (z) LTM sales of 0.79x and 0.74x, respectively. Based on its
professional judgment and expertise, Merrill Lynch selected the following
ranges of multiples, and applied such ranges to comparable data for Delco
(which, in the case of estimates of future financial performance, were provided
to Merrill Lynch by management of Delco): transaction value as a mulitple of
(1) LTM EBITDA ranging from 6.5x to 8.0x, (2) LTM EBIT ranging from 10.0x to
12.0x and (3) LTM sales ranging from 0.6x to 1.0x.
Based on these analyses, and using comparable data for Delco (which, in the
case of estimates of future financial performance, were provided to Merrill
Lynch by management of Delco), Merrill Lynch derived an implied enterprise
value range of Delco (including DSO) of $5.6 billion to $6.6 billion.
Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash flow
analysis of Delco (1) on a stand-alone basis, based upon estimates of projected
financial performance prepared by the management of Delco (the "Stand-Alone
Case"), (2) on a stand-alone basis, based upon estimates of projected financial
performance which include certain benefits of the Delco/Delphi Combination,
prepared by the managements of Delco and Delphi (the "Competitive Case") and
(3) on a stand-alone basis, based upon estimates of projected financial
performance which include full benefits of the Delco/Delphi Combination
prepared by the managements of Delco and Delphi (the "Delco/Delphi Combination
Case"). Using these projections, Merrill Lynch calculated ranges of total
enterprise value for Delco and, in so doing, utilized (1) terminal multiples of
fiscal year 2007 EBITDA of 5.0x to 6.5x for the Stand-Alone Case, and 6.0x to
7.5x for each of the Competitive Case and the Delco/Delphi Combination Case and
(2) discount rates, reflecting Delco's weighted average cost of capital,
ranging from 10% to 12%. The analysis yielded total enterprise values for Delco
(including DSO) of (1) $3.6 billion to $4.7 billion, based upon the Stand-Alone
Case, (2) $4.6 billion to $6.0 billion, based upon the Competitive Case and (3)
$5.3 billion to $7.0 billion, based upon the Delco/Delphi Combination Case.
Merrill Lynch performed a sensitivity analysis of the Stand-Alone Case
assuming a reduction in the non-NAO revenue growth rate. Such analysis resulted
in a decrease in the implied enterprise value of Delco of $500 million to $700
million. Merrill Lynch also performed a sensitivity analysis of the Stand-Alone
Case assuming a reduction in NAO vehicle volume. Such analysis resulted in a
decrease in the implied enterprise value of Delco of $200 million.
Merrill Lynch also performed a sensitivity analysis of the Competitive Case
assuming an increase in per vehicle savings. Such analysis resulted in an
increase in the implied enterprise value of Delco of $100 million.
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79
Analysis of Other Factors Impacting Net Transaction Effect Base Amount.
Merrill Lynch identified for the GM Board, but did not quantify, certain
effects of the Hughes Transactions and the Raytheon Merger on the GM Class H
Stockholders which were not quantifiable, including (1) the potential positive
impact of (a) owning an asset-based investment in New Raytheon in lieu of a
tracking stock interest in Hughes Defense and Delco, thereby eliminating any
potential tracking stock discount, (b) owning New GM Class H Common Stock which
will be a more focused tracking stock investment than GM Class H Common Stock,
thereby reducing any potential conglomerate discount and (c) the terms of the
New GM Class H Common Stock that prevent the GM Board from electing to
recapitalize the New GM Class H Common Stock into GM $1 2/3 Common Stock until
after December 31, 2002; (2) the potential neutral impact of (a) the potential
stock price volatility of the New GM Class H Common Stock and (b) the dividend
rights of the New GM Class H Common Stock as compared to the GM Class H Common
Stock; and (3) the potential negative impact of the Hughes Transactions not
resulting in a recapitalization of GM Class H Common Stock into GM $1 2/3
Common Stock at a 120% exchange ratio. Merrill Lynch also identified for the GM
Board, but did not quantify, certain effects of the Hughes Transactions and the
Raytheon Merger on the GM $1 2/3 Common Stockholders which were not
quantifiable, including (1) the potential positive impact of (a) owning a
conventional common stock interest in New Raytheon in lieu of a tracking stock
interest in Hughes Defense, thereby eliminating any potential tracking stock
discount, (b) General Motors, as an original equipment manufacturer, receiving
full benefits of the Delco/Delphi Combination and (c) the elimination of a
charge to GM's earnings for goodwill related to the acquisition of Hughes
Defense; and (2) the potential negative impact of the terms of the New GM Class
H Common Stock that prevent the GM Board from electing to recapitalize the New
GM Class H Common Stock into GM $1 2/3 Common Stock until after December 31,
2002. Merrill Lynch also identified for the GM Board, but did not quantify,
certain effects of the Hughes Transactions and the Raytheon Merger on the GM $1
2/3 Common Stockholders, including the potential neutral impact of (1) any
effects on GM's credit ratings and (2) any impact on profit sharing costs.
Analysis of Net Transaction Effect Base Amount. Using the ranges of implied
enterprise values of Delco (including DSO) identified above, Merrill Lynch
calculated ranges of implied values of a 25% interest in Delco and compared
such ranges to $1.625 billion, which was assumed to be the Net Transaction
Effect Base Amount.
SALOMON BROTHERS OCTOBER PRESENTATION
On October 6, 1997, Salomon Brothers made a presentation (the "Salomon
Brothers Presentation") to the GM Board regarding the Hughes Transactions. The
following is a description of the Salomon Brothers Presentation and certain of
the financial analyses used by Salomon Brothers (in addition to those analyses
described above under "--October Presentation") in connection with providing
the Salomon Brothers Fairness Opinion.
Summary of Analyses. Salomon Brothers considered the financial impact on the
GM $1 2/3 Common Stockholders and GM Class H Common Stockholders of the
allocation of Class A Common Stock between GM $1 2/3 Common Stockholders and GM
Class H Common Stockholders based upon the Net Transaction Effect (representing
compensation to the GM Class H Common Stockholders for relinquishing their
tracking stock interest in Delco and for other factors affecting their
interests, as determined by the GM Board, and the value of any additional
shares of Class A Common Stock to be distributed to the GM Class H Stockholders
in the event that any of the cash borrowed by Hughes Defense prior to the
Hughes Defense Spin-Off is distributed to General Motors). Salomon Brothers
performed a number of analyses with respect to the value of Delco, both on a
base case basis and after giving effect to management's estimates of the value
of the net benefits of the Delco/Delphi integration. In its analyses, Salomon
Brothers took into account an agreed value of approximately $97 million
attributed to Delco Systems Operations in connection with the agreement to
transfer the Delco Systems Operations business to General Motors in connection
with the Hughes Reorganization. Salomon Brothers compared the results of these
valuation analyses with the total value of Delco implied by the Net Transaction
Effect Base Amount. Salomon also noted that the Delco/Delphi integration
pursuant to the Hughes Transactions could facilitate a future offering of some
form of equity stock relating to the combined business of Delco and Delphi, but
did not ascribe any value thereto.
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Discounted Cash Flow Analysis--Base Case. Using a discounted cash flow
("DCF") methodology, Salomon Brothers valued Delco by estimating the present
value of future free cash flows available to debt and equity holders if Delco
were to perform on a stand-alone basis in accordance with management forecasts
through 2007 (without giving effect to any operating or other efficiencies
arising from the Delco/Delphi integration). Free cash flow represents the
amount of cash generated and available for principal, interest and dividend
payments after providing for ongoing business operations. Salomon Brothers
aggregated the present value (utilizing discount rates ranging from 10.5% to
12.5%) of the free cash flow with the present value of the range of terminal
values described below. The range of terminal values was calculated by applying
multiples ranging from 5.5x to 7.5x to Delco's earnings before interest, taxes,
depreciation and amortization ("EBITDA"). This range of terminal values
represented Delco's value beyond 2007. The DCF analysis resulted in a firm
value range for Delco of approximately $3.7 billion to $5.0 billion. In
particular, Salomon Brothers focused on the results obtained by utilizing
discount rates ranging from 11% to 12% and multiples ranging from 6.0x to 7.0x,
which resulted in a firm value range for approximately $4.0 to $4.6 billion.
Discounted Cash Flow Analysis--Synergies. Starting with the firm value range
of approximately $4.0 to $4.6 billion resulting from the base DCF analysis
described above, Salomon Brothers determined a range of firm values for Delco
after taking into account the Delco profit improvement, administrative cost
savings and Delphi profit improvement expected to result from the Delco/Delphi
integration (collectively, the "Synergies"). Salomon Brothers' analysis was
based on a weighted average cost of capital of 11% to 12%, terminal EBITDA
multiples of 6.0x to 7.0x for the Delco and Delphi profit improvement, and no
growth in administrative cost savings. This analysis resulted in a value range
for the assumed Synergies of approximately $1.36 to $1.75 billion and a range
of Delco valuations, including such assumed Synergies, of approximately $5.4
billion to $6.4 billion.
Public Company Analysis. Salomon Brothers compared selected financial data of
Delco with certain financial data from publicly traded companies that
participate in the automotive components business. The comparison group
consisted of: Arvin Industries, Inc.; Dana Corporation; Eaton Corporation;
Harman International Industries, Inc.; ITT Industries Inc.; Johnson Controls
Inc.; Lear Corporation; Magna International Inc.; Simpson Industries, Inc.; and
Superior Industries International, Inc. (the "Comparable Companies").
Based upon its review of certain publicly available information, Salomon
Brothers established, as of September 26, 1997, for each of the Comparable
Companies multiples of firm value to LTM, 1997 estimated and 1998 estimated
EBITDA and EBIT, and multiples of equity value to LTM, 1997 estimated and 1998
estimated earnings. The multiples obtained by Salomon Brothers with respect to
the Comparable Companies were as follows: (1) a range of implied ratios of firm
value to LTM EBITDA of 5.4x to 9.0x, with a median of 6.9x; (2) a range of
implied ratios of firm value to 1997 estimated EBITDA of 5.9x to 8.8x, with a
median of 6.6x; (3) a range of implied ratios of firm value to 1998 estimated
EBITDA of 5.2x to 7.8x, with a median of 5.7x; (4) a range of implied ratios of
firm value to LTM EBIT of 8.3x to 14.0x, with a median of 10.2x; (5) a range of
implied ratios of firm value to 1997 estimated EBIT of 8.7x to 12.8x, with a
median of 9.7x; (6) a range of implied ratios of firm value to 1998 estimated
EBIT of 7.4x to 11.1x, with a median of 8.1x; (7) a range of implied ratios of
equity value to LTM earnings of 10.5x to 20.3x, with a median of 16.7x; (8) a
range of implied ratios of equity value to 1997 estimated earnings of 14.2x to
17.1x, with a median of 15.5x; and (9) a range of implied ratios of equity
value to 1998 estimated earnings of 10.5x to 14.6x, with a median of 13.0x.
Applying these multiples to the financial results (actual and estimated) of
Delco, Salomon Brothers obtained a reference range for the firm value of Delco
of $4.9 billion to $5.7 billion.
For purposes of comparison, Salomon Brothers then obtained ratios of the $6.5
billion firm value of Delco (corresponding to the Net Transaction Effect Base
Amount established by the GM Board, both including and excluding $1.6 billion
of expected Synergies) to EBITDA and EBIT as follows: (1) firm value to LTM
EBITDA of 8.2x for Delco with Synergies and 6.2x without Synergies; (2) firm
value to 1997 estimated EBITDA of 8.5x for Delco with Synergies and 6.4x
without Synergies; (3) firm value to 1998 estimated EBITDA of 7.7x for Delco
with Synergies and 5.9x without Synergies; (4) firm value to LTM EBIT of 11.1x
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81
for Delco with Synergies and 8.4x without Synergies; (5) firm value to 1997
estimated EBIT of 11.9x for Delco with Synergies and 9.0x without Synergies;
and (6) implied ratios of firm value to 1998 estimated EBIT of 11.0x for Delco
with Synergies and 8.4x without Synergies. In addition, Salomon Brothers
established ranges of ratios of equity value to earnings based upon both a $5.0
billion equity valuation derived from the Net Transaction Effect Base Amount
established by the GM Board (assuming approximately $1.5 billion of debt, a 7%
interest rate and a 38% tax rate in order to make Delco's financial results
more comparable to those of other automotive component companies) and a $3.4
billion equity valuation (after excluding $1.6 billion to reflect the mid-point
of the implied value of the Delco business without the expected Synergies): (1)
equity value to LTM earnings of 16.8x for Delco with Synergies and 11.4x
without Synergies; (2) equity value to 1997 estimated earnings of 18.3x for
Delco with Synergies and 12.5x without Synergies; and (3) equity value to 1998
estimated earnings of 16.4x for Delco with Synergies and 11.2x without
Synergies. Salomon Brothers observed that the ratios implied by the Net
Transaction Effect Base Amount generally were consistent with the ratios
obtained with respect to the Comparable Companies.
Private Market Analysis. Salomon Brothers reviewed publicly available
information regarding 37 selected transactions in the automotive components
industry between December 1995 and September 1997 and focusing in particular on
four transactions over $1 billion. These four automotive component industry
transactions in excess of $1 billion and the dates such transactions were
announced are as follows: Johnson Controls Inc.'s acquisition of Prince Holding
Corporation (July 1996); Lucas Industries Inc.'s acquisition of Varity
Corporation (May 1996); Robert Bosch GmbH's acquisition of the brake business
of AlliedSignal Inc. (February 1996); and Tomkins PLC's acquisition of The
Gates Rubber Company (December 1995) (the "Comparable Transactions"). Based
upon its review of certain publicly available information, Salomon Brothers
established, as of September 26, 1997, for each of the Comparable Transactions
multiples of firm value to LTM, 1997 estimated and 1998 estimated EBITDA and
EBIT, and multiples of equity value to LTM, 1997 estimated and 1998 estimated
earnings, from which Salomon Brothers established the following reference
ranges: (1) a range of implied ratios of firm value to LTM EBITDA of 8.5x to
9.5x; (2) a range of implied ratios of firm value to 1997 estimated EBITDA of
7.0x to 8.0x; (3) a range of implied ratios of firm value to 1998 estimated
EBITDA of 6.5x to 7.5x; (4) a range of implied ratios of firm value to LTM EBIT
of 13.5x to 14.5x; (5) a range of implied ratios of firm value to 1997
estimated EBIT of 11.0x to 13.0x; (6) a range of implied ratios of firm value
to 1998 estimated EBIT of 8.5x to 10.5x; (7) a range of implied ratios of
equity value to LTM earnings
of 18.0x to 20.0x; (8) a range of implied ratios of equity value to 1997
estimated earnings of 13.5x to 15.5x; and (9) a range of implied ratios of
equity value to 1998 estimated earnings of 12.5x to 15.0x. Applying these
multiples to the financial results (actual and estimated) of Delco, Salomon
Brothers obtained a reference range for the firm value of Delco of $5.4 billion
to $6.4 billion. Salomon Brothers also noted that the ratios implied by the Net
Transaction Effect Base Amount generally were consistent with the ratios
obtained with respect to the Comparable Transactions.
Other Valuation Metrics. Salomon Brothers determined a range of Delco implied
firm value of approximately $5.9 to $7.0 by applying a 30% minority interest
premium to the public trading equity value of approximately $3.4 to $4.2
billion, which was derived from the public market valuation described above by
subtracting $1.5 billion of assumed net debt in order to make Delco's financial
results more comparable to those of other automotive component companies.
Salomon Brothers also determined a range of Delco implied firm value of
approximately $6.1 to $7.2 billion by applying a 35% merger premium to the
public market trading equity value of approximately $3.4 to $4.2 billion, which
was derived from the public market valuation described above by subtracting
$1.5 billion of assumed net debt. In addition, Salomon calculated the mean of
low and high estimates of Delco's firm value as determined by selected Wall
Street analysts, which resulted in a range of $5.6 to $6.6 billion.
Premium to GM Class H Common Stockholders and IRR to GM $1 2/3 Common
Stockholders. Salomon Brothers analyzed the premium to GM Class H Common
Stockholders represented by the Delco implied firm value of $6.5 billion and
implied equity value of $5.0 billion (assuming $1.5 billion of pro forma net
debt was assumed in order to make Delco's financial results more comparable to
those of other automotive component
CHAPTER 3: THE HUGHES TRANSACTIONS AND
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82
companies) and internal rate of return ("IRR") to GM $1 2/3 Common Stockholders
based upon the Net Transaction Effect Base Amount. Salomon Brothers computed
that the $6.5 billion implied firm value and $5.0 billion implied equity value
represented an implied firm value premium of 62%, 50% or 40% and an implied
equity premium of 98%, 77% and 59% to low, middle and high base DCF firm values
(without Synergies) of $4.0 billion, $4.3 billion and $4.6 billion,
respectively. Salomon Brothers also computed that the $6.5 billion implied firm
value and $5.0 billion implied equity value represented an implied firm value
premium of 33%, 23% or 14% and an implied equity premium of 47%, 32% and 19% to
low, middle and high estimated public market firm values (without Synergies) of
$4.9 billion, $5.3 billion and $5.7 billion, respectively. Salomon Brothers
computed low, middle and high implied IRR to GM $1 2/3 Common Stockholders of
16.7%, 17.6% and 18.4% on an investment in Delco in the amount of the Net
Transaction Effect Base Amount, assuming low, middle and high values for a
25.6% interest in Delco (representing the Class H Fraction as of September 30,
1997), before Synergies, of $1.03, $1.11 and $1.19 billion, respectively, and
low, middle and high values of 100% of the Synergies of $1.36, $1.56 and $1.75
billion, respectively.
REQUISITE STOCKHOLDER APPROVAL OF THE HUGHES TRANSACTIONS
In order to consummate the Hughes Transactions, General Motors must obtain
the consent of the holders of:
. a majority of the outstanding shares of GM $1 2/3 Common Stock, voting as a
separate class; and
. a majority of the outstanding shares of GM Class H Common Stock, voting as
a separate class.
If General Motors obtains both of these approvals, General Motors will also
have obtained, as required by applicable law, the approval of a majority of the
voting power of all outstanding shares of both classes of GM common stock,
voting together as a single class based on their respective per share power
pursuant to the provisions set forth in the GM Certificate of Incorporation. We
sometimes refer in this document to these approvals collectively as the
"Requisite Stockholder Approval." See "Description of the Hughes Transactions--
Stockholder Approval of the Hughes Transactions" below and "Solicitation of
Written Consent of GM's Common Stockholders" in Chapter 7.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS RELATING TO CERTAIN OF THE
HUGHES TRANSACTIONS
The following discussion is a general summary of the material U.S. federal
income tax consequences of certain of the Hughes Transactions. This discussion
does not address all aspects of U.S. federal income taxation that might be
relevant to you in light of your status or personal investment circumstances;
nor does it discuss
the consequences to those of you who are subject to special treatment under the
U.S. federal income tax laws,
such as non-U.S. persons, dealers in securities, regulated investment
companies, life insurance companies, other financial institutions, tax-exempt
organizations, pass-through entities, or taxpayers who will hold GM $1 2/3
Common Stock, New GM Class H Common Stock or Class A Common Stock as part of a
"straddle," "hedge" or "conversion transaction" or who have a "functional
currency" other than the U.S. dollar. In addition, this discussion does not
address the tax consequences to holders of options in respect of GM common
stock or other persons who have received their GM common stock as compensation.
Also, this discussion does not address the tax consequences of the Hughes
Transactions under U.S. state or local and non-U.S. tax laws. Furthermore, the
following discussion does not cover the tax consequences of every transaction
included in the Hughes Transactions or the Raytheon Merger. We assume for
purposes of this discussion that the GM common stock you now hold, and the
Class A Common Stock to be distributed to you in the Hughes Defense Spin-Off,
will be held by you as a capital asset on the date of the Hughes Defense Spin-
Off.
This discussion is based upon the Code, regulations proposed or promulgated
thereunder, judicial precedent relating thereto and current rulings and
administrative practice of the IRS, in each case as in effect as of the date of
this document and all of which are subject to change at any time, possibly with
retroactive effect.
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THE RAYTHEON MERGER
83
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
Any such change could alter the tax consequences to General Motors or you as
its common stockholders as described directly below.
YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO
YOU OF THE HUGHES TRANSACTIONS, INCLUDING THE APPLICABILITY AND EFFECT OF U.S.
FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX LAWS. For a description
of certain U.S. federal income tax considerations relating to the Raytheon
Merger, see "--Certain U.S. Federal Income Tax Considerations Relating to the
Raytheon Merger" below.
HUGHES DEFENSE SPIN-OFF
The following discussion summarizes those U.S. federal income tax
considerations resulting from the Hughes Defense Spin-Off that materially
affect General Motors and you (its common stockholders).
General Motors has received the IRS Ruling, which holds, among other things,
that the Hughes Defense Spin-Off will be treated as a reorganization under
Section 368(a) of the Code and as a tax-free distribution under Section 355 of
the Code. Based on the foregoing IRS Ruling, for U.S. federal income tax
purposes:
. no gain or loss will be recognized by General Motors upon the distribution
of the Class A Common Stock to you (as part of the Hughes Defense Spin-
Off);
. no gain or loss will be recognized by you (and no amount will otherwise be
included in your income) upon your receipt of the Class A Common Stock (as
part of the Hughes Defense Spin-Off);
. the tax basis in the Class A Common Stock which you will receive will be
determined by allocating your existing tax basis in your GM common stock
immediately before the Hughes Defense Spin-Off between your Class A Common
Stock and GM common stock immediately after the consummation of the Hughes
Defense Spin-Off, based on the stocks' relative fair market values
immediately after such consummation; and
. the holding period of the Class A Common Stock which you will receive will
include the holding period of your GM common stock upon which such Class A
Common Stock will have been distributed.
The IRS Ruling also holds that General Motors will not recognize any gain or
loss as a result of certain transactions included in the Hughes Reorganization
that are generally preparatory to the Hughes Defense Spin-Off, such as the
transfer of Delco from Hughes Electronics to General Motors and the Hughes
Telecom Spin-Off.
The IRS Ruling does not specifically address how tax bases and holding
periods should be allocated among shares of Class A Common Stock received in
the Hughes Defense Spin-Off by stockholders who own two or more blocks of
either the GM Class H Common Stock or the GM $1 2/3 Common Stock (or both) with
different per share bases and/or holding periods. If you fall into this
category of stockholders, you are encouraged to consult with your own tax
advisor regarding the possible tax basis and holding period consequences of the
Hughes Defense Spin-Off.
The IRS Ruling, while generally binding on the IRS, is based upon certain
factual representations and assumptions described in the IRS Ruling. If any
such factual representations or assumptions are incorrect or untrue in any
material respect, the IRS Ruling may be invalidated. We are not aware of any
facts or circumstances which would cause any such representations or
assumptions to be incorrect or untrue in any material respect. Nevertheless, if
the Hughes Defense Spin-Off were held to be taxable, both General Motors and
holders of GM common stock potentially would incur material tax liabilities.
Current Treasury Regulations require each GM stockholder who receives Class A
Common Stock pursuant to the Hughes Defense Spin-Off to attach to such
stockholder's federal income tax return for the year in which the Hughes
Defense Spin-Off occurs a statement setting forth such data as may be
appropriate in order to show the applicability of Section 355 of the Code to
the Hughes Defense Spin-Off. We will provide such information
84
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
to you after the consummation of the Hughes Transactions and the Raytheon
Merger so that you can comply with these regulations.
TAX-FREE STATUS OF THE EDS SPLIT-OFF
The IRS Ruling also holds that the consummation of the transactions
contemplated by the Spin-Off Merger Agreement and the consummation of the
Raytheon Merger will not adversely affect the tax-free status of the EDS Split-
Off. We sometimes refer in this document to this component of the IRS Ruling as
the "IRS Supplemental Ruling." As described below under "Description of the
Hughes Transactions--GM Spin-Off Merger Agreement," the absence of any
notification from the IRS that the IRS Supplemental Ruling has been withdrawn,
invalidated or modified is a condition to GM's obligation to consummate the GM
Spin-Off Merger. As of the date of this document, this condition to the GM
Spin-Off Merger has been satisfied.
CERTAIN LEGISLATION
On August 5, 1997, President Clinton signed legislation that, under certain
circumstances, causes a corporation to recognize gain on the distribution of
the stock of a subsidiary in a spin-off transaction. This legislation will not
apply to the Hughes Defense Spin-Off and the Hughes Telecom Spin-Off under the
transition provisions enacted as part of this legislation, provided that these
transactions occur as described in this document.
If the Hughes Transactions are not consummated, any future transactions
involving Hughes Defense, if structured in a manner similar to the Hughes
Transactions, would be subject to this legislation and thus would cause General
Motors to recognize taxable gain for U.S. income tax purposes if consummated.
While there may be other transactions involving Hughes Defense that potentially
could be effected without generating taxable gain to General Motors or its
stockholders (such as, among other things, a spin-off of Hughes Defense in the
absence of a pre-arranged merger of Hughes Defense with a third party), there
can be no assurance that any such alternative transaction (or transactions)
would address Hughes Defense's strategic challenges, would be proposed or, if
proposed, consummated.
RECAPITALIZATION AND CONVERSION OF GM CLASS H COMMON STOCK
The following discussion summarizes those U.S. federal income tax
considerations that materially affect General Motors and you as its
stockholders resulting from the recapitalization and conversion of each issued
and outstanding share of GM Class H Common Stock into one share of New GM Class
H Common Stock and the right to receive a distribution of Class A Common Stock
in accordance with the Distribution Ratio. For a description of the GM
Recapitalization, see "Description of the Hughes Transactions--GM Spin-Off
Merger Agreement--Recapitalization and Conversion of GM Class H Common Stock"
below.
The GM Spin-Off Merger is conditioned on the receipt by General Motors of an
opinion of GM's outside tax counsel, Kirkland & Ellis, to the effect that (1)
the recapitalization of GM Class H Common Stock into New GM Class H Common
Stock will be tax-free to General Motors and the GM Class H Common Stockholders
and (2) each of GM Class H Common Stock and New GM Class H Common Stock is
stock of General Motors for U.S. federal income tax purposes.
Based on the foregoing opinion of counsel, for U.S. federal income tax
purposes:
. no gain or loss will be recognized by General Motors upon the issuance of
New GM Class H Common Stock in exchange for GM Class H Common Stock as
part of the Hughes Defense Spin-Off;
. no gain or loss will be recognized by you (and no amount will otherwise
be included in your income) upon your receipt of the New GM Class H
Common Stock in exchange for GM Class H Common Stock as part of the
Hughes Defense Spin-Off;
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. the tax basis in the New GM Class H Common Stock which you will receive
will be equal to your existing tax basis in your GM Class H Common Stock
immediately before the Hughes Defense Spin-Off, but reduced by the amount
of such existing tax basis which is allocated to the Class A Common Stock
which you receive in the Hughes Defense Spin-Off; and
. the holding period of the New GM Class H Common Stock which you will
receive will include the holding period of your GM Class H Common Stock.
GM expects to receive the GM Recapitalization Opinion from Kirkland & Ellis
described above prior to the GM Spin-Off Merger Effective Time. Although the
condition regarding receipt of the opinion described above is waivable by
General Motors, General Motors does not intend to waive such condition to
consummation of the GM Spin-Off Merger.
The GM Recapitalization Opinion is subject to certain limitations and
qualifications described therein, and will be based on current law and upon
certain factual representations and assumptions described therein, which if
incorrect or untrue in any material respect would jeopardize the conclusions
reached by counsel in the GM Recapitalization Opinion. We are not aware of any
facts or circumstances which would cause any such representations or
assumptions to be incorrect or untrue in any material respect. General Motors
has not requested a letter ruling from the IRS regarding the GM
Recapitalization. The GM Recapitalization Opinion neither binds the IRS or the
courts, nor precludes the IRS from adopting a contrary position. If the GM
Recapitalization were held to be taxable, both General Motors and holders of GM
Class H Common Stock potentially would incur material tax liabilities. In
addition, the IRS Ruling relating to the Hughes Defense Spin-Off is based in
part on a representation that the GM Recapitalization qualifies as a tax-free
reorganization for U.S. federal income tax purposes.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE RAYTHEON MERGER
GENERAL
The following discussion is a general summary of the material U.S. federal
income tax consequences of the Raytheon Merger. This discussion is based upon
the Code, regulations proposed or promulgated thereunder, judicial precedent
relating thereto and current rulings and administrative practice of the IRS, in
each case as in effect as of the date of this document and all of which are
subject to change at any time, possibly with retroactive effect. Any such
change could alter the tax consequences to General Motors, Hughes Defense or
you as a stockholder of these corporations as described directly below. We
assume for purposes of this discussion that the Class A Common Stock to be
distributed to you in the Hughes Defense Spin-Off will be held by you as a
capital asset on the date of the Raytheon Merger. This discussion does not
address all aspects of U.S. federal income taxation that might be relevant to
you in light of your status or personal investment circumstances; nor does it
discuss the consequences to those of you who are subject to special treatment
under the U.S. federal income tax laws, such as non-U.S. persons, dealers in
securities, regulated investment companies, life insurance companies, other
financial institutions, tax-exempt organizations, pass-through entities, or
taxpayers who will hold Class A Common Stock as part of a "straddle," "hedge"
or "conversion transaction" or who have a "functional currency" other than the
U.S. dollar. In addition, this discussion does not address the tax consequences
to holders of options in respect of GM Class H Common Stock or other persons
who have received their GM common stock as compensation.
YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO
YOU OF THE RAYTHEON MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF U.S.
FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX LAWS.
We intend that the Raytheon Merger qualify as a reorganization under Section
368(a) of the Code. It is a condition to Hughes Defense's obligation to
consummate the Raytheon Merger that Hughes Defense receive an opinion from its
outside tax counsel, Weil, Gotshal & Manges LLP, to the effect that the
Raytheon Merger will
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be treated as a reorganization within the meaning of Section 368(a) of the
Code. It is a condition to Raytheon's obligation to consummate the Raytheon
Merger that Raytheon receive an opinion from its outside tax counsel, Wachtell,
Lipton, Rosen & Katz, to the same effect.
Based on the foregoing opinion of counsel to Hughes Defense, for U.S. federal
income tax purposes:
. no gain or loss will be recognized by Hughes Defense or Raytheon as a
result of the Raytheon Merger;
. no gain or loss will be recognized by you (and no amount will otherwise be
included in your income) as a result of the Raytheon Merger (other than
with respect to cash received instead of fractional shares of Class A
Common Stock, as discussed below); and
. neither the tax basis nor the holding period of your Class A Common Stock
will be affected as a result of the Raytheon Merger.
In rendering the Raytheon Merger Opinions, counsel to each of Hughes Defense
and Raytheon will rely upon certain assumptions and certain representations
made by Hughes Defense and Raytheon, and such opinions are subject to certain
limitations and qualifications set forth therein. We are not aware of any facts
or circumstances which would cause any such representations or assumptions to
be incorrect or untrue in any material respect. The Raytheon Merger Opinions
neither bind the IRS or the courts, nor preclude the IRS from adopting a
contrary position. If the Raytheon Merger were held to be taxable, Raytheon,
its stockholders and Hughes Defense potentially would incur material tax
liabilities. In addition, the IRS Ruling relating to the Hughes Defense Spin-
Off is based in part on a representation that the Raytheon Merger qualifies as
a tax-free reorganization for U.S. federal income tax purposes.
Hughes Defense and Raytheon expect to receive their respective Raytheon
Merger Opinions as described above prior to the Raytheon Merger Effective Time.
Although the Hughes Defense condition regarding receipt of its Raytheon Merger
Opinion above is waivable by Hughes Defense, Hughes Defense does not intend to
waive such condition to consummation of the Raytheon Merger.
RECEIPT OF CASH IN LIEU OF FRACTIONAL SHARES
Fractional shares of Class A Common Stock will be distributed to GM's common
stockholders in the Hughes Defense Spin-Off. However, all fractional shares so
distributed will be converted into an equivalent number of fractional shares of
Class B Common Stock in the Raytheon Merger, and these fractional shares will
then be aggregated and sold by the Raytheon Merger Exchange Agent and the
proceeds will be distributed to the owners of such fractional shares.
Cash received by a holder of GM common stock in lieu of a fractional share
interest will be treated as having been received in exchange for such
fractional share interest, and gain or loss will be recognized for U.S. federal
income tax purposes. This gain or loss will be measured by the difference
between the amount of cash received and the portion of such GM common
stockholder's tax basis allocable to such fractional share interest. Such gain
or loss will generally be treated as capital gain or loss. For taxpayers who
are individuals, if their fractional share interest has a holding period for
U.S. federal income tax purposes of more than one year but not more than 18
months, any gain will generally be subject to a maximum rate of 28%; if their
interest has a holding period of more than 18 months, any gain will generally
be subject to a maximum rate of 20%. In general, a person's holding period for
a fractional share interest will include the period during which such person
held the GM common stock with respect to which the distribution of such
fractional share interest was received.
Under the Code, as a holder of fractional share interests in Class A Common
Stock you may be subject, under certain circumstances, to backup withholding at
a 31% rate with respect to your fractional share interests unless you provide
proof of an applicable exemption or a correct taxpayer identification number,
and otherwise comply with applicable requirements of the backup withholding
rules. Any amounts withheld under the backup withholding rules are not an
additional tax and may be refunded or credited against your U.S. federal income
tax liability, provided you furnish the required information to the IRS.
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STOCKHOLDER LITIGATION RELATING TO THE HUGHES TRANSACTIONS
After our announcement of the Hughes Transactions on January 16, 1997, the
following nine lawsuits were filed in Delaware Chancery Court: Levine v.
General Motors Corporation, et al.; Patinkin v. General Motors Corporation, et
al.; Rosenwald v. General Motors Corporation, et al.; Verkouteren v. General
Motors Corporation, et al.; Whited et al. v. General Motors Corporation, et
al.; Strauss v. General Motors Corporation, et al.; Andrew Carlucci, I.R.A. v.
General Motors Corporation, et al.; Mantel v. General Motors Corporation, et
al.; and John P. McCarthy Profit Sharing Plan v. General Motors Corporation, et
al. These suits were filed in February and March 1997. All of these lawsuits
have been consolidated. Each suit is denominated as a class action and is
purportedly brought on behalf of specified holders of GM Class H Common Stock
against the defendants, General Motors and its directors. The complaints make
essentially the same allegations, namely, that the defendants have breached and
are continuing to breach their contractual and fiduciary duties to specified
holders of GM Class H Common Stock by proposing and pursuing the Hughes
Transactions, which plaintiffs variously contend would unfairly benefit General
Motors and/or GM $1 2/3 Common Stockholders to the detriment of GM Class H
Common Stockholders.
More specifically, the lawsuits allege that the Hughes Transactions unfairly
effect a disposition of Hughes Defense without providing for a recapitalization
of the GM Class H Common Stock into GM $1 2/3 Common Stock at a 120% exchange
ratio, as currently provided for under certain circumstances in the GM
Certificate of Incorporation. Certain actions further allege that the GM Class
H Common Stockholders have contractual rights to recapitalize their shares of
GM Class H Common Stock at the 120% exchange ratio and that the proposed Hughes
Transactions would result in a breach of those alleged rights. Other actions
allege that GM Class H Common Stockholders are being coerced into forfeiting
the benefits of current provisions of the GM Certificate of Incorporation that
would result under certain circumstances in a recapitalization of GM Class H
Common Stock at a 120% exchange ratio in order to receive the benefits of the
Hughes Transactions. Certain actions also allege that no independent
representative is separately representing the interests of GM Class H Common
Stockholders in connection with the Hughes Transactions. Some of the actions
also allege that the shares of New GM Class H Common Stock and the shares of
Class A Common Stock to be received by GM Class H Common Stockholders in the GM
Spin-Off Merger are substantially less valuable than the shares of GM $1 2/3
Common Stock that such holders would otherwise receive under a recapitalization
subject to the 120% exchange ratio.
The lawsuits seek preliminary and permanent injunctions against the Hughes
Transactions (or any other disposition of Hughes Defense in the absence of a
recapitalization of the GM Class H Common Stock into GM $1 2/3 Common Stock at
the 120% exchange ratio) and compensatory damages. We intend to defend against
them vigorously.
Additional suits may be filed after the date of this document.
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DESCRIPTION OF THE HUGHES TRANSACTIONS
GENERAL
You are being asked to approve the Hughes Transactions. There are two
principal steps to the Hughes Transactions: the Hughes Reorganization and the
GM Spin-Off Merger. Each of these principal steps is described below.
If approved by GM's common stockholders and completed, the Hughes
Transactions will have the following principal effects:
. Hughes Defense will be spun off in its entirety to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders and it then will merge
with Raytheon.
. Delco will be transferred from Hughes Electronics to General Motors such
that the tracking stock interest in the earnings of Delco currently held by
GM Class H Common Stockholders will be reallocated to GM $1 2/3 Common
Stockholders and the operations of Delco can be more fully integrated with
those of Delphi.
. GM Class H Common Stock will be recapitalized and converted into New GM
Class H Common Stock, whose earnings pool for dividend purposes will track
the financial performance of New Hughes Electronics.
. Hughes Telecom will receive approximately $3.9 billion of the proceeds of
debt of Hughes Defense outstanding at the time of the Hughes Defense Spin-
Off, which Hughes Telecom will use to fund its capital needs. The
obligation to repay this debt will remain with Hughes Defense.
ORGANIZATIONAL CHARTS BEFORE AND AFTER THE HUGHES TRANSACTIONS AND THE
RAYTHEON MERGER
The following charts present in simplified form the organizational structure
of General Motors and Hughes Electronics before the Hughes Transactions and
after the completion of the Hughes Transactions and the Raytheon Merger. The
transactions are described in greater detail after the charts.
CHAPTER 3: THE HUGHES TRANSACTIONS AND
89 THE RAYTHEON MERGER
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BEFORE THE HUGHES TRANSACTIONS
LOGO
AFTER THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER
LOGO
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HUGHES REORGANIZATION
The Hughes Reorganization includes a number of preliminary transactions which
are necessary to prepare Hughes Defense to be spun off to GM's common
stockholders and to separate the businesses of Hughes Defense, Delco and Hughes
Telecom. The Hughes Reorganization will be effected largely pursuant to
transactions described in the Master Separation Agreement and the agreements
contemplated thereby. See "Separation and Transition Arrangements."
The following is a description of certain significant aspects of the Hughes
Reorganization:
. Certain assets and liabilities will be transferred among Hughes Defense,
Delco and Hughes Telecom and their respective subsidiaries so that each
will have the appropriate assets and liabilities for its business.
. Hughes Defense will make available to Hughes Telecom the proceeds of new
debt (up to $4.0 billion) incurred by Hughes Defense with third party
lenders immediately prior to the Hughes Defense Spin-Off as contemplated by
the Raytheon Merger Agreement. To the extent such proceeds exceed $4.0
billion, the funds will be used to repay intercompany loans made by Delco
to Hughes Defense. Since Delco will be transferred to General Motors as
part of the Hughes Transactions, such funds will effectively be made
available to General Motors. See "Description of the Raytheon Merger--
Raytheon Merger Agreement--Certain Covenants--Indebtedness" below.
. Hughes Electronics will be merged with General Motors. As a result, both
Hughes Defense and Delco will be direct wholly owned subsidiaries of
General Motors.
. Hughes Aircraft, which is the subsidiary of Hughes Defense which
principally operates the defense electronics business, will be merged with
Hughes Defense.
. Hughes Defense will distribute 100% of the stock of Hughes Telecom to
General Motors in a tax-free transaction. This distribution of Hughes
Telecom stock constitutes the Hughes Telecom Spin-Off. In connection with
the Hughes Telecom Spin-Off, Hughes Telecom will be renamed "Hughes
Electronics Corporation."
After the completion of these components of the Hughes Reorganization, each
of Hughes Defense, Delco and Hughes Telecom will be a direct wholly owned
subsidiary of General Motors. Hughes Defense will hold all of the assets and
liabilities of the defense electronics business of Hughes Electronics, Delco
will continue to hold all of the assets and liabilities of the automotive
electronics business of Hughes Electronics and Hughes Telecom will hold all of
the assets and liabilities of the telecommunications and space business of
Hughes Electronics.
As part of the Hughes Reorganization, Hughes Defense will recapitalize its
capital stock so as to authorize Class A Common Stock, Class B Common Stock and
preferred stock, which will be New Raytheon Preferred Stock upon consummation
of the Raytheon Merger. These three classes of stock will represent all of the
authorized capital stock of New Raytheon upon consummation of the Raytheon
Merger. The Class A Common Stock (all of which will be held by General Motors
after the transactions described above) will be distributed by General Motors
to its common stockholders in the Hughes Defense Spin-Off. Immediately
following the Hughes Defense Spin-Off, Hughes Defense and Raytheon will merge
and Class B Common Stock will be issued to Raytheon's common stockholders in
the Raytheon Merger. See "Description of the Raytheon Merger" below. For a
description of Class A Common Stock and Class B Common Stock, see "New Raytheon
Capital Stock" in Chapter 6.
Prior to the GM Spin-Off Merger, Hughes Defense will adopt a shareholder
rights plan to be effective immediately prior to the GM Spin-Off Merger
Effective Time, which will become the shareholder rights plan of New Raytheon
upon the consummation of the Raytheon Merger. See "New Raytheon Capital Stock--
New Raytheon Rights Agreement" in Chapter 6. Each share of Class A Common Stock
distributed in the GM Spin-Off Merger, and each share of Class B Common Stock
issued in the Raytheon Merger, will have a share purchase right attached to
such share.
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GM SPIN-OFF MERGER
Subject to the terms and conditions of the GM Spin-Off Merger Agreement,
Merger Sub, a wholly owned subsidiary of General Motors formed in order to
effect the GM Spin-Off Merger, will merge with General Motors. General Motors
will be the surviving corporation of the merger. Pursuant to the GM Spin-Off
Merger, among other things, the following will occur:
. each outstanding share of GM Class H Common Stock will be recapitalized and
converted automatically into one share of New GM Class H Common Stock and
each GM Class H Common Stockholder will receive a distribution of Class A
Common Stock in accordance with the Distribution Ratio;
. each outstanding share of GM $1 2/3 Common Stock will remain outstanding
and each GM $1 2/3 Common Stockholder will receive a distribution of Class
A Common Stock in accordance with the Distribution Ratio; and
. the GM Certificate of Incorporation will be amended to delete provisions
relating to the GM Class H Common Stock and to add provisions setting forth
the terms of the New GM Class H Common Stock.
For additional information regarding the Distribution Ratio, including the
methodology used to determine the Distribution Ratio formula and the Net
Transaction Effect, see "Special Factors--The Distribution Ratio" and "--
Background to the Hughes Transactions--Development of the Hughes Transactions
and the Raytheon Merger--September 23, 1997 Capital Stock Committee Meeting"
above. For information regarding the provisions of the New GM Class H Common
Stock, see "New GM Class H Common Stock" in Chapter 6.
Following the Hughes Reorganization and the GM Spin-Off Merger, Hughes
Defense will be an independent, publicly held company, comprising the defense
electronics business of Hughes Electronics. Immediately thereafter, Hughes
Defense and Raytheon will merge. See "Description of the Raytheon Merger"
below.
GM SPIN-OFF MERGER AGREEMENT
INTRODUCTION
As described above, several components of the Hughes Transactions will be
effected pursuant to the GM Spin-Off Merger. The GM Spin-Off Merger will be
consummated pursuant to the GM Spin-Off Merger Agreement. The following is a
summary description of the principal provisions of the GM Spin-Off Merger
Agreement.
THE DESCRIPTION OF THE GM SPIN-OFF MERGER AGREEMENT SET FORTH BELOW, WHICH
SUMMARIZES THE MATERIAL TERMS OF THE AGREEMENT, DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE GM SPIN-OFF MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS DOCUMENT AND IS
INCORPORATED INTO THIS DOCUMENT BY REFERENCE. WE THEREFORE URGE YOU TO READ THE
GM SPIN-OFF MERGER AGREEMENT, INCLUDING EXHIBIT A THERETO, CAREFULLY.
EFFECTIVENESS OF THE GM SPIN-OFF MERGER
Promptly following the satisfaction or waiver of the conditions to the GM
Spin-Off Merger set forth in the GM Spin-Off Merger Agreement, the parties will
file a certificate of merger with the Secretary of State of the State of
Delaware, at which time (or at such later time as set forth in the certificate
of merger) the GM Spin-Off Merger will become effective. At the GM Spin-Off
Merger Effective Time, Merger Sub will merge with General Motors and the
separate corporate existence of Merger Sub will cease. General Motors will be
the surviving corporation of the GM Spin-Off Merger. The Raytheon Merger will
be completed immediately after the GM Spin-Off Merger Effective Time.
AMENDMENT OF THE GM CERTIFICATE OF INCORPORATION
In the GM Spin-Off Merger, Article Fourth of the GM Certificate of
Incorporation will be amended to:
. Delete the provisions which relate to the GM Class H Common Stock; and
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. Add provisions which relate to the New GM Class H Common Stock.
As part of the GM Spin-Off Merger, the GM Certificate of Incorporation will be
amended so that the Hughes Transactions will not result in a recapitalization
of GM Class H Common Stock into GM $1 2/3 Common Stock at a 120% exchange
ratio. As a result, by consenting to the Hughes Transactions, you will in
effect be waiving application of such recapitalization to the Hughes
Transactions. For additional information regarding the GM Class H Common Stock
and the New GM Class H Common Stock, see "GM Class H Common Stock" and "New GM
Class H Common Stock" in Chapter 6.
The GM Certificate of Incorporation, as so amended, will be the certificate
of incorporation of General Motors as the surviving corporation of the GM Spin-
Off Merger. Article Fourth of the GM Certificate of Incorporation, in the form
proposed to be amended, is included in Appendix A to this document (as Exhibit
A to the GM Spin-Off Merger Agreement). The GM By-Laws will be unchanged except
for necessary amendments to provisions regarding GM Class H Common Stock and
New GM Class H Common Stock (including with respect to uncertificated shares).
The directors and officers of General Motors will be the directors and officers
of General Motors as the surviving corporation of the GM Spin-Off Merger.
RECAPITALIZATION AND CONVERSION OF GM CLASS H COMMON STOCK
At the GM Spin-Off Merger Effective Time, each issued and outstanding share
of GM Class H Common Stock will be recapitalized and converted into one share
of New GM Class H Common Stock and the right to receive a distribution of Class
A Common Stock in accordance with the Distribution Ratio. Accordingly,
immediately after the GM Spin-Off Merger Effective Time, (1) for purposes of
determining the record holders of New GM Class H Common Stock and Class A
Common Stock, the GM Class H Common Stockholders immediately prior to the GM
Spin-Off Merger Effective Time will be deemed to be holders of New GM Class H
Common Stock and Class A Common Stock and (2) subject to any transfer of such
stock (including pursuant to the provisions of the Raytheon Merger Agreement
regarding fractional shares), such holders will be entitled to receive all
dividends payable on, and exercise voting rights and all other rights and
privileges with respect to, New GM Class H Common Stock and Class A Common
Stock. Fractional shares of Class A Common Stock will be cashed out as
described below under "Description of the Raytheon Merger--Raytheon Merger
Agreement--Exchange of Shares."
BankBoston, N.A., as the Hughes Transactions Exchange Agent, will mail, as
promptly as practicable following the GM Spin-Off Merger Effective Time to each
record holder of GM Class H Common Stock as of the GM Spin-Off Merger Effective
Time a letter of transmittal and related materials for use in surrendering the
certificates which formerly represented such holder's GM Class H Common Stock.
GM Class H Common Stockholders will be instructed to mail the certificates
formerly representing their GM Class H Common Stock to the Hughes Transactions
Exchange Agent accompanied by such letter of transmittal. However, since New GM
Class H Common Stock will be issued as uncertificated shares registered in
book-entry form through the Direct Registration System (unless you request
certificates representing your shares of New GM Class H Common Stock), no
certificates representing shares of New GM Class H Common Stock will be mailed
to you. As a result, instead of receiving share certificates, you will receive
account statements reflecting your respective ownership interest in shares of
New GM Class H Common Stock. Your book-entry shares will be held with the GM
Transfer Agent, who will serve as the record keeper for all New GM Class H
Common Stockholders. However, any stockholder who wants to receive a physical
certificate evidencing his or her shares of New GM Class H Common Stock will be
able to obtain a certificate at no charge by contacting the GM Transfer Agent.
After the Hughes Transactions are completed, upon the surrender by GM Class H
Common Stockholders of their share certificates, the GM Transfer Agent will
mail account statements reflecting ownership of shares of New GM Class H Common
Stock as of the close of business on the day on which the GM Spin-Off Merger
Effective Time falls.
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Pursuant to the Raytheon Merger Agreement, each GM Class H Common Stockholder
will also receive a check for cash instead of fractional shares of Class A
Common Stock received by such holder as a result of the GM Spin-Off Merger. GM
Class H Common Stockholders will not need any letter of transmittal in order to
receive their whole shares of Class A Common Stock. Since Class A Common Stock
will also be issued as uncertificated shares registered in book-entry form
through the Direct Registration System (unless you request certificates
representing your shares of Class A Common Stock), no certificates representing
whole shares of Class A Common Stock will be mailed to you. As a result,
instead of receiving share certificates you will receive account statements
reflecting your respective ownership interest in shares of Common Stock. Your
book-entry shares will be held with New Raytheon's transfer agent, who will
serve as the record keeper for all Class A Common Stockholders. However, any
stockholder who wants to receive a physical certificate evidencing his or her
shares of Class A Common Stock will be able to obtain a certificate at no
charge by contacting New Raytheon's transfer agent.
After the Hughes Transactions and the Raytheon Merger are completed, New
Raytheon's transfer agent will begin mailing account statements reflecting
ownership of shares of Class A Common Stock as of the close of business on the
day on which the GM Spin-Off Merger Effective Time falls.
DO NOT RETURN THE CERTIFICATES REPRESENTING YOUR SHARES OF GM CLASS H COMMON
STOCK WITH THE CONSENT CARD ENCLOSED WITH THIS DOCUMENT.
DISTRIBUTION ON AND CONVERSION OF GM $1 2/3 COMMON STOCK
At the GM Spin-Off Merger Effective Time, each issued and outstanding share
of GM $1 2/3 Common Stock will be converted into one share of GM $1 2/3 Common
Stock of General Motors as the surviving corporation of the GM Spin-Off Merger
(such that GM $1 2/3 Common Stock effectively will remain outstanding after the
consummation of the GM Spin-Off Merger) and the right to receive a distribution
of Class A Common Stock in accordance with the Distribution Ratio. Accordingly,
immediately after the GM Spin-Off Merger Effective Time, (1) for purposes of
determining the record holders of Class A Common Stock, the GM $1 2/3 Common
Stockholders immediately prior to the GM Spin-Off Merger Effective Time will be
deemed to be Class A Common Stockholders and (2) subject to any transfer of
such stock (including pursuant to the provisions of the Raytheon Merger
Agreement regarding fractional shares), such holders will be entitled to
receive all dividends payable on, and exercise voting rights and all other
rights and privileges with respect to, Class A Common Stock. Fractional shares
of Class A Common Stock will be cashed out as described under "Description of
the Raytheon Merger--Raytheon Merger Agreement--Exchange of Shares."
Following the GM Spin-Off Merger Effective Time, each GM $1 2/3 Common
Stockholder will receive a check for cash instead of fractional shares of Class
A Common Stock received by such holder as a result of the GM Spin-Off Merger.
GM $1 2/3 Common Stockholders will not need any letter of transmittal to
receive their whole shares of Class A Common Stock. Since Class A Common Stock
will be registered in book-entry form through the Direct Registration System
(unless you request certificates representing your shares of Class A Common
Stock), no certificates representing whole shares of Class A Common Stock will
be mailed to you. For a description of the Direct Registration System, see "--
Recapitalization and Conversion of GM Class H Common Stock" above. The
certificates representing the shares of GM $1 2/3 Common Stock outstanding
prior to the GM Spin-Off Merger Effective Time will represent the shares of GM
$1 2/3 Common Stock of General Motors as the surviving corporation of the GM
Spin-Off Merger after the GM Spin-Off Merger Effective Time.
DO NOT RETURN THE CERTIFICATES REPRESENTING YOUR SHARES OF GM $1 2/3 COMMON
STOCK WITH THE CONSENT CARD ENCLOSED WITH THIS DOCUMENT. THOSE CERTIFICATES
WILL CONTINUE TO REPRESENT YOUR SHARES OF GM $1 2/3 COMMON STOCK AFTER THE
HUGHES TRANSACTIONS.
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CONDITIONS TO CLOSING
Under the GM Spin-Off Merger Agreement, GM's obligation to consummate the GM
Spin-Off Merger is subject to, among other things, satisfaction or waiver of
the following conditions:
. The absence of a good faith determination by the GM Board, in the exercise
of its fiduciary obligations under applicable law, on the basis of oral or
written advice of outside counsel, that the consummation of the Hughes
Transactions would not be both in the best interests of General Motors and
its common stockholders and fair to the GM $1 2/3 Common Stockholders and
to the GM Class H Common Stockholders;
. The absence of any order, injunction, decree, statute, rule or regulation
preventing the consummation of any of the transactions contemplated by the
GM Spin-Off Merger Agreement;
. The Requisite Stockholder Approval of the Hughes Transactions shall have
been obtained;
. None of the Merrill Lynch Fairness Opinion, the Salomon Brothers Fairness
Opinion and the Goldman Sachs Fairness Opinion shall have been withdrawn,
revoked or modified;
. The absence of any notification from the IRS that the IRS Ruling has been
withdrawn, invalidated or modified in any way and the absence of a good
faith determination by the GM Board, on the basis of advice of tax counsel,
that the representations and assumptions underlying the IRS Ruling are not
true and correct in all material respects;
. The absence of any notification from the IRS that the IRS Supplemental
Ruling has been withdrawn, invalidated or modified in any way and the
absence of a good faith determination by the GM Board, on the basis of
advice of tax counsel, that the representations and assumptions underlying
the IRS Supplemental Ruling are not true and correct in all material
respects;
. The receipt of an opinion from Kirkland & Ellis, outside tax counsel to
General Motors, to the effect that, on the basis of and subject to the
assumptions, representations, limitations and other matters set forth
therein, (1) the recapitalization of GM Class H Common Stock into New GM
Class H Common Stock will be tax-free to the holders thereof and to General
Motors and (2) each of GM Class H Common Stock and New GM Class H Common
Stock is stock of General Motors for U.S. federal income tax purposes;
. The consummation of the Hughes Reorganization;
. The execution and delivery of the Separation Agreements;
. The satisfaction or waiver of all conditions to the Raytheon Merger, other
than the consummation of the GM Spin-Off Merger, and the preparedness of
Raytheon and Hughes Defense to cause the consummation of the Raytheon
Merger immediately following the GM Spin-Off Merger Effective Time;
. The absence of any issuance of, or proceeding initiated for the purpose of
issuing, a stop order suspending the effectiveness of either of the
Registration Statements of which this document forms a part by the SEC; and
. The payment in full of the Intercompany Payment.
TERMINATION
General Motors may terminate the GM Spin-Off Merger Agreement for any of the
following reasons at any time prior to the GM Spin-Off Merger Effective Time:
. In the event that the GM Board determines in good faith, in the exercise of
its fiduciary obligations under applicable law, on the basis of oral or
written advice of outside counsel, (1) that the consummation of the Hughes
Transactions would not be both in the best interests of General Motors and
its common stockholders and fair to the GM $1 2/3 Common Stockholders and
GM Class H Common Stockholders and (2) that such determination could not
reasonably be avoided by adjusting the Distribution Ratio to enable (A) the
GM Board to conclude, as of the date of the adjustment of the Distribution
Ratio, that the Hughes Transactions, taken as a whole, are both in the best
interests of General Motors and its common
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stockholders and fair to the GM $1 2/3 Common Stockholders and GM Class H
Common Stockholders and (B) Merrill Lynch to provide the Merrill Lynch
Fairness Opinion and Salomon Brothers to provide the Salomon Brothers
Fairness Opinion;
. In the event that the Merrill Lynch Fairness Opinion, the Salomon Brothers
Fairness Opinion or the Goldman Sachs Fairness Opinion is withdrawn or
revoked;
. In the event that General Motors has been notified by the IRS that the IRS
Ruling has been withdrawn, invalidated or modified in an adverse manner or
has been notified by the IRS or otherwise reasonably determines, on the
basis of advice of outside tax counsel, that the consummation of (1) either
of (A) the distribution of Class A Common Stock to GM's common stockholders
in the Hughes Defense Spin-Off or (B) the Hughes Telecom Spin-Off will not
constitute a tax-free distribution under applicable sections of the Code or
(2) the recapitalization of GM Class H Common Stock into New GM Class H
Common Stock will not be tax-free to General Motors and the holders
thereof;
. In the event that General Motors has been notified by the IRS that the IRS
Supplemental Ruling has been withdrawn, invalidated or modified or has been
notified by the IRS or otherwise reasonably determines, on the basis of
advice of outside tax counsel, that the consummation of the transactions
contemplated by the GM Spin-Off Merger Agreement will jeopardize the tax-
free status of the EDS Split-Off;
. In the event that the Hughes Transactions fail to receive the Requisite
Stockholder Approval at the time contemplated; or
. In the event that either the Raytheon Merger Agreement or the
Implementation Agreement is terminated in accordance with its terms.
General Motors has agreed that, unless the Implementation Agreement has been
terminated, it will not, and will not permit Merger Sub to, terminate (except
as may be permitted by the terms of the GM Spin-Off Merger Agreement) or waive
any condition of the GM Spin-Off Merger Agreement, without the prior written
consent of Raytheon.
AMENDMENT
Subject to certain provisions set forth in the Implementation Agreement, the
GM Spin-Off Merger Agreement may be amended at any time and from time to time
by General Motors and Merger Sub, provided that any such amendment made after
the Hughes Transactions have been approved by GM's common stockholders may not
alter or change (1) the amount or kind of shares to be distributed in respect
of, or the rights to be received in exchange for or on recapitalization and
conversion of, the GM Class H Common Stock, (2) the amount or kind of shares to
be distributed to, or the rights to be received by, the GM $1 2/3 Common
Stockholders, (3) any term of the certificate of incorporation of General
Motors as the surviving corporation of the GM Spin-Off Merger or (4) any of the
terms and conditions of the GM Spin-Off Merger Agreement if such alteration or
change would adversely affect the holders of any class or series of GM capital
stock.
Pursuant to the Implementation Agreement, General Motors has agreed to
consult with Raytheon regarding any changes or additions that are proposed to
be made to the GM Spin-Off Merger Agreement prior to the Raytheon Merger.
General Motors has also agreed that, except for any amendment to the GM Spin-
Off Merger Agreement to adjust the Distribution Ratio (as described above),
General Motors will not permit any such change or addition to be made prior to
the Raytheon Merger Effective Time to the GM Spin-Off Merger Agreement without
Raytheon's consent (which consent will not be unreasonably withheld or
delayed), unless such change or addition could not reasonably be foreseen (1)
to have an adverse effect on the business, assets, liabilities or financial
condition of Hughes Defense or, following the Raytheon Merger, New Raytheon or
(2) to delay materially the consummation of the Raytheon Merger on the terms
and subject to the conditions of the Implementation Agreement and the other
agreements relating to the Hughes Transactions and the Raytheon Merger.
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ALLOCATION OF HUGHES DEFENSE DEBT PROCEEDS; HUGHES TELECOM FUNDING
The GM Board has determined, based on the recommendations of GM management,
Hughes Electronics management and the Capital Stock Committee, that the
proceeds of the new debt to be incurred by Hughes Defense as contemplated by
the Raytheon Merger Agreement shall be made available to Hughes Telecom (up to
$4.0 billion) and the amount, if any, in excess of $4.0 billion shall be used
to repay loans to Delco and therefore shall be available to General Motors. See
"Description of the Raytheon Merger--Raytheon Merger Agreement--Certain
Covenants--Indebtedness" below. For a description of the new debt to be
incurred by Hughes Defense, see "New Debt of Hughes Defense To Be Assumed By
New Raytheon" in Chapter 5. We currently estimate that no debt proceeds will be
made available to General Motors unless the Raytheon stock price as applied
under the Raytheon Merger Agreement is $53.59 per share or less and that in no
event will more than $0.9 billion be made available to General Motors. See "--
Distribution Ratio." Any proceeds made available to General Motors will be used
for general working capital purposes.
Hughes Electronics management currently expects to apply the debt proceeds to
be made available to Hughes Telecom to the repayment of approximately $1.725
billion borrowed from General Motors in connection with the PanAmSat Merger and
the repayment of commercial paper borrowings of Hughes Electronics, which are
currently estimated to be approximately $1.3 billion at the time of the closing
of the Hughes Transactions. As a result, Hughes Telecom would have
approximately $0.9 billion of the debt proceeds remaining. Together with other
expected Hughes Telecom cash balances as of the closing of approximately $1.1
billion, New Hughes Electronics would thus have total cash of approximately $2
billion at the time of the closing of the Hughes Transactions. Since its only
significant third party debt is expected to be $1.1 billion at PanAmSat, Hughes
Electronics management expects that net liquidity would be $0.9 billion. Hughes
Electronics management expects that this initial cash and ordinary course
borrowing capacity will provide New Hughes Electronics with adequate capital to
execute its business plan. In this regard, Hughes Electronics management has
indicated that cash needs beyond those reflected in the base business plan,
such as for large strategic acquisitions, will require access to additional
funding. Merrill Lynch and Salomon Brothers, financial advisors to General
Motors, also reviewed the adequacy of the funding available to Hughes Telecom
and its ability to pursue its business plan. See "Special Factors--Hughes
Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers" above.
NO RECAPITALIZATION AT A 120% EXCHANGE RATIO
In considering the possibility of strategic transactions involving Hughes
Electronics and its three principal businesses, the GM Board was advised by GM
management that substantial dilution of the GM $1 2/3 Common Stock would occur
if any such transaction were to result in a recapitalization of GM Class H
Common Stock into GM $1 2/3 Common Stock at a 120% exchange ratio, as currently
provided for under certain circumstances in the GM Certificate of
Incorporation. This dilution would be expected to have an adverse effect not
only on the market value of the GM $1 2/3 Common Stock held by existing
stockholders but also on the market value of such stock to be issued to holders
of GM Class H Common Stock in any such recapitalization. Further, if a
transaction structured along the lines of the Hughes Transactions resulted in a
recapitalization, the GM Class H Common Stock would be eliminated and investors
in that stock would be deprived of an ongoing tracking stock interest in Hughes
Electronics' telecommunications and space business, which GM management and
Hughes Electronics management believe currently offers the greatest growth
potential of the three principal businesses of Hughes Electronics. The GM Board
considered its belief that most holders of GM Class H Common Stock had
purchased such stock in order to invest in a tracking stock related to the
businesses of Hughes Electronics and that such holders would not necessarily
desire to hold GM $1 2/3 Common Stock, so that the issuance of GM $1 2/3 Common
Stock to them in a recapitalization would frustrate this investment objective
and likely result in substantial trading activity that would exacerbate the
anticipated adverse effect on market value for all stockholders. In addition,
the telecommunications and space business would be subsumed within the broader
business operations of General Motors, with a resulting loss of the benefits of
a tracking stock structure related to that business, including the flexibility
of General Motors to finance the business through the issuance of equity
interests relating to Hughes Telecom without incurring corporate-level tax and
the ability of General Motors to use tracking stock as a focused security for
management compensation.
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GM management also noted certain practical difficulties related to the
mechanics of the recapitalization provisions in the context of a complex series
of transactions such as the Hughes Transactions. These difficulties included
the difficulty of achieving an appropriate valuation period for any such
exchange in the context of the negotiation, announcement and consummation of a
strategic transaction that would be subject to substantial uncertainties as to
the timing of disclosure, the possibility of market leaks and the likelihood of
consummation. Moreover, GM management and legal counsel advised the GM Board
that there was substantial uncertainty as to whether any likely strategic
transactions, such as a possible spin-off of Hughes Defense and transfer of
Delco to General Motors, would in fact trigger the nondiscretionary
recapitalization provision of the GM Certificate of Incorporation, which is
only effective upon the consummation of a sale, transfer, assignment or other
disposition of substantially all of the business of Hughes Aircraft (i.e., the
entity that currently owns both the defense electronics business and the
telecommunications and space business of Hughes Electronics) or the sale or
other disposition of substantially all of the other business of Hughes
Electronics (i.e., Delco's automotive electronics business) to a person, entity
or group of which General Motors is not a majority owner.
Based on the foregoing factors, and in light of the substantial benefits that
the contemplated strategic transactions would be expected to have for the
holders of both classes of GM common stock, the GM Board determined that it
would be in the best interests of all of GM's common stockholders to structure
a potential strategic transaction involving Hughes Electronics or any of its
three principal businesses so as not to result in a recapitalization of GM
Class H Common Stock into GM $1 2/3 Common Stock. GM management and legal
counsel have advised the GM Board that there is substantial uncertainty as to
whether the Hughes Transactions would trigger the nondiscretionary
recapitalization provision in the GM Certificate of Incorporation. Accordingly,
as part of the GM Spin-Off Merger, the GM Certificate of Incorporation will be
amended to eliminate any possible application of the recapitalization provision
to the Hughes Transactions and, by voting in favor of the Hughes Transactions,
you will in effect be waiving any application of the recapitalization provision
to the Hughes Transactions.
STOCKHOLDER APPROVAL OF THE HUGHES TRANSACTIONS
As described above, in order to consummate the Hughes Transactions, General
Motors must obtain the Requisite Stockholder Approval, which consists of the
consent of the holders of:
. a majority of the outstanding shares of GM $1 2/3 Common Stock, voting as a
separate class; and
. a majority of the outstanding shares of GM Class H Common Stock, voting as
a separate class.
The series of related transactions comprising the Hughes Transactions are all
part of a single plan. By approving and consenting to the Hughes Transactions,
you will be ratifying each of these transactions and adopting the GM Spin-Off
Merger Agreement. You are not being asked to approve the Raytheon Merger, which
has already been approved by Hughes Electronics (in its capacity as the sole
stockholder of Hughes Defense). See "Solicitation of Written Consent of GM's
Common Stockholders" in Chapter 7.
IF THE HUGHES TRANSACTIONS ARE NOT APPROVED BY GM'S COMMON STOCKHOLDERS, NONE
OF THE HUGHES TRANSACTIONS WILL BE CONSUMMATED AND THE RAYTHEON MERGER WILL NOT
BE COMPLETED.
In certain circumstances, termination of the Raytheon Merger Agreement
requires Hughes Defense to make certain payments to Raytheon. See "Description
of the Raytheon Merger--Raytheon Merger Agreement--Effect of Termination;
Termination Fees" below.
THE GM BOARD HAS UNANIMOUSLY APPROVED THE HUGHES TRANSACTIONS AND HAS
DETERMINED THAT THE HUGHES TRANSACTIONS, ARE IN THE BEST INTERESTS OF GENERAL
MOTORS AND IN YOUR BEST INTERESTS AS COMMON STOCKHOLDERS OF GENERAL MOTORS. THE
GM BOARD ALSO HAS DETERMINED THAT THE HUGHES TRANSACTIONS ARE FAIR TO BOTH
CLASSES OF GM'S COMMON STOCKHOLDERS. THE GM BOARD RECOMMENDS THAT YOU VOTE TO
APPROVE THE HUGHES TRANSACTIONS.
98
NO APPRAISAL RIGHTS
The Delaware General Corporation Law does not provide appraisal rights to
GM's common stockholders in connection with the Hughes Transactions. Appraisal
rights will not be available to GM Class H Common Stockholders because, among
other things, the GM Class H Common Stock is, and the New GM Class H Common
Stock and the Class A Common Stock will both be, listed on the NYSE. GM $1 2/3
Common Stockholders will not be entitled to appraisal rights because, among
other things, GM $1 2/3 Common Stock is listed on the NYSE and the holders
thereof will not exchange or otherwise relinquish any such stock pursuant to
the GM Spin-Off Merger. Similarly, no appraisal rights will be available to
GM's common stockholders in connection with the Raytheon Merger.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
For a description of certain U.S. federal income tax considerations relating
to certain of the Hughes Transactions and the Raytheon Merger, see "Special
Factors--Certain U.S. Federal Income Tax Considerations Relating to Certain of
the Hughes Transactions" and "--Certain U.S. Federal Income Tax Considerations
Relating to the Raytheon Merger" above.
CERTAIN LITIGATION
For a description of certain stockholder litigation relating to the Hughes
Transactions, see "Special Factors--Stockholder Litigation Relating to the
Hughes Transactions" above.
ACCOUNTING TREATMENT
General Motors will record the distribution of Hughes Defense to GM $1 2/3
Common Stockholders and GM Class H Common Stockholders at "fair value" and will
recognize and report a gain of approximately $3.9 to $4.5 billion as "Other
Income" (approximately $5.56 to $6.41 per share of earnings from continuing
operations attributable to GM $1 2/3 Common Stock) in GM's consolidated
financial statements so long as the market price of Raytheon Common Stock is
within a range of $44.42 and $54.29 per share. The Recent Raytheon Stock Price
($57.88 per share on October 10, 1997) is above the collar range and would
indicate a total transaction value of approximately $9.9 billion, with a
resulting gain of approximately $4.4 billion based on the net book value of
Hughes Defense at June 30, 1997 (approximately $6.27 per share of earnings from
continuing operations attributable to GM $1 2/3 Common Stock). In addition, we
currently anticipate that there will be a reduction of GM stockholders' equity
of between $0.6 and $1.6 billion as a result of the Hughes Transactions (based
on the Recent Raytheon Stock Price and the net assets of Hughes Defense at June
30, 1997, the overall reduction in GM stockholders' equity is estimated to be
approximately $1.5 billion). The exact amount of such reduction will depend on
several variables, the most significant of which is the amount of debt incurred
by Hughes Defense prior to the Hughes Defense Spin-Off.
REGULATORY REQUIREMENTS
In order to consummate the Hughes Transactions and the Raytheon Merger, we
and Raytheon must make certain filings and receive certain various
authorizations from various governmental agencies, both in the United States
and internationally, with respect to the proposed transactions. These filings,
notifications and authorizations relate primarily to competition and securities
law issues.
The Raytheon Merger is subject to the requirements of the Hart-Scott-Rodino
Act, which provides that certain transactions may not be consummated until
required information and materials are furnished to the Antitrust Division of
the U.S. Department of Justice and the U.S. Federal Trade Commission (the
"FTC") and the requisite waiting period has expired or is terminated. General
Motors and Raytheon have reached a preliminary agreement with the U.S.
Department of Justice and the Department of Defense regarding the basis upon
which the Raytheon Merger can proceed. The preliminary agreement contemplates
certain divestitures and
CHAPTER 3: THE HUGHES TRANSACTIONS AND
99 THE RAYTHEON MERGER
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operating agreements, the implementation of which General Motors and Raytheon
do not expect to be materially adverse to the business of New Raytheon. General
Motors and Raytheon expect to finalize the agreement and antitrust clearance in
October 1997.
We believe that no material U.S. state, foreign or other regulatory
requirements remain to be complied with, and no further material approvals
thereunder must be obtained, in order to consummate the Hughes Transactions or
the Raytheon Merger.
SALES TO GENERAL MOTORS
Approximately 32% of Hughes Electronics' 1996 total revenues were
attributable to sales to General Motors and its affiliates. Substantially all
of these sales were by Delco, with approximately 81% of Hughes Electronics'
1996 revenues in its automotive electronics business segment attributable to
sales to GM NAO, and approximately 9% attributable to sales to GM operations
outside of North America and affiliates of General Motors. See "Business of
Delco--Sales to GM NAO" and "--International and Other Sales" in Chapter 4.
Hughes Electronics and General Motors periodically provide research and
technological services to each other pursuant to contractual arrangements.
Approximately 3% of Hughes Defense's 1996 total revenues were attributable to
sales to General Motors and its affiliates. Among other things, Hughes Defense
provides advanced training system services to General Motors, both in Europe
and at several GM facilities in the United States. See "Business of Hughes
Defense--Information Systems--Hughes Training Inc." in Chapter 4. After the
Hughes Transactions, all transactions between New Raytheon on the one hand and
General Motors and its affiliates on the other hand will be subject to GM's
worldwide purchasing process.
We do not currently expect sales by New Hughes Electronics to General Motors
and its affiliates following the consummation of the Hughes Transactions to be
significant. On a pro forma basis giving effect to the consummation of the
Hughes Transactions, less than 1% of Hughes Telecom's 1996 total revenues were
attributable to General Motors and its affiliates.
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DESCRIPTION OF THE RAYTHEON MERGER
GENERAL
OVERVIEW
Immediately after the completion of the Hughes Defense Spin-Off and the other
Hughes Transactions, Raytheon and Hughes Defense will consummate the Raytheon
Merger. Hughes Defense will be the surviving corporation of this merger and
will be renamed "Raytheon Company." Pursuant to the Raytheon Merger, among
other things,
. each whole share of Class A Common Stock distributed to GM common
stockholders in the Hughes Defense Spin-Off will remain outstanding and
will be unchanged;
. all fractional shares of Class A Common Stock distributed to GM's common
stockholders in the Hughes Defense Spin-Off will be converted into an
equivalent number of fractional shares of Class B Common Stock, which will
then be aggregated and sold by the Raytheon Merger Exchange Agent and the
proceeds distributed to the owners of such fractional shares on a pro rata
basis; and
. each outstanding share of Raytheon Common Stock will be converted into one
share of Class B Common Stock.
See "--Raytheon Merger Agreement" below.
Immediately following the Raytheon Merger, the Class A Common Stock will
represent approximately 30% of the common stock of New Raytheon and the Class B
Common Stock will represent approximately 70% of the common stock of New
Raytheon. The Class A Common Stockholders will be entitled, in the aggregate,
to 80.1% of the total voting power of New Raytheon for the election and removal
of directors. The Class B Common Stockholders will be entitled, in the
aggregate, to 19.9% of the total voting power of New Raytheon for the election
and removal of directors. With respect to all other matters, separate class
approvals of the Class A Common Stockholders and the Class B Common
Stockholders will be required. See "New Raytheon Capital Stock" in Chapter 6.
Class A Common Stock and Class B Common Stock will be identical in all other
respects. General Motors, Hughes Defense and Raytheon agreed to the terms of
the Class A Common Stock and the Class B Common Stock for the sole purpose of
permitting General Motors to obtain the IRS Ruling described herein with
respect to the U.S. federal income tax consequences of the Hughes Defense Spin-
Off and certain related transactions. The IRS Ruling is premised on the fact
that GM's common stockholders will receive in the Hughes Defense Spin-Off stock
possessing at least 80% of the voting power in the election of directors of New
Raytheon.
INDICATED VALUE OF THE HUGHES DEFENSE SPIN-OFF AND THE RAYTHEON MERGER TO
GENERAL MOTORS AND ITS COMMON STOCKHOLDERS
Under the terms of the Raytheon Merger Agreement, the Hughes Defense Spin-Off
and the Raytheon Merger have a total indicated value of approximately $9.9
billion to General Motors and its common stockholders based on the Recent
Raytheon Stock Price. We believe that this value represents a substantial
premium to the enterprise value of Hughes Defense under the current General
Motors and Hughes Electronics ownership structure. The spin-off and merger
transactions would have a total indicated value of $9.5 billion so long as the
market price of Raytheon Common Stock is within a collar ranging from $44.42 to
$54.29 per share. Raytheon stock prices above $54.29 per share (such as the
Recent Raytheon Stock Price) would result in transaction values higher than
$9.5 billion, while Raytheon stock prices below $44.42 per share would result
in transaction values less than $9.5 billion.
This total transaction value consists of a combination of:
. the Class A Common Stock to be distributed to GM's common stockholders in
the Hughes Defense Spin-Off, which has an indicated value of approximately
$5.9 billion based on the Recent Raytheon Stock Price; and
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. the amount of debt (including new debt which Hughes Defense will incur
prior to the Hughes Defense Spin-Off) that Hughes Defense is permitted to
have immediately before the Raytheon Merger Effective Time, which is
approximately $3.9 billion based on the Recent Raytheon Stock Price. This
debt will remain with New Raytheon (and not constitute obligations of
General Motors, New Hughes Electronics or their respective subsidiaries)
after the Raytheon Merger.
Because the value of the shares of Class A Common Stock which you will
receive in the Hughes Defense Spin-Off will vary based on the market price of
Raytheon Common Stock, the total value of the Hughes Defense Spin-Off and the
Raytheon Merger at the Raytheon Merger Effective Time could be either higher or
lower than that indicated by the Recent Raytheon Stock Price.
The actual amount of new debt to be incurred by Hughes Defense prior to the
Hughes Defense Spin-Off will be determined by subtracting from $9.5 billion any
other outstanding debt of Hughes Defense as of the Raytheon Merger Effective
Time and also subtracting the product of (x) the total number of shares of
Class A Common Stock to be distributed to GM common stockholders (i.e.,
102,630,503 shares) and (y) the average closing market price of Raytheon Common
Stock during the 30-day period ending on the fifth day prior to consummation of
the Raytheon Merger, provided that in the event such average price is less than
$44.42, it will be deemed to be $44.42, and in the event such price is more
than $54.29, it will be deemed to be $54.29. This amount of new debt is
referred to in the Raytheon Merger Agreement as the "Intercompany Payment
Amount." Based on the Recent Raytheon Stock Price and our expectation that
Hughes Defense will not have any other significant debt as of the time it is
spun off, the Intercompany Payment Amount is currently expected to be $3.9
billion. To the extent that such amount exceeds $4.0 billion, the excess will
be made available to General Motors as described under "Special Factors--The
Distribution Ratio" in Chapter 3.
The table below shows the range of reported per share closing prices on the
NYSE Composite Tape for the Raytheon Common Stock for the periods indicated.
MONTH HIGH LOW
----- ------ ------
1996
October................................................. $55.38 $45.88
November................................................ 52.38 49.00
December................................................ 51.50 46.25
1997
January................................................. 50.00 44.75
February................................................ 47.63 44.38
March................................................... 48.63 45.13
April................................................... 45.63 42.75
May..................................................... 47.75 45.25
June.................................................... 53.75 47.38
July.................................................... 56.25 52.56
August.................................................. 57.63 55.00
September............................................... 60.56 56.94
October (through October 10, 1997)...................... 60.25 57.00
POST-CLOSING ADJUSTMENT
Within approximately four months after completion of the Raytheon Merger, New
Hughes Electronics will prepare and deliver to New Raytheon a final balance
sheet for Hughes Defense and its subsidiaries as of immediately prior to the
Raytheon Merger (but giving effect to the Hughes Defense Spin-Off) and a
related report from New Hughes Electronics' auditors. Within 30 business days
after its receipt of this final balance sheet and related auditors' report, New
Raytheon will notify New Hughes Electronics of any objections to the balance
sheet and report. New Hughes Electronics and New Raytheon will then work
together to try to reach
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agreement on any disputed matters and, if the parties cannot reach agreement,
all disputed matters will be submitted to arbitration before independent
auditors for final resolution.
To the extent that this final balance sheet reflects an adjusted net worth
(calculated as described in the Master Separation Agreement) that deviates more
than $50 million from a target amount, a payment will be made from New Hughes
Electronics to New Raytheon, or from New Raytheon to New Hughes Electronics, as
appropriate, to compensate for the amount of such difference (plus interest
thereon from the Raytheon Merger Effective Time to the date of payment). See
"Separation and Transition Arrangements--Summary of Master Separation
Agreement--Post-Closing Adjustment Between New Hughes Electronics and New
Raytheon" below.
THE DESCRIPTIONS OF THE RAYTHEON MERGER AGREEMENT AND THE IMPLEMENTATION
AGREEMENT SET FORTH BELOW, WHICH SUMMARIZE THE MATERIAL TERMS OF SUCH
AGREEMENTS, DO NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY
BY REFERENCE TO THE RAYTHEON MERGER AGREEMENT AND TO THE IMPLEMENTATION
AGREEMENT. COPIES OF THESE AGREEMENTS ARE INCLUDED IN GM'S FORM 8-K DATED
JANUARY 16, 1997, WHICH WE HAVE INCORPORATED INTO THIS DOCUMENT BY REFERENCE.
SEE "WHERE YOU CAN FIND MORE INFORMATION" IN CHAPTER 7.
RAYTHEON MERGER AGREEMENT
GENERAL
The Raytheon Merger Agreement is an agreement between Hughes Defense and
Raytheon which provides for the merger of Raytheon with Hughes Defense (which
at the time will comprise the defense electronics business of Hughes
Electronics). Hughes Defense will be the surviving corporation of the Raytheon
Merger. As a result of the Raytheon Merger, the separate corporate existence of
Raytheon will cease and Hughes Defense, as the surviving corporation, will
continue its existence under the laws of the State of Delaware and its name
will be changed to "Raytheon Company." The Raytheon Merger will become
effective in accordance with a certificate of merger to be filed with the
Secretary of State of the State of Delaware. The closing under the Raytheon
Merger Agreement will occur as soon as practicable after the satisfaction or
waiver of all of the conditions specified in the Raytheon Merger Agreement,
including the consummation of the Hughes Transactions. We and Raytheon are
planning to cause the Raytheon Merger to occur immediately after the completion
of the GM Spin-Off Merger. Under the Raytheon Merger Agreement, the Hughes
Defense Certificate of Incorporation and the Hughes Defense By-Laws described
in this document will continue as the certificate of incorporation and the by-
laws of New Raytheon following the Raytheon Merger.
As described above, Hughes Defense will be the surviving corporation of the
Raytheon Merger. Since Hughes Defense, as the surviving corporation of the
Raytheon Merger, will be renamed "Raytheon Company" as part of the merger, we
sometimes refer in this document to Hughes Defense as "New Raytheon,"
particularly where such references relate to periods commencing after the
Raytheon Merger Effective Time. References to "Hughes Defense" in the
descriptions below of the Raytheon Merger Agreement, the Separation Agreements
and the arrangements contemplated by such agreements should be considered, as
appropriate, also to be references to "New Raytheon." Similarly, we sometimes
refer in this document to the "Hughes Defense Certificate of Incorporation" and
the "Hughes Defense By-Laws" as the "New Raytheon Certificate of Incorporation"
and the "New Raytheon By-Laws," respectively.
CONSIDERATION TO BE RECEIVED IN THE RAYTHEON MERGER
Under the Raytheon Merger Agreement, each whole share of Class A Common Stock
that is issued and outstanding immediately prior to the Raytheon Merger
Effective Time (which will be the shares distributed to GM's common
stockholders in the Hughes Defense Spin-Off) will remain outstanding and will
be unchanged after the Raytheon Merger. Each fractional share of Class A Common
Stock that is issued and outstanding immediately prior to the Raytheon Merger
Effective Time will be converted into and represent an equivalent
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number of fractional shares of Class B Common Stock, which will be sold by the
Raytheon Merger Exchange Agent as described below under "--Raytheon Merger
Agreement--Treatment of Fractional Shares of Class A Common Stock." Similarly,
the conversion of fractional shares of Class A Common Stock into Class B Common
Stock prior to such shares being aggregated and sold as described above is
intended to permit such sales without diluting the voting power in the election
of directors of New Raytheon to be received by GM's common stockholders in the
Hughes Defense Spin-Off, which could have prevented General Motors from
receiving the IRS Ruling.
At the Raytheon Merger Effective Time, each issued and outstanding share of
Raytheon Common Stock (other than shares to be canceled as described below)
will be converted into and represent one share of Class B Common Stock. Each
share of Raytheon capital stock held in the treasury of Raytheon or owned by
any wholly owned subsidiary of Raytheon will be canceled and retired and no
payment will be made in respect thereof.
Each option to purchase Raytheon Common Stock outstanding under stock option
plans of Raytheon in effect at the Raytheon Merger Effective Time (each, a
"Raytheon Option") will be automatically converted, at the Raytheon Merger
Effective Time, into an option to purchase shares of Class B Common Stock (a
"New Raytheon Exchange Option"). Each New Raytheon Exchange Option will allow
the holder to purchase the same number of shares of Class B Common Stock at the
same exercise price as the corresponding Raytheon Option with respect to
Raytheon Common Stock, and with other terms and conditions that are the same as
the terms and conditions of such Raytheon Option immediately before the
Raytheon Merger Effective Time (except for any changes in vesting rights or
permitted time of exercise which result from the occurrence of the Raytheon
Merger). For information regarding the treatment of stock options in respect of
GM Class H Common Stock, see "Separation and Transition Arrangements--Summary
of Other Agreements Contemplated by the Master Separation Agreement--Stock
Options" below.
TREATMENT OF FRACTIONAL SHARES OF CLASS A COMMON STOCK
As described above, fractional shares of Class A Common Stock will be
converted in the Raytheon Merger into an equivalent number of shares of Class B
Common Stock. No fractional shares of Class B Common Stock will be distributed
to Class A Common Stockholders. Instead, the aggregate number of fractional
shares of Class B Common Stock (the "Excess Shares") will be sold by the
Raytheon Merger Exchange Agent following the Raytheon Merger Effective Time at
then prevailing prices on the NYSE. The sale of the Excess Shares will be in
round lots to the extent practicable. The Raytheon Merger Exchange Agent will
use all reasonable efforts to complete the sale of the Excess Shares as
promptly following the Raytheon Merger Effective Time as is practicable
consistent with obtaining the best execution of such sales in light of
prevailing market conditions. Until the net proceeds of such sale have been
distributed to the holders of such fractional interests in the Class B Common
Stock, the Raytheon Merger Exchange Agent will hold such proceeds in trust for
such holders. The portion of the proceeds of such sale of Excess Shares to
which each holder of such fractional interests in the Class B Common Stock is
entitled, as determined by the Raytheon Merger Exchange Agent, will then be
distributed, net of any required tax withholding, to such Class B Common
Stockholders. New Raytheon will pay all commissions, transfer taxes and other
out-of-pocket expenses incurred in connection with such sale of the Excess
Shares. For purposes of determining whether a Class A Common Stockholder
immediately prior to the Raytheon Merger Effective Time holds a fractional
share of Class A Common Stock, all shares of Class A Common Stock held by such
holder will be aggregated by the Raytheon Merger Exchange Agent to the extent
practicable.
BOARDS, COMMITTEES AND OFFICERS
The Raytheon Merger Agreement provides for the composition of the New
Raytheon Board, as well as the composition of various committees of the New
Raytheon Board and certain other committees. The Raytheon Merger Agreement also
provides that the officers of Raytheon immediately prior to the Raytheon Merger
Effective Time will be the officers of New Raytheon immediately following the
Raytheon Merger Effective Time. See "New Raytheon--New Raytheon Management--
Directors and Executive Officers" in Chapter 5.
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CERTAIN COVENANTS
The Raytheon Merger Agreement includes certain provisions which govern the
manner in which Raytheon and Hughes Defense must conduct their respective
businesses between the date of the Raytheon Merger Agreement and the Raytheon
Merger Effective Time. The purpose of these provisions is to ensure that at the
Raytheon Merger Effective Time, each company represents approximately the same
assets, liabilities and businesses as existed when the Raytheon Merger
Agreement was executed.
Conduct of Raytheon's Operations. The Raytheon Merger Agreement provides that
until the Raytheon Merger Effective Time, Raytheon will conduct its business
and operations in the ordinary course except as expressly contemplated by the
Raytheon Merger Agreement and the transactions contemplated thereby, and will
use all commercially reasonable efforts to maintain and preserve its business
organization and its material rights and franchises and to retain the services
of its officers and key employees and maintain relationships with customers,
suppliers, lessees, licensees and other third parties so that their goodwill
and ongoing business will not be impaired in any material respect.
The Raytheon Merger Agreement also provides that, except in certain
circumstances, until the Raytheon Merger Effective Time, Raytheon will not,
without the prior written consent of Hughes Defense:
. do or effect any of the following actions with respect to its securities:
(1) adjust, split, combine, recapitalize or reclassify its capital stock,
(2) declare or pay any dividend (other than regular quarterly cash
dividends consistent as to time of payment and amount with the dividends
declared and paid during 1996) or distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for
any shares of its capital stock (except for limited purchases of shares of
Raytheon Common Stock by Raytheon in the open market), (3) grant any person
any right or option to acquire any shares of its capital stock other than
in the ordinary course of business, consistent with past practice pursuant
to existing option plans or the Raytheon Company Deferral Plan for
Directors, the aggregate amount of which will not exceed certain pre-
determined limits, (4) issue or sell or agree to issue or sell any shares
of its capital stock or any securities, instruments or obligations
convertible into or exchangeable or exercisable for any shares of its
capital stock or such securities except in certain limited circumstances,
or (5) enter into any agreement, understanding or arrangement with respect
to the sale or voting of Raytheon's capital stock;
. except as may be required by changes in applicable law or accounting
principles, change any method or principle of accounting in a manner that
is inconsistent with past practice;
. take any action that would reasonably be expected to result in its
representations and warranties contained in the Raytheon Merger Agreement
becoming false or inaccurate;
. take any action which could reasonably be expected to adversely affect or
delay the ability of any of the parties to the Raytheon Merger Agreement to
obtain any approval of any governmental authority required to consummate
the transactions contemplated by the Raytheon Merger Agreement; or
. permit or cause any subsidiary to do any of the foregoing or agree or
commit to do any of the foregoing or agree in writing or otherwise to take
any of the foregoing actions.
Conduct of Hughes Defense's Operations. The Raytheon Merger Agreement
provides that, except in certain circumstances, until the Raytheon Merger
Effective Time, Hughes Defense will conduct its business and operations in the
ordinary course, and will use all commercially reasonable efforts to maintain
and preserve its business organization and its material rights and franchises
and to retain the services of its officers and key employees and maintain
relationships with customers, suppliers, lessees, licensees and other third
parties to the end that their goodwill and ongoing business will not be
impaired in any material respect.
105
The Raytheon Merger Agreement also provides that, except in certain
enumerated circumstances, until the Raytheon Merger Effective Time, Hughes
Defense will not, without the prior written consent of Raytheon:
. grant any person any right or option to acquire any shares of its capital
stock (other than granting certain options for the purchase of Class B
Common Stock to certain employees of Hughes Defense who would have been
eligible to receive options to purchase GM Class H Common Stock) or enter
into any agreement, understanding or arrangement with respect to the
purchase, sale or voting of its capital stock or issue any instrument
convertible into or exchangeable for such capital stock, or make, declare
or pay any dividend or distribution in respect of any of its capital stock
other than in cash;
. sell, transfer, lease, pledge, mortgage, encumber or otherwise dispose of
any material amount of its property or assets other than in the ordinary
course of business, consistent with past practice;
. make or propose any changes in its certificate of incorporation or bylaws;
. merge or consolidate with any other persons or persons or acquire assets or
capital stock of any other person or persons the value of which
individually or in the aggregate exceeds $100 million or enter into any
confidentiality agreement with any person with respect to any such
transaction;
. create any subsidiaries which are material to Hughes Defense and which are
not, directly or indirectly, wholly owned by Hughes Defense;
. enter into or modify any employment, severance, termination or similar
agreements or arrangements with, or grant any bonuses, salary increases,
severance or termination pay to, or otherwise increase the compensation or
benefits of, any officer, director, consultant or employee other than
increases in salary, compensation or benefits granted in the ordinary
course of business consistent (including as to the amount and timing
thereof) with past practice, except as may be required by applicable law or
a binding written contract in effect on the date of the Raytheon Merger
Agreement;
. except as may be required by changes in applicable law or accounting
principles, change any method or principle of accounting in a manner that
is inconsistent with past practice;
. take any action that would reasonably be expected to result in its
representations and warranties contained in the Raytheon Merger Agreement
becoming false or inaccurate;
. enter into or carry out any other transaction which is material to Hughes
Defense other than in the ordinary and usual course of business;
. take any action which could reasonably be expected to adversely affect or
delay the ability of any parties to the Raytheon Merger Agreement to obtain
any approval of any governmental authority required to consummate the
transaction contemplated by the Raytheon Merger Agreement;
. settle any actions, whether now pending or hereafter made or brought, on
terms which include a material limitation on the business or operations of
New Raytheon; or
. permit or cause any subsidiary to do any of the foregoing or agree or
commit to do any of the foregoing or agree in writing or otherwise to take
any of the foregoing actions.
Indebtedness. The Raytheon Merger Agreement also provides that as of or prior
to the Raytheon Merger Effective Time, Hughes Defense will incur indebtedness
for borrowed money in an amount equal to the Intercompany Payment Amount (as
defined below). For a description of the new debt to be incurred by Hughes
Defense, see "New Debt of Hughes Defense To Be Assumed By New Raytheon" in
Chapter 5. The proceeds of such indebtedness (up to $4.0 billion) will be made
available as capital to Hughes Telecom. The proceeds of such indebtedness, if
any, above $4.0 billion will be used to repay intercompany loans owing to Delco
and, therefore, since Delco is being transferred to General Motors as part of
the Hughes Transactions, any such proceeds will be available to General Motors.
See "Special Factors--Allocation of Hughes Defense Debt Proceeds; Hughes
Telecom Funding." The Raytheon Merger Agreement uses the term "Intercompany
Payment" to apply to these applications of proceeds. We currently estimate that
such proceeds will exceed $4.0 billion only if the average closing price of
Raytheon Common Stock as described below is $53.59 or less.
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The "Intercompany Payment Amount" will be equal to $9.5 billion minus the
"Class A Common Stock Amount" (as defined below) and minus the principal amount
of all other indebtedness for borrowed money of Hughes Defense to be
outstanding at the Raytheon Merger Effective Time. The "Class A Common Stock
Amount" is equal to 102,630,503 (the fixed number of shares of Class A Common
Stock to be distributed to GM's common stockholders in the Hughes Defense Spin-
Off) multiplied by the average closing price of
Raytheon Common Stock on the NYSE during the 30-day period ending five days
prior to the Raytheon Merger Effective Time, provided, however, that in the
event such average price is greater than $54.29 such price will be deemed to be
$54.29, and in the event such average price is less than $44.42, such price
will be deemed to be $44.42. It is this covenant that gives rise to the $9.5
billion of indicated total value in the Hughes Defense Spin-Off and Raytheon
Merger to General Motors and its common stockholders, as described elsewhere in
this document. See "--General--Indicated Value of the Hughes Defense Spin-Off
and the Raytheon Merger to General Motors and Its Common Stockholders" above.
The Raytheon Merger Agreement requires that no interest in respect of the
indebtedness comprising the Intercompany Payment Amount be accrued and unpaid
at the Raytheon Merger Effective Time.
Other Actions; Notification of Certain Matters. The Raytheon Merger Agreement
provides that, among other things, (1) during the period from and after the
date of the Raytheon Merger Agreement, each of the parties will use all
commercially reasonable efforts to consummate the Raytheon Merger and the
transactions contemplated by the Raytheon Merger Agreement and to cause the
conditions to the Raytheon Merger for which they are responsible to be
satisfied as soon as practicable and (2) neither party nor its affiliates will
take any action that would cause the Raytheon Merger, the Hughes Defense Spin-
Off or the Hughes Telecom Spin-Off not to qualify for tax-free treatment under
the Code as contemplated by the parties.
The Raytheon Merger Agreement provides that Raytheon and Hughes Defense will
promptly notify the other party of (1) the occurrence or non-occurrence of any
event which would cause any representation or warranty made by it in the
Raytheon Merger Agreement to be untrue or inaccurate in any material respect at
or prior to the Raytheon Merger Effective Time and (2) any material failure by
it to comply with or satisfy any covenant, condition or agreement to be
compiled with or satisfied by it under the Raytheon Merger Agreement, provided,
however, that no such notification will limit or otherwise affect the remedies
of the parties available under the Raytheon Merger Agreement.
Competing Transactions. The Raytheon Merger Agreement provides that, during
its term, without the consent of the other party, neither Raytheon nor Hughes
Defense will, and will not authorize or permit any of its subsidiaries or any
of its subsidiaries' directors, officers, employees, agents or representatives,
directly or indirectly, to (1) solicit, initiate, knowingly encourage or
facilitate, or furnish or disclose non-public information in furtherance of,
any inquiries or the making of any proposal with respect to a Competing
Transaction (as defined below), (2) negotiate, explore or otherwise engage in
discussions with any person (other than the other party to the Raytheon Merger
Agreement or its respective directors, officers, employees, agents and
representatives or, with respect to Hughes Defense, its affiliates) with
respect to any Competing Transaction or (3) enter into any agreement,
arrangement or understanding therefor requiring it to abandon, terminate or
fail to consummate the Raytheon Merger. This prohibition does not apply (1) to
Hughes Defense with respect to Competing Transactions that do not include the
defense electronics business of Hughes Electronics or the consummation of which
would not otherwise result in the termination or material breach of any of the
Transaction Agreements, and (2) to Raytheon, with respect to compliance with
Rule 14e-2 under the Exchange Act with regard to a tender or exchange offer. In
addition, the prohibition does not apply, subject to the observance of certain
notice, confidentiality and other requirements, to certain negotiations and
discussions relating to any Competing Transaction (1) that is superior to the
transactions contemplated by the Raytheon Merger Agreement, (2) in which the
offeror has demonstrated that the consideration necessary for such Competing
Transaction is reasonably likely to be available, and (3) that Raytheon's board
of directors or Hughes Defense's board of directors, as the case may be,
concludes in good faith, on the basis of oral or written advice of outside
counsel, that such action is necessary for it to act in a manner consistent
with its fiduciary duties under applicable law.
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In the event that Raytheon's board of directors or Hughes Defense's board of
directors, as the case may be, will have concluded in good faith, after
considering applicable provisions of state law, and after seeking to make such
adjustments in the terms and conditions of the Raytheon Merger Agreement as
would enable such party to proceed with the transactions contemplated by the
Raytheon Merger Agreement, that it must accept such Competing Transaction in
order to comply with its fiduciary duties under applicable law, then Raytheon
or Hughes Defense, as the case may be, may terminate the Raytheon Merger
Agreement and pay to the other party: (1) the expenses incurred by such other
party and its affiliates in connection with pursuing the Raytheon Merger and
the transactions contemplated by the Raytheon Merger Agreement, which amount
will not exceed $20 million, and (2) a termination fee of $200 million.
"Competing Transaction" means any merger, consolidation or other business
combination involving such party, or any acquisition of any capital stock or
any material portion of the assets (except for acquisitions of assets in the
ordinary course of business consistent with past practice and except for
consummation of the Hughes Transactions) of such party, or any combination of
the foregoing.
CONDITIONS
Each party's obligation to effect the Raytheon Merger is subject to the
satisfaction or waiver of a number of conditions. Failure to satisfy or waive
any of these conditions could, therefore, result in the delay or non-
consummation of the Raytheon Merger.
Conditions of Each Party's Obligations to Consummate the Raytheon Merger. The
respective obligations of Raytheon and Hughes Defense to consummate the
Raytheon Merger are subject to fulfillment of the following conditions:
. no order, injunction or decree which prevents the consummation of the
Raytheon Merger will have been issued and remain in effect, and no statute,
rule or regulation will have been enacted by any governmental authority
which prevents the consummation of the Raytheon Merger;
. all required approvals of, or filings with, any governmental authority will
have been obtained or made, except where failure to do so would have no
material adverse effect;
. all required consents or approvals of all persons (other than governmental
authorities) will have been obtained and will be in full force and effect,
unless the failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a material adverse
effect;
. approval of Raytheon's stockholders;
. consummation of the Hughes Transactions;
. the Goldman Sachs Fairness Opinion will not have been withdrawn, revoked or
modified;
. the opinions of Bear, Stearns and Credit Suisse First Boston Corporation,
each dated January 16, 1997 (respectively, the "Bear Stearns Fairness
Opinion" and the "First Boston Fairness Opinion"), to Raytheon's board of
directors, in each case to the effect that, on the basis of and subject to
the assumptions, representations, limitations and other matters set forth
therein, the financial terms of the Raytheon Merger are fair to the
stockholders of Raytheon from a financial point of view (with respect to
Bear, Stearns) and the Raytheon Merger Consideration (as defined in the
opinion of Credit Suisse First Boston Corporation) is fair to the
stockholders of Raytheon from a financial point of view, will not have been
withdrawn, revoked or modified;
. receipt by Raytheon and Hughes Defense respectively, of the tax opinions of
Wachtell, Lipton, Rosen & Katz, special counsel to Raytheon, and Weil,
Gotshal & Manges LLP, special counsel to Hughes Defense, in each case to
the effect that the Raytheon Merger will qualify as a reorganization within
the meaning of Section 368 of the Code; and
. receipt of all required state securities or blue sky permits or approvals.
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Conditions to the Obligations of Raytheon. Raytheon's obligations to
consummate the Raytheon Merger are also subject to the fulfillment or waiver of
the following conditions:
. certain representations and warranties of Hughes Defense being true and
correct on the date of the Raytheon Merger Agreement and on and as of the
closing date as though made on and as of the closing date and certain other
representations and warranties of Hughes Defense being true and correct on
the date of Raytheon Merger Agreement and on and as of the closing date as
though made on and as of the closing date, except for such inaccuracies
which would not reasonably be expected to have a material adverse effect on
Hughes Defense or New Raytheon;
. Hughes Defense having performed in all material respects each obligation
and agreement and having complied in all material respects with each
covenant to be performed and complied with by it under the Raytheon Merger
Agreement at or prior to the Raytheon Merger Effective Time; and
. except to the extent contemplated by the Raytheon Merger Agreement, there
will not have been any material adverse change in the assets, liabilities,
results of operations, business or financial condition of Hughes Defense
and its subsidiaries taken as a whole or any material adverse effect on the
ability of Hughes Defense to consummate the transactions contemplated by
the Raytheon Merger Agreement.
Conditions to the Obligations of Hughes Defense. Hughes Defense's obligations
to consummate the Raytheon Merger are also subject to the fulfillment or waiver
of the following conditions:
. certain representations and warranties of Raytheon being true and correct
on the date of the Raytheon Merger Agreement and on and as of the closing
date as though made on and as of the closing date and certain other
representations and warranties of Raytheon being true and correct on the
date of the Raytheon Merger Agreement and on and as of the closing date as
though made on and as of the closing date, except for such inaccuracies
which would not reasonably be expected to have a material adverse effect on
Raytheon or New Raytheon;
. Raytheon having performed in all material respects each obligation and
agreement and having complied in all material respects with each covenant
to be performed and complied with by it under the Raytheon Merger Agreement
at or prior to the Raytheon Merger Effective Time;
. except to the extent contemplated by the Raytheon Merger Agreement, there
will not have been any material adverse change in the assets, liabilities,
results of operations, business or financial condition of Raytheon to
consummate the transactions contemplated by the Raytheon Merger Agreement;
and
. the Intercompany Payment will have been duly made in full.
REPRESENTATIONS AND WARRANTIES; NO SURVIVAL
The Raytheon Merger Agreement contains various representations and warranties
of Raytheon and Hughes Defense. The representations and warranties of Raytheon
relate generally to: due corporate organization and qualification; corporate
authority; absence of violations of, among other things, certificates of
incorporation, by-laws, contracts and laws; required filings with and consents
and approvals of governmental authorities; board recommendation and stockholder
voting requirements; the capital structure of Raytheon; the subsidiaries and
other equity or ownership interests of Raytheon; documents filed with the SEC
by Raytheon, and the accuracy of certain information, including financial
statements, contained in such documents and in the Raytheon Registration
Statement and this document; financial statements of Raytheon; proper
accounting controls; payments to international sales representatives; absence
of certain material events and changes; compliance with applicable laws; real
estate matters; litigation; taxes; employee benefit plans; environmental
matters; takeover statutes; brokers and finders; employees; restrictive
agreements; absence of shareholder rights plans; and opinions of financial
advisors.
The representations and warranties of Hughes Defense relate generally to: due
corporate organization and qualification; corporate authority; absence of
violations of, among other things, certificates of incorporation, by-laws,
contracts and laws; required filings with and consents and approvals of
governmental authorities; board
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and stockholder approvals; the subsidiaries and other equity or ownership
interests of Hughes Defense; information filed with the SEC as part of the
Raytheon Registration Statement, including the Raytheon Proxy Statement, and
the accuracy of information contained in such documents; financial statements
with respect to Hughes Defense; proper accounting controls; payments to
international sales representatives; absence of certain material changes and
events; conduct of operations; absence of undisclosed liabilities; employees;
employee benefits and retirement plan assets; real estate matters;
environmental matters; restrictive agreements; compliance with applicable laws;
litigation; takeover statutes; brokers and finders; and opinions of financial
advisors.
The representations and warranties made in the Raytheon Merger Agreement by
Raytheon and Hughes Defense will not survive the Raytheon Merger Effective
Time.
WAIVER AND AMENDMENT
The Raytheon Merger Agreement provides that, subject to applicable law, the
parties may (1) extend the time for the performance of any of the obligations
or other acts of the other party, (2) waive any inaccuracies in the
representations and warranties contained in the Raytheon Merger Agreement or in
any document delivered pursuant thereto or (3) waive compliance with any of the
agreements or conditions contained in the Raytheon Merger Agreement, by action
of the parties' respective boards of directors and written agreement signed by
the party agreeing to such extension or waiver.
In addition, subject to applicable law, the parties to the Raytheon Merger
Agreement may amend the Raytheon Merger Agreement by action of their respective
board of directors, at any time, provided that after adoption of the Raytheon
Merger Agreement by Raytheon's common stockholders or approval of the Hughes
Transactions by GM's common stockholders, amendments which by law require
further approval or authorization by the stockholders of Raytheon or General
Motors, as the case may be, may not be made without such further approval or
authorization. In either case, the Raytheon Merger Agreement may not be amended
except by a written instrument signed by each party.
TERMINATION
The Raytheon Merger Agreement may be terminated at any time prior to the
Raytheon Merger Effective Time by mutual written consent of Raytheon and Hughes
Defense or, by either Raytheon or Hughes Defense:
. if any permanent injunction or other order of a court or other competent
governmental authority preventing the consummation of the Raytheon Merger
or the Hughes Transactions has become final and nonappealable;
. in the event of a material breach by the other party of any representation
or warranty, or any of the covenants or agreements contained in the
Raytheon Merger Agreement which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach;
. if the Raytheon Merger is not consummated before December 31, 1997, unless
such date is extended by the board of directors of both Raytheon and Hughes
Defense (provided that the terminating party (or its affiliates) has not
failed to perform any material covenant or obligation under the Raytheon
Merger Agreement or under the Implementation Agreement, which failure has
been the cause of or resulted in the failure of the Raytheon Merger to
occur on or before such date);
. if the requisite vote of Raytheon stockholders to approve the Raytheon
Merger and the transactions contemplated hereby is not obtained;
. if the approval by the GM $1 2/3 Common Stockholders and the GM Class H
Common Stockholders of the Hughes Transactions sought pursuant to this
document is not obtained;
. upon the occurrence of any event or effect not contemplated by the Raytheon
Merger Agreement that has resulted in a material adverse change after the
date of the Raytheon Merger Agreement in the assets,
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liabilities, results of operations, businesses or financial condition of
the other party and its subsidiaries, taken as a whole, or upon the
occurrence of an event which could reasonably be expected to result in such
a material adverse change with respect to such party or, after the Raytheon
Merger Effective Time, New Raytheon;
. if the board of directors of the other party or any committee of the board
of directors of the other party (1) withdraws or modifies in any adverse
manner its approval or recommendation of the Raytheon Merger Agreement or
the Raytheon Merger, (2) fails to reaffirm such approval or recommendation
upon such party's request, (3) approves or recommends any acquisition of
the other party or a material portion of its assets or any tender offer for
shares of its capital stock, in each case, other than by a party to the
Raytheon Merger Agreement or an affiliate thereof, or (4) resolves to take
any of the actions specified in clause (1) above;
. under the circumstances described above under "--Raytheon Merger
Agreement--Certain Covenants--Competing Transactions"; or
. if the Implementation Agreement is terminated pursuant to its terms.
In the event of a termination of the Raytheon Merger Agreement pursuant to
its terms, the Raytheon Merger Agreement (except with respect to payment of the
expenses of the other party and payment of a termination fee in certain
circumstances, as described below under "--Raytheon Merger Agreement--Effect of
Termination; Termination Fees") will become void and have no effect, without
any liability, however, on the part of the parties or their directors, officers
or stockholders. Nothing in the Raytheon Merger Agreement relieves any party of
liability for a willful breach of any provisions of the Raytheon Merger
Agreement.
EFFECT OF TERMINATION; TERMINATION FEES
Termination Fees Payable by Hughes Defense: The Raytheon Merger Agreement
obligates Hughes Defense to pay all Raytheon Expenses (as defined below) if the
Raytheon Merger Agreement is terminated in accordance with its terms in any of
the following circumstances:
. by Raytheon in response to any resolution or action by Hughes Defense's
board of directors (i) to withdraw, modify in any adverse manner or decline
to reaffirm upon request, its approval or recommendation of the Raytheon
Merger Agreement or the Raytheon Merger or (ii) to approve or recommend any
acquisition of Hughes Defense or a material portion of its assets by any
person other than Raytheon and its affiliates;
. by Hughes Defense if Hughes Defense's board of directors concludes that, as
a result of a Competing Transaction, such action is necessary in order for
it to comply with its fiduciary duties under applicable law as described
above;
. by either Raytheon or Hughes Defense if the GM $1 2/3 Common Stockholders
and the GM Class H Common Stockholders fail to approve the Hughes
Transactions as contemplated in this document;
. by either Raytheon or Hughes Defense in the event that the Implementation
Agreement has been terminated for any of the following reasons:
(1) by General Motors in the event that the GM Board has determined in good
faith, in the exercise of its fiduciary obligations, under applicable
law, on the basis of advice of outside counsel, that it must revoke or
withdraw its recommendation in favor of the Hughes Transactions set
forth in this document and such conclusion cannot reasonably be avoided
by adjusting the Distribution Ratio;
(2) by Raytheon in the event that the GM Board has made a determination
described in paragraph (1) above and has not terminated the Raytheon
Merger Agreement within 10 business days thereof;
(3) by Raytheon in the event that General Motors revokes, withdraws,
modifies in an adverse manner or fails to reaffirm upon request the
recommendation of the GM Board in favor of the Hughes Transactions set
forth in this document; or
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THE RAYTHEON MERGER
(4) by either General Motors or Raytheon as a result of the termination of
the GM Spin-Off Merger Agreement as a result of: (A) determination by
the GM Board (and such determination cannot reasonably be avoided by
adjusting the Distribution Ratio) that consummation of the Hughes
Transactions would not be both in the best interests of General Motors
and its common stockholders and fair to the GM $1 2/3 Common
Stockholders and the GM Class H Common Stockholders; (B) the Merrill
Lynch Fairness Opinion, the Salomon Brothers Fairness Opinion or (other
than in certain limited circumstances) the Goldman Sachs Fairness
Opinion being revoked or withdrawn; or (C) the Hughes Transactions
failing to receive the requisite approval of GM stockholders; or
. by either Raytheon or Hughes Defense if the Raytheon Merger is not
consummated before December 31, 1997, or such later date as agreed by
Raytheon and Hughes Defense, and the failure to consummate the Raytheon
Merger is based on the failure of General Motors to consummate the GM Spin-
Off Merger because either (1) the Merrill Lynch Fairness Opinion or the
Salomon Brothers Fairness Opinion is withdrawn or revoked or (2) the GM
Board determines in good faith, in the exercise of its fiduciary duties
under applicable law, on the basis of the advice of outside counsel, that
consummation of the Hughes Transactions would not be in the best interests
of General Motors and its common stockholders and fair to the holders of
both classes of GM common stock.
Hughes Defense also will be obligated to pay Raytheon $200 million in the
event that the Raytheon Merger Agreement is terminated as described above and
either (1) prior to the time of such termination a Competing Transaction
involving Hughes Defense is commenced, publicly proposed, publicly disclosed or
communicated to Hughes Defense's board of directors or (2) at any time within
three months following such termination any agreement with respect to a
Competing Transaction involving the defense electronics business of Hughes
Electronics is entered into or any such Competing Transaction is consummated.
"Raytheon Expenses" means an amount in cash equal to the aggregate amount of
Raytheon's and its affiliates' actual documented out-of-pocket expenses
incurred in connection with pursuing the transactions contemplated by the
Raytheon Merger Agreement, including legal, accounting and investment banking
fees, in an aggregate amount not to exceed $20 million.
Termination Fees Payable by Raytheon. The Raytheon Merger Agreement obligates
Raytheon to pay all Hughes Defense Expenses (as defined below) if the Raytheon
Merger Agreement is terminated in accordance with its terms in the following
circumstances:
. by Hughes Defense (1) if the requisite vote of Raytheon stockholders to
approve the Raytheon Merger is not obtained; or (2) in response to any
resolution or action by Raytheon's board of directors to withdraw, modify
in any adverse manner or decline to reaffirm upon request, its approval or
recommendation of the Raytheon Merger Agreement or the Raytheon Merger or
to approve or recommend any acquisition of Raytheon or a material portion
of its assets by any person other than Hughes Defense and its affiliates;
. by Raytheon if (1) the requisite vote of Raytheon stockholders to approve
the Raytheon Merger is not obtained; or (2) Raytheon's board of directors
concludes that, as a result of a Competing Transaction, such action is
necessary in order for it to comply with its fiduciary duties under
applicable law as described above; or
. by either Raytheon or Hughes Defense if the Raytheon Merger shall not have
been consummated before December 31, 1997, or such later date as agreed by
Raytheon and Hughes Defense, and the failure to consummate the Raytheon
Merger because the Bear Stearns Fairness Opinion or the Credit Suisse
Fairness Opinion has been withdrawn or revoked when all other conditions to
the Raytheon Merger (other than the consummation of the Hughes
Transactions) have been satisfied or are capable of being satisfied if such
withdrawal or revocation of the Bear Stearns Fairness Opinion or the Credit
Suisse Fairness Opinion does not result from a breach of the
representations and warranties of Hughes Defense set forth in the Raytheon
Merger Agreement.
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In addition, Raytheon will be obligated to pay Hughes Defense $200 million in
the event that the Raytheon Merger Agreement is terminated as described above
and either (1) prior to the time of such termination a Competing Transaction
involving Raytheon is commenced, publicly proposed, publicly disclosed or
communicated to Raytheon's board of directors, or (2) at any time within three
months following such termination any agreement with respect to a Competing
Transaction involving Raytheon is entered into or any such Competing
Transaction is consummated.
"Hughes Defense Expenses" means an amount in cash equal to the aggregate
amount of Hughes Defense's and its affiliates' actual documented out-of-pocket
expenses incurred in connection with pursuing the transactions contemplated by
the Raytheon Merger Agreement, including legal, accounting and investment
banking fees, in an aggregate amount not to exceed $20 million.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Raytheon Merger Agreement provides that from and after the Raytheon
Merger Effective Time, New Raytheon will indemnify, defend and hold harmless
each individual who was, at any time prior to the Raytheon Merger Effective
Time, an officer or director of Raytheon or Hughes Defense or any of their
respective subsidiaries (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts that are paid in
settlement with the approval of New Raytheon (which approval will not be
unreasonably withheld) arising out of or in connection with any claim, action,
suit, proceeding or investigation based in whole or in part on or arising in
whole or in part out of (1) the fact that such person is or was a director or
officer of Raytheon or Hughes Defense or their respective subsidiaries, as the
case may be, whether pertaining to any matter existing or occurring at or prior
to the Raytheon Merger Effective Time and whether asserted or claimed prior to,
or at or after, the Raytheon Merger Effective Time and (2) the Raytheon Merger
Agreement or the transactions contemplated thereby, in each case to the full
extent Raytheon or Hughes Defense, as the case may be, would have been
permitted under Delaware law and its certificate of incorporation and bylaws to
indemnify such person, and New Raytheon will pay expenses reasonably incurred
by an Indemnified Party in advance of the final disposition of any such action
or proceeding to such Indemnified Party to the full extent permitted by law
upon receipt of the undertaking contemplated by Section 145(e) of the Delaware
General Corporation Law.
Without limiting the generality of the foregoing, in the event any such
claim, action, suit, proceeding or investigation is brought against any
Indemnified Party (whether arising before or after the Raytheon Merger
Effective Time), after the Raytheon Merger Effective Time, New Raytheon (1)
will pay all reasonable fees and expenses of any counsel retained by any
Indemnified Parties promptly as statements therefor are received, and (2) will
use its commercially reasonable efforts to assist in the vigorous defense of
any such matter, provided that New Raytheon will not be liable for any
settlement of any claim effected without its written consent, which consent,
however, will not be unreasonably withheld. Pursuant to the terms of the
Raytheon Merger Agreement, any Indemnified Party wishing to claim
indemnification, upon learning of any such claim, action, suit, proceeding or
investigation, will notify New Raytheon (but the failure so to notify New
Raytheon will not relieve it from any liability which it may have except to the
extent such failure materially prejudices New Raytheon), and will deliver to
new Raytheon the undertaking, if any, contemplated by Section 145(e) of the
Delaware General Corporation Law. Under the terms of the Raytheon Merger
Agreement, the indemnification provisions are intended to be for the benefit
of, and will be enforceable by, each Indemnified Party, his or her heirs and
his or her legal representatives.
IMPLEMENTATION AGREEMENT
GENERAL
The Implementation Agreement is an agreement between General Motors and
Raytheon, pursuant to which General Motors has agreed to take certain actions
to effect the Hughes Transactions.
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THE RAYTHEON MERGER
PROPOSAL OF THE HUGHES TRANSACTIONS
The Implementation Agreement provides that, following the determination of
the Distribution Ratio and the execution of the GM Spin-Off Merger Agreement
and provided that none of the Merrill Lynch Fairness Opinion, the Salomon
Brothers Fairness Opinion and the Goldman Sachs Fairness Opinion has been
revoked, withdrawn or modified in a manner adverse to General Motors or to the
GM Board or to either class of GM's common stockholders, General Motors will:
(1) take all commercially reasonable action in accordance with the federal
securities laws, the Delaware General Corporation Law, the GM
Certificate of Incorporation and the GM By-Laws necessary to present the
Hughes Transactions to GM's common stockholders for their consideration
and approval;
(2) include in this document the recommendation of the GM Board in favor of
the Hughes Transactions; and
(3) use all commercially reasonable efforts to solicit from GM's common
stockholders consents with respect to the Hughes Transactions.
Each of these obligations is subject to the fiduciary duties of the GM Board
under applicable law.
COVENANTS OF GENERAL MOTORS
No Solicitation. The Implementation Agreement provides that until the
Raytheon Merger Effective Time, without the prior written consent of Raytheon,
General Motors will not, and will not authorize or permit any of its
subsidiaries or any of its or its subsidiaries' directors, officers, employees,
agents or representatives to, directly or indirectly, solicit, initiate,
knowingly encourage or facilitate, or furnish or disclose non-public
information in furtherance of, any inquiries or the making of any proposal with
respect to any Competing Transaction (as defined in the Raytheon Merger
Agreement) relating to Hughes Defense or the consummation of which would
otherwise result in the termination or material breach of any of the
Transaction Agreements, or negotiate, explore or otherwise engage in
discussions with any person (other than Raytheon or its respective directors,
officers, employees, agents and representatives) with respect to any Competing
Transaction or enter into any agreement, arrangement or understanding therefor
requiring them to abandon, terminate or fail to consummate the Raytheon Merger.
The foregoing limitation, however, does not prohibit any of such parties from
taking any action to the extent (including compliance by General Motors with
the conditions set forth therein) that Hughes Defense could do so pursuant to
the comparable provision of the Raytheon Merger Agreement. See "--Raytheon
Merger Agreement--Certain Covenants--Competing Transactions."
Transaction Agreements. The Implementation Agreement also provides that:
. General Motors will enter into, and to cause its subsidiaries to enter
into, the Transaction Agreements, as and when contemplated by the
Implementation Agreement and the other Transaction Agreements;
. General Motors will consult with Raytheon regarding any changes, amendments
or additions that are proposed to be made to the Transaction Agreements
prior to the Raytheon Merger Effective Time, whether before or after any
such agreement is entered into by the respective parties to such agreement;
. General Motors will not permit (except for any amendment to the GM Spin-Off
Merger Agreement to adjust the Distribution Ratio under certain
circumstances) any change, amendment or addition to be made prior to the
Raytheon Merger Effective Time to the forms or terms of the Transaction
Agreements without Raytheon's consent (which consent shall not be
unreasonably withheld or delayed), unless such change, amendment or
addition could not reasonably be foreseen (1) to have an adverse effect on
the business, assets, liabilities or financial condition of Hughes Defense
or (2) to delay materially the consummation of the Raytheon Merger on the
terms and subject to the conditions of the Implementation Agreement and the
other Transaction Agreements;
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
. General Motors will not, and will not permit any of its subsidiaries to,
terminate (except as may be permitted by the terms of any of the
Transaction Agreements) or waive any condition of the Transaction
Agreements, without the prior written consent of Raytheon, unless the
Implementation Agreement has been terminated; and
. General Motors will not permit Hughes Defense to make prior to the Raytheon
Merger Effective Time any formal election expressly referenced in the
Master Separation Agreement to be made by Hughes Defense unless such
election is acceptable to Raytheon.
CERTAIN OTHER COVENANTS
The Implementation Agreement further provides that, among other things, each
of General Motors and Raytheon will, and will cause its subsidiaries to, use
all commercially reasonable efforts to consummate the Hughes Transactions and
the Raytheon Merger.
The Implementation Agreement provides that General Motors and Raytheon will
promptly notify the other party of (1) the occurrence or non-occurrence of any
event which would cause any representation or warranty made by it contained in
the Implementation Agreement to be untrue or inaccurate in any material respect
at or prior to the Raytheon Merger Effective Time and (2) any material failure
by it to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it under the Implementation Agreement, provided,
however, that no such notification will limit or otherwise affect the remedies
of the parties available under the Implementation Agreement.
REPRESENTATIONS AND WARRANTIES; NO SURVIVAL
The Implementation Agreement contains various representations and warranties
of General Motors and Raytheon. The representations and warranties of General
Motors relate generally to: due corporate organization and qualification;
corporate authority; ownership of the capital stock of Hughes Defense; absence
of violations of, among other things, certificates of incorporation, by-laws,
contracts and laws; required filings with and consents and approvals of
governmental authorities; litigation; brokerage and finder's fees; stockholder
voting requirements; and the accuracy of certain information contained in the
Raytheon Registration Statement and the Raytheon Proxy Statement.
The representations and warranties of Raytheon relate generally to: due
corporate organization and qualification; corporate authority; and the accuracy
of certain information contained in this document. Raytheon also confirms in
the Implementation Agreement all of the representations and warranties of
Raytheon set forth in the Raytheon Merger Agreement. See "--Raytheon Merger
Agreement--Representations and Warranties; No Survival" above.
The representations and warranties made in the Implementation Agreement by
General Motors and Raytheon will not survive the Raytheon Merger Effective
Time.
WAIVER AND AMENDMENT
The Implementation Agreement provides that, subject to applicable law, the
parties may (1) extend the time for the performance of any of the obligations
or other acts of the other party, (2) waive any inaccuracies in the
representations and warranties contained in the Implementation Agreement or in
any document delivered pursuant thereto and (3) waive compliance with any of
the agreements or conditions contained in the Implementation Agreement, by
action of the parties' respective boards of directors and written agreement
signed by the party agreeing to such extension or waiver.
In addition, subject to applicable law, the parties to the Implementation
Agreement may amend the Implementation Agreement by action of their respective
boards of directors, at any time, provided, that after
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
adoption of the Raytheon Merger Agreement by Raytheon stockholders or approval
of the Hughes Transactions by GM stockholders, amendments which by law require
further approval or authorization by the stockholders of Raytheon or General
Motors, as the case may be, may not be made without such further approval or
authorization. In either case, the Implementation Agreement may not be amended
except by a written instrument signed by each party.
TERMINATION OF THE IMPLEMENTATION AGREEMENT
The Implementation Agreement may be terminated at any time prior to the
Raytheon Merger Effective Time by mutual written consent of General Motors and
Raytheon or as follows:
. by either General Motors or Raytheon at any time following the termination
of either of the Raytheon Merger Agreement or the GM Spin-Off Merger
Agreement in accordance with the terms thereof;
. by either General Motors or Raytheon in the event of either: (1) a material
breach by the other party of any representation or warranty contained in
the Implementation Agreement which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach; or (2) a material breach by the other party of any of the
covenants or agreements contained in the Implementation Agreement which
breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach.
. by General Motors in the event that the GM Board determines in good faith,
in the exercise of its fiduciary obligations under applicable law, on the
basis of oral or written advice of outside counsel, (1) that it must revoke
or withdraw its recommendation in this document in favor of the Hughes
Transactions and (2) that the foregoing determination could not reasonably
be avoided by adjusting the Distribution Ratio so as to enable (A) the GM
Board to determine that the Hughes Transactions, taken as a whole, are in
the best interests of General Motors and its common stockholders and fair
to the GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders
and (B) the Merrill Lynch Fairness Opinion and the Salomon Brothers
Fairness Opinion to be applicable to the Hughes Transactions with the
Distribution Ratio as adjusted; or
. by Raytheon in the event that: (1) the GM Board makes a determination
regarding the Distribution Ratio as described in the immediately preceding
paragraph and does not terminate the Implementation Agreement within ten
business days thereof; or (2) the GM Board withdraws or modifies in any
adverse manner its approval or recommendation of the Hughes Transactions or
fails to reaffirm such approval or recommendation upon Raytheon's request.
EFFECT OF TERMINATION
In the event of the termination of the Implementation Agreement, the
Implementation Agreement will become void and have no effect, without any
liability on the part of either party or its subsidiaries or their respective
directors, officers or stockholders, except for payment of expenses and a
termination fee to the extent provided in the Raytheon Merger Agreement. See
"--Raytheon Merger Agreement--Effect of Termination; Termination Fees" above.
Notwithstanding the foregoing, nothing in the Implementation Agreement is
intended to relieve either party to the Implementation Agreement of liability
for a willful breach of any provision of the Implementation Agreement.
GM STOCKHOLDER APPROVAL NOT REQUIRED FOR THE RAYTHEON MERGER
You are not being asked to approve the Raytheon Merger, which has already
been approved by Hughes Electronics as the sole stockholder of Hughes Defense.
Although you are not being asked to approve the Raytheon Merger, consummation
of the Raytheon Merger is conditioned upon, among other things, the
consummation of the Hughes Transactions, which requires the approval of GM's
common stockholders. IF GM'S COMMON STOCKHOLDERS APPROVE THE HUGHES
TRANSACTIONS AND ALL OTHER CONDITIONS ARE SATISFIED OR WAIVED, THE RAYTHEON
MERGER WILL BE CONSUMMATED IMMEDIATELY AFTER THE CONSUMMATION OF THE HUGHES
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
DEFENSE SPIN-OFF. IF GM'S COMMON STOCKHOLDERS DO NOT APPROVE THE HUGHES
TRANSACTIONS, NEITHER THE HUGHES TRANSACTIONS NOR THE RAYTHEON MERGER WILL BE
CONSUMMATED.
APPROVALS BY THE CAPITAL STOCK COMMITTEE AND THE GM BOARD; FAIRNESS OF THE
RAYTHEON MERGER
The Raytheon Merger was approved by the GM Board on January 16, 1997. This
approval was based on, among other things, recommendations of the Capital Stock
Committee, the Hughes Defense Spin-Off Committee, Hughes Electronics management
and GM management. The Raytheon Merger was also approved by the Hughes
Electronics Board. Additional information regarding the January 16, 1997
meetings of the Hughes Electronics Board, the Hughes Defense Spin-Off
Committee, the Capital Stock Committee and the GM Board, and certain factors
considered at these and other meetings, is set forth above under "Special
Factors--Background of the Hughes Transactions." For a description of certain
matters considered by the Capital Stock Committee and the GM Board in approving
the Raytheon Merger, see "Recommendations of the Capital Stock Committee and
the GM Board; Fairness of the Hughes Transactions" above.
RAYTHEON MERGER FAIRNESS OPINION: GOLDMAN SACHS
On January 16, 1997, Goldman Sachs delivered its written opinion to the
boards of directors of General Motors, Hughes Electronics and Hughes Defense
that, as of the date of such opinion, the Aggregate Consideration (as defined
below) is fair to the GM Group as a whole. It is a condition to the completion
of the Hughes Transactions that Goldman Sachs has not withdrawn its fairness
opinion.
For purposes of the Goldman Sachs Fairness Opinion, Hughes Defense, Hughes
Electronics, General Motors and the GM $1 2/3 Common Stockholders and the GM
Class H Common Stockholders are collectively referred to as the "GM Group."
For purposes of the Goldman Sachs Fairness Opinion, the ownership by the
Class A Common Stockholders, in the aggregate, of approximately 30% of the
outstanding common stock of New Raytheon upon the consummation of the Raytheon
Merger and the indebtedness for borrowed money of Hughes Defense immediately
prior to the Hughes Defense Spin-Off and the Raytheon Merger (which will become
the indebtedness of New Raytheon upon the consummation of the Raytheon Merger)
are together referred to as the "Aggregate Consideration."
The Goldman Sachs Fairness Opinion does not address the fairness of the
Hughes Transactions or the fairness of the distribution to and allocation among
the GM $1 2/3 Common Stockholders and GM Class H Common Stockholders of Class A
Common Stock in the Hughes Defense Spin-Off. These matters are addressed, to
the extent specified therein, in the Merrill Lynch Fairness Opinion and the
Salomon Brothers Fairness Opinion. See "Special Factors--Hughes Transactions
Fairness Opinions: Merrill Lynch and Salomon Brothers--Merrill Lynch Fairness
Opinion" and "--Salomon Brothers Fairness Opinion" above.
The Goldman Sachs Fairness Opinion is directed only to the fairness of the
Aggregate Consideration to be received by the GM Group as a whole and does not
(1) address GM's underlying business decision to effect the Hughes
Transactions, (2) address the fairness of the allocation of the Aggregate
Consideration among the members of the GM Group or (3) constitute a
recommendation concerning whether GM $1 2/3 Common Stockholders and GM Class H
Common Stockholders should approve the Hughes Transactions.
THE FULL TEXT OF THE GOLDMAN SACHS FAIRNESS OPINION, WHICH SETS FORTH
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN
IN CONNECTION WITH THE OPINION, IS INCLUDED IN APPENDIX B TO THIS DOCUMENT AND
IS INCORPORATED INTO THIS DOCUMENT BY REFERENCE. WE URGE YOU TO READ THE
GOLDMAN SACHS FAIRNESS OPINION CAREFULLY. A COPY OF THE WRITTEN PRESENTATION BY
GOLDMAN SACHS TO THE GM BOARD IN JANUARY 1997 HAS BEEN FILED AS AN EXHIBIT TO
THE SCHEDULE 13E-3 FILED WITH THE SEC WITH RESPECT TO THE HUGHES TRANSACTIONS
AND A COPY OF THE PRESENTATION IN THE FORM FILED WITH THE SEC MAY BE INSPECTED
AND COPIED, AND OBTAINED BY MAIL, FROM THE SEC AS SET FORTH UNDER "WHERE YOU
CAN
117
FIND MORE INFORMATION" IN CHAPTER 7 AND WILL BE MADE AVAILABLE FOR INSPECTION
AND COPYING AT THE PRINCIPAL EXECUTIVE OFFICES OF GENERAL MOTORS AT GENERAL
MOTORS CORPORATION, 100 RENAISSANCE CENTER, DETROIT, MICHIGAN 48243-7301 DURING
REGULAR BUSINESS HOURS BY ANY INTERESTED COMMON STOCKHOLDER OF GENERAL MOTORS
OR HIS OR HER REPRESENTATIVE WHO HAS BEEN SO DESIGNATED IN WRITING.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(1) the form of the Raytheon Merger Agreement; (2) the form of the
Implementation Agreement; (3) the form of the GM Spin-Off Merger Agreement; (4)
the form of the Master Separation Agreement; (5) the form of the Spin-Off
Separation Agreement; (6) the Annual Reports of Hughes Electronics for the five
years ended December 31, 1995; (7) the Annual Reports to Stockholders of
Raytheon on Form 10-K for the five years ended December 31, 1995; (8) certain
interim reports to stockholders and Quarterly Reports on Form 10-Q for
Raytheon; (9) certain other communications from General Motors and Raytheon to
their respective stockholders; and (10) certain internal financial analyses and
forecasts for Hughes Defense and Raytheon prepared by their respective
managements. Goldman Sachs also held discussions with members of the senior
management of Hughes Defense and Raytheon regarding the past and current
business operations, financial condition, and future prospects of their
respective companies, including forecasts of revenue and cost synergies that
are expected to result from the Raytheon Merger (collectively, the
"Synergies"). In addition, Goldman Sachs reviewed the reported price and
trading activity for the shares of Raytheon Common Stock; compared certain
financial and stock market information for Raytheon with similar information
for certain other companies the securities of which are publicly traded,
reviewed the financial terms of certain recent business combinations in the
aerospace and defense industry specifically and in other industries generally
and performed such other studies and analyses as it considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed the accuracy and
completeness thereof in all material respects for purposes of its opinion. In
that regard, Goldman Sachs assumed, with the consent of General Motors, Hughes
Electronics and Hughes Defense, that the financial forecasts prepared by Hughes
Defense and Raytheon, including without limitation, the Synergies resulting
from the Raytheon Merger, have been reasonably prepared on a basis reflecting
the best currently available judgments and estimates of Hughes Defense and
Raytheon and that such forecasts will be realized in all material respects in
the amounts and at the times contemplated thereby. Goldman Sachs did not make
an independent evaluation or appraisal of the assets and liabilities of Hughes
Defense or Raytheon or any of their subsidiaries and Goldman Sachs was not
furnished with any such evaluation or appraisal. Goldman Sachs' advisory
services and opinion were provided for the information and assistance of the
boards of directors of each of General Motors, Hughes Electronics and Hughes
Defense in connection with their consideration of the Raytheon Merger. Goldman
Sachs was informed that the boards of directors of each of General Motors,
Hughes Electronics and Hughes Defense were considering the Raytheon Merger in
the context of the Hughes Transactions.
In the Goldman Sachs Fairness Opinion, Goldman Sachs does not express any
opinion as to the prices at which the Class A Common Stock, the Class B Common
Stock or the New GM Class H Common Stock will trade if and when they are
issued.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing the Goldman Sachs Fairness Opinion
and in analyzing the Northrop Grumman proposal.
(1) Selected Companies Analysis. Goldman Sachs reviewed certain financial
information, ratios and public market multiples for six publicly traded
corporations: The Boeing Company (adjusted pro forma for the acquisition of
Rockwell International Corporation's Aerospace and Defense business but not
including the impact of the then-pending acquisition of McDonnell Douglas
Corporation), General Dynamics Corporation, Hughes Electronics, Lockheed
Martin Corporation, Northrop Grumman Corporation and Raytheon (adjusted for
the then-pending acquisition of Texas Instruments Defense) (the "Selected
Companies"). The Selected Companies were chosen because they are publicly
traded companies with operations (or, in the case of
CHAPTER 3: THE HUGHES TRANSACTIONS AND
118 THE RAYTHEON MERGER
Hughes Electronics, track operations) that for purposes of analysis may be
considered similar to Hughes Defense. Goldman Sachs calculated and compared
various financial multiples and ratios. With respect to the Selected
Companies, Goldman Sachs considered levered market capitalization (i.e.,
market value of common equity plus estimated market value of debt less cash)
as a multiple of 1997 estimated earnings before interest, taxes, depreciation
and amortization ("EBITDA") and stock price as a multiple of 1997 and 1998
estimated earnings per share ("EPS"). The levered market capitalizations were
based on closing stock prices as of January 11, 1997 and balance sheet data
as of September 30, 1996. January 11, 1997 represented the most recent
closing stock prices and September 30, 1996 represented the most recent
publicly-available balance sheet information for the Selected Companies at
the time the analysis was performed. The analysis was performed in advance of
the GM Board meeting on January 16, 1997 in order to distribute material to
the GM Board prior to such meeting. The 1997 EBITDA multiples estimates for
each of the Selected Companies were based on Goldman Sachs research as of
November 1996 (excluding pension and non-cash income). The 1997 and 1998
price/earnings ("P/E") multiples were based on stock prices as of January 11,
1997 and Institutional Brokers Estimate Service ("IBES") estimates for EPS as
of January 8, 1997 (estimates for companies with non-calendar fiscal years
ends were calendarized). Goldman Sachs' analysis of the Selected Companies
indicated levered market capitalization multiples of 1997 estimated EBITDA
ranging from 6.6x to 9.5x with a median of 8.4x and a mean of 8.2x. Goldman
Sachs also considered for the Selected Companies estimated 1997 P/E
multiples, which ranged from 13.1x to 23.6x with a median of 14.7x and a mean
of 16.5x, estimated 1998 P/E multiples, which ranged from 11.8x to 20.4x with
a median of 13.8x and a mean of 14.5x, and debt to capitalization ratios,
which ranged from 3.0% to 62.6%.
(2) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to eight selected transactions in the aerospace and
defense industry since 1994 (listed by acquirer/target): (1) Raytheon
Company/Texas Instruments Defense, (2) The Boeing Company/McDonnell Douglas
Corporation, (3) The Boeing Company/Rockwell International Corporation's
Aerospace and Defense business, (4) Lockheed Martin Corporation/Loral
Corporation, (5) Northrop Grumman Corporation/Westinghouse's Electronic
Systems Group business, (6) Raytheon Company/E-Systems, (7) Martin Marietta
Corp./Lockheed Corporation, and (8) Northrop Corporation/Grumman Corporation
(the "Selected Transactions"). Such analysis indicated that for the Selected
Transactions levered consideration as a multiple of (1) current year sales
ranged from 0.56x to 1.68x, as compared to 1.53x for the Raytheon Merger and
1.50x for a merger of Northrop Grumman with Hughes Defense, (2) current year
earnings before interest and taxes ("EBIT") ranged from 8.6x to 12.9x, as
compared to 13.7x for the Raytheon Merger and 13.4 for a merger of Northrop
Grumman with Hughes Defense, (3) current year EBITDA ranged from 5.4x to
10.6x, as compared to 11.7x for the Raytheon Merger and 11.4x for a merger of
Northrop Grumman with Hughes Defense, (4) next year sales ranged from 0.57x
to 1.66x, as compared to 1.43x for the Raytheon Merger and 1.40x for a merger
of Northrop Grumman with Hughes Defense, (5) next year EBIT ranged from 8.2x
to 12.9x, as compared to 13.0x for the Raytheon Merger and 12.7x for a merger
of Northrop Grumman with Hughes Defense, and (6) book value ranged from 1.9x
to 9.6x, as compared to 1.9x for the Raytheon Merger and 1.8x for a merger of
Northrop Grumman with Hughes Defense.
(3) Discounted Cash Flow Analysis. Goldman Sachs performed a discounted cash
flow analysis using Hughes Defense management projections. Goldman Sachs
calculated the net present value of the cash flows of Hughes Defense as of
January 1, 1997 using discount rates from 10% to 12%. Goldman Sachs
calculated terminal values of Hughes Defense based on a multiple of trailing
EBITDA in the year 2001 ranging from 7.0x EBITDA to 8.0x EBITDA. These
terminal values were then discounted to present value (as of January 1, 1997)
using discount rates from 10% to 12%. Such analysis indicated a range of
$6.482 billion to $7.757 billion. The discount rates used were determined
using a number of different factors, including (1) a weighted average cost of
capital analysis and (2) expected internal rates of return for Hughes Defense
as well as for other companies in the aerospace and defense industry.
(4) Discounted Cash Flow Analysis--Synergies--Raytheon/Hughes Defense.
Goldman Sachs performed a discounted cash flow analysis of the Synergies
using Raytheon's management projections. Goldman Sachs calculated the net
present value of the cash flows as of January 1, 1997 using discount rates
from 10% to 12%. Goldman Sachs calculated the terminal values based on a
multiple of trailing EBIT in the year 2001
CHAPTER 3: THE HUGHES TRANSACTIONS AND
119 THE RAYTHEON MERGER
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
ranging from 8.0x EBIT to 10.0x EBIT. These terminal values were then
discounted to present value (as of January 1, 1997) using discount rates from
10% to 12%. Such analysis indicated a range from $3.396 billion to $4.321
billion. The discount rates used were determined using a number of different
factors, including (1)
a weighted average cost of capital analysis and (2) expected internal rates
of return for each of Hughes Defense and Raytheon as well as for other
companies in the aerospace and defense industry.
(5) Discounted Cash Flow Analysis--Synergies--Northrop Grumman/Hughes
Defense. Goldman Sachs performed a discounted cash flow analysis of the
Synergies using Northrop Grumman's management projections. Goldman Sachs
calculated the net present value of the cash flows as of January 1, 1997
using discount rates from 10% to 12%. Goldman Sachs calculated the terminal
values based on a multiple of trailing EBIT in the 2001 ranging from 8.0x
EBIT to 10.0x EBIT. These terminal values were then discounted to present
value (as of January 1, 1997) using discount rates from 10% to 12%. Such
analysis indicated a range from $1.632 billion to $2.049 billion.
(6) Contribution Analysis--Raytheon. Goldman Sachs reviewed certain
estimated future operating and financial information (including, among other
things, revenues, EBITDA, operating income and levered value) for Hughes
Defense, Raytheon and the pro forma combined entity resulting from the
Raytheon Merger based on Hughes Defense and Raytheon managements' financial
forecasts for each of Hughes Defense and Raytheon (which included a pro forma
base forecast for the impact of Texas Instruments Defense, before the impact
of synergies) and the pro forma combined entity. Goldman Sachs also analyzed
the relative income statement contribution of Hughes Defense and Raytheon to
the combined company on a pro forma basis based on financial data and on the
assumptions provided to Goldman Sachs by Hughes Defense and Raytheon
managements. This analysis indicated that in 1997 Hughes Defense would have
contributed 28.4% to combined revenues, 27.7% to combined EBITDA and 29.1% to
combined operating income. Based on the Aggregate Consideration of $9.5
billion for Hughes Defense and market prices of Raytheon as of January 10,
1997, Hughes Defense would receive 34.1% of the combined levered value. The
34.1% figure was calculated by taking (a) Hughes Defense's levered value of
$9,500 million as reflected by the Raytheon proposal and dividing it by (b)
the combined levered value of $27,876 million consisting of (x) Hughes
Defense's levered value of $9,500 million plus Raytheon's levered value as of
January 10, 1997 of $18,376 million, which was adjusted to include an
additional $2,950 million of debt from the then-pending acquisition of Texas
Instruments Defense business. The figure of 34.1% is the result of dividing
$9,500 million by $27,786 million.
(7) Contribution Analysis--Northrop Grumman. Goldman Sachs reviewed certain
estimated future operating and financial information (including, among other
things, revenues, EBITDA, operating income and levered value) for Hughes
Defense, Northrop Grumman and the pro forma combined entity resulting from
the merger of Hughes Defense and Northrop Grumman based on Hughes Defense and
Northrop Grumman managements' financial forecasts for each of Hughes Defense
and Northrop Grumman and the pro forma combined entity. Goldman Sachs also
analyzed the relative income statement contribution of Hughes Defense and
Northrop Grumman to the combined company on a pro forma basis based on
financial data and on the assumptions provided to Goldman Sachs by Hughes
Defense and Northrop Grumman managements.
(8) Pro Forma Trading Analysis--Raytheon. Goldman Sachs prepared pro forma
analyses of the financial impact of the Raytheon Merger. Using earnings
estimates for Raytheon prepared by its management for the years 1997 and
1998, Goldman Sachs compared the EPS of Raytheon Common Stock, on a stand-
alone basis, to the EPS of the common stock of the combined companies on a
pro forma basis (including the
impact of Raytheon's acquisition of Texas Instruments Defense). Goldman Sachs
performed this analysis based on a price of $49.35 per share (the midpoint of
the range used in determining the amount of indebtedness Hughes Defense may
have at the Raytheon Merger Effective Time) of Raytheon Common
Stock. Based on such analysis the proposed transaction would be dilutive to
Raytheon's stockholders on an
earnings per share basis in 1997 and slightly accretive to Raytheon's
stockholders on an earnings per share basis in 1998.
(9) Pro Forma Trading Analysis--Northrop Grumman. Goldman Sachs prepared pro
forma analyses of the financial impact of a merger between Hughes Defense and
Northrop Grumman. Using earnings estimates for
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
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Northrop Grumman prepared by its management for the years 1997 and 1998,
Goldman Sachs compared the EPS of Northrop Grumman's common stock, on a
standalone basis, to the EPS of the common stock of the combined companies on
a pro forma basis. Goldman Sachs performed this analysis based on a price of
$81.00 per share (the midpoint of the collar) of Northrop Grumman's common
stock.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying the Goldman Sachs Fairness Opinion. In arriving at its fairness
determination, Goldman Sachs considered the results of all such analyses.
Goldman Sachs reaches a single conclusion as to fairness based on its
experience and professional judgment and its analysis as a whole. Goldman Sachs
does not, as part of its process, isolate the various analyses and reach
separate conclusions with respect thereto. No company or transaction used in
the above analyses as a comparison (other than Hughes Electronics and Raytheon)
is directly comparable to General Motors, Hughes Electronics, Hughes Defense or
Raytheon or the contemplated transaction. The analyses were prepared solely for
purposes of Goldman Sachs providing its opinion to the board of directors of
each of General Motors, Hughes Electronics and Hughes Defense as to the
fairness of the Aggregate Consideration to the GM Group as a whole and do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, none of General Motors, Hughes Electronics, Hughes Defense, Raytheon,
Goldman Sachs or any other person assumes responsibility if future results are
materially different from those forecast.
As described above, the Goldman Sachs Fairness Opinion was one of many
factors taken into consideration by the board of directors of each of General
Motors, Hughes Electronics and Hughes Defense in making their respective
determinations to approve the Raytheon Merger Agreement. THE FOREGOING SUMMARY
DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE ANALYSIS PERFORMED BY
GOLDMAN SACHS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE GOLDMAN
SACHS FAIRNESS OPINION INCLUDED IN APPENDIX B TO THIS DOCUMENT.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. General Motors, Hughes
Electronics and Hughes Defense selected Goldman Sachs as their financial
advisor because it is a nationally recognized investment banking firm that has
substantial experience in transactions similar to the Raytheon Merger. Goldman
Sachs is familiar with Hughes Defense having provided certain investment
banking services to Hughes Defense and Hughes Electronics from time to time and
having acted as financial advisor to Hughes Defense, Hughes Electronics and
General Motors in connection with, and having participated in certain of the
negotiations leading to, the Raytheon Merger Agreement. Goldman Sachs is also
familiar with Raytheon having provided certain investment banking services to
Raytheon from time to time, including having acted as its financial advisor in
connection with the acquisition of Chrysler Technologies Airborne Systems in
June 1996 and acting as a dealer in connection with Raytheon's issuance of
commercial paper.
Goldman Sachs is a full service securities firm and as such may from time to
time effect transactions, for its own account or the account of customers, and
hold positions in the securities or options on securities of General Motors
and/or Raytheon.
Pursuant to a letter agreement dated October 23, 1996 (the "Engagement
Letter"), General Motors and Hughes Electronics engaged Goldman Sachs to act as
their financial advisor in connection with the Hughes Defense Spin-Off and the
Raytheon Merger. Pursuant to the terms of the Engagement Letter, General Motors
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
and Hughes Electronics have agreed to pay Goldman Sachs upon the consummation
of the Raytheon Merger a transaction fee based on 0.30% of the aggregate
consideration of the Raytheon Merger. General Motors and Hughes Electronics
have agreed to reimburse Goldman Sachs for its reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of its attorneys, and
to indemnify Goldman Sachs against certain liabilities, including certain
liabilities under the U.S. federal securities laws. In the opinion of the SEC,
indemnification for liabilities arising under the Securities Act is against
public policy as expressed in the Securities Act and is, therefore, in its
view, unenforceable.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
For a description of certain U.S. federal income tax considerations relating
to the Raytheon Merger, see "Special Factors--Certain U.S. Federal Income Tax
Considerations Relating to the Raytheon Merger" above.
ACCOUNTING TREATMENT
The Raytheon Merger will be accounted for by New Raytheon as a purchase for
financial accounting purposes in accordance with GAAP. Raytheon will be treated
as the acquiror of Hughes Defense for purposes of preparing the consolidated
financial statements of New Raytheon, and New Raytheon will establish a new
accounting basis for assets and liabilities of Hughes Defense based upon the
fair values thereof and the value of the consideration deemed to be provided to
General Motors, its subsidiaries and its common stockholders in connection with
the Raytheon Merger, and the costs of the Raytheon Merger. New Raytheon will
record as goodwill the excess, if any, of such consideration over such fair
values. A final determination of required purchase accounting adjustments,
including the allocation of such consideration to the assets acquired and
liabilities assumed based on their respective fair values, has not yet been
made. Accordingly, the purchase accounting adjustments made in connection with
the development of the pro forma condensed combined financial information of
New Raytheon appearing elsewhere in this document are preliminary and have been
made solely for purposes of developing such pro forma condensed combined
financial information. New Raytheon will undertake a study to determine the
fair value of certain of Hughes Defense's assets and liabilities (as so
adjusted) and will make appropriate purchase accounting adjustments upon
completion of that study. For financial reporting purposes, the results of
operations of Hughes Defense will be included in New Raytheon's consolidated
statement of income following the Raytheon Merger Effective Time. New
Raytheon's financial statements for prior periods will not be restated as a
result of the Raytheon Merger or related transactions. See "New Raytheon--New
Raytheon Unaudited Pro Forma Condensed Combined Financial Statements" in
Chapter 5.
122
SEPARATION AND TRANSITION ARRANGEMENTS
INTRODUCTION
As a condition to the consummation of the Raytheon Merger, Raytheon has
required that Hughes Defense be, at the time of the consummation of the
Raytheon Merger, an independent, publicly owned company comprising the defense
electronics business of Hughes Electronics. This condition will be satisfied by
means of the Hughes Reorganization and the Hughes Defense Spin-Off.
The Hughes Reorganization generally will be effected pursuant to the terms of
the Master Separation Agreement among General Motors, Hughes Defense, Delco and
Hughes Telecom and the agreements contemplated thereby. See "Description of the
Hughes Transactions--General--Hughes Reorganization" above. As the surviving
corporation of the Raytheon Merger, Hughes Defense (which will be renamed
"Raytheon Company") will continue to have rights and obligations pursuant to
each of these agreements after the consummation of the Raytheon Merger, except
as otherwise described below. Accordingly, references to "Hughes Defense" in
the descriptions below of such agreements should be considered, as appropriate,
also to be references to "New Raytheon." In addition, in connection with the
consummation of the Hughes Transactions, Hughes Telecom will become a direct
wholly owned subsidiary of General Motors and will be renamed "Hughes
Electronics Corporation." Accordingly, references to "Hughes Telecom" in the
descriptions below of such agreements should be considered, as appropriate,
also to be references to "New Hughes Electronics."
THE FOLLOWING IS A SUMMARY DESCRIPTION OF CERTAIN OF THE PRINCIPAL PROVISIONS
OF THE SEPARATION AGREEMENTS. THIS DESCRIPTION OF THE SEPARATION AGREEMENTS,
WHICH SUMMARIZES THE MATERIAL TERMS OF SUCH AGREEMENTS, DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE SEPARATION
AGREEMENTS. THE FORMS OF EACH OF THE MASTER SEPARATION AGREEMENT, THE SPIN-OFF
SEPARATION AGREEMENT AND THE TAX SHARING AGREEMENT HAVE BEEN FILED WITH THE SEC
AS EXHIBITS TO THE REGISTRATION STATEMENTS OF WHICH THIS DOCUMENT IS A PART AND
ARE INCORPORATED INTO THIS DOCUMENT BY REFERENCE.
SUMMARY OF MASTER SEPARATION AGREEMENT
GENERAL
The Master Separation Agreement is an agreement among General Motors, Hughes
Defense, Delco and Hughes Telecom, pursuant to which, among other things, the
transfers of certain assets and liabilities (which are required so that each of
Hughes Defense, Delco and Hughes Telecom will consist of the respective
businesses described in this document after the completion of the Hughes
Reorganization) will be effected. The Master Separation Agreement also includes
indemnification provisions and provides for a post-closing adjustment between
New Hughes Electronics and New Raytheon based on an adjusted net worth of
Hughes Defense as of immediately prior to the Raytheon Merger and for certain
other separation and transition arrangements. The Master Separation Agreement
also requires that certain parties to such agreement enter into the Spin-Off
Separation Agreement, the Tax Sharing Agreement and certain other agreements.
See "Description of the Hughes Transactions--General--Hughes Reorganization"
above.
ASSET AND LIABILITY TRANSFERS
Pursuant to the Master Separation Agreement, prior to the GM Spin-Off Merger
Effective Time, General Motors will cause Hughes Electronics (or the
appropriate subsidiary of Hughes Electronics) to transfer, as appropriate, to
each of Hughes Defense, Delco and Hughes Telecom all of Hughes Electronics'
right, title and interest in the assets of Hughes Electronics that are used or
held for use primarily in (but not presently owned by) the respective
businesses of these entities. See "Description of the Hughes Transactions--
General--
CHAPTER 3: THE HUGHES TRANSACTIONS AND
123 THE RAYTHEON MERGER
CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
Hughes Reorganization" above. The assets transferred will be transferred "as is
where is" and, except as set forth below under "--Summary of Master Separation
Agreement--Indemnification," no transferor of the assets described above will
make any warranty, either express or implied, including, without limitation,
warranties of merchantability or fitness for a particular purpose, with respect
to any of the assets transferred. For a description of the transfers with
respect to Hughes Electronics' intellectual property, see "--Summary of Other
Agreements Contemplated by the Master Separation Agreement--Intellectual
Property" below.
Simultaneously with the transfers described above, each of Hughes Defense,
Delco and Hughes Telecom, in partial consideration for such transfers, will
assume and agree on a timely basis to pay and discharge in accordance with
their terms any and all liabilities relating to or arising out of the assets
transferred to such entity. Each of Hughes Defense, Delco and Hughes Telecom
will also retain or assume, as the case may be, and no other party to the
Master Separation Agreement will assume or have any liability with respect to,
liabilities relating primarily to, or arising primarily out of, the defense
electronics business, the automotive electronics business or the
telecommunications and space business, respectively, of Hughes Electronics as
conducted at any time prior to, on or after the GM Spin-Off Merger Effective
Time, as well as certain other liabilities as identified in the Master
Separation Agreement.
Pursuant to the Master Separation Agreement, immediately following the
transfers described above, Hughes Electronics will merge with General Motors,
with General Motors as the surviving corporation, and Hughes Aircraft will
merge with Hughes Defense, with Hughes Defense as the surviving corporation.
Hughes Defense will then transfer to General Motors all of its right, title and
interest in and to the shares of capital stock of Hughes Telecom in the Hughes
Telecom Spin-Off. See "Description of the Hughes Transactions--General--Hughes
Reorganization" above.
INDEMNIFICATION
Under the Master Separation Agreement, Hughes Telecom will represent and
warrant to Hughes Defense that the assets of Hughes Defense (except for cash
and cash equivalents and without giving effect to the sale or anticipated sale
of, or other action with respect to, the assets of Hughes Defense relating to
the approval process under the Hart-Scott-Rodino Act) as of immediately
following the GM Spin-Off Merger Effective Time will include all assets owned
by Hughes Electronics (and all assets in which Hughes Electronics has
contractual rights) which are primarily used in, or held primarily for use in,
the defense electronics business of Hughes Electronics as of the GM Spin-Off
Merger Effective Time and will be sufficient to conduct such business after the
GM Spin-Off Merger Effective Time as it is conducted immediately prior to the
GM Spin-Off Merger Effective Time. Hughes Telecom will indemnify, defend and
hold harmless Hughes Defense, New Raytheon, General Motors, Hughes Electronics
and Delco, their respective successors-in-interest, subsidiaries and their
respective past and present directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives against any
losses, claims, damages, liabilities or actions arising, whether prior to or
following the transfers contemplated by the Master Separation Agreement, out of
or in connection with any violation of such representation and warranty and
will reimburse them for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
damage, liability or action.
Hughes Defense, Delco and Hughes Telecom will each indemnify, defend and hold
harmless each other and General Motors and Hughes Electronics, and their
respective successors-in-interest, subsidiaries, past and present directors,
officers, employees, agents, consultants, advisors, accountants, attorneys and
representatives, against any losses, claims, damages, liabilities or actions
arising, whether prior to or following the transfers contemplated by the Master
Separation Agreement, out of or in connection with their respective assets and
liabilities and the conduct of their respective businesses (including, in the
case of Hughes Defense, in connection with any breach by Hughes Defense or any
of its subsidiaries after the GM Spin-Off Merger Effective Time of any terms of
the Transaction Agreements) and will reimburse them for any legal or any other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action.
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Each of Hughes Telecom and Delco will also indemnify, defend and hold
harmless General Motors, its successors-in-interest, subsidiaries and past and
present directors, officers, employees, agents, consultants, advisors,
accountants, attorneys and representatives against any losses, claims, damages,
liabilities or actions arising, whether prior to or following the transfers
contemplated by the Master Separation Agreement, out of or in connection with
the merger of Hughes Electronics with General Motors (other than, in each case,
those that primarily relate to the assets, liabilities and conduct of the
business of Delco) and will reimburse them for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action. The indemnification by Hughes
Telecom of General Motors will include indemnification for losses arising from
any guarantees and similar arrangements of Hughes Electronics that become
obligations of General Motors as a result of the merger of Hughes Electronics
into General Motors as part of the Hughes Reorganization.
POST-CLOSING ADJUSTMENT BETWEEN NEW HUGHES ELECTRONICS AND NEW RAYTHEON
The Master Separation Agreement provides for a payment to be made under the
circumstances described below by either New Hughes Electronics or New Raytheon
to the other party following the consummation of the Raytheon Merger based upon
a comparison of (1) the "adjusted net worth" of Hughes Defense (as determined
pursuant to the Master Separation Agreement) as reflected on the September 30,
1996 balance sheet provided to Raytheon as part of the negotiations relating to
the Raytheon Merger Agreement, as adjusted pursuant to the terms of the Master
Separation Agreement (the "Target Amount"), and (2) the "adjusted net worth" of
Hughes Defense as of immediately prior to the Raytheon Merger Effective Time
and after the consummation of the Hughes Reorganization as reflected in an
audited balance sheet prepared as of such time and in such manner as described
in the Master Separation Agreement (the "Closing Date Final Amount").
Within approximately four months after the completion of the Raytheon Merger,
New Hughes Electronics will prepare, and its auditors will audit, the final
balance sheet for Hughes Defense and its subsidiaries as of immediately prior
to the Raytheon Merger Effective Time (but giving effect to the Hughes
Reorganization), which will set forth the Closing Date Final Amount, and a
related report from New Hughes Electronics' auditors. Within approximately 30
business days after its receipt of this final balance sheet and related
auditors' report, New Raytheon will notify New Hughes Electronics of any
objections to the balance sheet and report. New Hughes Electronics and New
Raytheon will then work together to try to reach agreement on any disputed
matters and, if the parties cannot reach agreement, all disputed matters will
be submitted to arbitration before independent auditors for final resolution.
If the Target Amount exceeds the Closing Date Final Amount by $50 million or
more, then New Hughes Electronics will be obligated to pay to New Raytheon in
cash the amount in excess of $50 million by which the Target Amount exceeds the
Closing Date Final Amount, plus interest thereon from the Raytheon Merger
Effective Time to the date of such payment thereof at the per annum rate equal
to the rate announced by Citibank, N.A. in the City of New York as its base
rate as in effect on the Raytheon Merger Effective Time. If the Closing Date
Final Amount exceeds the Target Amount by $50 million or more, then New
Raytheon will be obligated to pay to New Hughes Electronics in cash the amount
in excess of $50 million by which the Closing Date Final Amount exceeds the
Target Amount, plus interest thereon calculated in the same manner as described
above. In addition to the foregoing, any cash reflected in such audited balance
sheet of Hughes Defense will be transferred to New Hughes Electronics at the
time of the cash payment described above, or, if no such payment is made, as
soon as practicable after the completion of such audited balance sheet,
together with interest thereon calculated in the same manner as described
above.
CONDITIONS TO CLOSING
The obligations of each of the parties to the Master Separation Agreement to
consummate the transactions contemplated by the Master Separation Agreement
will be subject to the satisfaction or waiver (by the party for whose benefit
such condition exists) of each of the conditions to the closing of the Raytheon
Merger as set forth in the Raytheon Merger Agreement (other than the
consummation of the Hughes Transactions). See "Description of the Raytheon
Merger--Raytheon Merger Agreement--Conditions" above.
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SUMMARY OF SPIN-OFF SEPARATION AGREEMENT
GENERAL
The Master Separation Agreement contemplates that, prior to the Raytheon
Merger Effective Time, General Motors and Hughes Defense will enter into the
Spin-Off Separation Agreement. As noted above, the obligations of Hughes
Defense under the Spin-Off Separation Agreement will be obligations of New
Raytheon after the Raytheon Merger.
PRESERVATION OF TAX-FREE STATUS OF THE HUGHES TRANSACTIONS AND THE RAYTHEON
MERGER
The Spin-Off Separation Agreement contains covenants intended to protect the
tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off and
the Raytheon Merger. These covenants could have the effect of delaying,
deferring or preventing a change in control of New Raytheon and of limiting the
opportunity to realize premiums over prevailing market prices for New Raytheon
Common Stock in connection therewith during the period of their applicability.
See "Risk Factors--Risk Factors Regarding New Raytheon After the Raytheon
Merger--Certain Limitations on Changes in Control of New Raytheon; New
Raytheon's Ability to Participate in Future Defense Industry Consolidation" in
Chapter 2.
Hughes Defense will indemnify, defend and hold harmless General Motors and
its affiliates against any and all tax-related losses incurred by General
Motors in connection with any proposed tax assessment or tax controversy with
respect to the Hughes Defense Spin-Off or the Raytheon Merger to the extent
caused by any breach by Hughes Defense of any of the following covenants.
Hughes Defense will agree that, unless General Motors determines, in its sole
and absolute discretion, which discretion will be exercised in good faith
solely to preserve the tax-free status of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off and the Raytheon Merger, that any of the following
transactions would not jeopardize the tax-free status of the Hughes Defense
Spin-Off, the Hughes Telecom Spin-Off or the Raytheon Merger, Hughes Defense
will not:
. for two years after the Raytheon Merger Effective Time, enter into or
permit (to the extent Hughes Defense has the right to prohibit) any
transaction or series of transactions as a result of which any person or
any group of related persons would acquire, or have the right to acquire,
(1) from one or more holders of outstanding shares of New Raytheon Capital
Stock, a number of shares of New Raytheon Capital Stock that would comprise
more than 15% of (A) the value of all outstanding shares of New Raytheon
Capital Stock as of the date of such transaction, or in the case of a
series of transactions, the date of the last transaction of such series, or
(B) the number of the issued and outstanding shares of Class A Common Stock
or Class B Common Stock as of the date of such transaction, or in the case
of a series of transactions, the date of the last transaction of such
series, or (2) from Hughes Defense, all or a substantial portion of its
assets or business in exchange in whole or in part for equity interests in
such person or group which are received by holders of New Raytheon Capital
Stock (a "Proposed Acquisition Transaction");
. for two years after the Raytheon Merger Effective Time, enter into any
transaction or series of transactions as a result of which any person would
acquire, or have the right to acquire, from Hughes Defense or an affiliate
of Hughes Defense, one or more shares of New Raytheon Capital Stock (a
"Proposed Stock Issuance Transaction") if, as a result of such Proposed
Stock Issuance Transaction, Hughes Defense would issue a number of shares
of New Raytheon Capital Stock that, when aggregated with all other shares
of New Raytheon Capital Stock issued pursuant to any Proposed Stock
Issuance Transaction occurring prior to or simultaneously with such
Proposed Stock Issuance Transaction, would cause (A) the number of shares
of Class A Common Stock distributed to GM's common stockholders in the
Hughes Defense Spin-Off to constitute less than 80% of the total combined
voting power of all outstanding shares of the New Raytheon Capital Stock
entitled to vote generally in the election of directors or (B) the issuance
of outstanding shares of any class or series of New Raytheon Capital Stock
other than New Raytheon Capital Stock which is entitled to vote generally
in the election of directors;
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. for two years after the Hughes Defense Spin-Off, enter into any transaction
as a result of which Hughes Defense or an affiliate of Hughes Defense would
acquire, or have the right to acquire, one or more shares of New Raytheon
Capital Stock if, as a result of such transaction, the then-outstanding
shares of Class A Common Stock would constitute less than 80% of the total
combined voting power of all outstanding shares of New Raytheon Capital
Stock entitled to vote generally in the election of directors; and
. for three years after the Hughes Defense Spin-Off, amend or change the New
Raytheon Certificate of Incorporation or New Raytheon By-Laws in such a way
as to affect the composition or size of the New Raytheon Board, the manner
in which the New Raytheon Board is elected or the duties and
responsibilities of the New Raytheon Board.
For two years after the Hughes Defense Spin-Off, Hughes Defense will also
agree:
. to continue the active conduct of the trade or business (as defined in
Section 355(b)(2) of the Code) conducted by Hughes Defense immediately
prior to the Raytheon Merger Effective Time (the "Active Trade or
Business");
. not to (A) liquidate, dispose of, or otherwise discontinue the conduct of
any portion of the Active Trade or Business with a value in excess of $1.0
billion or (B) dispose of any business or assets that would cause Hughes
Defense to be operated in a manner inconsistent in any material respect
with the business purposes for the Hughes Defense Spin-Off as set forth in
the representation letters, tax opinions and tax rulings related to the
Hughes Transactions and the Raytheon Merger (including, among other things,
the IRS Ruling), in each case unless General Motors has determined, in its
sole and absolute discretion, which discretion will be exercised in good
faith solely to preserve the tax-free status of the Hughes Defense Spin-
Off, the Hughes Telecom Spin-Off and the Raytheon Merger, that such
liquidation, disposition or discontinuance would not jeopardize the tax-
free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off or
the Raytheon Merger;
. not to liquidate, dispose of, or otherwise discontinue the conduct of any
portion of the Active Trade or Business if such liquidation, disposition or
discontinuance would constitute a breach of Section 4.2(e) of the Spin-Off
Separation Agreement (which requires that, until two years after the
Raytheon Merger Effective Time, and except in the ordinary course of
business, neither Hughes Defense nor any of its subsidiaries sell,
transfer, or otherwise dispose of or agree to dispose of assets (including
any shares of capital stock of such subsidiaries) that, in the aggregate,
constitute more than (A) 60% of the gross assets of Hughes Defense (based
on the fair market value of each such asset as of the Raytheon Merger
Effective Time) or (B) 60% of the consolidated gross assets of Hughes
Defense (based on the fair market value of each such asset as of the
Raytheon Merger Effective Time), unless prior to the consummation of such
transaction General Motors has determined, in its sole and absolute
discretion, which discretion will be exercised in good faith solely to
preserve the tax-free status of the Hughes Defense Spin-Off, the Hughes
Telecom Spin-Off and the Raytheon Merger, that such transaction would not
jeopardize the tax-free status of the Hughes Defense Spin-Off, the Hughes
Telecom Spin-Off or the Raytheon Merger); and
. not to voluntarily dissolve or liquidate, and except in the ordinary course
of business, not to sell, transfer, or otherwise dispose of or agree to
dispose of assets (including, for such purpose, any shares of capital stock
of its subsidiaries) that, in the aggregate, constitute more than (1) 60%
of the gross assets of Hughes Defense (based on the fair market value of
each such asset as of the Raytheon Merger Effective Time) or (2) 60% of the
consolidated gross assets of Hughes Defense (based on the fair market value
of each such asset as of the Raytheon Merger Effective Time), unless prior
to the consummation of such transaction General Motors has determined, in
its sole and absolute discretion, which discretion will be exercised in
good faith solely to preserve the tax-free status of the Hughes Defense
Spin-Off, the Hughes Telecom Spin-Off and the Raytheon Merger, that such
transaction would not jeopardize the tax-free status of the Hughes Defense
Spin-Off, the Hughes Telecom Spin-Off or the Raytheon Merger.
Hughes Defense also will agree not to propose at any time a plan of
recapitalization (including a Proposed Acquisition Transaction, if, as a result
of such transaction, holders of New Raytheon Common Stock
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
immediately before the Proposed Acquisition Transaction will own more than 50%
of the common equity of the person (or group of related persons) acquiring the
New Raytheon Capital Stock immediately after consummation of the Proposed
Acquisition Transaction, and, in such case, the person acquiring New Raytheon
Capital Stock pursuant to a Proposed Acquisition Transaction will be treated as
if such person were Hughes Defense) or amendment to the New Raytheon
Certificate of Incorporation or other action providing for (1) the conversion
of shares of any class of New Raytheon Common Stock into a different class of
New Raytheon Capital Stock, (2) a change in the absolute or relative voting
rights of any class of New Raytheon Common Stock from the rights existing at
the Raytheon Merger Effective Time, or (3) any other action having an effect
similar to that described in clause (1) or (2), unless prior to the
consummation of such action General Motors has determined, in its sole and
absolute discretion, which discretion will be exercised in good faith solely to
preserve the tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom
Spin-Off and the Raytheon Merger, that such action would not jeopardize the
tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off or
the Raytheon Merger.
For two years after the Hughes Defense Spin-Off, Hughes Defense also will
agree not to take, or permit any of its subsidiaries to take, any other actions
or enter into any transaction or series of transactions or agree to enter into
any other transactions that would be reasonably likely to jeopardize the tax-
free status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off or the
Raytheon Merger, including any action or transaction that would be reasonably
likely to be inconsistent with any representation made in the representation
letters related to the Hughes Transactions and the Raytheon Merger, unless
prior to the consummation of such action or transaction General Motors has
determined, in its sole and absolute discretion, which discretion will be
exercised in good faith solely to preserve the tax-free status of the Hughes
Defense Spin-Off, the Hughes Telecom Spin-Off and the Raytheon Merger, that
such action or transaction would not jeopardize the tax-free status of the
Hughes Defense Spin-Off, the Hughes Telecom Spin-Off or the Raytheon Merger.
In the event that Hughes Defense notifies General Motors that it desires to
take one of the actions described above and General Motors concludes that such
action would jeopardize the tax-free status of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off or the Raytheon Merger, General Motors will, at the
request of Hughes Defense, elect either to (1) use all commercially reasonable
efforts to obtain a tax opinion or ruling that would permit Hughes Defense to
take the specified action or (2) provide all reasonable cooperation to Hughes
Defense in connection with Hughes Defense obtaining such tax ruling or opinion
in form and substance reasonably satisfactory to General Motors. The reasonable
costs and expenses of obtaining any such tax opinion or ruling will be borne by
Hughes Defense.
For purposes of this description of the Spin-Off Separation Agreement, "New
Raytheon Capital Stock" means all classes or series of capital stock of Hughes
Defense and, upon the consummation of the Raytheon Merger, New Raytheon.
INDEMNIFICATION
In addition to the indemnification for tax matters described above, Hughes
Defense will also indemnify, defend and hold harmless General Motors, all of
GM's affiliates and each of their respective directors, officers and employees
(in their capacities as such), from and against:
. all losses relating to, arising out of, or due to, directly or indirectly,
any breach by Hughes Defense or any affiliate of Hughes Defense of any of
the provisions of the Spin-Off Separation Agreement;
. all losses relating to, arising out of, or due to (1) any untrue statement
or alleged untrue statement of a material fact contained in the Hughes
Defense Registration Statement or the Raytheon Registration Statement
relating to (A) Raytheon, the capital stock of Raytheon, the Raytheon
business, financial information and data relating to Raytheon (including
both historical and pro forma financial data) or (B) the Raytheon Merger,
plans regarding Hughes Defense after the Raytheon Merger (i.e., New
Raytheon) and other forward-looking information regarding Hughes Defense
(the "Hughes Defense Disclosure
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
Portions") or (2) the omission or alleged omission to state in the Hughes
Defense Disclosure Portions a material fact required to be stated therein or
necessary to make the statements therein not misleading; and
. all losses relating to or arising out of actions taken (or omitted to be
taken) by Raytheon or any affiliate of Raytheon in violation of the
Raytheon Merger Agreement.
General Motors will agree to indemnify, defend, and hold harmless Hughes
Defense, all affiliates of Hughes Defense, and each of their respective
directors, officers and employees (in their capacities as such), from and
against:
. all losses relating to, arising out of, or due to, directly or indirectly,
any breach by General Motors or any affiliate of General Motors (excluding
Hughes Defense) of any of the provisions of the Spin-Off Separation
Agreement;
. all losses relating to, arising out of, or due to (1) any untrue statement
or alleged untrue statement of a material fact contained in any material
set forth in either the Hughes Defense Registration Statement or the
Raytheon Registration Statement (A) relating to (x) Hughes Defense, the
capital stock of Hughes Defense, the business of Hughes Defense, financial
information and data relating to Hughes Defense (including both historical
and pro forma financial data), in each case prior to the consummation of
the Raytheon Merger, or (y) the Hughes Transactions or (B) that otherwise
does not constitute a part of a Hughes Defense Disclosure Portion (the "GM
Disclosure Portions") or (2) the omission or alleged omission to state in
the GM Disclosure Portions a material fact required to be stated therein or
necessary to make the statements therein not misleading; and
. all losses relating to or arising out of any breach of GM's representation
that neither the execution and delivery of the Transactions Agreements by
General Motors or any of its subsidiaries (other than Hughes Defense) nor
the consummation of the transactions on the part of General Motors or any
such subsidiary contemplated by the Implementation Agreement will conflict
with or result in a breach of any provision of the certificate of
incorporation or bylaws of General Motors or any such subsidiary.
ALLOCATION OF COSTS AND EXPENSES
The Spin-Off Separation Agreement allocates responsibility for the payment of
fees and expenses incurred in connection with the Hughes Transactions and the
Raytheon Merger between (1) Raytheon and Hughes Defense on the one hand and (2)
General Motors and its subsidiaries (other than Hughes Defense) on the other
hand.
Hughes Defense will pay all costs and expenses relating exclusively to the
Raytheon Merger, including, without limitation, all reasonable out-of-pocket
costs and expenses of printing and distributing any materials to be sent to
Raytheon's stockholders in connection with the Raytheon Merger (including SEC
filing fees), the fees associated with making any other federal, state, local
or foreign governmental securities law or other regulatory filings exclusively
in connection with the Raytheon Merger, the fees and expenses of the New
Raytheon Transfer Agent and any proxy or consent solicitation agents,
information agents or similar consultants engaged by Raytheon in connection
with effecting the Raytheon Merger. Hughes Defense will also pay, unless
otherwise agreed between General Motors and Hughes Defense, the fees and
expenses of Goldman Sachs and the fees and expenses of Weil, Gotshal & Manges
LLP in connection with the Raytheon Merger, provided that such fees and
expenses, to the extent to be paid by Hughes Defense after the Raytheon Merger
Effective Time, will be included as current liabilities of Hughes Defense on
the balance sheet prepared for the purpose of calculating the post-closing
adjustment. See "--Summary of Master Separation Agreement--Post-Closing
Adjustment Between New Hughes Electronics and New Raytheon" above.
General Motors or one of its subsidiaries (excluding Hughes Defense) will pay
all costs and expenses relating to the Hughes Transactions except (1) those
relating exclusively to the Raytheon Merger and (2) the fees of any transfer or
exchange agent engaged by Hughes Defense and all fees relating to listing New
Raytheon Common Stock on any domestic or foreign stock exchange or similar
organization, which will be
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THE RAYTHEON MERGER
paid by Hughes Defense. The costs and expenses to be paid by General Motors or
one of such subsidiaries will include, without limitation, the fees and
expenses of Merrill Lynch, Salomon Brothers and Kirkland & Ellis, and all costs
and expenses relating exclusively to the GM Spin-Off Merger, including, without
limitation, all reasonable out-of-pocket costs and expenses of printing and
distributing this document and any related materials (including SEC filing
fees), the fees associated with making any other federal, state, local or
foreign governmental securities law or other regulatory filings exclusively in
connection with the GM Spin-Off Merger, and the fees and expenses of the GM
Transfer Agent and any proxy or consent solicitation agents, information agents
or similar consultants engaged by General Motors in connection with effecting
the GM Spin-Off Merger.
SUMMARY OF TAX SHARING AGREEMENT
As part of the Master Separation Agreement and as a condition to the
consummation of the Raytheon Merger, General Motors, Hughes Defense and Hughes
Telecom will enter into the Tax Sharing Agreement. The Tax Sharing Agreement
sets outs certain duties and obligations of General Motors, Hughes Defense
(i.e., New Raytheon) and Hughes Telecom (i.e., New Hughes Electronics)
regarding the preparation and filing of returns relating to and the payment of
the liability for U.S. federal, state and local (but not foreign) income taxes
("Income Taxes") of Hughes Defense. Among other things, the Tax Sharing
Agreement establishes (1) the obligations for paying Hughes Defense's Income
Taxes for taxable periods ending on or before the date of the Hughes Defense
Spin-Off (each a "Pre-Distribution Taxable Period"), (2) the obligations for
paying New Raytheon's Income Taxes for taxable periods which begin after the
date of the Hughes Defense Spin-Off (each a "Post-Distribution Taxable
Period"), (3) the obligations for paying New Raytheon's Income Taxes for
taxable periods which include but do not end on date of the Hughes Defense
Spin-Off (each a "Straddle Period") and (4) certain indemnification rights and
obligations among New Raytheon, New Hughes Electronics and General Motors. The
Tax Sharing Agreement also sets out the rights of General Motors, New Hughes
Electronics and New Raytheon to any refunds of Income Taxes and the rights and
obligations of such parties with respect to the effects of certain timing
differences and the carryback of certain tax benefits for the various taxable
periods. The following summary describes certain of the operative elements of
the Tax Sharing Agreement.
Pre-Distribution Taxable Period. General Motors or New Hughes Electronics
generally will pay all Income Taxes attributable to Hughes Defense and its
subsidiaries for Pre-Distribution Taxable Periods.
Post-Distribution Taxable Period. New Raytheon generally will pay all Income
Taxes due with respect to all tax returns required to be filed by New Raytheon
for Post-Distribution Taxable Periods.
Straddle Period. The Income Tax liability attributable to Hughes Defense and
its subsidiaries for a Straddle Period generally will be allocated between New
Hughes Electronics or General Motors, on the one hand, and New Raytheon, on the
other hand, based on an interim closing of the books on the date of the Hughes
Defense Spin-Off. New Raytheon generally will be allocated the Income Tax
liability for income (1) attributable to a member of the Hughes Defense Group
(as defined in the Tax Sharing Agreement) for the period subsequent to the date
of the Hughes Defense Spin-Off or (2) attributable to any entity which becomes
a member of the Hughes Defense Group after the Hughes Defense Spin-Off.
Government Contracts. The Tax Sharing Agreement contains special provisions
relating to Income Taxes which may be reimbursed pursuant to government
contracts.
Indemnification. Except as provided in the Spin-Off Separation Agreement,
General Motors and New Hughes Electronics generally will indemnify New Raytheon
for all liabilities (other than foreign income tax liabilities) related to the
following:
. Income Tax liabilities incurred by a member of the GM Consolidated Group
(as defined in the Tax Sharing Agreement) arising out of the Hughes Defense
Spin-Off or the Raytheon Merger;
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THE RAYTHEON MERGER
. all costs, expenses and damages from stockholder litigation or
controversies arising in connection with any proposed tax with respect to
the Hughes Defense Spin-Off or the Raytheon Merger;
. all Income Tax liabilities which General Motors or New Hughes Electronics
is obligated to pay as set out in the sections above captioned "Post-
Distribution Taxable Period," "Pre-Distribution Taxable Period" or
"Straddle Period"; and
. any Income Tax liabilities of the Hughes Defense Group resulting from a
breach by New Hughes Electronics or General Motors of any of their
covenants contained in the Tax Sharing Agreement.
Under the terms of the Tax Sharing Agreement, New Raytheon generally will
indemnify General Motors for all liabilities (other than foreign income tax
liabilities) related to the following:
. all Income Tax liabilities which Hughes Defense/New Raytheon is obligated
to pay as set out in the sections above captioned "Post-Distribution
Taxable Period," "Pre-Distribution Taxable Period" or "Straddle Period";
and
. any Income Tax liabilities of any member of the GM Consolidated Group
resulting from a breach by New Raytheon of any of its covenants contained
in the Tax Sharing Agreement.
The Tax Sharing Agreement provides for arbitration to resolve any disputes in
respect of matters covered thereby.
For a description of certain covenants of and related indemnification of
General Motors and certain of its affiliates by Hughes Defense (and, after the
Raytheon Merger, New Raytheon) which are intended to protect the tax-free
status of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off and the
Raytheon Merger, see "--Summary of Spin-Off Separation Agreement--Preservation
of Tax-Free Status of the Hughes Transactions and the Raytheon Merger" above.
SUMMARY OF OTHER AGREEMENTS CONTEMPLATED BY THE MASTER SEPARATION AGREEMENT
Pursuant to the Master Separation Agreement, the parties to that agreement
will enter into certain other agreements to implement transitional and
separation arrangements with respect to such matters as intellectual property,
Hughes Research Labs, real estate and environmental matters, employee matters,
stock options, insurance, supply arrangements, transition services and
corporate purchasing. SET FORTH BELOW IS A SUMMARY DESCRIPTION OF THE MATERIAL
TERMS OF SUCH ARRANGEMENTS WITH RESPECT TO EACH OF THESE MATTERS. THIS
DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH AGREEMENTS.
INTELLECTUAL PROPERTY
Pursuant to the provisions of the Master Separation Agreement and the
agreements to be entered into pursuant thereto, Hughes Telecom will acquire or
otherwise own, and Hughes Defense will assign to Hughes Telecom, all of Hughes
Defense's right, title and interest in and to all of Hughes Electronics' or
Hughes Electronics' subsidiaries' intellectual property (including trademarks),
other than the intellectual property relating primarily to the defense
electronics business. Additionally, Hughes Defense will assign to Hughes
Telecom (1) Dual Use Technology, which is intellectual property developed by
Hughes Defense for the defense electronics business (A) that is useful in the
telecommunications and space business as conducted immediately prior to the GM
Spin-Off Merger Effective Time and (B) which covers components manufactured or
processes that are to be utilized by Hughes Telecom, (2) the intellectual
property of Hughes Research Labs that exists as of the GM Spin-Off Merger
Effective Time and (3) any trademark, service mark or trade name which contains
the name "Hughes." Hughes Defense will grant to Hughes Telecom and Delco a non-
exclusive, perpetual,
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CHAPTER 3: THE HUGHES TRANSACTIONS AND
THE RAYTHEON MERGER
royalty-free license to make, have made, use, sell and import products under
Hughes Defense's retained intellectual property for use only in the business of
Hughes Telecom and the business of Delco, respectively, and any new but related
businesses that may be conducted by Hughes Telecom or its affiliates or Delco
or its affiliates, as the case may be, after the GM Spin-Off Merger Effective
Time that can be reasonably classified under the broad category of a
telecommunications or space business or an automotive electronics business, as
the case may be. Hughes Telecom will grant a non-exclusive, perpetual, royalty-
free license to Hughes Defense to make, have made, use, sell and import
products under the Dual Use Technology for use in any business that is not
competitive with Hughes Telecom or Delco, in each case as conducted at the GM
Spin-Off Merger Effective Time. Hughes Telecom will also grant a non-exclusive,
perpetual, royalty-free license to Hughes Defense with respect to the use of
certain intellectual property specified in the Master Separation Agreement that
is necessary for the business of Hughes Defense as conducted at the GM Spin-Off
Merger Effective Time.
Hughes Telecom will grant a non-exclusive, perpetual, royalty-free license to
Hughes Defense to make, have made, use, sell and import products under the
intellectual property of Hughes Research Labs that exists as of the GM Spin-Off
Merger Effective Time for use in any business that is not competitive with
Hughes Telecom or Delco, in each case as conducted at the GM Spin-Off Merger
Effective Time.
In addition, effective at the GM Spin-Off Merger Effective Time, Hughes
Telecom will grant a non-exclusive, perpetual, royalty-free trademark and trade
and company name license to Hughes Defense to use the name "Hughes" solely in
connection with the business of Hughes Defense as part of any trade and company
name of New Raytheon (or any subsidiary or division thereof), provided that the
"Raytheon" name is also used as part of such trade or company name and provided
further that "Raytheon" precedes the name "Hughes." In no event, however, will
Hughes Defense have rights to use the logo of the word "Hughes" in the round-
cornered blue rectangle, except for limited circumstances during a transitional
period following the Raytheon Merger.
HUGHES RESEARCH LABS
Hughes Defense and Hughes Telecom each will continue to have an interest in
Hughes Research Labs, Hughes Electronics' research facility located in Malibu,
California. After completion of the transactions contemplated by the Master
Separation Agreement, the research facility will be owned and funded 50% by
each party.
In general, Hughes Research Labs will own the intellectual property resulting
from general research projects and each of Hughes Defense and Hughes Telecom
will have a perpetual, royalty-free license to such intellectual property for
their respective businesses. In addition, each of Hughes Defense and Hughes
Telecom may fund research for special research projects (so long as such
projects do not interfere with general research projects) at cost and the
funding party will be granted a royalty-free, exclusive license from Hughes
Research Labs to intellectual property resulting from such projects. Pursuant
to the contemplated arrangements, each of Hughes Defense and Hughes Telecom can
dissolve Hughes Research Labs after five years (or earlier if one party becomes
affiliated with a competitor of the other party), subject to certain
conditions, including a buy-out arrangement which permits the non-dissolving
party to purchase the other party's interest.
REAL ESTATE AND ENVIRONMENTAL MATTERS
As contemplated by the Master Separation Agreement, substantially all real
property owned or leased by Hughes Electronics and occupied by Hughes Defense
will be retained by Hughes Defense, including Hughes Electronics' present
corporate headquarters building in Los Angeles. Similarly, substantially all
real property owned or leased by Hughes Electronics and occupied by Hughes
Telecom will be transferred to Hughes Telecom. Certain facilities, however,
will be shared by Hughes Defense and Hughes Telecom, with one party leasing or
sub-leasing the shared premises from the other. Additionally, all environmental
liabilities will be the responsibility of the business that created the
contamination. Thus, for example, the ongoing environmental litigation in
Tucson, Arizona will be a liability of New Raytheon after the Raytheon Merger.
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THE RAYTHEON MERGER
EMPLOYEE MATTERS
Pursuant to the Master Separation Agreement, Hughes Defense will agree to
maintain for its employees through the end of 1998 compensation and benefits
which are, in the aggregate, substantially comparable to those currently
provided. Hughes Defense will also agree to continue indefinitely, for
contributory participants, without adverse change, the features of the
retirement plans which provide for the determination of benefits, the early
retirement subsidy and cost of living adjustments. Additionally, Hughes Defense
will agree to continue company-paid retiree medical benefits for contributory
participants for a period of five years and thereafter as long as such benefits
are provided to other retirees of New Raytheon. The aggregate assets and
liabilities of the Hughes Bargaining and Nonbargaining Retirement Plans for
active and inactive employees will be allocated between Hughes Defense and
Hughes Telecom with those allocated to Hughes Defense transferred to separate
plans of Hughes Defense.
STOCK OPTIONS
Pursuant to the Master Separation Agreement, all stock options in respect of
GM Class H Common Stock, vested and non-vested, held by Hughes Defense
employees will be converted into stock options in respect of Class B Common
Stock. The formula for conversion is intended to preserve the value of all such
stock options (i.e., market value as of the effective time of the transactions
less exercise price) in all material respects. The GM Board, based on the
recommendation of its Executive Compensation Committee, also has determined
that all stock options in respect of GM Class H Common Stock held by Hughes
Telecom employees will be converted into stock options in respect of New GM
Class H Common Stock and those held by Delco employees will be converted into
stock options in respect of GM $1 2/3 Common Stock. The formulas for conversion
are similarly intended to preserve the value of all such options in all
material respects. In addition, appropriate adjustments will be made to
preserve value in all material respects on options in respect of GM $1 2/3
Common Stock.
INSURANCE
Hughes Defense will institute a separate insurance program after the GM Spin-
Off Merger Effective Time while remaining entitled to assert claims for events,
acts or omissions first occurring under policies maintained by Hughes Telecom
or General Motors prior to the GM Spin-Off Merger Effective Time. To the extent
permitted by law and contract, such policies will remain under the control and
administration of Hughes Telecom or General Motors with settlement authority on
site-specific environmental claims afforded to Hughes Defense on a basis not
prejudicial to Hughes Telecom or General Motors.
SUPPLY ARRANGEMENTS
Hughes Defense and Hughes Telecom will continue to supply various technical
services to each other after the GM Spin-Off Merger Effective Time. In
addition, Hughes Telecom will procure as prime contractor, and Hughes Defense
will make available as subcontractor, certain products and services for a
period of two years after the GM Spin-Off Merger Effective Time. The products
and services generally will be provided to the other party at market prices.
TRANSITION SERVICES
Hughes Defense and Hughes Telecom will continue to provide various
transitional services to each other at cost for a minimum transition period of
twelve months after the GM Spin-Off Merger Effective Time (with longer periods
for certain information systems services such as payroll). The services to be
provided will be substantially similar in scope, level and cost with services
provided at the GM Spin-Off Merger Effective Time. If the periods of providing
such services are extended beyond the initial transition period pursuant to
agreement of New Raytheon and New Hughes Electronics, the applicable services
generally will then be provided at cost plus six percent.
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CORPORATE PURCHASING
For an initial period of one year after the GM Spin-Off Merger Effective Time
(with termination upon 90-day notice thereafter), (1) New Raytheon will have
access to GM's Worldwide Purchasing Process, (2) General Motors, New Hughes
Electronics and New Raytheon will continue to work together under joint
purchasing agreements and (3) General Motors will continue to support Hughes
Defense's Tomahawk procurement activities in the manner supported prior to the
GM Spin-Off Merger Effective Time until completion of New Raytheon's
participation in such program.
134
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
CHAPTER 4
FINANCIAL AND BUSINESS REVIEWS
PAGE
----
RECENT DEVELOPMENTS............................................... 137
General Motors................................................... 137
Hughes Electronics............................................... 137
Raytheon......................................................... 137
GENERAL MOTORS PRO FORMA CONSOLIDATED
CAPITALIZATION................................................... 138
INTRODUCTION TO THE FINANCIAL AND BUSINESS REVIEWS
OF HUGHES DEFENSE, DELCO AND HUGHES TELECOM...................... 140
Overview......................................................... 140
Purchase Accounting Adjustments.................................. 140
HUGHES DEFENSE SELECTED COMBINED HISTORICAL
FINANCIAL DATA................................................... 141
HUGHES DEFENSE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................... 142
BUSINESS OF HUGHES DEFENSE........................................ 146
Introduction..................................................... 146
Sensors & Communications Systems................................. 147
Weapons Systems.................................................. 149
Information Systems.............................................. 151
Defense Systems.................................................. 153
U.S. Government Contracts........................................ 153
DELCO SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA... 154
DELCO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS. 155
DELCO NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS....................................................... 158
DELCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 159
BUSINESS OF DELCO................................................. 163
Introduction..................................................... 163
Principal Products and Sales..................................... 164
Automotive....................................................... 165
Sales to GM NAO.................................................. 165
International and Other Sales.................................... 167
Acquisitions and Alliances....................................... 168
Competition...................................................... 168
Integration of Delco and Delphi.................................. 169
HUGHES TELECOM SELECTED COMBINED HISTORICAL AND
PRO FORMA FINANCIAL DATA......................................... 170
HUGHES TELECOM UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS.......................... 171
HUGHES TELECOM NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS............................................. 175
HUGHES TELECOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 178
135
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
PAGE
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BUSINESS OF HUGHES TELECOM........................................ 183
Introduction..................................................... 183
Satellite Manufacturing.......................................... 183
Network Systems.................................................. 185
Direct-to-Home Broadcast......................................... 186
Satellite Services............................................... 189
Hughes Avicom.................................................... 190
Corporate and Other.............................................. 191
Strategy......................................................... 191
Acquisitions, Strategic Alliances and Divestitures............... 191
Regulation....................................................... 192
U.S. Government Contracts........................................ 192
Competition...................................................... 193
Research and Intellectual Property............................... 193
Employees........................................................ 194
Real Property.................................................... 194
Legal Proceedings................................................ 194
Directors and Executive Officers of New Hughes Electronics....... 196
RAYTHEON SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL
DATA............................................................. 197
OVERVIEW OF RAYTHEON BUSINESS..................................... 198
General.......................................................... 198
Electronics Segment.............................................. 198
Engineering and Construction Segment............................. 198
Aircraft Segment................................................. 199
Appliances Segment............................................... 199
136
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
RECENT DEVELOPMENTS
GENERAL MOTORS
[Selected third quarter financial information to come.]
HUGHES ELECTRONICS
[Selected third quarter financial information to come.]
RAYTHEON
SALE OF PORTIONS OF THE APPLIANCES BUSINESS
On September 10, 1997, Raytheon sold its home appliance, heating and air
conditioning and commercial cooking businesses to Goodman Manufacturing
Company, L.P. The total sale price was $550 million in cash, subject to
adjustment for certain changes in the net working capital of such businesses
between December 31, 1996 and the closing date of the transaction. In 1996,
these three businesses represented approximately 80% of the sales and 50% of
the operating income of Raytheon's Appliance Group. In addition, Raytheon has
realized approximately $200 million from the sale of receivables relating to
the businesses which were sold. Raytheon is retaining the commercial laundry
and electronics controls businesses of the Appliance Group, but is continuing
its strategic review of these remaining businesses. Proceeds from the sale of
the three Appliance Group businesses will be used to reduce debt incurred in
connection with the Texas Instruments Defense Acquisition. Raytheon believes
that the 1996 sales, operating income, net income and total assets of the
businesses sold were not material and does not expect the sale to have a
significant effect on results of operations.
TEXAS INSTRUMENTS DEFENSE ACQUISITION
On July 11, 1997, Raytheon purchased substantially all of the assets of, and
assumed substantially all the liabilities related to, Texas Instruments Defense
for an aggregate amount of $2.875 billion in cash. The purchase price is
subject to post-closing adjustments for certain changes in the net assets of
Texas Instruments Defense between September 30, 1996 and the closing date of
such purchase. In addition, Raytheon paid $75 million for an assignment and
license of certain related intellectual property. Texas Instruments Defense had
1996 sales of approximately $1.8 billion.
DEBT FINANCINGS
In connection with the Texas Instruments Defense Acquisition and in
contemplation of the Raytheon Merger, Raytheon arranged the Raytheon
Facilities, revolving credit facilities with a syndicate of banks totaling $7.0
billion. Of these, lines for $4.0 billion have a maturity of five years and
lines for $3.0 billion have a maturity of 364 days. Raytheon incurred
indebtedness in the amount of $2.95 billion under the Raytheon Facilities in
order to finance the Texas Instruments Defense Acquisition. The Raytheon
Facilities include covenants which require (1) repayment and reduction of the
outstanding commitment of such facilities or similar facilities with 75% of the
net cash proceeds from any capital markets financings and asset sales for a
period of two years from the closing date and (2) the ratio of total debt to
total capitalization not to exceed 65% until July 2, 2000, 60% from July 2,
2000 to January 1, 2002 and 55% thereafter. The Raytheon Facilities rank pari
passu with other senior unsecured indebtedness of Raytheon, including the
Raytheon Notes (as defined below), and, upon completion of the Raytheon Merger,
New Raytheon (including the debt incurred by Hughes Defense as described
herein).
On August 12, 1997, Raytheon completed a public offering of the Raytheon
Notes, consisting of $3.0 billion aggregate principal amount of notes offered
with final maturities of three, five, ten and thirty years. The net proceeds
from the sale of the Raytheon Notes were used primarily to reduce amounts
outstanding under the Raytheon Facilities and to refinance other debt incurred
in the Texas Instruments Defense Acquisition, including commercial paper
borrowings.
Additional proceeds have been and will continue to be used by Raytheon for
capital expenditures, working capital requirements and general corporate
purposes.
137
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
GENERAL MOTORS PRO FORMA CONSOLIDATED CAPITALIZATION
The following table sets forth the capitalization of General Motors and its
consolidated subsidiaries at June 30, 1997, and as adjusted to reflect
consummation of the Hughes Transactions and a preferred stock exchange that
occurred on July 9, 1997. The following table should be read in conjunction
with GM's Consolidated Financial Statements (including the notes thereto) and
Management's Discussion and Analysis in the GM 1996 Form 10-K, which is
incorporated into this document by reference, including the information with
respect to Hughes Electronics in Exhibit 99 thereto.
JUNE 30, 1997
---------------------------------
PRO
ACTUAL ADJUSTMENTS FORMA
---------- ----------- --------
($ IN MILLIONS)
Notes and loans payable .................... $ 89,918 $ 3,890 (c)
(3,928)(d)
(697)(f) $ 89,183
Minority interests.......................... 716 -- 716
Redeemable preferred stock of subsidiary.... 402 -- 402
General Motors--obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely junior
subordinated debentures of General Motors--
Series D................................... -- 79 (g) 79
General Motors--obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely junior
subordinated debentures of General Motors--
Series G................................... -- 143 (g) 143
STOCKHOLDERS' EQUITY
Preference stocks.......................... 1 -- 1
GM common stock
GM $1 2/3 Common Stock (a)................ 1,202 -- 1,202
GM Class H Common Stock................... 10 (10)(e) --
New GM Class H Common Stock............... -- 10 (e) 10
Capital surplus (principally paid-in
capital) (a).............................. 17,250 (196)(g) 17,054
Retained earnings.......................... 9,201 4,395 (b)
(5,940)(d)
(106)(d)
(26)(g) 7,524
-------- ------- --------
Subtotal.................................. 27,664 (1,873) 25,791
Minimum pension liability adjustment....... (3,490) 86 (d) (3,404)
Accumulated foreign currency translation
adjustments............................... (642) 20 (d) (622)
Net unrealized gains on investments in
certain debt and equity securities........ 499 -- 499
-------- ------- --------
Total stockholders' equity................ 24,031 (1,767) 22,264
-------- ------- --------
Total capitalization...................... $115,067 $(2,280) $112,787
======== ======= ========
PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
($ IN MILLIONS)
Amount Available for the Payment of
Dividends
GM $1 2/3 Common Stock..................... $ 22,986 $(1,149)(h)
(222)(g) $ 21,615
GM Class H Common Stock.................... 3,465 (396)(h)
(3,069)(e) --
New GM Class H Common Stock................ -- 3,069 (e) 3,069
-------- ------- --------
$ 26,451 $(1,767) $ 24,684
======== ======= ========
138
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
- ------------
(a) During the first six months of 1997, General Motors used $2 billion to
acquire 35.5 million shares of GM $1 2/3 Common Stock, completing 80% of
GM's $2.5 billion stock repurchase program announced in January 1997.
General Motors also used approximately $300 million to repurchase shares of
GM $1 2/3 Common Stock for certain employee benefit plans during the first
six months of 1997. Subsequently, on August 4, 1997, General Motors
announced that it had completed the $2.5 billion stock repurchase program
that began in the first half of 1997 and announced an additional $2.5
billion stock repurchase program of GM $1 2/3 Common Stock to be completed
over a 12 month period. The stock repurchases to be made under the second
repurchase program would represent about 5% of the outstanding shares of GM
$1 2/3 Common Stock based on the NYSE's closing price of $64.44 per share
on Friday, August 1, 1997.
(b) Represents the gain on the Hughes Defense Spin-Off, assuming the price of
Raytheon Common Stock is $57.88 (i.e., the Recent Raytheon Stock Price) at
the time of the Hughes Defense Spin-Off, calculated as follows (in
millions):
Assumed market value of Hughes Defense Net Assets before additional
borrowing by Hughes Defense........................................ $9,868
Less: Net Book Value of Hughes Defense Net Assets at June 30, 1997.. 5,373
Estimated Transaction Costs......................................... 100
------
Gain............................................................. $4,395
======
The Hughes Defense Spin-Off and the Raytheon Merger would have a total
value of $9.5 billion (so long as the market price of Raytheon Common Stock
is within a collar range of $44.42 and $54.29 per share). The Recent
Raytheon Stock Price ($57.88 per share on October 10, 1997) was above the
collar range and would indicate a total transaction value of approximately
$9.9 billion. For additional information about the collar range, see
"Description of the Raytheon Merger--General--Indicated Value of the Hughes
Defense Spin-Off and the Raytheon Merger to General Motors and Its Common
Stockholders."
(c) Reflects additional borrowings incurred by Hughes Defense prior to the
Hughes Defense Spin-Off.
(d) Represents the impact of the Hughes Defense Spin-Off, including the
additional borrowings of $3.9 billion incurred by Hughes Defense prior to
the Hughes Defense Spin-Off, as well as the elimination of certain minimum
pension liability and foreign currency translation adjustments relating to
Hughes Defense.
(e) Reflects the recapitalization of GM Class H Common Stock into New GM Class
H Common Stock.
(f) Reflects the repayment of Hughes Electronics commercial paper with proceeds
of the additional borrowings incurred by Hughes Defense prior to the Hughes
Defense Spin-Off.
(g) During July 1997, the General Motors Capital Trust D ("Series D Trust")
issued approximately $79 million of its 8.67% Trust Originated Preferred
SecuritiesSM ("TOPrSSM"), Series D ("Series D Preferred Securities"), in a
one-for-one exchange for 3,055,255 of the outstanding GM Series D 7.92%
Depositary Shares, each representing one-fourth of a share of GM Series D
7.92% Preference Stock, $0.10 par value per share. In addition, the General
Motors Capital Trust G ("Series G Trust") issued approximately $143 million
of its 9.87% Trust Originated Preferred SecuritiesSM ("TOPrSSM"), Series G
("Series G Preferred Securities"), in a one-for-one exchange for 5,064,489
of the outstanding GM Series G 9.12% Depositary Shares, each representing
one-fourth of a share of GM Series G 9.12% Preference Stock, $0.10 par
value per share. Concurrently with the exchanges and the related purchases
by General Motors from the Series D and Series G Trusts (the "Trusts") of
the common securities of such Trusts, representing approximately 3% of the
assets of such Trusts, General Motors issued to the Trusts, as the Trusts'
sole assets, its 8.67% and 9.87% Junior Subordinated Deferrable Interest
Debentures, Series D and Series G, due July 1, 2012 (the "Series D
Debentures" and "Series G Debentures" or collectively, the "Debentures"),
having aggregate principal amounts equal to the aggregate stated
liquidation amounts of the Series D and Series G Preferred Securities and
the related common securities, respectively. General Motors has guaranteed
the payment in full to the holders of the Series D and Series G Preferred
Securities (collectively, the "Preferred Securities") of all distributions
and other payments on the Preferred Securities to the extent not paid by
the Trusts only if and to the extent that the Trusts have assets therefor
(i.e., General Motors has made payments of interest or principal on the
related Debentures). These guarantees, when taken together with GM's
obligations under the Debentures and the indentures relating thereto and
the obligations under the Declarations of Trust of the Trusts, including
the obligations to pay certain costs and expenses of the Trusts, constitute
full and unconditional guarantees by General Motors of each Trust's
obligations with respect to its Preferred Securities.
(h) Based on the Recent Raytheon Stock Price, reflects the allocation of the
estimated net reduction in GM stockholders' equity. For additional
information, see "New GM Class H Common Stock--GM Certificate of
Incorporation Provisions Regarding Dividends" in Chapter 6.
139
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
INTRODUCTION TO THE
FINANCIAL AND BUSINESS REVIEWS OF
HUGHES DEFENSE, DELCO AND HUGHES TELECOM
OVERVIEW
Hughes Electronics currently conducts its operations in three primary
business segments: Aerospace and Defense Systems, Automotive Electronics and
Telecommunications and Space. In 1996, these segments represented,
respectively, 40%, 33% and 26% of Hughes Electronics' revenues and 44%, 41% and
16% of Hughes Electronics' operating profit (excluding purchase accounting
adjustments related to GM's acquisition of Hughes Aircraft in 1985), and
operations reported as Corporate and Other represented approximately 1% of
revenues and reported an operating loss of $14.2 million. Information
concerning Hughes Electronics' consolidated financial performance, including
Management's Discussion and Analysis, may be found in certain documents
incorporated into this document by reference, including in Exhibit 99 to the GM
1996 Form 10-K and GM's Forms 10-Q for the periods ended March 31, 1997 and
June 30, 1997. For various ways you can obtain this information, see "Where You
Can Find More Information" in Chapter 7.
The Hughes Transactions involve all three primary business segments of Hughes
Electronics, as well as the operations reported as Corporate and Other. The
Hughes Reorganization includes a number of preliminary transactions necessary
to separate the three primary business segments of Hughes Electronics, and the
operations reported as Corporate and Other, into Hughes Defense, Delco and
Hughes Telecom. See "Description of the Hughes Transactions--General--Hughes
Reorganization" and "Separation and Transition Arrangements" in Chapter 3.
After giving effect to the Hughes Reorganization, (1) Hughes Defense generally
will consist of businesses currently reported in the Aerospace and Defense
Systems segment of Hughes Electronics, (2) Delco generally will consist of
businesses currently reported in the Automotive Electronics segment of Hughes
Electronics and (3) Hughes Telecom generally will consist of businesses
currently reported in the Telecommunications and Space segment and Corporate
and Other.
The separate financial statements of Hughes Defense, Delco and Hughes Telecom
contained in this document have been prepared in accordance with generally
accepted accounting principles and reflect the businesses to be included in
each after giving effect to the Hughes Reorganization. Hughes Electronics
corporate assets and liabilities have been included in the separate financial
statements to the extent identifiable to individual business units. The
separate financial statements also include allocations of corporate expenses
from Hughes Electronics. Such allocations are based either on actual usage or
on allocation methodologies which comply with U.S. government cost accounting
standards.
PURCHASE ACCOUNTING ADJUSTMENTS
The separate financial statements of Hughes Defense and Hughes Telecom
reflect the application of purchase accounting adjustments arising from GM's
acquisition of Hughes Aircraft in 1985. The GM Certificate of Incorporation, as
proposed to be amended in the GM Spin-Off Merger, will provide that, in
calculating the amount available for payment of dividends on New GM Class H
Common Stock (which amount will also be used to calculate earnings per share of
New GM Class H Common Stock), amortization of excess purchase price for GM's
acquisition of Hughes Aircraft in 1985 applicable to Hughes Telecom will not be
charged against the earnings of Hughes Telecom. See "New GM Class H Common
Stock--GM Certificate of Incorporation Provisions Regarding Dividends" in
Chapter 6.
140
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES DEFENSE SELECTED COMBINED HISTORICAL FINANCIAL DATA
The following Hughes Defense selected combined historical financial data have
been derived from the financial statements of Hughes Defense. The data should
be read in conjunction with Hughes Defense's Combined Financial Statements
(including the notes thereto) included in Appendix C to this document. The
income statement data for the periods ended December 31, 1996, 1995 and 1994
and the balance sheet data as of December 31, 1996 and 1995 have been derived
from the combined financial statements of Hughes Defense audited by Deloitte &
Touche LLP, independent public accountants. The income statement data for the
periods ended December 31, 1993 and 1992 and June 30, 1997 and 1996 and the
balance sheet data as of June 30, 1997 and 1996 and December 31, 1994, 1993 and
1992 have been derived from unaudited combined financial statements of Hughes
Defense. In the opinion of management, the unaudited combined financial
statements reflect all adjustments (consisting only of normal recurring items)
that are necessary for the fair presentation of financial position and results
of operations for such periods. Operating results for the six-month periods
ended June 30, 1997 and 1996 are not necessarily indicative of the results that
may be expected for the entire year.
AS OF AND FOR THE
SIX MONTHS AS OF AND FOR THE
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------------
1997 1996 1996 1995 1994 1993 1992 (A)
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
OPERATING RESULTS:
Net sales............... $3,413.3 $3,053.1 $6,382.7 $5,921.8 $5,896.0 $6,353.5 $5,503.8
Other income, net....... 13.3 4.5 9.1 43.0 22.5 24.7 45.2
-------- -------- -------- -------- -------- -------- --------
Total Revenues......... 3,426.6 3,057.6 6,391.8 5,964.8 5,918.5 6,378.2 5,549.0
-------- -------- -------- -------- -------- -------- --------
Cost and Expenses....... 3,118.3 2,765.5 5,770.3 5,309.5 5,314.5 5,605.1 5,836.8
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 50.6 50.6 101.3 101.3 101.3 101.3 101.3
-------- -------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 3,168.9 2,816.1 5,871.6 5,410.8 5,415.8 5,706.4 5,938.1
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... 257.7 241.5 520.2 554.0 502.7 671.8 (389.1)
Income taxes (credit)... 118.5 111.1 239.3 235.4 226.2 293.9 (182.9)
Cumulative effect of
accounting changes..... -- -- -- -- (7.1) -- (268.5)
-------- -------- -------- -------- -------- -------- --------
Net Income (loss)....... $ 139.2 $ 130.4 $ 280.9 $ 318.6 $ 269.4 $ 377.9 $ (474.7)
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 81.6 $ 29.2 $ 59.7 $ 15.7 $ 58.7 $ 1.6 $ 9.1
Current assets.......... 3,167.2 3,060.1 2,907.7 2,880.0 2,462.0 2,529.3 2,692.9
Total assets............ 7,382.3 7,175.5 7,028.4 7,025.9 6,249.1 6,548.6 7,012.9
Current liabilities..... 1,665.2 1,835.6 1,889.0 1,959.9 1,604.9 1,814.9 1,624.0
Long-term debt and
capitalized leases..... 33.3 48.7 34.4 49.7 57.6 83.9 38.0
Parent Company's net
investment 5,372.5 4,939.6 4,823.0 4,680.2 4,198.2 4,278.3 4,801.0
OTHER DATA:
Depreciation and
amortization........... $ 126.7 $ 116.8 $ 246.6 $ 240.5 $ 265.5 $ 295.9 $ 303.5
Capital expenditures.... $ 68.8 $ 55.4 $ 178.3 $ 99.4 $ 174.1 $ 119.8 $ 88.1
- ------------
(a) Includes the effect of a pre-tax restructuring charge of $833.1 million.
141
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES DEFENSE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
RESULTS OF OPERATIONS
Revenues. Hughes Defense reported revenues for the first six months of 1997
of $3,426.6 million, an increase of 12.1% from the $3,057.6 million reported in
the first half of 1996. The growth was primarily the result of the build-up of
several newer programs, particularly information systems and service programs
such as Desktop V, Wide Area Augmentation System and Hughes Air Warfare Center.
Additionally, revenues increased due to the acquisition of the Marine Systems
Group of Alliant Techsystems in March 1997, increased engineering effort on
several missile programs including Standard, EKV and ESSM and increased
activity on the Phalanx program. Finally, Sensors and Communications Systems
had increased revenues on certain radar production programs.
Other Income--Included in revenues is other income of $13.3 million for the
first six months of 1997 and $4.5 million for the same period in the prior
year.
Operating Profit. Operating profit for the first half of 1997 was $294.0
million, a 4.5% increase from the $281.3 million reported during the comparable
period in the prior year. The operating profit margin for 1997 was 8.6%
compared with 9.2% in the prior year's period. The increase in operating profit
was due primarily to the revenue growth described above, partially offset by
lower operating margins. The reduced operating profit margin was primarily due
to provisions taken on certain air traffic control and training contracts
offset in part by strong performance on several radar programs. Future
operating profits could be adversely impacted by the reductions in the U.S.
defense budget.
Costs and Expenses. Selling, general and administrative expenses for the
first half of 1997 were $188.4 million, an increase of $28.8 million from the
$159.6 million reported in the same period last year. The increase was
principally due to the addition of the Hughes Air Warfare Center and the
acquisition of Alliant Techsystems in 1997 and increased business effort within
Information Systems.
The effective income tax rate was 46.0% for the first six months of 1997 and
1996.
Earnings. Hughes Defense earnings increased 6.7% to $139.2 million in the
first six months of 1997 compared with $130.4 million reported in the same
period in 1996. The increase was principally due to the increase in operating
profit discussed above.
Backlog. The backlog at June 30, 1997 of $7,400.0 million decreased from the
$7,982.4 million reported at June 30, 1996, primarily due to activity related
to Hughes Air Warfare Center.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $81.6 million at
June 30, 1997, an increase of $21.9 million from the $59.7 million reported at
December 31, 1996. The increase was due primarily to net contributions from the
Parent Company of $412.2 million, offset by cash used in operations, the
acquisition of the Marine Systems Group of Alliant Techsystems for $141.0
million, and capital expenditures.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.90 at June 30, 1997 and 1.54 at
December 31, 1996. Working capital was $1,502.0 million at June 30, 1997
compared to $1,018.7 million at December 31, 1996.
Property and Equipment. Property, net of accumulated depreciation, increased
$60.5 million to $1,145.6 million at June 30, 1997, compared to $1,085.1
million reported at December 31, 1996. Expenditures for
142
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
property were $68.8 million through June 30, 1997 compared with $55.4 million
for the comparable period in 1996. The increase was largely the result of
increased investments on Sensors and Communications Systems programs such as
Space Based Infra-Red Systems-Low ("SBIRS-Low") and the Joint Strike Fighter
program.
Debt and Capitalized Leases. Long-term debt and capitalized leases at June
30, 1997 were $33.3 million compared to $34.4 million reported at December 31,
1996.
Acquisitions. In March 1997, Hughes Defense acquired the Marine Systems Group
of Alliant Techsystems, Inc. for $143.3 million in cash. The Marine Systems
Group is a leader in lightweight torpedo manufacturing and the design and
manufacturing of underwater surveillance, sonar and mine warfare systems.
1996 COMPARED TO 1995
RESULTS OF OPERATIONS
Revenues. Hughes Defense revenues were $6,391.8 million in 1996, a 7.2%
increase from the $5,964.8 million reported in 1995. The growth was primarily
attributable to additional revenues resulting from the December 1995
acquisition of Hughes Defense Communications (formerly Magnavox Electronic
Systems Company) and the build-up of newer programs including Desktop V, Wide
Area Augmentation System and Land Warrior. Further increases were attributable
to the full year impact of the CAE-Link acquisition, increases in certain
international training and in civil systems contracts. These increases were
partially offset by lower production rates on several missile programs
including Stinger, Standard and Sparrow and the divestiture of certain product
lines.
Other Income--Included in revenues is other income of $9.1 million for 1996
and $43.0 million for 1995. The decrease from 1995 was primarily the result of
lower royalty income in 1996 and gains realized from selling certain product
lines and businesses and the favorable settlement of an environmental insurance
claim in 1995.
Operating Profit. Operating profit was $603.4 million in 1996 compared to
$586.9 million in 1995. The increase in operating profit was due primarily to
the increased revenues described above, offset in part by the lower operating
margin. The operating profit margin on the same basis for 1996 declined to 9.5%
from 9.9% in 1995 primarily due to a continued shift from production programs
to engineering and development programs, and growth in information systems and
services revenues.
Costs and Expenses. Selling, general and administrative expenses were $321.6
million in 1996 compared to $311.0 million in 1995. The increase was primarily
due to increased bidding costs in 1996 on certain programs within Information
Systems.
The effective income tax rate was 46.0% in 1996 and 42.5% in 1995. The lower
effective tax rate in 1995 was the result of an investment tax credit.
Earnings. Hughes Defense 1996 earnings were $280.9 million compared with
$318.6 million reported in 1995. The decrease in 1996 earnings was primarily
related to higher interest expense and the decreases in other income described
above.
Backlog. The 1996 year-end backlog of $8,197.5 million increased from the
$7,784.2 million reported at the end of 1995, primarily due to the acquisition
of Hughes Defense Communications (formerly Magnavox Electronics Systems
Company) in 1995 and activity related to TOW missile and UAE Frigate programs.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $59.7 million at
December 31, 1996, an increase of $44.0 million from the $15.7 million reported
at December 31, 1995. Operating activities generated
143
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
cash of $353.0 million which was partially offset by capital expenditures of
$178.3 million and net distributions to the Parent Company of $136.1 million.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.54 at December 31, 1996 and 1.47
at December 31, 1995. Working capital was $1,018.7 million at December 31, 1996
as compared to $920.1 million at December 31, 1995. The increases were
principally due to the increase in cash described above.
Property and Equipment. Property, net of accumulated depreciation, increased
$23.2 million to $1,085.1 million in 1996 from $1,061.9 million reported in
1995. Expenditures for property were $178.3 million and $99.4 million, in 1996
and 1995, respectively. The increase was related to capital expenditures to
support expanding business requirements, primarily within Information Systems.
Debt and Capitalized Leases. Long-term debt and capitalized leases were $34.4
million at December 31, 1996 compared to $49.7 million at December 31, 1995.
The decline was due to scheduled principal repayments and the reclassification
of certain amounts to current liabilities.
1995 COMPARED TO 1994
RESULTS OF OPERATIONS
Revenues. Hughes Defense revenues were $5,964.8 million in 1995, a 0.8%
increase from the $5,918.5 million reported in 1994. The increase was due to
additional revenues related to the 1995 acquisition of CAE-Link Corporation and
increased effort on the Tomahawk program. Such revenue increases were offset in
part by lower production rates on several missile programs, including Advanced
Medium-Range Air-to-Air Missile ("AMRAAM"), Tube-launched, Optically-tracked,
Wire-guided ("TOW") and Advanced Cruise Missile ("ACM").
Other Income--Included in revenues is other income of $43.0 million in 1995
and $22.5 million in 1994. The increase was largely attributable to gains
recognized from the sale in 1995 of certain product lines and businesses and
the favorable settlement of an environmental insurance claim in 1995.
Operating Profit. Operating profit was $586.9 million in 1995 compared to
$545.1 million in 1994. The operating profit margin on the same basis for 1995
increased to 9.9% from 9.2% in 1994 largely due to a provision taken in 1994
for certain air traffic control contracts.
Costs and Expenses. Selling, general and administrative expenses were $311.0
million in 1995 compared to $323.2 million in 1994. The decline was primarily
attributable to facilities consolidation costs incurred in 1994 offset by the
acquisition of CAE-Link in 1995.
The effective income tax rate was 42.5% in 1995 and 45.0% in 1994. The lower
tax rate in 1995 was the result of an investment tax credit.
Earnings. Hughes Defense 1995 earnings were $318.6 million compared with
$269.4 million reported in 1994. The increase was largely due to increased
operating profit as described above, the lower effective tax rate in 1995 and
the other income increases. Earnings in 1994 included the unfavorable effect of
an accounting change for postemployment benefits other than pensions. Excluding
the accounting change, Hughes Defense earnings in 1994 would have been $276.5
million.
Backlog. The 1995 year-end backlog of $7,784.2 million decreased from the
$8,876.0 million reported at the end of 1994, due to several large orders
received in 1994 on Tomahawk production and engineering, F-15 and B-2 radar
production and TOW missile awards.
144
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $15.7 million at
December 31, 1995, a decrease of $43.0 million from the $58.7 million reported
at December 31, 1994. The decrease in cash was primarily due to the
acquisitions of CAE-Link and Magnavox Electronic Systems Company for $176.0
million and $373.2 million, respectively, partially offset by cash provided by
operating activities and proceeds from the sale of the certain product lines
and businesses and the disposal of certain property.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.47 at December 31, 1995 and 1.53
at December 31, 1994, relatively unchanged. Working capital was $920.1 million
at December 31, 1995 compared to $857.1 million at December 31, 1994.
Property and Equipment. Property, net of accumulated depreciation, decreased
$34.6 million to $1,061.9 million in 1995 from $1,096.5 million in 1994.
Expenditures for property were $99.4 million and $174.1 million, in 1995 and
1994, respectively. The decrease in 1995 expenditures was due to the high level
of expenditures in 1994 related to the consolidation of facilities in an effort
to increase the operational efficiencies of manufacturing and engineering
activities.
Debt and Capitalized Leases. Long-term debt and capitalized leases were $49.7
million at December 31, 1995, a decrease of $7.9 million from the $57.6 million
reported at December 31, 1994. The decline was primarily due to scheduled
principal repayments.
Acquisitions and Divestitures. In February 1995, Hughes Defense completed the
acquisition of CAE-Link Corporation, an established supplier of simulation,
training and technical services, primarily to the U.S. military and NASA, for
$176.0 million. In December 1995, Hughes acquired Magnavox Electronics Systems
Company, a leading supplier of military tactical communications, electronic
warfare and command and control systems, for $382.4 million.
During 1995, Hughes Defense divested several non-strategic enterprises
resulting in aggregate proceeds of approximately $23.6 million with no
significant net income impact.
145
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
BUSINESS OF HUGHES DEFENSE
INTRODUCTION
The following description of the business of Hughes Defense gives effect to
the Hughes Reorganization but does not give effect to the Raytheon Merger.
Accordingly, the following description does not address the strategy or
business plans of New Raytheon, which are separately addressed under "Overview
of New Raytheon Business" in Chapter 5.
Hughes Defense has been a major producer of electronics-based aerospace and
defense products and systems for more than four decades and is a leading
supplier of defense electronics products and services to the U.S. government.
Hughes Defense has positioned itself as a leading developer and producer of a
variety of tactical programs and as a subcontractor for certain types of
subsystems for strategic purposes rather than seeking to become a prime
contractor for major strategic weapons platforms such as tanks and aircraft.
This permits Hughes Defense to participate in major segments of the defense
market while reducing the impact of specific program cancellations. During
1996, no single Department of Defense program accounted for more than 6% of
Hughes Defense's revenues, and the ten largest Department of Defense programs,
in the aggregate, accounted for less than 33% of Hughes Defense's revenues.
Approximately 64% of Hughes Defense's 1996 revenues were attributable to sales
to the Department of Defense.
Hughes Defense's business strategy has been to strengthen its leadership
position in aerospace and defense electronics products, systems and services
through continued emphasis on technological advances, operational efficiencies,
cost reduction and competitiveness. Due to its technological capabilities and
the volume of its products and systems in operation around the world, Hughes
Defense believes that it has capitalized on the opportunities presented by the
continuing trend toward upgrading and retrofitting electronic systems as a
cost-effective alternative to developing new strategic weapons platforms.
Hughes Defense also has been pursuing its strategy of reducing its
vulnerability to reductions in U.S. defense spending by diversifying its
customer base and product line, with emphasis on international markets and non-
defense government agencies. Hughes Defense has been seeking to expand its non-
defense businesses by building on its expertise and experience in developing
and manufacturing defense electronics systems and providing related services.
Hughes Defense has also sought to diversify both its product line and its
customer base with respect to its sales to the Department of Defense. By
positioning itself as a leading developer and producer of a variety of tactical
programs and as a subcontractor for certain types of subsystems for strategic
programs, Hughes Defense participates in major segments of the defense market
while reducing the impact of specific program cancellations. As the U.S.
defense budget has declined in recent years, the Pentagon has increasingly used
electronic and tactical weapons upgrades to extend the capabilities of existing
platforms. Tactical programs, such as airborne radar systems and missile
programs, typically involve the large-scale production of expendable products
or electronics systems which are later upgraded. Hughes Defense provides
subsystems for a variety of strategic programs in which its technological
capabilities may offer it a competitive advantage. Hughes Defense's strategy
has also included diversification of its customer base. In 1996, no single
branch of the U.S. Armed Forces accounted for more than 25% of Hughes Defense's
revenues.
Hughes Defense currently conducts its operations through three principal
business units: Sensors & Communications Systems, Weapons Systems and
Information Systems. In addition, Hughes Defense has a Defense Systems business
unit which engages in systems integration work. The following table sets forth
the revenues of each of these business units for each of the last three years.
1996 1995 1994
------ ------ ------
(IN MILLIONS)
Sensors & Communications Systems........................ $2,522 $2,214 $2,351
Weapons Systems......................................... 1,979 2,066 2,387
Information Systems..................................... 2,202 1,923 1,529
Defense Systems......................................... 56 35 --
Intercompany Sales (a).................................. (367) (273) (348)
------ ------ ------
$6,392 $5,965 $5,919
====== ====== ======
- ------------
(a) Represents intercompany sales between Hughes Defense business units, which
are eliminated in consolidation.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
SENSORS & COMMUNICATIONS SYSTEMS
Hughes Defense's Sensors & Communications Systems ("SCS") business unit
designs, develops and produces sophisticated radar (ground and airborne),
communications and electro-optical equipment systems for military use. SCS also
produces some of the critical high value components within these systems, such
as processors and focal planes.
SENSOR SYSTEMS
Hughes Defense's sensor systems consist of radars, electro-optical systems,
electronic warfare systems and processors.
Radars. The principal product groups of the radar business are as follows:
BUSINESS DESCRIPTION
-------- -----------
Airborne Radar Multi-mode fire control, reconnaissance and surveillance
radar and related upgrades for military aircraft for sale
to the U.S. and other governments. Radar Systems for use
in customs, law enforcement, environmental monitoring and
military applications.
Ground-Based Radar Ground-based radar and short-range air defense systems.
Airborne Radar--Hughes Defense is a leading developer and producer of
sophisticated airborne radar systems. Its airborne fighter radar units are
among the most sophisticated in the world. They are deployed by the U.S.
military aboard four of its five front-line fighter aircraft (the F-14, the F-
15, the F/A-18 and the AV-8B Harrier jet), the AC-130U gunship, the U-2R
reconnaissance aircraft and the B-2 stealth bomber, as well as by a number of
foreign militaries.
Ground-Based Radar--Hughes Defense supplies a variety of ground-based radar
products and short-range air defense systems. Hughes Defense's ground-based
radar products are deployed in the U.S. Army's Forward Area Air Defense system,
the NASAMS, other medium- and short-range air defense systems and the
Firefinder family of weapon-locating radars in use by the military forces of
the United States and 16 other nations.
Electro-Optical Systems. Electro-optical systems use advanced sensors to
detect radiated energy in the form of heat or light, high-speed data and signal
processors to analyze the sensor data and sophisticated communications and
display technology to deliver that information to commanders and other decision
makers. Electro-optical systems employ thermal imaging, laser guidance,
infrared sensors and advanced optics technologies for a variety of tactical,
space and strategic applications. Of strategic importance to the electro-
optical systems business is Hughes Defense's Santa Barbara Research Center,
which designs and produces infrared focal plane detectors and civilian space
sensors.
In early 1996, Hughes Aircraft acquired Itek Optical Systems ("Itek"), an
expert in large space optics, and combined this business with Hughes Danbury
Optical Systems. The acquisition has strengthened Hughes Defense's position as
a leader in the large space optics field. Itek is also important to Hughes
Defense because it specializes in airborne, visible image reconnaissance. This
expertise has improved Hughes Defense's competitive position in reconnaissance.
The principal product groups of the electro-optical systems business are as
follows:
PRODUCT DESCRIPTION
------- -----------
Tactical EO Systems Systems for use in military aircraft, tanks and
ground defense systems, including weapon fire
control systems, night and obscured vision systems
and sensors.
Space and Strategic Systems for earth monitoring and planetary
Systems exploration and ballistic missile warning, tracking
and guidance systems.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Tactical EO Systems--Hughes Defense is a leading producer of tactical
military laser and thermal electro-optical systems. Hughes Defense provides
night vision systems incorporating its thermal imaging and laser technologies
for aircraft, tanks and armored personnel carriers. Together with its
licensees, Hughes Defense has built more than 30,000 tactical laser
rangefinders and more than 20,000 thermal imaging systems. Hughes Defense is a
contractor for the U.S. Army's Horizontal Technology Integration program to
provide improved electro-optical sights on armored vehicles and is a supplier
of thermal imaging target acquisition fire control system upgrades for the
Bradley Fighting Vehicle.
For light-armored vehicles, Hughes Defense produces a high performance fire
control thermal imaging system that is being used in conjunction with fire
control and Tube-launched, Optically tracked, Wire-guided ("TOW") missile
programs and has been installed on a variety of vehicles. For infantry
application, Hughes Defense has developed an infrared Thermal Weapon Sight
("TWS") for the U.S. Army that is light enough to be used with rifles, machine
guns and shoulder-launched missiles.
Airborne systems being developed by Hughes Defense include an infrared system
for the U.S. Marine Corps' V-22 Osprey that incorporates advanced staring focal
plane array technology. Hughes Defense also provides a night targeting system
for the AH-1 Cobra attack helicopter, and night vision systems for a variety of
other helicopters in service with the U.S. and other armed forces. Fixed-wing
electro-optical products include the infrared navigation and targeting pods for
the F/A-18 Hornet aircraft.
Space and Strategic Systems--Hughes Defense is a leading designer and
producer of visible light wavelength and infrared detector sensors for imaging
products deployed on satellites and used for a variety of earth monitoring,
planetary exploration and commercial purposes. In the area of earth remote
sensing for civil space applications, Hughes Defense has manufactured key
instruments for a majority of the imaging weather satellites launched since the
late 1960s and is currently performing on several major civil earth monitoring
contracts (such as LANDSAT).
Hughes Defense has pioneered the technologies for telescopes that can
maintain high performance at extremely low temperatures and which are
fundamental to space sensors and interceptors used by the Department of
Defense. In addition, for both tactical and space and strategic applications,
advances in wide field of view reflective optics for land and airborne
applications are permitting increased capability in increasingly smaller
packages by enabling visible, infrared and laser wavelengths to use a single
aperture. Precision machining and diamond turning technology are being used to
enable production of these optics with fewer parts and lower cost.
Hughes Defense is currently developing space-based infrared sensors to detect
and track ballistic missiles in flight, providing data for early warning and
tracking. Hughes Defense is a contractor on the U.S. Air Force's Space Based
Infrared Low ("SBIRs-Low") program.
Electronic Warfare Systems. Electronic Warfare Systems are used for the
passive detection, tracking and identification of signals. In 1994, Hughes
Defense was awarded a contract to demonstrate and validate the precision
direction finding system for the Manned Destructive Suppression of Enemy Air
Defenses mission of the U.S. Air Force and two other electronic warfare
contracts. Hughes Defense has also developed an advanced special receiver which
is expected to become the standard radar warning receiver for U.S. Navy and
U.S. Marine Corps tactical aircraft.
Processors. Hughes Defense is a leading developer and producer of
sophisticated processors for use in aerospace and defense products and systems.
Hughes Defense is developing the Common Integrated Processor, an advanced,
ultra high-speed modular computer developed for the avionics systems on the F-
22 Advanced Tactical Fighter ("ATF").
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
COMMUNICATIONS SYSTEMS
Hughes Defense supplies communications products and command and control
systems that can efficiently gather, process and transmit large amounts of
information for military use. The strategic acquisition of Magnavox Electronic
Systems Company in 1995 significantly added to Hughes Defense's long-range
satellite communications customer base and has contributed significantly toward
Hughes Defense's goal of becoming the industry's tactical communications market
leader. Hughes Defense communications products include the Enhanced Position
Location Reporting System ("EPLRS"), a digital locator and communications
system. This system provides secure tactical data communications, friendly
identification, position reporting and navigation services to the U.S. Army.
WEAPONS SYSTEMS
Hughes Defense is a leading developer and producer of tactical missile
systems as well as naval and maritime systems. The principal product groups of
these businesses are as follows:
BUSINESS DESCRIPTION
-------- -----------
Missile Systems Tactical guided missiles (including air-to-air, air-
to-surface, surface-to-surface and surface-to-air
missiles),
guidance and control systems, sensor systems and
missile launchers.
Naval and Maritime Torpedoes, sonar and other acoustics systems, ship
Systems defense and display systems and underwater
surveillance systems.
MISSILE SYSTEMS
Hughes Defense develops and produces tactical guided missiles, guidance and
control systems, sensor systems and missile launchers. With its air-to-air,
air-to-surface, surface-to-surface and surface-to-air missile products, Hughes
Defense participates in all portions of the tactical missile systems market and
believes it is a leader in the tactical missile systems business.
Hughes Defense has been a long-time developer, supplier and leader in radar
guided air-to-air missiles, such as the Phoenix used on the F-14 fighter and
the Advanced Medium Range Air-to-Air Missile ("AMRAAM"), which has become a
primary weapon system on front-line fighter aircraft for the U.S. Air Force and
the U.S. Navy. In addition, AMRAAM is the missile of choice for a growing
number of foreign militaries. In 1996, Hughes Defense was selected to produce
the AIM-9X, the next generation replacement for the existing AIM-9M
"Sidewinder" short-range air-to-air missile.
Hughes Defense is one of the primary subcontractors to Standard Missile
Company for engineering and production services for all elements of STANDARD
Missile. Standard Missile Company is the prime contractor for STANDARD Missile,
and is owned by Hughes Missile Systems Company and Raytheon. STANDARD Missile
is the primary surface launched area air defense weapon for the U.S. Navy and
many allied countries. It is currently in service in several variants--the SM-1
Block VI and SM-2 Block II, III, IIIA and IIIB. The SM-2 Block IV extended
range variant has just entered low-rate production. The U.S. Navy is developing
the next evolutionary generations of STANDARD Missile capable of intercepting
tactical ballistic missiles.
In 1994, Hughes Defense was awarded a sole source contract for the production
of the Tomahawk Cruise Missile, and also is developing the next version of
Tomahawk, the Block IV. Hughes Defense is also pursuing the growth aspects of
the Tomahawk program, including the new Tactical Tomahawk, which currently is
expected to be awarded in 1998.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Hughes Defense is also one of two producers of the Sparrow missile, a medium-
range, semi-active guided missile used in multiple roles by multiple services.
In its air-to-air role, the missile is used on fighter aircraft of the U.S.
Navy and U.S. Air Force and allied countries. The surface-to-air version, the
SeaSparrow, is used for shipboard point defense on more than 150 ships of
various classes for the United States and numerous other countries. In addition
to the SeaSparrow, Hughes Defense plays a major role in the self defense of
ships as the producer of the Rolling Airframe Missile ("RAM") and the Phalanx
Close-in Weapon System. RAM is a surface-to-air missile and launcher system
that was developed and is produced by the United States and Germany under a
cooperative agreement. Phalanx is a computer-controlled radar and gun system
used to defeat anti-ship missiles and other close-in surface and air threats.
In addition, Hughes Defense is leading a 10-country NATO consortium to develop
the Evolved SeaSparrow Missile ("ESSM"), a kinematics upgrade to the
SeaSparrow. ESSM will primarily target enemy aircraft and anti-ship missiles.
The armed forces of more than 40 nations rely on Hughes Defense's TOW
missile. Hughes Defense has produced more than 600,000 TOW antitank missiles,
which can be fired from ground tripods, armored and unarmored vehicles and
helicopters against tanks, armored personnel carriers, bunkers and small boats.
Hughes Defense also is the sole-source producer of the Stinger family of
missiles, the basis for the most advanced, accurate, shoulder-fired anti-
aircraft weapon system in the world. In addition to being shoulder-launched,
Stinger is adaptable to a variety of launch platforms, including helicopters,
ground combat vehicles and U.S. Navy ships.
Hughes Defense is a leader in Theater Ballistic Missile Air Defense systems.
Hughes Defense is developing the Exoatmospheric Kill Vehicle, a well
established program which started in 1990. Flight tests in 1998 and 1999 are
expected to lead into the National Missile Defense System Testing Phase.
Additionally, Hughes Defense is the sole developer of the Lightweight
Exoatmospheric Projectile--Kinetic Warhead ("LEAP-KW") for the U.S. Navy. The
LEAP-KW will be integrated with a unique variant of STANDARD Missile (also
being developed by Hughes Defense) and will have the capability to acquire,
track, intercept, and destroy Theater Ballistic Missiles in flight.
Hughes Defense also has been a significant developer and producer of air-to-
surface and surface-to-surface missiles. The versatile Maverick family of
missiles can be fired from a variety of aircraft. Infrared-guided Mavericks
offer all-weather, around-the-clock attack capability and the U.S. Marine
Corps' laser-guided Maverick allows pin-point accuracy on the battlefield.
Mavericks are employed by the armed forces of many other countries.
NAVAL AND MARITIME SYSTEMS
Naval and maritime systems products include torpedoes, antisubmarine warfare
systems, naval combat systems, mine warfare systems, ocean surveillance systems
and ship system integration, principally for the U.S. Navy. For decades, the
UYQ-21 family of display systems has been a standard for the combat information
centers of U.S. Navy surface ships. Hughes Defense's MK23 Target Acquisition
System, an advanced radar system, permits ships to detect low-flying, high
speed missiles and aircraft. Hughes Defense also supports the U.S. Navy's
Surveillance Towed Array Sensor Segment ("SURTASS") system, a passive
underwater surveillance sensing system that utilizes an acoustic sensor array
towed from a dedicated surface ship to acquire data. Hughes Defense believes
that technology developed through its current participation in key U.S. Navy
programs presents opportunities for international sales. These programs, which
are shifting from development to production, include the Airborne Low Frequency
Sonar ("ALFS") and the Surface Search Radar ("SSR"). Hughes Defense was
recently selected as the ship electronics system integrator for the U.S. Navy's
new amphibious San Antonio class of ships of which the LPD-17 is first in
class.
This business unit also includes operations acquired from Alliant
Techsystems' Marine Systems Group in March 1997 for $141 million. The group,
which is based in Mukilteo, Washington, manufactures MK46, MK50 and NT37
torpedoes and underwater surveillance systems.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
INFORMATION SYSTEMS
Hughes Defense's information systems business unit is involved in developing,
supporting and providing training for key information technologies. The unit
includes four principal businesses: Hughes Information Technology Systems;
Hughes Training Inc.; Hughes Technical Services Company; and Hughes Data
Systems. Information technologies are driving the evolving joint command and
intelligence networks which, in turn, influence all defense systems, including
weapons systems. Advanced distributed simulation is becoming a more important
military tool for weapons development, operational planning and training.
HUGHES INFORMATION TECHNOLOGY SYSTEMS
Hughes Information Technology Systems consists of four principal product
groups as described below:
BUSINESS DESCRIPTION
-------- -----------
Command and Control Military command and control systems for air defense
Systems systems;
air traffic control systems; airport information and
operations
management systems.
Defense Systems Mapping and weather systems.
Space Systems Classified and commercial ground station systems.
Civil Systems Earth Observing System Data Information Systems
("EOSDIS").
Command and Control Systems. Hughes Defense's command and control air defense
systems utilize modular software to integrate large amounts of data from a
variety of sensors, rapidly process the data using proprietary algorithms and
then communicate information to decision makers in command and control centers
on a real-time basis. Hughes Defense's systems are deployed in the United
States and over 20 other nations. Hughes Defense has designed, developed and
implemented a $1.3 billion Command, Control and Communication system for Saudi
Arabia called Peace Shield. Hughes Defense is currently providing contractor
technical services for this operational system under a separate $386 million
contract ending in December 1997. Hughes Defense is also currently under
contract to design, develop and implement air defense systems for Egypt,
Iceland, Kuwait, Taiwan and NATO.
Hughes Defense has applied its technology and experience in air defense
systems to develop civilian air traffic control systems. Hughes Defense offers
a full range of systems to the air traffic control market, with products that
range from systems that integrate multiple support centers and radar
installations for large countries to systems servicing a single airport tower.
Hughes Defense is working on contracts to modernize and better integrate
Canada's civil and military air traffic control systems. Hughes Defense also is
under contract to provide air traffic control systems in a number of countries,
including Indonesia, Saudi Arabia, Switzerland and China. In addition, Hughes
Defense has become a major supplier to the Federal Aviation Administration
("FAA"). The Wide Area Augmentation System ("WAAS") is a $480 million five-year
contract to develop and deploy a satellite based navigation and air traffic
control system over the United States. The Oceanic Systems Development Support
("OSDS") is an $200 million eight-year contract to improve air traffic control
capabilities offshore. Finally, Hughes Defense and Raytheon teamed to win the
Standard Terminal Replacement System ("STARS") contract to replace and upgrade
equipment in 172 FAA air traffic control terminals and 199 Department of
Defense facilities. Hughes Defense's share of the contract is $125 million.
Defense Systems. Hughes Defense has expertise in processing large quantities
of data in real time, storing data in secure data bases accessible to
geographically distributed users and handling the requirements of complex
communications networks.
For the U.S. government, Hughes Defense has developed Command, Control,
Communications and Intelligence ("C/3/I") systems and support for classified
military requirements as well as missions and sensor
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
data processing for national security applications. In addition, Hughes Defense
provides systems engineering services to the U.S. Defense Information Systems
Agency. Defense systems also include terrain mapping and weather information.
Space Systems. Hughes Defense develops and supports classified government and
commercial ground station systems which control the operations of satellites
while in orbit.
Civil Systems. Hughes Defense also provides scientific and engineering
services for the National Aeronautics and Space Administration ("NASA") and the
National Oceanic and Atmospheric Administration ("NOAA") such as Mission to
Planet Earth, an international research effort to understand the planet's eco-
systems and climatic changes, and other planetary and astrophysical research.
In 1993, Hughes Defense was awarded a 10-year contract currently valued at
approximately $800 million by NASA to develop the EOSDIS Core System. Hughes
Defense also has developed law enforcement applications for the U.S.
Immigration and Naturalization Services and is currently pursuing opportunities
in information technology for the U.S. government in health care and other non-
defense areas.
HUGHES TRAINING INC.
Hughes Defense has been a pioneer, and continues to be a leader in, the field
of advanced training systems, services and equipment (including simulators) for
a variety of military requirements. With the acquisition of CAE-Link in
February 1995, Hughes Defense is now a leading supplier of training systems and
services to the Department of Defense. Hughes Defense also provides training
systems and services for NASA and industrial customers. Hughes Training
consists of three principal product groups as described below:
BUSINESS DESCRIPTION
-------- -----------
Military Training Systems Training simulators and equipment for the
Department of Defense and NASA.
Training Operations Training services to the Department of
Defense and NASA.
Commercial/Industrial Training Equipment, systems and programs for
industrial training and
testing applications.
Military Training Systems and Training Operations. For military applications,
Hughes Defense has focused its resources on opportunities that permit it to
take advantage of ongoing Hughes Defense and similar programs held by other
defense contractors, such as training programs for the B-2, F/A-18, F-16 and C-
141 aircraft. Hughes Defense is also well positioned to provide combined arms
tactics training for the U.S. Army and U.S. Navy. Hughes Defense's flight
training systems include sophisticated simulators in which pilots practice
combat tactics as well as emergency procedures and standard maneuvers. The
flexible software of these simulators can be adapted so that pilots can also
train for specific missions. Hughes Defense's training systems are capable of
teaching all phases of operations and maintenance for aircraft as diverse as
the F-16 and F/A-18 fighters and the C-141 cargo aircraft. Hughes Defense also
designs and produces multi-platform training equipment for the U.S. Navy. Using
Hughes Defense's Anti-Submarine Warfare Tactical Team Trainers, teams of navy
personnel train in coordinating ships, submarines and aircraft in simulated
anti-submarine and fleet defense warfare maneuvers.
Commercial/Industrial Training. Hughes Defense also develops equipment,
systems and programs for industrial training and testing applications,
including curriculum and coursework and training delivery and management. In
1995, Hughes Defense was selected by General Motors Europe to be its single
training integrator and to provide various dealer training programs. Hughes
Defense also has advanced training system projects with General Motors Europe
and several of GM's facilities in the United States. Hughes Defense was awarded
a 10-year $500 million contract with General Motors Europe in 1995. Hughes
Defense is exploring training opportunities for General Motors in Asia as well
as other customers domestically and internationally.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TECHNICAL SERVICES COMPANY
Hughes Defense provides a wide range of scientific, technical and support
services, primarily to the Department of Defense and other military customers,
both through direct contracts and through support of other Hughes Defense
projects. Hughes Defense specializes in the areas of operation and maintenance
of customer equipment and systems; repair and supply depot operations;
logistics engineering; space and Earth sciences; commercial services; remote
logistics; range support; and privatization of government services. In 1996,
Hughes Electronics was selected by the U.S. Navy and the City of Indianapolis
to privatize the Naval Air Warfare Center in Indianapolis. The Indianapolis
facility, renamed the Hughes Air Warfare Center, represents the Department of
Defense's largest privatization initiative to date and provides engineering and
technical support of advanced avionics and electronic systems.
HUGHES DATA SYSTEMS
The Hughes Data Systems unit is responsible for procurement and delivery of
system hardware and software. This unit primarily supports certain long-
standing customer relationships. Primary products include the Desktop V, USAF
Workstation, Patent Trademark Office and Desktop Computers.
DEFENSE SYSTEMS
In addition to the three major business units addressed above, Hughes Defense
is also developing its defense systems integration business. This Defense
Systems business unit is approaching new contracts essentially as a "prime"
contractor in which Hughes Defense serves as a system integrator to combine the
best components for a system. Defense Systems supports customers in the
Ballistic Missile Defense Organization ("BMDO") and the U.S. Army in air and
missile defense systems and solider systems. An example of these systems
integration efforts is a cost effective short range air defense system that
integrates radars and communications equipment from Hughes Defense's Sensors &
Communications Systems business unit and a ground launched version of the
Weapons Systems business unit's AMRAAM missile. Other major programs include
the Medium Extended Air Defense System ("MEADS") for preliminary development of
a new multinational ground-based air defense system between the U.S., Germany
and Italy; Aerostat CMD for the concept development of a tethered aerostat
airborne surveillance and targeting system for cruise missile defense; and the
Land Warrior EMD program for development and fielding of an integrated soldier
fighting system.
U.S. GOVERNMENT CONTRACTS
Hughes Defense acts as a prime contractor or major subcontractor with respect
to many different U.S. government programs. Government acquisition programs
typically follow a life cycle that begins with the research and development
stage and progresses into full-scale production which may continue, with
refinements and improvements, for several years. Because of significant start-
up costs, many programs are not expected to become profitable until well into
the full-scale production phase. Moreover, not all programs are selected for
full-scale production, even when considerable resources have been expended in
pre-production phases. The U.S. government has historically used multiple
supply sources for a single program to further intensify competition and add to
the number of experienced contractors available for future programs. It is
anticipated that the ability to use multiple sources for production will be
limited by declines in U.S. defense spending.
A portion of Hughes Defense's contracts with the U.S. government which are
the basis of Hughes Defense's backlog are subject to appropriations decisions
subsequent to award. This results in many long-term programs being funded
annually. Changes in government policy/priorities may lead to the cancellation
of the remaining portion of a program. Some Hughes Defense contracts contain
options which may or may not be exercised at the discretion of the U.S.
government. Also, once awarded, contracts may be contested by other bidders.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following Delco selected combined historical financial data have been
derived from the financial statements of Delco. The data should be read in
conjunction with Delco's Combined Financial Statements (including the notes
thereto) included in Appendix D to this document. The income statement data for
the periods ended December 31, 1996, 1995 and 1994 and the balance sheet data
as of December 31, 1996 and 1995 have been derived from the combined financial
statements of Delco audited by Deloitte & Touche LLP, independent public
accountants. The income statement data for the periods ended December 31, 1993
and 1992 and June 30, 1997 and 1996 and the balance sheet data as of June 30,
1997 and 1996 and December 31, 1994, 1993 and 1992 have been derived from
unaudited combined financial statements of Delco. In the opinion of management,
the unaudited combined financial statements reflect all adjustments (consisting
only of normal recurring items) that are necessary for the fair presentation of
financial position and results of operations for such periods. The Delco
unaudited selected pro forma operating results for the six months ended June
30, 1997 and for the year ended December 31, 1996 give effect to the Hughes
Transactions as if they had occurred at the beginning of each respective period
but do not give effect to the planned integration of Delco and Delphi. The
Delco unaudited selected pro forma balance sheet data as of June 30, 1997 give
effect to the Hughes Transactions as if they had occurred at that date.
Operating results for the six-month periods ended June 30, 1997 and 1996 are
not necessarily indicative of the results that may be expected for the entire
year. Pro forma data are not necessarily indicative of future financial
position or operating results.
AS OF AND FOR THE SIX
MONTHS AS OF AND FOR THE YEARS
ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------
PRO PRO
FORMA FORMA
1997 (A) 1997 1996 1996 (A) 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
OPERATING RESULTS:
Net sales............... $2,904.2 $2,904.2 $2,916.0 $5,560.1 $5,560.1 $5,757.2 $5,560.7 $4,808.1 $4,143.5
Other income, net....... 13.8 103.8 89.7 32.4 202.4 195.6 150.6 114.7 158.7
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues......... 2,918.0 3,008.0 3,005.7 5,592.5 5,762.5 5,952.8 5,711.3 4,922.8 4,302.2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Cost and Expenses. 2,628.0 2,628.0 2,524.0 4,901.9 4,901.9 4,869.0 4,751.6 4,219.3 3,695.1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 290.0 380.0 481.7 690.6 860.6 1,083.8 959.7 703.5 607.1
Income taxes............ 107.6 141.0 183.3 261.4 325.8 411.3 364.7 280.5 209.8
Cumulative effect of
accounting changes..... -- -- -- -- -- -- (35.2) -- (478.4)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income.............. $ 182.4 $ 239.0 $ 298.4 $ 429.2 $ 534.8 $ 672.5 $ 559.8 $ 423.0 $ (81.1)
======== ======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 31.0 $ 221.8 $ 756.9 $ 741.0 $ 926.1 $1,243.2 $ 773.2 $ 571.3
Current assets.......... 1,087.5 4,031.3 3,583.1 3,858.0 3,276.2 2,813.0 2,146.9 1,691.2
Total assets............ 2,448.2 5,592.0 5,510.7 5,464.1 5,186.4 4,842.4 4,205.9 3,779.8
Current liabilities..... 714.5 714.5 894.5 734.2 767.9 927.9 786.6 673.5
Parent Company's net
investment............. 585.9 3,779.7 3,580.2 3,662.1 3,402.1 2,949.4 2,566.7 2,288.3
OTHER DATA:
Depreciation and
amortization........... $ 113.6 $ 101.2 $ 204.4 $ 155.6 $ 145.0 $ 152.0 $ 125.6
Capital expenditures.... $ 71.9 $ 103.0 $ 196.5 $ 264.1 $ 165.7 $ 149.2 $ 266.1
- ------------
(a) Pro forma balance sheet data as of December 31, 1996 and pro forma other
data have not been determined.
154
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of Delco have
been derived from the historical combined financial statements of Delco, and
give effect to the Hughes Transactions. The unaudited summary pro forma
condensed combined statements of income for the six months ended June 30, 1997
and for the year ended December 31, 1996 give effect to the Hughes Transactions
as if they had occured at the beginning of each respective period but do not
give effect to the planned integration of Delco and Delphi. The unaudited pro
forma condensed combined balance sheet as of June 30, 1997 gives effect to the
Hughes Transactions as if they had occured at that date.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with Delco's Combined Financial Statements (including the
notes thereto) included in Appendix D to this document as of and for the period
ended December 31, 1996, and the unaudited combined financial statements
(including the notes thereto) of Delco included in Appendix D to this document
as of and for the period ended June 30, 1997.
The pro forma condensed combined balance sheet is not necessarily indicative
of the financial position of Delco that would have been attained had the Hughes
Transactions been consummated on June 30, 1997. The pro forma condensed
combined statements of income are not necessarily indicative of the results of
operations of Delco that would have been attained had the Hughes Transactions
been consummated on January 1, 1996 and 1997, nor are they necessarily
indicative of any future operating results.
DELCO
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
HUGHES
TRANSACTIONS
HISTORICAL PRO FORMA PRO FORMA
DELCO ADJUSTMENTS COMBINED
---------- ------------ ---------
(DOLLARS IN MILLIONS)
REVENUES
Net Sales
General Motors and affiliates.............. $2,659.5 $2,659.5
Outside.................................... 244.7 244.7
Other income, net
Interest income--General Motors and
affiliates................................ 93.8 $(90.0)(a) 3.8
Other...................................... 10.0 10.0
-------- ------ --------
Total Revenues.......................... 3,008.0 (90.0) 2,918.0
-------- ------ --------
COSTS AND EXPENSES
Cost of sales and other operating charges,
exclusive of items listed below........... 2,384.9 2,384.9
Selling, general and administrative
expenses.................................. 129.5 129.5
Depreciation and amortization.............. 113.6 113.6
-------- ------ --------
Total costs and expenses................ 2,628.0 2,628.0
-------- ------ --------
INCOME BEFORE INCOME TAXES.................. 380.0 (90.0) 290.0
Income taxes............................... 141.0 (33.4)(b) 107.6
-------- ------ --------
Net Income.............................. $ 239.0 $(56.6) $ 182.4
======== ====== ========
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
155
DELCO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
HUGHES
TRANSACTIONS
HISTORICAL PRO FORMA PRO FORMA
DELCO ADJUSTMENTS COMBINED
---------- ------------ ---------
(DOLLARS IN MILLIONS)
REVENUES
Net Sales
General Motors and affiliates.............. $4,990.2 $4,990.2
Outside customers.......................... 569.9 569.9
Other Income--net
Interest Income--General Motors and
affiliates................................ 180.2 $(170.0)(a) 10.2
Other...................................... 22.2 22.2
-------- ------- --------
Total Revenues.......................... 5,762.5 (170.0) 5,592.5
-------- ------- --------
COSTS AND EXPENSES
Cost of sales and other operating charges,
exclusive of items listed below........... 4,421.0 4,421.0
Selling, general and administrative
expenses.................................. 276.5 276.5
Depreciation and amortization.............. 204.4 204.4
-------- ------- --------
Total costs and expenses................ 4,901.9 4,901.9
-------- ------- --------
INCOME BEFORE INCOME TAXES.................. 860.6 (170.0) 690.6
Income taxes................................ 325.8 (64.4)(b) 261.4
-------- ------- --------
Net Income.............................. $ 534.8 $(105.6) $ 429.2
======== ======= ========
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
156
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
HUGHES
TRANSACTIONS
HISTORICAL PRO FORMA PRO FORMA
DELCO ADJUSTMENTS COMBINED
---------- ------------ ---------
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 221.8 $ (190.8)(d) $ 31.0
Accounts receivable (less allowances)
General Motors and affiliates............ 110.2 110.2
Trade receivables........................ 160.6 160.6
Notes Receivable--Hughes.................. 2,753.0 (2,753.0)(c) --
Contracts in process...................... 43.8 43.8
Inventories............................... 657.7 657.7
Deferred income taxes..................... 59.0 59.0
Prepaid expenses.......................... 25.2 25.2
-------- --------- --------
Total Current Assets................... 4,031.3 (2,943.8) 1,087.5
-------- --------- --------
Notes receivable--Hughes................... 200.0 (200.0)(c) --
-------- --------- --------
Property, net.............................. 1,004.8 1,004.8
-------- --------- --------
Investments and Other Assets--principally
at cost (less allowances)................. 145.4 145.4
-------- --------- --------
Deferred Income Taxes...................... 210.5 210.5
-------- --------- --------
Total Assets........................... $5,592.0 $(3,143.8) $2,448.2
======== ========= ========
LIABILITIES AND PARENT COMPANY'S NET
INVESTMENT
CURRENT LIABILITIES
Accounts payable
General Motors and affiliates............ $ 17.9 $ 17.9
Other trade payables..................... 346.7 346.7
Loans payable............................. 27.8 27.8
Income taxes payable...................... 67.6 67.6
Accrued liabilities
General Motors and affiliates............ 34.4 34.4
Other liabilities........................ 220.1 220.1
-------- --------- --------
Total Current Liabilities.............. 714.5 714.5
-------- --------- --------
Other Liabilities and Deferred Credits..... 49.1 $ 50.0 (e) 99.1
-------- --------- --------
Post retirement benefits other than
pensions.................................. 1,048.7 1,048.7
-------- --------- --------
Parent Company's Net Investment............ 3,779.7 (2,953.0)(c) 585.9
(190.8)(d)
(50.0)(e)
Total Liabilities and Parent Company's
Net Investment........................ $5,592.0 $(3,143.8) $2,448.2
======== ========= ========
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
157
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of Delco have
been derived from the historical combined financial statements of Delco to give
effect to the Hughes Transactions (i.e., the Hughes Reorganization and not
including the integration with Delphi). The unaudited pro forma condensed
combined balance sheet has been prepared as if the Hughes Transactions had
occurred on June 30, 1997 and the unaudited pro forma condensed combined
statements of income have been prepared as if the Hughes Transactions had
occurred at the beginning of the periods presented.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with Delco's Combined Financial Statements (including notes
thereto) as of and for the year ended December 31, 1996, and as of and for the
six months ended June 30, 1997, each included in Appendix D to this document.
The pro forma condensed combined balance sheet is not necessarily indicative
of the financial position of Delco that would have been attained had the Hughes
Transactions been consummated on June 30, 1997. The pro forma condensed
combined statements of income are not necessarily indicative of the results of
operations of Delco that would have been attained had the Hughes Transactions
been consummated at the beginning of the periods presented, nor are they
necessarily indicative of any future operating results.
The following pro forma adjustments were made with respect to the Hughes
Transactions:
(a) To eliminate interest income reflected in the historical financial
statements of Delco relating to notes receivable from Hughes
Electronics which will be eliminated and cash which will be transferred
to Hughes Telecom in connection with the Hughes Transactions.
(b) To reflect income taxes on pro forma adjustments.
(c) To reflect the distribution of notes receivable from Delco to its sole
stockholder.
(d) To record the transfer of cash of Delco to Hughes Telecom.
(e) To record the potential income tax liabilities which will be
transferred from Hughes Electronics to Delco.
158
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
DELCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
Revenues. Delco revenues for the first six months of 1997 were $3,008.0
million, a slight increase from the $3,005.7 million reported during the first
half of 1996. Revenues attributed to GM NAO were relatively unchanged as the
decline in average electronic content supplied by Delco (primarily due to price
reductions resulting from competitive pricing in connection with GM's global
sourcing initiative) was offset by a 6% increase in GM NAO vehicle volume
during the first six months of 1997.
Other Income--Included in revenues is other income of $103.8 million for
the first six months of 1997 and $89.7 million for the same period in 1996. The
increase was principally due to the increase in interest income driven
primarily by the increase in notes receivable from Hughes Electronics during
the first six months of 1997.
Operating Profit. Operating profit for the first half of 1997 was $276.2
million, a 29.5% decrease from the $392.0 million reported during the
comparable period last year. The operating profit margin on the same basis for
1997 was 9.5% compared with 13.4% in the prior year's period. These reductions
were primarily due to price reductions and costs associated with continued
international expansion.
As the principal supplier of automotive electronics to GM NAO, Delco's sales
of automotive electronics is and will continue to be heavily dependent on GM's
production of vehicles in North America, the level of Delco supplied electronic
content per GM vehicle, the price of such electronics and the competitiveness
of Delco's product offerings. In this regard, it is anticipated that
competition through GM's global purchasing process will negatively impact
Delco's sales to GM NAO and result in a decline in the portion of GM NAO
automotive electronics supplied by Delco. Delco's strategy is to aggressively
reduce costs in order to minimize the effect of continuing price reductions and
to manage the loss of GM NAO market share by offering competitive products
which increase electronic functionality through a focus on safety, security,
communications and convenience. Delco will also seek to improve its systems
capability and cost competitiveness both internally and by developing key
design, manufacturing and marketing alliances and other relationships with
mechanical and electrical automotive component suppliers.
The international market for automotive electronic products is also highly
competitive. Delco has refined its strategy for this market to focus on
profitable growth as well as increased market share, and accordingly, will seek
to enhance the cost competitiveness of its international operations.
The competitive environment described above is making it increasingly
difficult to maintain the level of operating profit margins realized at Delco
in recent years as price and volume declines associated with GM's global
sourcing initiatives more than offset Delco's ability to achieve cost
reductions. In response to the increased pressure on margins and to enhance
future competitiveness, Delco management is taking action to reduce the cost
structure of the business. As a result of the factors described above, the
operating margin is expected to be at low double digits for the remainder of
1997, and then show modest improvement in 1998 and 1999. For information
regarding the impact of the integration of Delco and Delphi on Delco's
competitive position and business strategy, see "Special Factors--Purposes of
the Hughes Transactions--Integration of Delco and Delphi" and "--Background of
the Hughes Transactions--Development of the Hughes Transactions and Raytheon
Merger--September 23, 1996 Capital Stock Committee Meeting" in Chapter 3.
Costs and Expenses. Selling, general and administrative expenses were $129.5
million for the first six months of 1997 compared to the $121.9 million
reported during the comparable period in 1996. The increase was attributable to
costs associated with continued international expansion.
The effective income tax rate was 37.1% for the first six months of 1997
compared to 38.1% for the same period in 1996.
Earnings. Delco earnings decreased 19.9% to $239.0 million in the first six
months of 1997 compared with $298.4 million reported in the same period in
1996, principally due to the decrease in operating profit discussed above.
159
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $221.8 million at
June 30, 1997, a decrease of $519.2 million from the $741.0 million reported at
December 31, 1996. The decrease was primarily due to the increase in notes
receivable from Hughes Electronics of $776.8 million, net distributions to the
Parent Company of $121.4 million and capital expenditures, partially offset by
cash provided by operating activities of $434.5 million and proceeds from the
disposal of certain property.
Cash flows for the third quarter of 1997 and beyond are expected to be
negatively impacted by a change in the credit terms between Delco and GM NAO
for purchases of automotive electronics. In the past, GM NAO has generally paid
Delco for product shipments immediately upon billing. The policy governing
Delco/GM NAO credit terms is being changed such that Delco and GM NAO will
implement credit terms substantially equivalent to those given to GM NAO's non-
affiliated suppliers. Such a change will be phased in over a four-year period
starting in the third quarter of 1997. However, if the Hughes Transactions are
completed with Delco being transferred to Delphi, the credit terms for Delco
will change, effective immediately after the Hughes Transactions are completed,
without any phase-in period.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 5.64 at June 30, 1997 and 5.26 at
December 31, 1996. Working capital was $3,316.8 million at June 30, 1997 as
compared to $3,123.8 million at December 31, 1996. The increases were
principally due to increased notes receivable from Hughes Electronics of $776.8
million.
Property and Equipment. Property, net of accumulated depreciation, decreased
$61.3 million to $1,004.8 million at June 30, 1997, compared to $1,066.1
million at December 31, 1996. Expenditures for property, equipment and special
tools were $71.9 million through June 30, 1997 compared with $103.0 million for
the comparable period in 1996. The decrease in capital spending was due
primarily to an overall reduction in domestic spending.
1996 COMPARED TO 1995
RESULTS OF OPERATIONS
Revenues. Delco revenues decreased 3.2% in 1996 to $5,762.5 million from
$5,952.8 million in 1995. The decline was principally due to price reductions
resulting from competitive pricing in connection with GM's global sourcing
initiative and a 6.4% reduction in GM vehicles produced in the United States
and Canada (excluding joint ventures) primarily related to the United and
Canadian Auto Workers' ("UAW" and "CAW", respectively) strikes offset, in part,
by an increase in Delco-supplied electronic content in these vehicles from $888
per vehicle to $906 per vehicle and an increase in international and non-GM NAO
sales from $841 million in 1995 to $1,010 million in 1996.
Other Income--Included in revenues is other income of $202.4 million for
1996 compared with $195.6 million for 1995. The increase was principally due to
improved results from certain equity investments.
Operating Profit. Operating profit was $658.2 million in 1996 compared to
$888.2 million in 1995. Operating profit margin on the same basis for 1996
declined to 11.8% from 15.4% in 1995 primarily due to the reduced production
volumes, continued price reductions and the costs associated with continued
investment in international expansion.
Costs and Expenses. Selling, general and administrative expenses were $276.5
million in 1996 compared to $260.6 million in 1995. The increase was
principally due to infrastructure put into place to support non-GM NAO
customers in Europe, Asia/Pacific and the Americas. The level of depreciation
and amortization in 1996 was $204.4 million compared to $155.6 million in 1995
primarily due to the increase in special tooling amortization.
160
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
The effective income tax rate was 37.9% in 1996 and 1995.
Earnings. Delco's earnings were $534.8 million in 1996 compared to the $672.5
million reported in 1995. The decline was principally due to the decline in
operating profit discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $741.0 million at
December 31, 1996, a decrease of $185.1 million from the $926.1 million
reported at December 31, 1995. The decrease in cash was primarily due to
increases in notes receivable from Hughes Electronics of $437.1 million, net
distributions to Parent Company of $274.8 million and capital expenditures of
$196.5 million, partially offset by cash provided by operating activities of
$705.3 million.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 5.26 at December 31, 1996 and 4.27
at December 31, 1995. Working capital was $3,123.8 million at December 31, 1996
compared to $2,508.3 million at December 31, 1995. The increases were
principally due to increased notes receivable from Hughes Electronics of $437.1
million.
Property and Equipment. Property, net of accumulated depreciation, decreased
$17.3 million to $1,066.1 million in 1996 from $1,083.4 million reported in
1995. Net expenditures for property, equipment and special tools were $196.5
million in 1996 compared with $264.1 million in 1995. 1995 capital spending was
higher due to spending requirements for new technology and product redesign on
powertrain products to meet On Board Diagnostics ("OBD") II and Corporate
Average Fuel Economy ("CAFE") requirements.
1995 COMPARED TO 1994
RESULTS OF OPERATIONS
Revenues. Delco revenues increased $241.5 million, or 4.2%, in 1995 to
$5,952.8 million from $5,711.3 million in 1994. Increased revenue growth was
primarily attributed to an increase in Delco-supplied electronic content in GM
vehicles produced in North America to $888 in 1995 from $857 in 1994 and an
increase in sales to international and non-GM NAO customers to $841 million in
1995 from $672 million in 1994. GM NAO vehicle production remained relatively
unchanged between 1994 and 1995.
Other Income--Included in revenues is other income of $195.6 million for
1995 compared with $150.6 million for 1994. The increase was principally due to
the increase in interest income driven primarily by the increase in notes
receivable from Hughes Electronics.
Operating Profit. Operating profit was $888.2 million in 1995 compared to
$809.1 million in 1994. Operating profit margin for 1995 increased to 15.4%
from 14.6% in 1994 primarily due to the increase in revenues discussed above
and aggressive cost reduction programs.
Costs and Expenses. Selling, general and administrative expenses were $260.6
million in 1995 and $192.3 million in 1994. The increase was principally due to
infrastructure put into place to support non-GM NAO customers in Europe,
Asia/Pacific and the Americas. The level of depreciation and amortization in
1995 was $155.6 million compared to $145.0 million in 1994.
The effective income tax rate was 37.9% in 1995 and 38.0% in 1994.
Earnings. Delco's earnings were $672.5 million in 1995 compared to $559.8
million reported in 1994 due to increased revenues and aggressive cost
reduction programs. Earnings in 1994 included the unfavorable effect of an
accounting change for post employment benefits. Excluding the accounting
change, Delco earnings in 1994 would have been $595.0 million.
161
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $926.1 million at
December 31, 1995, a decrease of $317.1 million from the $1,243.2 million
reported at December 31, 1994. The decrease in cash was primarily due to
increases in notes receivable from Hughes Electronics of $390.8 million,
capital expenditures of $264.1 million, net distributions to Parent Company of
$219.9 million, the acquisition of FUBA Automotive ("FUBA") for $63.2 million
and repayment of loans payable to General Motors of $33.8 million, partially
offset by cash provided by operating activities of $644.3 million.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 4.27 at December 31, 1995 and 3.0 at
December 31, 1994. Working capital was $2,508.3 million at December 31, 1995
compared to $1,885.1 million at December 31, 1994. The increases were primarily
attributed to increased notes receivable from Hughes Electronics of $390.8
million.
Property and Equipment. Property, net of accumulated depreciation, increased
$86.3 million to $1,083.4 million in 1995 from $997.1 million reported in 1994.
Net expenditures for property, equipment and special tools were $264.1 million
in 1995 compared with $165.7 million in 1994. Increased 1995 capital spending
was required for new technology and product redesign on powertrain products to
meet On Board Diagnostics ("OBD") II and Corporate Average Fuel Economy
("CAFE") requirements.
Acquisitions. In September 1995, Delco announced that it had reached an
agreement to acquire FUBA for $63.2 million in cash. FUBA is a leading supplier
of active integrated antenna systems. The acquisition was completed in October
1995.
162
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
BUSINESS OF DELCO
INTRODUCTION
The following description of the business of Delco gives effect to the Hughes
Reorganization but does not generally give effect to the integration of Delco
and Delphi. For additional information, see "Delco Management's Discussion and
Analysis of Financial Condition and Results of Operation" above.
Delco is one of the world's leading suppliers of automotive electronics, with
an estimated 22% share of worldwide automotive electronics sales in 1996. Delco
is currently the principal supplier of automotive electronics to GM North
American Operations ("GM NAO"). Approximately 81% (or $4.3 billion) of Delco's
1996 revenues were attributable to sales to GM NAO, with the remaining 19%
resulting from sales to customers (including GM operations outside of North
America) other than GM NAO. Delco anticipates increased sales to non-GM NAO and
international customers. During 1996, over 50% (based on dollar value) of
Delco's contracts for new business were with customers other than GM NAO.
Deliveries under such contracts are expected to begin in 1998.
Delco's strategy is to maintain its position as a principal supplier of
automotive electronics to GM NAO while continuing to expand its sales to
international and other non-GM NAO customers. Delco believes that consumer
demand for vehicles with enhanced safety, convenience and performance features
will provide opportunities for additional revenues from Delco-supplied
automotive electronics on GM NAO vehicles. Moreover, the integration of Delco
and Delphi would combine advanced electronics capability with components and
systems expertise, and the combined business operations would be expected to
compete aggressively in high-growth markets worldwide by developing new
electronically enhanced vehicle systems with improved functionality, lower cost
and higher quality. The combined Delco/Delphi entity will be better able to
align its product, technical and manufacturing operations to address strategic
objectives for growth and competitiveness. Delco believes that other
opportunities exist as a result of new products based on Delco/Delphi core
technologies. Successful commercialization of these products will depend on,
among other things, consumer acceptance, affordability and the ability to
achieve high volume production of sophisticated products, none of which can be
assured.
As the principal supplier of automotive electronics to GM NAO, Delco's sales
of automotive electronics will continue to be heavily dependent on GM's North
American production, the level of Delco-supplied electronic content per GM
vehicle, the price of such electronics and the competitiveness of Delco's
product offerings. In this regard, it is anticipated that competition through
GM's global purchasing process will negatively impact Delco's sales to GM NAO
and result in a decline in the portion of GM NAO automotive electronics
supplied by Delco. Delco's strategy is to aggressively reduce costs in order to
minimize the effect of continuing price reductions and to manage the loss of GM
NAO market share by offering competitive products which increase electronic
functionality through a focus on safety, security, communications and
convenience.
The international market for automotive electronic products is also highly
competitive. Delco has refined its strategy for this market to focus on
profitable growth as well as increased market share and, accordingly, will seek
to enhance the cost competitiveness of its international operations.
163
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Delco's aggressive cost reduction programs have yielded substantial cost
savings over the last several years. Delco continues to work aggressively to
reduce its costs for automotive electronics in order to maintain its
competitiveness with respect to both GM NAO and other sales. By improving
product design and manufacturing techniques, Delco has been able to and expects
to continue to improve its production methods while reducing its costs of
production. More than half of Delco's automotive electronics products
manufacturing is conducted outside of the United States, resulting in
substantial cost savings as compared to U.S. operations. Other efforts to
reduce costs include purchases of components from unaffiliated suppliers,
synchronous workshops, supplier cost improvement programs and a global
electronics manufacturing strategy.
PRINCIPAL PRODUCTS AND SALES
Delco has three principal product lines: (1) Powertrain, (2) Chassis, Air
Bag, Security and (3) Integrated Body Systems. For GM NAO, product development
and design are organized by product line. For sales other than to GM NAO,
production and sales responsibility is organized by three customer-focused
units: Delco Europe, Delco Asia/Pacific and Delco-Americas.
The following table sets forth revenues of Delco by product line for GM NAO,
and by customer-focused unit for non-GM NAO, for each of the last three years.
1996 1995 1994
------ ------ ------
(IN MILLIONS)
GM NAO (a)
Powertrain............................................... $1,561 $1,554 $1,516
Chassis, Air Bag, Security............................... 680 914 823
Integrated Body Systems.................................. 2,060 2,171 2,160
------ ------ ------
Subtotal................................................ 4,301 4,639 4,499
Other Sales
Delco Europe............................................. 405 366 258
Delco Asia/Pacific....................................... 217 216 168
Delco-Americas and Other................................. 388 259 246
------ ------ ------
Subtotal................................................ 1,010 841 672
------ ------ ------
Subtotal Sales--Automotive............................ 5,311 5,480 5,171
------ ------ ------
Delco Systems Operations (b)............................. 250 277 389
------ ------ ------
Total Sales........................................... 5,561 5,757 5,560
------ ------ ------
Other Income............................................ 202 196 151
------ ------ ------
Total Revenues........................................ $5,763 $5,953 $5,711
====== ====== ======
- ------------
(a) Includes Delco-supplied content on vehicles which are manufactured in the
United States and Canada by General Motors (excluding affiliates) available
for sale anywhere in the world.
(b) Delco Systems Operations ("DSO") has historically been included in the
Aerospace and Defense Systems segment of Hughes Electronics. However, in
connection with the Hughes Reorganization, DSO is being transferred to
General Motors and thus is included in Delco, not Hughes Defense. DSO is
currently dedicated to the light armored turret vehicle business as well as
advanced classified programs.
Delco's non-GM NAO sales have grown from $672 million in 1994 to $1.01
billion in 1996, with sales to GM International Operations representing
approximately one-third of non-GM NAO sales. Delco and Delphi have established
a close working relationship in Europe and have worked together to obtain
additional automotive electronics business and expect in the future to further
leverage their marketing, engineering, manufacturing and administrative efforts
to achieve consistent customer focus and reduced operating cost.
164
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
AUTOMOTIVE
The principal products of Delco's three product lines for automotive
electronics sales to customers worldwide are as follows:
PRODUCT LINE PRINCIPAL PRODUCTS DESCRIPTION
------------------ ----------------------------- ---------------------------
Powertrain Systems Engine Management Controllers Microprocessor-based
controllers to optimize
engine performance, fuel
economy and driveability
while reducing emissions
and providing on-board
diagnostics.
Ignition Modules Solid state spark-timing
electronics for ignition
control.
Pressure Sensors Micro-machined pressure
sensors used primarily for
air-to-fuel ratio mix
control.
Control Modules Microprocessor-based
controllers for engines and
transmissions.
Chassis, Air Bag Air Bag Control Modules Control modules and sensors
Controls and and Sensors for driver and passenger-
Security Systems side supplemental
inflatable restraint
systems.
Anti-lock Brake Controllers Electronic systems which
control the brakes to
prevent wheel lock-up.
PASS-Key(R) Anti-theft vehicle security
systems.
FOREWARN(R) Microwave-based object
detection systems.
Integrated Body Audio Systems Full line of audio systems
Systems ranging from AM radios to
integrated compact disc
receivers.
Amplifiers Vehicle acoustic systems,
including speakers.
Instrument Panel Clusters Full line of
instrumentation, from
traditional analog and
digital clusters to
auxiliary displays, such as
head-up displays.
Air Controls Heater, ventilation and air
conditioner controls,
ranging from mechanical (or
manual) to electronic (or
automatic).
Telepath(TM) 100 Satellite-based electronic
navigation system.
SALES TO GM NAO
Approximately 81% of Delco's 1996 revenues were attributable to sales to GM
NAO. Delco's sales of automotive electronics to GM NAO are heavily dependent
upon the level of GM's North American production and sales of motor vehicles.
Such sales by Delco are also dependent on the level of Delco-supplied
electronic content (based on the number and sophistication of electronic
functions) per vehicle and the price (or cost to GM NAO) of such electronics.
Since 1992, pursuant to its global sourcing initiative, GM NAO has aggressively
pursued price reductions from its suppliers and has provided suppliers
worldwide with the opportunity to bid for business customarily sourced with
Delco. Delco believes that it has been and will continue to be able to compete
effectively for GM NAO business because of the quality of its products, its
ongoing cost reduction efforts and its product and technological innovations.
From 1994 through 1996, Delco won approximately 81% of all globally sourced,
competitive bids for GM NAO automotive electronics business for which Delco
competed (based on the dollar value of all bids submitted by Delco).
Nonetheless, it is anticipated that competition through GM's global purchasing
process will negatively impact Delco's sales to GM NAO and result in a decline
in the portion of GM NAO automotive electronics supplied by Delco.
Delco expects that the level of electronic functions in vehicles will
continue to increase, but that its prices to GM NAO will continue to decrease
as a result of global, market-based pricing pressures and increasing
165
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
electronic sophistication at lower prices. As a result of such price decreases
and the decline in the portion of GM NAO automotive electronics supplied by
Delco as described above, Delco expects that its revenues per GM NAO vehicle
will decrease after 1996. Delco is working to mitigate the effect of continuing
price reductions for current products by developing, producing and expanding
sales of enhanced products. Delco believes that by utilizing its core
technologies, opportunities exist for products offering consumers enhanced
safety, convenience and performance. Moreover, Delco believes that it will be
able to mitigate the effect of GM NAO price reductions on operating profit
through its demonstrated ability to reduce costs.
It is a policy of General Motors that a standard of fair dealing govern the
prices, terms and conditions of commercial transactions between Delco and
General Motors.
GM PRODUCTION AND SALES
The following table sets forth certain of GM's production, delivery (sales to
ultimate purchasers, including both retail and fleet customers) and market
share data for North America over the last three years.
1996 1995 1994
---- ---- ----
North American Motor Vehicle Production
(in millions of units)*...................................... 4.8 5.2 5.2
North American Motor Vehicle Deliveries
(in millions of units)**..................................... 5.3 5.3 5.6
North American Motor Vehicle Market Share (%)**............... 31.0% 32.3% 32.3%
- --------
* Includes units which are manufactured in the United States and Canada by
General Motors (excluding affiliates), available for sale anywhere in the
world.
** Includes units which are manufactured by other companies and which are sold
in North America by General Motors and its affiliates.
The automotive industry is historically cyclical and is dependent on general
market conditions, including interest rates. In addition, although not
necessarily leading to a permanent loss of volume, GM's vehicle production is
subject to interruptions from work stoppages, plant and equipment failures and
other conditions and events, many of which are beyond the control of General
Motors.
ELECTRONIC CONTENT OF MOTOR VEHICLES
From 1986 to 1996, Delco revenues per GM NAO vehicle increased each year,
primarily as a result of increases in the number and sophistication of
electronic functions. The increasing level of electronic content of motor
vehicles is reflected in the average Delco electronics dollar sales per vehicle
produced by General Motors (excluding affiliates) in the United States and
Canada (for sale anywhere in the world) from 1994 to 1996, as set forth in the
following table:
AVERAGE DELCO
DOLLAR SALES
PER VEHICLE
PRODUCED BY GM
IN NORTH
AMERICA
--------------
1996 1995 1994
---- ---- ----
Powertrain...................................................... $329 $297 $289
Chassis, Air Bag Controls, Security............................. 143 175 157
Integrated Body Systems......................................... 434 416 411
---- ---- ----
Total.......................................................... $906 $888 $857
==== ==== ====
The Delco-supplied electronic content per GM NAO vehicle varies among vehicle
models and according to the options selected by customers, with more expensive
vehicles tending to have more sophisticated electronic functions. Delco
believes that the functionality of automotive electronics in GM NAO vehicles
will continue to increase, principally as a result of continued, and often
increasingly stringent, regulatory standards for automotive emissions and
consumer demand for increased performance, all of which will require more
166
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
sophisticated electronic engine controls. In addition, in the near term, Delco
believes that electronic components such as sensors and controllers will be
increasingly utilized to meet consumer preference for enhanced safety and
security features.
Automotive Emission Standards. Delco believes that the use of sophisticated
engine control computers in the United States will continue to increase,
primarily because of increasingly stringent automotive emissions standards and
more sophisticated diagnostic requirements as defined by the 1990 Clean Air Act
and California Air Resources Board regulations and higher Corporate Average
Fuel Economy ("CAFE") standards. Delco's engine control modules increase fuel
efficiency while helping to lower exhaust emissions.
Safety. Currently, Delco supplies air bag controllers for 100% of GM NAO
vehicles, up from 75% in 1994. Beginning in the 1998 model year, side-impact
air bag controllers will be introduced on various GM vehicles. Delco is also
developing occupant detection sensors which will suppress air bag deployment
based on a passenger's weight and/or position.
Delco also supplies over 90% of GM NAO's passenger car requirements for anti-
lock brake controllers in conjunction with Delphi. Additional features such as
traction control, variable effort steering and YAW control have been integrated
into Delco brake controllers for improved vehicle functioning.
Fuel Efficiency. In conjunction with Delphi, Delco will introduce electro-
hydraulic power steering ("EHPS") in the 1998 model year. EHPS allows for more
effective use of the hydraulic steering system which increases fuel efficiency.
Delco is also developing an improved electric power steering ("EPS") controller
that will eliminate steering hydraulics and lower the total system cost.
Convenience Features. Delco has expanded its penetration into the security
and personalization market through its acquisition of European-based Megamos
and Texton companies. Consumer demand continues to increase for enhanced body
control functions such as lock-out prevention, theater light dimming, vehicle
theft protection and remote keyless entry.
New Products. Delco continues to refine and develop its FOREWARN(R) forward
and rear-looking radar systems. The forward looking system is being pursued as
an adaptive cruise control system. The rear looking radar system continues to
be pursued as a backup aid to warn the driver of possible rear collisions.
These products are expected to be in full production around the year 2000. The
integration of Delco and Delphi is expected to increase synergies with Delphi
units and result in the ability to provide fully integrated, engineered and
assembled interior systems for automotive Original Equipment Manufacturer
("OEM") applications. Successful commercialization of these products will
depend on, among other things, consumer acceptance, affordability and ability
to achieve high volume production of sophisticated products, none of which can
be assured.
INTERNATIONAL AND OTHER SALES
Sales of Delco's automotive electronics to customers other than GM NAO grew
at an 18% compounded annual rate from $382 million in 1990 to $1,010 million in
1996. In 1996, Delco was awarded approximately 61% of all orders (excluding GM
NAO orders) for which it competed worldwide (based on the dollar value of all
bids submitted by Delco). Deliveries under such contracts are expected to begin
in 1998. Delco currently supplies automotive electronics products to several
customers worldwide, including Chrysler, Daewoo, Isuzu, Renault, Toyota, John
Deere, Nissan, BMW, Audi, Ford, Fiat and Mercedes. In 1996, Delco became QS-
9000 certified, attesting to its production and quality capabilities as a
world-class supplier.
The levels of average electronic content of European-produced and Asian-
produced vehicles are currently substantially below the average level of
electronic content of vehicles sold in North America, indicating that the
worldwide demand for automotive electronics should grow significantly through
the end of the decade. In addition, Delco believes that future growth
opportunities exist outside of the United States as other countries
167
adopt automotive emission and fuel standards. Delco's customer-focused business
units were established to focus on these growth opportunities as Delco seeks to
capitalize on its cost reduction efforts, product quality and technology,
together with its worldwide manufacturing capabilities and capacities, to
continue to increase international sales (including sales to GM's international
operations and affiliates) and sales to customers other than GM NAO.
The success of Delco's international and non-GM NAO efforts will depend,
among other things, upon the availability of technical, manufacturing and other
resources. Competition in such markets is intense and not necessarily open to
all suppliers on equal terms. See "--Competition" below. Delco continues to
review and enter into, where appropriate, strategic alliances and partnering
arrangements and to make acquisitions to enhance its ability to compete for
international business.
ACQUISITIONS AND ALLIANCES
Historically, Delco's acquisition and alliance activities have been focused
on three objectives: market expansion, product portfolio enhancement to achieve
full systems capability and strengthening of core technologies. Recent
activities include formation of Shanghai Delco Electronics (joint venture
localizing manufacturing in China), acquisition of Fuba Automotive (a leading
antenna business in Europe) and formation of the Flip Chip Technologies joint
venture (which provides innovative integrated circuit packaging technology).
Delco will continue to focus on selective ventures which meet strategic
objectives and which complement the venture needs and strategies of Delphi.
COMPETITION
In April 1992, General Motors launched a major reorganization to streamline
its business practices and downsize its GM NAO operations. These changes were
essential to GM's vision of total customer satisfaction. Central to these
efforts were improved quality, reduced costs, strengthened product focus and
leveraged global sourcing. With regard to global sourcing, GM NAO announced its
intentions to begin filling its procurement needs on a global basis. Pursuant
to this initiative, GM NAO has aggressively pursued price reductions from its
suppliers and has provided suppliers worldwide with the opportunity to bid for
business customarily sourced with Delco. As a result, Delco has reduced its
prices to GM NAO, and Delco expects prices to continue to decline. In 1996,
Delco-supplied electronic content represented approximately 90% of GM NAO
requirements. Delco believes that it is, has been and will continue to be able
to compete effectively for GM business because of the quality of its products,
its on-going cost reduction efforts and its product and technological
innovations. Delco also believes that it derives a competitive advantage from
its business practice of placing Delco engineers at GM facilities to help
integrate Delco electronic products into GM's vehicle designs. Delco believes
that its technological experience from its non-automotive businesses also
provides it with a competitive advantage in developing and implementing new
automotive electronic products. Delco believes that its cost reduction programs
will provide significant ongoing and sustainable cost savings. In light of the
foregoing, Delco expects to be able to continue to compete effectively for GM
NAO business as well as international and North American business other than GM
NAO. However, Delco does expect its share of GM NAO automotive electronics
requirements to decline from its current 90% share to about 80% in the early
2000's principally due to competition through GM's global purchasing process.
The worldwide automotive electronics market includes many strong, global
competitors. In Europe, Delco is challenging incumbent suppliers with dominant
shares and strong relationships with European vehicle manufacturers. These
competitors, like Delco, are innovative, have system capability, are able to
support the European vehicle manufacturers' globalization plans and have
embarked on aggressive cost cutting programs to meet the price pressure of
vehicle manufacturers. In the Asia/Pacific region, Delco faces competitors who
have strong system capability, offer cost competitive, high quality products
and who have strong relationships with vehicle manufacturers. In some cases,
vehicle manufacturers located in the Asia/Pacific region have significant
equity ownership in Delco's competitors. In Latin America, Delco's major
competitors include suppliers based
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
168
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
in both Europe and in the Asia/Pacific region who have transplanted some
operations to support their customers' entry into, and expansion in, the
region.
INTEGRATION OF DELCO AND DELPHI
For information regarding the integration of Delco and Delphi, see "Special
Factors--Purposes of the Hughes Transactions--Integration of Delco and Delphi"
and "--Background of the Hughes Transactions--Development of the Hughes
Transactions and Raytheon Merger--September 23, 1997 Capital Stock Committee
Meeting" in Chapter 3.
169
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM SELECTED COMBINED HISTORICAL AND
PRO FORMA FINANCIAL DATA
The following selected combined historical financial data have been derived
from the financial statements of Hughes Telecom. The data should be read in
conjunction with Hughes Telecom's Combined Financial Statements (including the
notes thereto) included in Appendix E to this document. The income statement
data for the periods ended December 31, 1996, 1995 and 1994 and the balance
sheet data as of December 31, 1996 and 1995 have been derived from the combined
financial statements of Hughes Telecom audited by Deloitte & Touche LLP,
independent public accountants. The income statement data for the periods ended
December 31, 1993 and 1992 and June 30, 1997 and 1996 and the balance sheet
data as of June 30, 1997 and 1996 and December 31, 1994, 1993 and 1992 have
been derived from the unaudited combined financial statements of Hughes
Telecom. In the opinion of management, the unaudited combined financial
statements reflect all adjustments (consisting only of normal recurring items)
that are necessary for the fair presentation of financial position and results
of operations for such periods. The Hughes Telecom unaudited summary pro forma
operating results data for the six months ended June 30, 1997 and for the year
ended December 31, 1996 give effect to the PanAmSat Merger that was completed
on May 16, 1997 and the Hughes Transactions (including the recapitalization of
GM Class H Common Stock into New GM Class H Common Stock) as if they had
occurred at the beginning of each respective period. The Hughes Telecom
unaudited summary pro forma balance sheet data as of June 30, 1997 give effect
to the Hughes Transactions as if they had occurred at that date. Operating
results for the six-month periods ended June 30, 1997 and 1996 are not
necessarily indicative of the results that may be expected for the entire year.
Pro forma data are not necessarily indicative of future financial position or
operating results.
AS OF AND FOR THE SIX AS OF AND FOR THE YEARS
MONTHS ENDED JUNE 30, ENDED DECEMBER 31,
---------------------------- --------------------------------------------------------
PRO
PRO FORMA FORMA
1997(A) 1997 1996 1996(A) 1996 1995 1994 1993 1992(B)
--------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS:
Net sales............... $ 2,354.8 $2,235.2 $1,831.4 $4,280.7 $4,099.6 $3,243.0 $2,773.5 $2,263.8 $2,282.2
Other income (expense),
net.................... (11.9) 477.8 104.5 74.9 74.9 (32.4) (10.0) 160.6 39.0
--------- -------- -------- -------- -------- -------- -------- -------- --------
Total Revenues......... 2,342.9 2,713.0 1,935.9 4,355.6 4,174.5 3,210.6 2,763.5 2,424.4 2,321.2
--------- -------- -------- -------- -------- -------- -------- -------- --------
Cost and expenses....... 2,227.8 2,184.2 1,728.9 4,079.3 3,943.6 3,192.2 2,678.2 2,155.6 2,266.6
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 10.6 10.6 10.6 21.0 21.0 27.2 21.2 21.2 21.2
--------- -------- -------- -------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 2,238.4 2,194.8 1,739.5 4,100.3 3,964.6 3,219.4 2,699.4 2,176.8 2,287.8
--------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
minority interests..... 104.5 518.2 196.4 255.3 209.9 (8.8) 64.1 247.6 33.4
Income taxes (credit)... 51.6 213.3 84.7 144.8 100.0 (10.4) 20.6 94.7 6.1
Minority interests in
(income) losses of
subsidiaries........... 0.9 21.9 15.4 (8.0) 52.6 4.6 -- -- --
Cumulative effect of
accounting change...... -- -- -- -- -- -- (2.3) -- (112.8)
--------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income (loss)....... $ 53.8 $ 326.8 $ 127.1 $ 102.5 $ 162.5 $ 6.2 $ 41.2 $ 152.9 $ (85.5)
======== ======== ======== ======== ======== ======== ========
Adjustments to exclude
the effects of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 10.6 21.0
--------- --------
Earnings used for
computation of
available separate
consolidated net income
of Hughes Telecom...... $ 64.4 $ 123.5
========= ========
Earnings per share
attributable to New GM
Class H Common Stock... $ 0.16 $ 0.31
========= ========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 2,564.5 $ 342.8 $ 5.6 $ 6.7 $ 7.6 $ 5.8 $ 10.2 $ 6.4
Current assets.......... 4,454.8 2,195.1 1,417.9 1,535.7 1,242.9 1,175.9 1,120.5 1,339.5
Total assets............ 11,869.2 9,177.1 4,243.4 4,479.2 4,047.7 3,662.7 3,222.3 3,100.2
Current liabilities..... 1,383.8 1,301.3 1,132.5 1,281.7 958.2 933.9 816.3 836.6
Long-term debt.......... 706.3 2,372.5 -- -- -- -- 1.5 125.6
Minority interests...... 643.1 643.1 53.9 21.6 40.2 -- -- --
Redeemable preferred
stock of a subsidiary.. 401.5 401.5 -- -- -- -- -- --
Parent Company's net
investment............. 7,358.9 3,610.9 2,538.1 2,491.6 2,608.9 2,301.0 1,973.3 1,752.3
OTHER DATA:
Depreciation and
amortization........... $ 129.4 $ 99.8 $ 218.5 $ 209.2 $ 163.0 $ 138.3 $ 145.0
Capital expenditures.... $ 220.2 $ 237.1 $ 451.4 $ 446.5 $ 400.4 $ 276.1 $ 187.0
- --------
(a) Pro forma balance sheet data as of December 31, 1996 and pro forma other
data have not been determined.
(b) Includes the effect of a pre-tax restructuring charge of $156.6 million.
170
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of Hughes
Telecom have been derived from the historical combined financial statements of
Hughes Telecom and consolidated financial statements of PanAmSat to give effect
to the PanAmSat Merger that was completed as of May 16, 1997 and the Hughes
Transactions (including the recapitalization of GM Class H Common Stock into
New GM Class H Common Stock). The pro forma adjustments of the PanAmSat Merger
were performed using the purchase method of accounting. The unaudited pro forma
condensed combined balance sheet has been prepared as if the Hughes
Transactions occurred on June 30, 1997. The unaudited pro forma condensed
combined statements of income have been prepared as if the PanAmSat Merger and
the Hughes Transactions occurred on January 1, 1996 and 1997.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with Hughes Telecom's Combined Financial Statements
(including the notes thereto) included in Appendix E to this document and
PanAmSat's Consolidated Financial Statements (including the notes thereto)
contained in pages FIN-1 through FIN-19 of the Proxy Statement on Schedule 14A,
filed on April 18, 1997, of PanAmSat, which pages are incorporated into this
document by reference, each as of and for the period ended December 31, 1996,
and the unaudited combined financial statements (including the notes thereto)
of Hughes Telecom included in Appendix E to this document and the unaudited
consolidated financial statements (including the notes thereto) of PanAmSat
included in PanAmSat's Form 10-Q/A for the period ended March 31, 1997, which
is incorporated into this document by reference.
The pro forma condensed combined balance sheet is not necessarily indicative
of the financial position of Hughes Telecom that would have been attained had
the Hughes Transactions been consummated on June 30, 1997. The pro forma
condensed combined statements of income do not give effect to any synergies
that may be realized as a result of the PanAmSat Merger and are not necessarily
indicative of the results of operations of Hughes Telecom that would have been
attained had the PanAmSat transaction and the Hughes Transactions been
consummated on January 1, 1996 and 1997, nor are they necessarily indicative of
any future operating results.
171
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
PANAMSAT HUGHES
HISTORICAL MERGER TRANSACTIONS
HUGHES HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TELECOM PANAMSAT* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ------------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Product sales.......... $1,423.8 $ (6.4)(a) $1,417.4 $1,417.4
Direct broadcast,
leasing and other
services.............. 811.4 $126.0 937.4 937.4
Other income (expense),
net................... 477.8 225.0 (489.7)(b) (11.9) (11.9)
(225.0)(c)
-------- ------ ------- -------- ------ --------
Total Revenues...... 2,713.0 351.0 (721.1) 2,342.9 2,342.9
-------- ------ ------- -------- ------ --------
COSTS AND EXPENSES
Costs of products sold. 1,096.8 (3.8)(a) 1,093.0 1,093.0
Broadcast programming
and other costs....... 466.6 466.6 466.6
Selling, general, and
administrative
expenses.............. 458.5 28.1 486.6 486.6
Depreciation and
amortization.......... 118.8 24.3 22.0 (d) 165.1 165.1
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft....... 10.6 10.6 10.6
Merger-related
expenses.............. 29.9 (29.9)(e) -- --
Interest expense....... 43.5 (4.2) 37.0 (f) 76.3 $(59.8)(k) 16.5
-------- ------ ------- -------- ------ --------
Total costs and
expenses........... 2,194.8 78.1 25.3 2,298.2 (59.8) 2,238.4
-------- ------ ------- -------- ------ --------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST............... 518.2 272.9 (746.4) 44.7 59.8 104.5
Income taxes........... 213.3 116.1 (301.7)(g) 27.7 23.9 (l) 51.6
Minority interests in
net losses (income) of
subsidiaries.......... 21.9 (7.6)(h) 0.9 0.9
(16.9)(i)
3.5 (j)
Preferred Stock
Dividend.............. 16.9 (16.9)(i) -- --
-------- ------ ------- -------- ------ --------
Net Income.......... $ 326.8 $139.9 $(448.8) $ 17.9 $ 35.9 53.8
======== ====== ======= ======== ======
Adjustments to exclude
the effect of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 10.6
--------
Earnings Used For
Computation of
Available Separate
Consolidated Net
Income................. $ 64.4
========
Available Separate
Consolidated Net
Income:
Average number of
shares of New GM
Class H Common Stock
outstanding (in
millions) (Numerator). 100.7
New GM Class H dividend
base (in millions)
(Denominator)......... 399.9
Available Separate
Consolidated Net
Income $ 16.2
========
Earnings Per Share
Attributable to New GM
Class H Common Stock.. $ 0.16
========
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
*The amounts labeled historical PanAmSat are for the period January 1-May 15,
1997.
172
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
PANAMSAT HUGHES
MERGER TRANSACTIONS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HUGHES TELECOM PANAMSAT ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
-------------- ---------- ----------- --------- ------------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Product sales.......... $3,070.6 $(65.8) (a) $3,004.8 $3,004.8
Direct broadcast,
leasing and other
services.............. 1,029.0 $246.9 1,275.9 1,275.9
Other income, net...... 74.9 74.9 74.9
-------- ------ ------- -------- ------- --------
Total Revenues....... 4,174.5 246.9 (65.8) 4,355.6 4,355.6
-------- ------ ------- -------- ------- --------
COSTS AND EXPENSES
Cost of products sold.. 2,241.3 (49.0)(a) 2,192.3 2,192.3
Broadcast programming
and other costs....... 653.8 32.7 686.5 686.5
Selling, general and
administrative
expenses.............. 805.1 44.2 849.3 849.3
Depreciation and
amortization.......... 197.5 61.3 58.8 (d) 317.6 317.6
Amortization of GM
purchase accounting
adjustments related to
Hughes Aircraft....... 21.0 21.0 21.0
Interest expense....... 45.9 0.6 87.7 (f) 134.2 $(100.6)(k) 33.6
-------- ------ ------- -------- ------- --------
Total costs and
expenses............ 3,964.6 138.8 97.5 4,200.9 (100.6) 4,100.3
-------- ------ ------- -------- ------- --------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST............... 209.9 108.1 (163.3) 154.7 100.6 255.3
Income taxes............ 100.0 46.4 (41.8)(g) 104.6 40.2 (l) 144.8
Minority interests in
net losses (income) of
subsidiaries........... 52.6 (28.5)(h) (8.0) (8.0)
(41.4)(i)
9.3 (j)
Preferred Stock
Dividend............... 41.4 (41.4)(i) -- --
-------- ------ ------- -------- ------- --------
Net Income........... $ 162.5 $ 20.3 $(140.7) $ 42.1 $ 60.4 102.5
======== ====== ======= ======== =======
Adjustments to exclude
the effect of GM
purchase accounting
adjustments related to
Hughes Aircraft........ 21.0
--------
EARNINGS USED FOR
COMPUTATION OF
AVAILABLE SEPARATE
CONSOLIDATED NET
INCOME................. $ 123.5
========
Available Separate
Consolidated Net
Income:
Average number of
shares of New GM Class
H Common Stock
outstanding (in
millions) (Numerator) 98.4
New GM Class H dividend
base (in millions)
(Denominator) 399.9
Available Separate
Consolidated Net
Income $ 30.4
========
Earnings Per Share
Attributable to New GM
Class H Common Stock $ 0.31
========
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
173
HUGHES TELECOM
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
HUGHES
HISTORICAL TRANSACTIONS
HUGHES PRO FORMA PRO FORMA
TELECOM ADJUSTMENTS COMBINED
---------- ------------ ---------
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 342.8 $ 869.7 (m) $ 2,564.5
1,352.0 (n)
Accounts and notes receivable (less
allowances).............................. 526.5 38.0 (o) 564.5
Contracts in process, less advances and
progress payments........................ 450.4 450.4
Inventories............................... 642.8 642.8
Deferred subscriber acquisition costs..... 99.7 99.7
Prepaid expenses and other including
deferred income taxes.................... 132.9 132.9
-------- --------- ---------
Total Current Assets.................... 2,195.1 2,259.7 4,454.8
-------- --------- ---------
Satellites, net............................ 2,220.4 2,220.4
-------- --------- ---------
Property, net.............................. 776.5 776.5
-------- --------- ---------
Net Investment in Sales-type Leases........ 310.3 310.3
-------- --------- ---------
Intangible Assets, net of amortization..... 2,824.9 2,824.9
-------- --------- ---------
Investments and Other Assets--principally
at cost (less allowances)................. 849.9 259.0 (p) 1,282.3
141.9 (o)
31.5 (q)
-------- --------- ---------
Total Assets............................ $9,177.1 $ 2,692.1 $11,869.2
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................... $ 367.1 $ 11.8 (o) $ 378.9
Advances on contracts..................... 158.5 158.5
Deferred revenues......................... 194.0 194.0
Accrued liabilities....................... 581.7 16.4 (r) 652.4
9.0 (s)
45.3 (o)
-------- --------- ---------
Total Current Liabilities............... 1,301.3 82.5 1,383.8
-------- --------- ---------
Long-Term Debt............................. 2,372.5 58.8 (o) 706.3
(1,725.0)(n)
-------- --------- ---------
Deferred Gains on Sales and Leasebacks..... 230.0 230.0
-------- --------- ---------
Other Liabilities and Deferred Credits..... 257.0 159.5 (s) 784.8
101.3 (o)
256.2 (t)
10.8 (r)
Deferred Income Taxes...................... 273.5 273.5
-------- --------- ---------
Accrued Operating Leaseback Expense........ 87.3 87.3
-------- --------- ---------
Total Liabilities....................... 4,521.6 (1,055.9) 3,465.7
-------- --------- ---------
Minority Interests......................... 643.1 643.1
-------- --------- ---------
Redeemable Preferred Stock of Subsidiary... 401.5 401.5
-------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock
Parent Company's Net Investment........... 3,610.9 3,748.0 (u) 7,358.9
Additional paid-in capital................
-------- --------- ---------
Total Stockholders' Equity.............. 3,610.9 3,748.0 7,358.9
-------- --------- ---------
Total Liabilities and Stockholders'
Equity................................. $9,177.1 $ 2,692.1 $11,869.2
======== ========= =========
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
174
HUGHES TELECOM
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of Hughes
Telecom have been derived from the historical combined financial statements of
Hughes Telecom and consolidated financial statements of PanAmSat to give effect
to the PanAmSat Merger that was completed as of May 16, 1997 and the Hughes
Transactions (including the recapitalization of GM Class H Common Stock into
New GM Class H Common Stock). The PanAmSat pro forma adjustments were performed
using the purchase method of accounting. The unaudited pro forma condensed
combined balance sheet has been prepared as if the Hughes Transactions had
occurred on June 30, 1997. The unaudited pro forma condensed combined
statements of income have been prepared as if the PanAmSat Merger and the
Hughes Transactions had occurred at the beginning of the periods presented. The
historical PanAmSat amounts included in the unaudited pro forma condensed
combined statement of income for the six month period ending June 30, 1997 are
for the period from January 1, 1997 through May 15, 1997, prior to the date of
the PanAmSat Merger.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with Hughes Telecom's Combined Financial Statements
(including notes thereto) as of and for the year ended December 31, 1996 and as
of and for the six months ended June 30, 1997 included in Appendix E to this
document and PanAmSat's Consolidated Financial Statements (including notes
thereto) contained in pages FIN-1 through FIN-19 of the Proxy Statement on
Schedule 14A, filed on April 18, 1997, of PanAmSat, which pages are
incorporated into this document by reference, and PanAmSat's Unaudited
Consolidated Financial Statements (including the notes thereto) as of and for
the period ended June 30, 1997, included in PanAmSat's Form 10-Q/A, which is
incorporated into this document by reference.
The pro forma condensed combined balance sheet is not necessarily indicative
of the financial position of Hughes Telecom that would have actually been
obtained had the Hughes Transactions been consummated on June 30, 1997. The pro
forma condensed combined statements of income are not necessarily indicative of
the results of operations of Hughes Telecom that would have actually been
obtained had the PanAmSat Merger and the Hughes Transactions been consummated
at the beginning of the periods presented, nor are they necessarily indicative
of any future operating results.
The following pro forma adjustments were made with respect to the PanAmSat
Merger:
(a) To eliminate intercompany transactions between PanAmSat and Hughes
Telecom.
(b) To eliminate the non-recurring gain recorded in connection with the
PanAmSat Merger. The PanAmSat Merger was treated for accounting
purposes as a partial sale of Hughes Telecom's Galaxy(R) satellite
services business by Hughes Telecom and resulted in a one-time pre-tax
gain of $489.7 million.
(c) To eliminate the non-recurring gain associated with the sale of certain
options which occurred in connection with the PanAmSat Merger. Prior to
the PanAmSat Merger, PanAmSat held options ("DTH Options") to purchase
equity interests in certain joint ventures formed to provide direct-to-
home services in Latin America and Spain. Since Hughes Electronics also
has investments in entities providing direct-to-home services in Latin
America, Hughes Electronics made it a condition of the PanAmSat Merger
that PanAmSat divest itself of the DTH Options. As a result, PanAmSat
sold the DTH Options and recognized a one-time pre-tax gain of $225.0.
(d) To reflect amortization of the excess of the purchase price of the
71.5% interest in PanAmSat acquired by Hughes Electronics over the fair
value of the net tangible assets acquired using the straight line
method over 40 years.
(e) To eliminate non-recurring expenses related to the PanAmSat Merger.
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
175
(f) To adjust interest expense as follows:
SIX MONTHS YEAR ENDED
ENDED JUNE DECEMBER 31,
30, 1997 1996
---------- ------------
(DOLLARS IN MILLIONS)
To reflect pro forma interest expense related to the
borrowings incurred in connection with the PanAmSat
Merger............................................. $41.7 $100.1
To reduce interest expense to reflect the
amortization of the adjustment to fair value of
PanAmSat's indebtedness at the date of the PanAmSat
Merger............................................. (4.7) (12.4)
----- ------
Net increase to interest expense.................... $37.0 $87.7
===== ======
(g) To reflect income taxes on the pro forma adjustments relating to the
PanAmSat Merger. Amortization of goodwill is not deductible for tax
purposes.
(h) To record the minority interest's share of PanAmSat's net income.
(i) To reclassify the preferred stock dividend of subsidiary to minority
interest.
(j) To reflect amortization of the adjustment to fair value of preferred
stock of subsidiary.
The following pro forma adjustments were made with respect to the Hughes
Transactions:
(k) To eliminate interest expense associated with debt related to the
PanAmSat Merger and debt held by Hughes Electronics which is expected
to be repaid with the proceeds from the Hughes Transactions.
(l) To reflect income taxes on the pro forma adjustments relating to the
Hughes Transactions.
(m) To record cash and cash equivalents held by Hughes Electronics, Hughes
Defense and Delco which will be contributed to Hughes Telecom in
connection with the Hughes Transactions.
(n) To record the estimated net cash proceeds relating to the Hughes
Transactions to be contributed to Hughes Telecom. The net cash proceeds
to be paid is subject to adjustment based on the price of Raytheon
Corporation's stock price at the closing of the Hughes Transactions and
other indebtedness of Hughes Defense outstanding at the time of the
Hughes Defense Spin-Off. Based upon the price of Raytheon Corporation's
stock price during the period prior to June 30, 1997, the net cash
proceeds are expected to be comprised of the following components:
(DOLLARS
IN MILLIONS)
------------
Estimated cash proceeds from the Hughes Transactions......... $ 3,774
Repayment of Hughes Electronics commercial paper............. (697)
-------
Net proceeds contributed to Hughes Telecom................... 3,077
Repayment of PanAmSat merger-related debt.................... (1,725)
-------
Net cash proceeds............................................ $ 1,352
=======
The net cash proceeds are also subject to adjustment based on the actual
net assets of Hughes Defense at the time of closing. The net assets of
Hughes Defense at June 30, 1997 are not necessarily indicative of the
actual net assets at the Closing Date.
(o) To record the transfer of other assets and liabilities of Hughes
Electronics related to the joint operations of Hughes Telecom, Hughes
Defense, and Delco which, pursuant to the Master Separation Agreement,
will be contributed to or assumed by Hughes Telecom.
(p) To record prepaid pension costs reflecting the estimated excess of
pension-related assets over pension-related obligations and net
deferred amounts associated with certain pension plans sponsored by
Hughes Electronics attributable to employees of Hughes Telecom. The
assets and liabilities relating to the pension plans have been
allocated to Hughes Telecom based upon the estimated percentage of the
projected benefit obligation related to Hughes Telecom in proportion to
the
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
176
projected benefit obligation of Hughes Electronics. Such assets and
liabilities will be assumed by Hughes Telecom pursuant to the Master
Separation Agreement as a result of the Hughes Transactions.
(q) To record Hughes Telecom's 50% equity interest in the Hughes Research
Labs joint venture that will be formed pursuant to the Master
Separation Agreement.
(r) To record estimated accrued liabilities associated with employee health
and welfare benefit plans sponsored by Hughes Electronics attributable
to employees of Hughes Telecom which will be assumed by Hughes Telecom
pursuant to the Master Separation Agreement.
(s) To record estimated accrued liabilities relating to postretirement
benefit plans other than pensions sponsored by Hughes Electronics
attributable to employees of Hughes Telecom which will be assumed by
Hughes Telecom pursuant to the Master Separation Agreement.
(t) To record potential income tax liabilities which will be transferred
from Hughes Electronics to Hughes Telecom.
(u) To record the effect of parent company's net investment related to the
pro forma adjustments referred to in notes (m), (n), (o), (p), (q),
(r), (s) and (t) as follows (in millions of dollars):
Contribution of cash held by Hughes Electronics, Hughes Defense
and Delco..................................................... $ 869.7
Estimated net cash proceeds from Hughes Transactions after
repayment of certain Hughes Electronics commercial paper debt. 3,077.0
Transfer of certain other assets and liabilities............... (37.3)
Contribution of prepaid pension costs.......................... 259.0
Contribution of 50% equity interest in Hughes Research Labs
joint venture................................................. 31.5
Assumption of liabilities relating to certain health and
welfare benefit plans......................................... (27.2)
Assumption of liabilities relating to postretirement benefit
plans......................................................... (168.5)
Assumption of liabilities relating to potential income tax
liabilities................................................... (256.2)
--------
$3,748.0
========
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
177
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
HUGHES TELECOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion excludes purchase accounting adjustments related to
GM's acquisition of Hughes Aircraft, since the amortization of such purchase
accounting adjustments will be excluded from the calculation of earnings
available for the payment of dividends on the New GM Class H Common Stock.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
RESULTS OF OPERATIONS
Revenues. Hughes Telecom reported revenues for the first six months of 1997
of $2,713.0 million, an increase of 40.1% from the $1,935.9 million reported in
the comparable period in 1996. The increase was primarily the result of a
$489.7 million pre-tax gain recognized in the second quarter of 1997 related to
the recently completed PanAmSat Merger, partially offset by the first quarter
1996 pre-tax gain of $120.3 million related to the sale of a 2.5% equity
interest in DIRECTV to AT&T. Revenues, excluding both of these gains, for the
first six months of 1997 were $2,223.3 million, an increase of 22.5% from the
$1,815.6 million reported in the first half of 1996. Such increase was
primarily related to the continued expansion of the DIRECTV(R) subscriber base
in the United States and Latin America. Also contributing to the revenue
increase was higher commercial satellite sales within the High Powered (HP)
product line of satellites and on the ICO Global Communications satellite
contract. These revenue increases were partially offset by lower sales of
wireless telecommunications equipment.
Other Income--Included in revenues is other income of $477.8 million for
the first six months of 1997 and $104.5 million in the same period last year.
The 1997 amount included the $489.7 million pre-tax gain recognized in
connection with the PanAmSat Merger and the 1996 amount included the $120.3
million pre-tax gain from the sale of a 2.5% equity interest in DIRECTV to
AT&T.
Operating Profit. Operating profit for the first six months of 1997 was $94.5
million, a $29.6 million decrease from the $124.1 million reported in the same
period last year. The operating profit margin on the same basis for the first
six months of 1997 was 4.2% compared with 6.8% reported in the prior year's
period. The reduced operating profit and margin were primarily attributable to
increased DIRECTV expenses resulting from the change in amortization period
adopted in the first quarter of 1997 for certain subscriber acquisition costs
in the United States, start-up operating losses from Hughes Telecom's Latin
American DIRECTV subsidiary, Galaxy Latin America, and lower wireless
telecommunications equipment sales and margins partially offset by improved
performance within satellite manufacturing on the HP and 601 satellite product
lines.
With respect to the worldwide DIRECTV businesses, particularly in the United
States, Hughes Telecom is considering a number of strategic initiatives
designed to expand its market share and enhance its competitive position. These
include new distribution channels, new services, broader programming and
marketing and other promotional strategies designed to address "barriers to
entry" identified by consumers. To the extent that such strategies are
implemented, subscriber acquisition costs are likely to increase and, as a
result, the execution of such strategies is likely to affect the timing and
amount of revenues and the overall profitability of the DIRECTV businesses.
However, Hughes Telecom believes that early capture of market share and the
establishment of market leadership are important to maximization of the long-
term value of the DIRECTV businesses.
Costs and Expenses. Selling, general and administrative expenses for the
first half of 1997 were $458.5 million, an increase of $155.5 million from the
$303.0 million reported in the same period last year. The increase was
primarily related to DIRECTV subscriber acquisition costs and start-up costs
for Galaxy Latin America.
The effective income tax rate was 40.3% for the first six months of 1997 and
40.9% for the comparable period in 1996.
178
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Earnings. Hughes Telecom earnings increased 145.0% to $337.4 million in the
first six months of 1997 compared with $137.7 million reported in the same
period in 1996. The increase was primarily due to the $318.3 million after-tax
gain recognized in connection with the PanAmSat Merger which more than offset
the reduced operating profit in 1997 and first quarter 1996 gain from the sale
of 2.5% of DIRECTV to AT&T.
Backlog. The backlog at June 30, 1997 of $10,034.8 million increased from the
$7,238.4 million reported at June 30, 1996, primarily due to the PanAmSat
Merger in May 1997 and activity related to the ICO mobile satellite program.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $342.8 million at
June 30, 1997, an increase of $336.1 million from the $6.7 million reported at
December 31, 1996. The increase was primarily due to the positive net impact on
cash of $258.8 million as a result of the PanAmSat Merger and contributions
from the Parent Company of $792.5 million, partially offset by cash used in
operating activities of $529.3 million and capital expenditures.
The completion of the PanAmSat Merger in May 1997 had a significant impact on
the liquidity and debt of Hughes Telecom. Existing PanAmSat cash and non-
current marketable securities of $296.9 million and $330.0 million,
respectively, were acquired as a result of the merger. Total Hughes Telecom
long-term debt increased by the acquisition financing of $1,725.0 million
provided by General Motors, as well as the assumption of the existing PanAmSat
debt of $613.4 million. Existing redeemable preferred stock of $395.8 million
was also assumed in connection with the merger; however, such redeemable
preferred stock is expected to be exchanged for senior subordinated notes in
the second half of 1997.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.69 at June 30, 1997 and 1.20 at
December 31, 1996. Working capital increased to $893.8 million at June 30, 1997
from $254.0 million at December 31, 1996. The increases were principally due to
the increases in cash described above.
Property and Equipment. Property, net of accumulated depreciation, increased
$75.4 million to $776.5 million at June 30, 1997 from the $701.1 million
reported at December 31, 1996. Satellites, net of accumulated depreciation,
increased $1,163.8 million to $2,220.4 million at June 30, 1997 compared with
$1,056.6 million reported at December 31, 1996. The increase in satellites was
principally due to the satellites acquired in connection with the PanAmSat
Merger as well as capital expenditures. Capital expenditures, including
expenditures for satellites, were $220.2 million through June 30, 1997 compared
with $237.1 million in the comparable period in 1996.
Long-Term Debt. Long-term debt was $2,372.5 million at June 30, 1997,
primarily consisting of the PanAmSat-related debt described above.
Acquisitions. In May 1997, Hughes Electronics and PanAmSat completed the
merger of their respective satellite service operations into a new publicly-
held company. Hughes Electronics contributed its Galaxy(R) satellite services
business in exchange for a 71.5% interest in the new company. Existing PanAmSat
stockholders received a 28.5% interest in the new company and $1.5 billion in
cash. Such cash consideration and other funds required to consummate the merger
were funded by new debt financing totaling $1.725 billion borrowed from General
Motors. It is anticipated that this borrowing will be repaid as part of the
Hughes Transactions.
For accounting purposes, the merger was treated by Hughes Electronics as an
acquisition of 71.5% of PanAmSat and was accounted for using the purchase
method. Accordingly, the purchase price was allocated to the net assets
acquired, including intangible assets, based on estimated fair values at date
of acquisition. In
179
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
addition, the merger was treated as a partial sale of the Galaxy(R) business by
Hughes Electronics and resulted in a one-time pre-tax gain of $489.7 million
($318.3 million after-tax).
The preferred stock of PanAmSat outstanding at the time of the merger is
included in the accompanying balance sheet as redeemable preferred stock of a
subsidiary. Dividends on such redeemable preferred stock are payable quarterly
in arrears. The redeemable preferred stock, pursuant to the terms of its
redemption feature, was exchanged for senior subordinated notes in September
1997.
1996 COMPARED TO 1995
RESULTS OF OPERATIONS
Revenues. Hughes Telecom revenues were $4,174.5 million in 1996, a 30.0%
increase from the $3,210.6 million reported in 1995. Included in 1996 revenues
was the $120.3 million pre-tax gain recognized on the sale of a 2.5% equity
interest in DIRECTV to AT&T. Excluding this gain, revenues were $4,054.2
million, a 26.3% increase from 1995. The increase in revenues was primarily due
to the continued expansion of the DIRECTV(R) subscriber base by over one
million subscribers from 1995 to 1996. Further, satellite manufacturing
revenues increased due to higher sales volume of commercial satellite programs,
including Chinasat, ICO, Asiasat, Thor IIA, Brasil B3 and JCSat 4 as well as
government programs such as NASA's TDRS program. Also contributing to the
revenue increase was higher wireless product sales coupled with the
introduction and sales of DSS(R) products. Finally, satellite services had
increased revenues with improved performance in cable, broadcast and direct-to-
home distribution services principally as a result of additional transponder
capacity due to the successful launches of Galaxy III-R and IX.
Other Income/(Expense)--Included in revenues is other income of $74.9
million for 1996 and other expense of $32.4 million for 1995. The 1996 amount
included the $120.3 million pre-tax gain recognized from the sale of a 2.5%
equity interest in DIRECTV to AT&T, while the 1995 amount included the pre-tax
charge of $40.0 million for the estimated loss on disposition of a non-
strategic business unit.
Operating Profit. Operating profit for 1996 was $201.9 million, a 74.2%
increase from the $115.9 million reported in 1995. Operating profit margins on
the same basis were 4.9% in 1996 compared to 3.6% in 1995. The increases were
primarily due to the revenue increases described previously. Further factors
affecting the improved profitability were increased utilization and capacity on
existing satellites, the strong performance of the wireless product lines and
reduced operating losses at Hughes Avicom. The operating loss at Hughes Avicom
decreased from $61.9 million in 1995 to $8.1 million in 1996. Such improvements
were offset in part by increased costs related to DIRECTV for consumer
financing, marketing and operating costs and operating losses related to the
start of service by the Company's DIRECTV business in Latin America.
Costs and Expenses. Selling, general and administrative expenses were $805.1
million in 1996 compared to $510.6 million in 1995. The increase was primarily
related to subscriber acquisition costs related to DIRECTV businesses for both
domestic and international operations. Further, costs increased due to
international expansion activities for satellite services and the wireless
product lines.
The effective income tax rate was 43.3% in 1996 and 56.5% in 1995. The
variance in the rate was primarily due to the effect of the foreign sales
corporation's ("FSC") tax benefits as a percentage of the operating profits of
the two years. The impact of the FSC benefit on the 1995 tax rate was
considerably higher due to the lower operating results in 1995.
180
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Earnings. Hughes Telecom 1996 earnings were $183.5 million compared with 1995
earnings of $33.4 million. The increase was related to improved operating
performance within satellite manufacturing for government and commercial
programs, improved wireless and satellite network product lines, and reduced
operating losses for DIRECTV's domestic subsidiary and Hughes Avicom, offset in
part by start-up operating losses for Galaxy Latin America.
Backlog. The 1996 year-end backlog of $6,866.3 million decreased from the
$7,108.4 million reported at the end of 1995, primarily due to reduced order
activity on the Milstar and ICO programs, offset in part by increased customer
commitments for Galaxy(R) X.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $6.7 million at
December 31, 1996, a decrease of $0.9 million from the $7.6 million reported at
December 31, 1995. The cash balance was impacted by net distributions to the
Parent Company of $279.8 million and capital expenditures for property and
satellites totaling $451.4 million offset in part by cash generated by
operating activities of $330.3 million and the proceeds from the sale-leaseback
of satellite GIII-R to GMAC for $252.0 million, the sale of a 2.5% equity
interest in DIRECTV to AT&T for $137.5 million, and the disposal of certain
property for $14.2 million.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) was 1.20 at December 31, 1996 and 1.30
at December 31, 1995. Working capital decreased $30.7 million to $254.0 million
at December 31, 1996 from the $284.7 million reported at December 31, 1995.
Property and Equipment. Property, net of accumulated depreciation, increased
$139.9 million to $701.1 million in 1996 from the $561.2 million reported in
1995. Satellites decreased $39.4 million to $1,056.6 million in 1996 from the
$1,096.0 million reported in 1995. The decrease in satellites was primarily due
to the sale-leaseback of GIII-R which more than offset the additional
expenditures related to the Galaxy satellite fleet. Capital expenditures,
including expenditures related to satellites increased to $451.4 million in
1996 from $446.5 million in 1995. The increase reflects additions to the Galaxy
satellite fleet, construction of the California Broadcast Center, an uplink
facility that supports Hughes Telecom's DIRECTV business in Latin America,
expenditures to upgrade satellite manufacturing capabilities, costs related to
DIRECTV's system enhancement projects, and the land acquisition for the Los
Angeles Broadcast Center.
Divestitures. In March 1996, Hughes Electronics sold a 2.5% equity interest
in DIRECTV to AT&T for $137.5 million, with options to increase their ownership
interest under certain conditions. The sale resulted in a $120.3 million pre-
tax gain, which is included in other income.
1995 COMPARED TO 1994
RESULTS OF OPERATIONS
Revenues. Hughes Telecom revenues were $3,210.6 million in 1995, a 16.2%
increase from 1994 revenues of $2,763.5 million. The increase resulted from
higher cellular communications equipment and private business network sales,
additional Galaxy satellite transponder sales, increased satellite construction
sales, and the commencement of service by DIRECTV. DIRECTV(R) increased
subscriber growth by nearly one million from 1994 to 1995. Such revenue
increases were offset in part by a decrease in revenues from Claircom
Communications at Hughes Network Systems.
Other Expense--Included in revenues is other expenses of $32.4 million in
1995 and $10.0 million in 1994. The 1995 and 1994 amounts included the pre-tax
charges of $40.0 million and $35.0 million, respectively, for the estimated
losses on disposition of non-strategic business units.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Operating Profit. Operating profit for 1995 was $115.9 million, a 23.3%
decrease from the $151.2 million reported in 1994. Operating profit margins on
the same basis were 3.6% in 1995 and 5.5% in 1994. Both years included
significant operating losses of Hughes Avicom which amounted to $61.9 million
in 1995 and $79.7 million in 1994. The overall declines were primarily a result
of increased operating expenses associated with the continued expansion of
DIRECTV(R) and increased development costs on a geostationary satellite mobile
telephony product line. Also contributing to the decline in operating profit
were the reduced costs associated with the replacement of a Galaxy(R)
satellite, that was deployed by a launch vehicle failure in August 1992, and
1994 earnings recognized by DIRECTV related to a contract with the National
Rural Telecommunications Cooperative. Such decreases were partially offset by
reduced operating losses at Hughes Avicom.
Costs and Expenses. Selling, general and administrative expenses were $510.6
million in 1995 compared to $374.5 million in 1994. The increase was
principally due to the continued expansion of DIRECTV and the international
expansion effort at Hughes Network Systems, offset in part, by the divestiture
of Hughes LAN Systems ("HLS") in 1995.
The effective income tax rate was 56.5% in 1995 and 24.2% in 1994. The
variance in the rate is primarily due to the effect of the foreign sales
corporation's ("FSC") tax benefits as a percentage of the operating profits of
the two years. The impact on the 1995 tax rate was considerably higher due to
the lower operating results in 1995.
Earnings. Hughes Telecom 1995 earnings were $33.4 million compared with 1994
earnings of $62.4 million. The decline was primarily related to the lower
operating profits previously discussed. Earnings in 1994 included the
unfavorable effect of an accounting change for postemployment benefits other
than pensions. Excluding the accounting change, Hughes Telecom earnings in 1994
would have been $64.7 million.
Backlog. The 1995 year-end backlog of $7,108.4 million increased from the
$4,253.1 million reported at the end of 1994, primarily due to orders on the
ICO and Thor IIA satellite programs, increased customer commitments for Galaxy
III-R and Galaxy IX, and increased wireless and broadcast product orders.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash and cash equivalents were $7.6 million at
December 31, 1995, an increase of $1.8 million from the $5.8 million reported
at December 31, 1994. The cash balance was impacted by contributions by the
Parent Company of $301.7 million, cash provided by operating activities of
$76.3 million and proceeds from the divestiture of HLS of $17.5 million, offset
in part by capital expenditures.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) of 1.30 at December 31, 1995 remained
comparable to the 1.26 reported at December 31, 1994. Working capital was
$284.7 million at December 31, 1995 compared to $242.0 million at December 31,
1994.
Property and Equipment. Property, net of accumulated depreciation, increased
$55.1 million to $561.2 million in 1995 from the $506.1 million reported in
1994. Satellites, net of accumulated depreciation, increased $151.6 million to
$1,096.0 million in 1995 compared with the $944.4 million reported in 1994.
Capital expenditures, including expenditures for satellites, were $446.5
million for 1995 compared with $400.4 million in 1994. The decrease in capital
expenditures was primarily due to 1994 capital expenditures including costs
associated with the completion of the Castle Rock Broadcast Center to support
DIRECTV, offset in part by increased expenditures related to the Galaxy
satellite fleet and upgrading satellite manufacturing capabilities.
Divestitures. During 1995, Hughes Electronics divested Hughes LAN Systems
resulting in aggregate proceeds of approximately $38.8 million and a net loss
of $9.0 million, for which a pre-tax charge of $35.0 million was taken in 1994.
Also in 1995, Hughes Electronics recorded a $40.0 million charge for the
estimated loss on disposition of a business unit, which is included in other
expense.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
BUSINESS OF HUGHES TELECOM
INTRODUCTION
The following description of the business of Hughes Telecom gives effect to
the Hughes Reorganization. Following the consummation of the Hughes
Transactions, this business will be conducted by New Hughes Electronics.
Hughes Telecom is a leading worldwide provider of satellite-based video, data
and telephony services and manufacturer of communications satellites and
wireless and other telecommunications equipment. Hughes Telecom has the world's
largest non-governmental fleet of geostationary communications satellites and
is the world's leading supplier of satellite-based private business networks.
In addition to providing a broad range of satellite-related services, Hughes
Telecom is a leader in the U.S. direct broadcast satellite market with its
programming distribution service known as DIRECTV(R), which was introduced in
1994 and was the first high-powered, all digital, Direct-to-Home ("DTH")
television distribution service in North America. Hughes Telecom believes it is
a leading manufacturer of commercial communications satellites and satellite-
based electronic equipment for the U.S. government. Hughes Telecom is a
vertically integrated supplier of satellites and satellite-based communications
systems and services. It also provides communications equipment and services in
the mobile communications and packet switching markets. Its equipment and
services are applied in, among other things, data, video and audio
transmission, cable and network television distribution, private business
networks, digital cellular communications and DTH satellite broadcast
distribution of television programming.
Hughes Telecom conducts its operations in five principal segments: Satellite
Manufacturing, Network Systems, Direct-To-Home Broadcast, Satellite Services
and Hughes Avicom. Certain other operations are included in Intercompany
Eliminations and Other. The following table sets forth revenues of Hughes
Telecom for each of the last three years by segment.
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
Satellite Manufacturing........................... 2,066.2 1,716.8 1,462.4
Network Systems................................... 1,067.4 909.2 813.6
Direct-to-Home Broadcast.......................... 728.4 241.0 108.3
Satellite Services................................ 483.4 394.0 331.5
Hughes Avicom..................................... 89.7 49.2 75.6
Intercompany Eliminations and Other............... (260.6) (99.6) (27.9)
-------- -------- --------
Total............................................ $4,174.5 $3,210.6 $2,763.5
======== ======== ========
SATELLITE MANUFACTURING
Through Hughes Space and Communications Company ("HSC"), Hughes Telecom is
the world leader in the manufacture of geostationary commercial communications
satellites, having built approximately 40% of the communications satellites now
in commercial service worldwide. Hughes Telecom believes that HSC is a leading
manufacturer of spacecraft and spacecraft-based electronic equipment for the
U.S. government. In addition to commercial applications, HSC's satellites and
satellite payloads are used for a variety of defense, NASA and other government
space missions.
Since its construction of the world's first geosynchronous communications
satellite in 1963, HSC has been recognized worldwide as a leader in the design
and manufacture of communications satellites. The following table outlines
certain publicly announced information with respect to commercial (non-defense)
communications satellites during the period from 1994 to 1996. Through
September 30, 1997, five additional HSC-built satellites were placed in
service.
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1996 1995 1994
---- ---- ----
Commercial Communications Satellite Launches
HSC-Built....................................................... 10 8 10
Total Industry.................................................. 26 19 18
Commercial Communications Satellites in Service
HSC-Built....................................................... 64 61 57
Total Industry.................................................. 165 145 134
As of September 30, 1997, HSC has publicly announced outstanding orders to
construct 40 communications satellites for companies (including subsidiaries
and affiliates of Hughes Electronics) and government agencies in nine
countries, including orders for 30 of its advanced HS 601 satellites (of which
ten are commercial orders for its higher-power models), representing over $4.4
billion in backlog. As of September 30, 1997, five HSC-built satellites are
scheduled for launch in the remainder of 1997. Launch schedules are subject to
a number of factors, including construction delays, weather, availability of
launch vehicles, launch vehicle problems and governmental and political
pressures, many of which are beyond the control of HSC. Launch difficulties and
delays can, in certain circumstances, result in increased costs to HSC.
Hughes Telecom believes that HSC's leadership position in the competitive
satellite manufacturing industry reflects the high quality and reliability of
its satellites, which results from HSC's technological superiority in satellite
design, production and operation. One measure of the reliability of HSC's
satellites is the duration of their operational service. Since the launch of
HSC's first satellite in 1963, HSC's satellites have accumulated over 850 years
of in-orbit experience, with channel availability of 99.5% on HS 376, HS 601
and other current generation commercial satellites. Approximately 95% of HSC's
satellites have remained in service past their originally scheduled retirement
dates. The quality of HSC's satellites is also evidenced by the number of
repeat customers. Since 1965, approximately one-half of all HSC's satellite
sales have been made to repeat customers.
HSC's technological capabilities have led to enhancements in the quality of
its satellites, improvements in cost effectiveness through higher power and
compression and expansion of its satellite product line, thereby strengthening
HSC's leadership position and expanding the market for satellites as a whole.
For example, HSC has developed a family of structures, electronics, propulsion
and power systems (referred to as "buses"), which can be replicated at
relatively low cost in a variety of commercial and defense configurations. In
addition, HSC has applied signal compression and has developed other methods to
enhance the efficiency of transponders. The newest product in this family is
the HS 702 bus, which offers substantially higher power levels than those
previously achieved. Advancements in digital electronics, high power
amplifiers, antenna implementations and propulsion systems offer enhanced
performance capabilities of HSC-built satellites at a relatively higher power
than other satellites. These advancements are expected to provide a competitive
advantage for HSC as a result of enhanced performance capabilities.
In order to enhance its competitive position in both the government and
commercial satellite manufacturing markets, HSC continues to work to lower its
costs and improve productivity while maintaining its quality standards. Since
1992, HSC has improved its satellite manufacturing productivity by
approximately 47% (as measured by satellite sales dollars per employee) and
reduced cycle time from order to delivery for satellite production by
approximately 30%. In addition, HSC has secured commitments for 35 launch
vehicles over the next several years, which will assure HSC's access to space
at competitive costs.
HSC is currently building twelve communications satellites for London-based
ICO Global Communications, providing revenues to HSC of over $2.0 billion. The
satellites will be used in a global satellite-based mobile communications
system designed primarily to provide services to dual-mode (space/terrestrial)
cellular phones. The system will offer digital voice, data and facsimile
services, as well as a range of messaging services worldwide. This will be the
first commercial program to utilize a payload with a
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complex, on-board digital processor and phased array antenna. It also will be
the first spacecraft to be built by HSC for an intermediate earth orbit.
In September 1997, HSC announced a contract with Thuraya Satellite
Telecommunications Company ("Thuraya"), to provide a satellite-based mobile
phone system to serve the Middle East, North Africa, Eastern Europe (including
Turkey), Central Asia and the Indian subcontinent. This award will be the
largest satellite communications project in the region, worth approximately $1
billion to Hughes Electronics, and includes the manufacture of two high-power
satellites, launch services for the first satellites, insurance, ground
facilities and between 112,000 and 235,000 mobile telephones.
NETWORK SYSTEMS
Through Hughes Network Systems, Hughes Telecom provides a broad range of
telecommunications products and services, including satellite and ground-based
communications equipment and services. With an estimated worldwide market share
in excess of 60%, Hughes Network Systems is the world's leading supplier of
satellite-based private business networks, which utilize its very small
aperture terminals ("VSATs") and are individually designed, owner controlled,
interactive, highly flexible communications systems with the capacity to link
thousands of locations for data exchange, voice communications and video
conferencing. Hughes Network Systems also provides shared-hub systems that
allow users with more modest communications needs to share usage of Hughes
Network Systems' satellite ground stations and networks. Hughes Network Systems
is also a leader in wireless telephone networks and digital cellular mobile
systems and believes significant opportunities exist in utilizing digital
cellular technologies to provide fixed wireless telecommunications networks for
local and international telecommunications in areas with deficient
communications infrastructures (particularly developing nations) and to provide
mobile communications systems and services. Hughes Network Systems is also the
leader in providing satellite-based access to the Internet through its
DirecPC(TM) service.
As the leading supplier of VSATs, Hughes Network Systems has delivered or
received orders for more than 170,000 VSATs for use in the private networks of
companies, government agencies, universities and research institutions. Among
these are the more than 9,000 installed in the GM Pulsat network, which is the
world's largest private business network. Since 1987, Hughes Network Systems
has sold private business networks to a variety of customers worldwide,
including Chrysler, Toyota, Chevron, Wal-Mart, Toys "R" Us, Jusco (Japan),
China Ministry of Posts and Telecommunications and France Telecom. Sales to
international customers are expected to increase, particularly as government
regulation of private ownership of such networks decreases. As of September 30,
1997, Hughes Network Systems had sold private networks for use in over 55
countries in North America, Europe, Asia, Latin America and Africa.
Hughes Network Systems has a long history of products for terrestrial data
communications, beginning with the X.25 packet switches for Telenet in the mid-
1970's. Hughes Network Systems recently announced a new family of networking
products called the Radiant(TM) family. Radiant products are able to address a
large range of customer's wide area networking requirements.
Hughes Network Systems believes that it has developed a unique and flexible
system that uses common hardware and software modules for multiple wireless
telecommunications applications, including analog and digital mobile cellular,
mobile data, fixed wireless telephony and Personal Communication Services
("PCS"). The advanced GMH 2000(TM) cellular system supports and is compatible
with the U.S. Telecommunications Industry Association ("TIA") analog, and Time
Division Multiple Access ("TDMA") and Code Division Multiple Access ("CDMA")
digital cellular standards, the Cellular Digital Packet Data ("CDPD") mobile
data standard, the BellCore "PACS" system proposed as a PCS standard and Hughes
Network Systems' proprietary enhancement to TDMA, Extended Time Division
Multiple Access ("E-TDMA(R)") standard. E-TDMA offers significantly increased
capacity as compared to conventional analog switching technology. Hughes
Network Systems has installed major telephone infrastructures in Jakarta,
Indonesia; Prague, Czech
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Republic; Blantyre, Malawi; Vladivostok, Russia; Chengdu, China; Ho Chi Minh
City and Hanoi, Vietnam; and Campos, Brazil. The Hughes Network Systems program
in Tatarstan, a Russian republic, for a high capacity fixed wireless telephone
system has been in operation since January 1995. Hughes Network Systems has a
contract with BellSouth Cellular Corporation under which it installed and
continues to expand its GMH 2000(TM) dual analog/digital cellular networks for
voice and data transmission in more than 50 markets in the southeastern United
States. GTE Mobilnet installed a Hughes Network Systems network with CDPD
technology in many of its markets in 1995.
Hughes Network Systems is discussing with several other countries and cities
the installation of similar systems to provide and upgrade basic telephone
service. For example, the government of India has issued to Hughes Ispat
Limited, a limited liability company organized under the laws of India in which
Hughes Telecom has agreed to take a strategic ownership interest, letters of
intent pursuant to which the company would provide basic telecommunications
services within the Indian states of Maharashtra and Karnataka. Hughes Network
Systems currently expects to receive the formal licenses to provide these
services in October 1997. In addition, HNS will be the primary wireless
equipment provider in connection with these services.
Hughes Network Systems believes that its technologies and other capabilities
position it to become a leading provider of satellite-based mobile
communications equipment and services. Recent awards, including those from
Thuraya and ICO, to provide satellite-based ground telecommunications
networking equipment have established Hughes Network Systems' credentials in
this sector. In addition, HNS is under contract to Thuraya to build between
112,000 and 235,000 hand held telephones that can operate in dual mode:
cellular and satellite.
In 1996, Hughes Network Systems began providing subscriber equipment for
DIRECTV(R) services. In addition, Hughes Network Systems has developed
DirecPC(TM), a satellite-based information delivery service that uses a small
antenna and high-speed digital transmission to make software, documents, desk-
top video, games, news and other information accessible through personal
computers. For example, through DirecPC's Turbo Internet(TM) service, a
personal computer user can download data and video at speeds up to 400 kilobits
per second. In 1996, Hughes Network Systems initiated commercial DirecPC
service in the United States and licensed two operators in Japan and the Hughes
Network Systems Olivetti joint venture in Europe for DirecPC operation.
DIRECT-TO-HOME BROADCAST
Hughes Telecom has consolidated its North American and international DIRECTV
efforts into one organization: DIRECTV Global. The goal of the reorganization
is to capitalize on Hughes Telecom's experience in North America as DIRECTV
expands into the international arena. The reorganization also provides
synergies in programming and technical support provided to these new markets.
UNITED STATES
Through DIRECTV Enterprises, Inc. ("DIRECTV U.S."), Hughes Telecom has
developed and operates the first high-powered, all digital DTH television
distribution service in North America, and is the leader in the direct
broadcast satellite market in the United States with its programming
distribution service known as DIRECTV. Introduced in June 1994, DIRECTV service
is broadcast from three Hughes HS 601 satellites directly to 18-inch receiving
antennae and decoding boxes located in households in the 48 contiguous states
in the United States. DIRECTV U.S. uses 11 of the 16 transponders on the first
satellite and all transponders on the second and third satellites for DIRECTV
services. The remaining five transponders on the first satellite have been sold
to United States Satellite Broadcasting, Inc. ("USSB") for use in its own
programming service. Programming is received and broadcast from DIRECTV's
55,000 square foot broadcast facility in Castle Rock, Colorado. The receiving
equipment for DTH television services, DSS(TM), is manufactured by a number of
name brand consumer electronics companies, including Thomson Consumer
Electronics under the RCA(R), Proscan and GE brand names, Sony, Panasonic,
Daewoo, Hitachi, Phillips,
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Hughes Network Systems, Toshiba and Uniden. DSS(R) equipment prices have fallen
steadily from the initial $699-$899 range in June 1994 to approximately $199-
$399 today. The technology for the DIRECTV(R) service is based, in part, on
Hughes Telecom's satellite and satellite-based services experience and in part,
on the expertise of the consumer electronics manufacturers which produce DSS
equipment. DIRECTV U.S. has outsourced many of the significant facets of
marketing directly to consumers and operating the related infrastructure and
support services to vendors experienced in the respective fields.
Hughes Telecom believes that DIRECTV U.S. can compete effectively with cable
and other DTH providers through a combination of its high quality video, audio
and customer service, broad range of programming and extensive distribution.
Both the DIRECTV programming service and DSS equipment are currently
distributed through consumer electronics stores such as Circuit City, Radio
Shack, Best Buy and Sears; and satellite television dealers. In addition,
pursuant to an arrangement with the National Rural Telecommunications
Cooperative ("NRTC"), the NRTC offers DIRECTV services to member cooperatives
located primarily in rural areas of the continental United States.
The DIRECTV entertainment services currently offered to subscribers include
over 175 television channels (including The Disney Channel, ESPN and CNN); an
assortment of pay per view events such as movies, boxing, wrestling, musical
concerts and other similar programs; 31 audio channels of commercial-free, CD-
quality music; professional sports programming consisting of out-of-market
games from the NFL, NBA, NHL, MLB and collegiate football sports programming;
and other entertainment services such as The Golf Channel, STARZ! and Playboy
TV. DIRECTV U.S. believes that its wide diversity of programming and its
variety of programming packages available to consumers (especially in the areas
of sports and movies) will allow DIRECTV to compete effectively in the market
for television entertainment. Future program offerings may include additional
basic, niche or specialized programming. DIRECTV U.S. also sells programming
packages to restaurants, bars, office buildings, hotels and other commercial
establishments. DIRECTV U.S. anticipates offering the DIRECTV video and audio
services as well as enhanced multimedia and data services on personal computers
in early 1998.
Primestar, USSB and Echostar are the only other direct broadcast service
companies currently in operation in the United States. ASkyB and Primestar
announced their intention to merge in 1997 to form a new company. At this time,
the transaction is still pending. In addition, on May 27, 1997, Alphastar filed
a voluntary Chapter 11 petition under Title 11 of the United States Code and on
August 8, 1997 ceased broadcast operations. DIRECTV service also competes with
cable television, other broadcast television and other entertainment services,
including video rentals and telephone services.
As of September 30, 1997, there were approximately 2.9 million subscribers in
the United States for DIRECTV programming services, including approximately
650,000 NRTC subscribers. Excluding NRTC subscribers (and revenues), average
revenue per U.S. subscriber is currently over $40 per month, and net subscriber
churn is currently approximately 1% per month. Recently, the demographics of
the DIRECTV U.S. subscriber base has changed, with increasingly more
subscribers coming from urban and suburban homes passed by cable.
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INTERNATIONAL
Hughes Telecom's business strategy also includes application of its U.S.
telecommunications industry experience and technology to international markets.
Consistent with this strategy, Hughes Telecom has entered into a partnership,
known as Galaxy Latin America, with three prominent Latin American media
companies to introduce satellite-based direct broadcast entertainment into
Latin America through a service using the DIRECTV(R) brand name. Galaxy Latin
America was the first DTH provider in Latin America and is currently the market
leader. Hughes Telecom estimates that the Latin American market represents the
third largest television market in the world, with over 90 million television
households, although the number of households which are potential customers for
DIRECTV service is estimated to be substantially less. In this regard, Hughes
Telecom Latin America believes that approximately one-half of television
households in Latin America earn an income to afford pay TV services, but only
a small fraction currently subscribe to such services. Hughes Telecom maintains
a 60% ownership share in the Galaxy Latin America partnership, which also
includes Cisneros Group of Venezuela (20%), Multivision of Mexico (10%) and TV
Abril of Brazil (10%).
Galaxy Latin America commenced operations in July 1996 using a Hughes Telecom
HS 601 satellite. Galaxy Latin America currently utilizes four broadcast
centers, in Long Beach, California, Mexico City, San Paulo and Caracas, to
uplink diverse programming throughout Latin America and plans to add one
additional broadcast center in Buenos Aires, which is expected to become
operational in late 1997. Local operating companies ("LOCs") in each country
provide marketing, sales, distribution, customer service and other
infrastructure services. Hughes Telecom either has purchased or plans to
purchase a 10% to 20% interest in each of the LOCs operating in the larger
Latin American markets, such as Brazil, Mexico, Venezuela, Colombia and
Argentina. Hughes Telecom believes that an equity stake in these firms will
help ensure a coordinated strategy throughout Latin America. DIRECTV service in
Latin America currently includes approximately 70 channels of entertainment for
customers in each of Mexico, Brazil, Venezuela, Ecuador, Panama, Costa Rica,
Trinidad/Tobago, Guatemala, Chile and, most recently, Colombia. Later in 1997,
Hughes Telecom expects Galaxy Latin America to introduce DIRECTV service in
Argentina and, by the end of 1998, expects to offer services to approximately
100% of the Latin American market. As of September 30, 1997, there were
approximately 235,000 subscribers in Latin America. Galaxy Latin America's
average revenue per subscriber is currently over $40 per month.
Galaxy Latin America's business strategy includes maintaining its market
leadership through program differentiation, high quality video, audio and
customer service, advanced technological capabilities and increased channel
capacity. Galaxy Latin America believes that its early entry into the Latin
American direct broadcast market, coupled with its existing DIRECTV technology,
provides it with a competitive advantage in this market.
In October 1996, Hughes Telecom announced an agreement to form DIRECTV JAPAN,
Inc. ("DTVJ"), a partnership of leading Japanese and American
telecommunications companies. The DTVJ partners and their equity ownership in
the company are as follows: Hughes Telecom (31.8%); Culture Convenience Club
Co., Ltd. ( 31.8%); Mitsubishi Corporation and certain of its affiliates
(13.7%); Matsushita Electric Industrial Co., Ltd. (9.1%); Tokuma Corporation
(9.1%); and Dai Nippon Printing Co., Ltd. (4.5%). Hughes Telecom estimates that
there are more than 40 million television households in Japan, with very low
cable penetration. Hughes Telecom believes that DTVJ's strong in-country
partners, DTH experience in the United States and Latin American markets, its
higher-quality video, audio, data and interactive services and its programming
line-up containing a number of unique local Japanese programs and major U.S.
programming channels provide it with a competitive advantage in this market.
Hughes Telecom currently expects DTVJ to commence commercial operations in
early 1998, with an offering of over 90 channels of advanced, digital, DTH
entertainment services throughout Japan.
GENERAL
With respect to the worldwide DIRECTV businesses, particularly in the United
States, Hughes Telecom is considering a number of strategic initiatives
designed to expand its market share and enhance its competitive position. These
include new distribution channels, new services, broader programming and
marketing and other
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
promotional strategies designed to address "barriers to entry" identified by
consumers. To the extent that such strategies are implemented, subscriber
acquisition costs are likely to increase and, as a result, the execution of
such strategies is likely to affect the timing and amount of revenues and the
overall profitability of the DIRECTV businesses. However, Hughes Telecom
believes that early capture of market share and the establishment of market
leadership are important to maximization of the long-term value of the DIRECTV
businesses.
There can be no assurance that any level of DIRECTV(R) subscribers or
profitability to Hughes Telecom in the United States, Latin America, Japan or
other markets will be achieved or, if and when achieved, maintained due to the
factors described in this section and other factors outside the control of
Hughes Telecom and its partners (including economic conditions and political
volatility in various foreign countries and currency and exchange rate risks).
To the extent that the factors described above affect the levels of subscribers
which are achieved or maintained, the timing and amount of revenues and
profitability to Hughes Telecom from its participation in providing DIRECTV
services in the United States, Latin America, Japan and other markets may be
adversely affected.
The DIRECTV U.S., Galaxy Latin America and DTVJ Japan systems, if and when
operational, will compete with other technologies and systems. See "--
Competition" below. Delays in the successful production or launch of the
related satellites could materially delay the commencement or expansion of such
services, which could materially affect market acceptance of such services and
the financial results to Hughes Telecom. Launch schedules are subject to a
number of factors, including construction delays, weather, availability of
launch vehicles, launch vehicle problems and governmental and political
pressures, many of which are beyond the control of Hughes Telecom. In addition,
there can be no assurance that Hughes Telecom will receive the approvals and
licenses from the FCC and other U.S. and foreign governmental agencies that
will be required to launch and operate the satellites for direct broadcast.
SATELLITE SERVICES
On May 16, 1997, Hughes Telecom and Old PanAmSat completed the PanAmSat
Merger, resulting in the merger of their respective satellite services
operations into a new publicly held company, which assumed the name "PanAmSat
Corporation" ("PanAmSat"). As part of this series of transactions, Hughes
Telecom contributed its Galaxy(R) satellite services business for a 71.5%
interest in PanAmSat. In these transactions, Old PanAmSat stockholders received
$1.5 billion in cash and a 28.5% interest in PanAmSat in exchange for their
existing holdings. PanAmSat borrowed approximately $1.725 billion to finance
the Old PanAmSat stock purchase and facilitate the sale of certain DTH
television rights to a stockholder of Old PanAmSat.
The PanAmSat Merger brings together the leading provider of commercial
satellite services in the U.S. domestic market with the leading commercial
provider in the international market. PanAmSat operates a global network of 16
satellites supported by seven teleport and operations facilities in the United
States and more than 400 sales, marketing and engineering employees on five
continents. PanAmSat believes that these resources enable the company to serve
as a unique, one-stop provider of global satellite services.
PanAmSat's global satellite network is used to provide video distribution and
telecommunications services. PanAmSat currently operates the leading satellites
for cable and broadcast television distribution in the United States, Latin
America, the Indian subcontinent and the Asia-Pacific region; and satellite
platforms for direct-to-home television services in Latin America, South
Africa, the Middle East and India. In addition, the company offers live
transmission services for news, sports and special events coverage worldwide
and satellite transmissions capacity and related services for private business
networks and international Internet access. PanAmSat also provide satellite
tracking, telemetry and control services for its own satellite fleet as well as
for satellites owned by others.
PanAmSat primarily provides satellite services through long-term operating
lease contracts to its customers for the use of full or partial transponder
capacity. The company also offers services to its customers through sales and
sales-type lease contracts. PanAmSat currently provides service to hundreds of
video distribution and telecommunications customers worldwide and, as of June
30, 1997, had long-term contracts for satellite services representing future
payments of approximately $7.1 billion.
189
The following table sets forth on a pro forma basis the number of
transponders on the in-orbit satellites in the PanAmSat network as of September
30, 1997 and December 31, 1996, 1995 and 1994 and the percentage of such
transponders committed, in the aggregate, for use by PanAmSat customers during
the current year (as of September 30, 1997) and during each of 1996, 1995 and
1994.
1997* 1996 1995 1994
----- ---- ---- ----
PanAmSat Network
Satellites.......................................... 16 14 11 11
Transponders Available.............................. 495 411 307 291
Transponders Committed.............................. 85% 85% 91% 72%
- --------
*As of September 30, 1997.
PanAmSat's business strategy is to capture more of the value-added benefits
of the satellite-based services market by offering one-stop satellite shopping
through its global reach and by capitalizing on its technological capabilities,
its early market entry, the desirable orbital locations of its satellite fleet
and its management expertise in satellite operations. In addition, PanAmSat is
the leader in the development and marketing of cable neighborhoods and a
broadcast neighborhood. These innovations, which concentrate a broad range of
quality cable programming or broadcast programming on certain satellites, have
made such satellites particularly attractive to cable programmers and broadcast
programmers desiring to distribute widely their programming to cable system
operators or television stations.
To meet the expected demand for additional satellite capacity, PanAmSat has
five additional satellites scheduled for launch by the end of 1998. These
additional launches would increase the number of PanAmSat satellite
transponders between 1996 and 1998 by 74% from 411 to 715 transponders. There
can be no assurance, however, that the schedule for PanAmSat's future satellite
launches will be met. Delays in the production or successful launch of these
satellites could materially affect the ability of PanAmSat to deliver services
and benefit from the opportunities it is currently pursuing. Launch schedules
are subject to a number of factors, including construction delays, weather,
availability of launch vehicles, launch vehicle problems and governmental and
political pressures, many of which are beyond the control of PanAmSat.
HUGHES AVICOM
Hughes Avicom is a supplier of cabin management, interactive passenger
communications and entertainment systems and related services for the
commercial airline market. Hughes Avicom's strategy is to provide and service
the "Airborne Data Highway" to support entertainment, wideband information and
communications for airline cabin crews and passengers. Hughes Avicom continues
to focus on improving its video and interactive products, its servicing of
those products, as well as reducing delivery costs.
The current health of the airline industry is driving growth in the in-flight
entertainment industry. Hughes Avicom believes that interactive and Video-on-
Demand systems will comprise the majority of that growth. In response to these
industry trends, Hughes Avicom has developed a complete cabin communications
and entertainment system that integrates its audio distribution technology,
large system processing capability and liquid crystal display technology to be
fully interactive and allow passengers, through individual screens at their
seats, to watch and listen to individually selected entertainment programs,
request meals and beverages and order duty free and other merchandise. The
interactive feature of this system is currently operating on a number of major
commercial carriers; a video-on-demand feature is expected to be available in
1998.
Hughes Avicom faces stiff competition from an array of international firms,
including Matsushita, Sony and BE Aerospace. There can be no assurance that any
level of profitability to Hughes Telecom will be achieved or maintained due to
factors outside the control of Hughes Telecom, including economic conditions
and changes to the current airline market.
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
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CORPORATE AND OTHER
Hughes Telecom operates and owns equity interests in other businesses in
addition to those described above. These businesses will be reported as part of
"Other" in New Hughes Electronics' consolidated financial statements and the
revenues of these businesses are not, in the aggregate, material to Hughes
Telecom.
For example, Hughes Telecom is the largest stockholder of American Mobile
Satellite Corporation (AMSC), with a current equity interest of approximately
27% (plus an option to acquire, under certain circumstances, an additional 10%
interest on a fully diluted basis). AMSC's common stock is publicly traded and
other stockholders include Singapore Telecommunications Ltd. and AT&T Wireless
Services. AMSC provides a full range of satellite-based mobile telephone,
facsimile and data services in the United States, including Alaska, Hawaii,
Puerto Rico, the Virgin Islands and hundreds of miles of U.S. coastal waters.
STRATEGY
Hughes Telecom's mission is to leverage its satellite and wireless
competencies to become a premier communications company. Hughes Telecom's
strategy includes using its vertical integration and market leadership to gain
a competitive advantage in the fast growing international communications
marketplace. Hughes Telecom's roots lie in its satellite design and
manufacturing expertise and it is this technological know how which has given
Hughes Telecom its early competitive advantage. Hughes Telecom now intends to
capture more of the value-added benefits of the satellite-based services market
by capitalizing on its technological capabilities, the size and desirable
orbital locations of its satellite fleet and its management expertise in
satellite, communications and telecommunications operations. Hughes Telecom's
strategy also includes building on its technology and experience to develop new
applications for its products and services for governments, businesses and
consumers and expanding international sales for all its businesses. Hughes
Telecom believes significant opportunities exist in (1) DTH satellite-based
television programming distribution outside North America based on Hughes
Telecom's experience with its DIRECTV service, especially in areas lacking
established alternative distribution infrastructures (such as developing
nations); (2) owning and operating an expanding satellite fleet to provide
global communications services;(3) fixed wireless telecommunications networks
for local and international telecommunications in areas with deficient
communications infrastructures (such as developing nations); (4) mobile
wireless communications systems and services based on Hughes Telecom's digital
satellite and cellular communications technologies; and (5) satellite-based
communications directly to personal computers. In addition, Hughes Telecom
seeks to maintain its strong position in satellite manufacturing and
telecommunications equipment through more efficient production processes.
In addition, Hughes Telecom seeks to expand into related markets where it
believes that its existing technologies will provide it with a sustainable
competitive advantage. For example, Hughes Telecom is actively involved in
pursuing Spaceway(TM), a high speed, bandwidth-on-demand satellite service.
Most of the space-based hardware (including the satellites, the transponders
and other electronic components comprising the satellite payloads) and most of
the ground-based control equipment will be designed or manufactured by Hughes
Telecom.
ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES
Due to the rapid growth in the telecommunications and space industry,
particularly internationally, and increasing competitive pressures, Hughes
Telecom reviews its competitive position on an ongoing basis and considers from
time to time various acquisitions, strategic alliances and divestitures in
order to continue to compete effectively, grow its business and allocate its
resources efficiently. It is becoming increasingly important for Hughes Telecom
to form strategic partnerships with other firms. These alliances bring together
the necessary expertise, such as distribution, market knowledge and technology,
to address competitive pressures and meet new market demands. Hughes Telecom
has done this in its international DIRECTV businesses as well as its Network
Systems businesses. See "--Direct-To-Home Broadcast" and "Network
191
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Systems" above. Hughes Telecom also seeks acquisitions which will improve its
position in these high growth and increasingly competitive markets. The
PanAmSat Merger, completed as of May 16, 1997, merging Hughes Galaxy and Old
PanAmSat satellite operations businesses to form the world's premier public
provider of satellite services is the most recent example of this. See "--
Satellite Services" above. Hughes Telecom continues to evaluate acquisitions,
alliances and divestitures, and from time to time engages in preliminary
discussions regarding possible transactions, which it believes will improve
Hughes Telecom's competitive position and financial results.
REGULATION
Various aspects of Hughes Telecom's businesses are subject to federal and
state regulation, noncompliance with which, depending upon the nature of the
noncompliance, may result in the suspension or revocation of any license or
registration at issue, the termination or loss of any contract at issue or the
imposition of contractual damages, civil fines or criminal penalties. Hughes
Telecom has experienced no material difficulties in complying with the various
laws and regulations affecting its business.
U.S. GOVERNMENT CONTRACTS
Hughes Telecom acts as a prime contractor or major subcontractor with respect
to U.S. government programs. Principally, this business is performed in the
satellite manufacturing segment of Hughes Telecom. Sales to the U.S. government
may be affected by changes in acquisition policies, budget considerations,
changing concepts of national defense, civilian space needs, spending
priorities and other factors that are outside the control of Hughes Telecom.
Government spacecraft acquisition programs generally follow a life cycle that
begins with the research and development phase, followed by an engineering
development phase which includes the first spacecraft, and finally progressing
into a production stage for the remaining spacecraft and may continue with
refinements and improvements for several years. Large programs with significant
start-up costs, which are usually incurred in the research and development
phase, do not become profitable until the engineering development phase. The
U.S. government typically uses multiple sources during the research and
development phase to intensify competition and down-selects to one source to
perform the later phases of the program. Therefore, Hughes Telecom may not be
selected for engineering development and production stages even when
considerable resources have been expended in the research and development phase
of a program.
Hughes Telecom's U.S. government business is performed under two general
types of contracts, fixed-price and cost reimbursement. Under fixed-price
contracts, Hughes Telecom realizes all the benefit or detriment caused by
decreased or increased costs of performing the contract. Cost reimbursement
contracts provide for reimbursement of costs, to the extent such costs are
reasonable, allocable to the contract and allowable under applicable
regulations, plus payment of a fee. Approximately 26% of Hughes Telecom's total
sales to the U.S. government in 1996 were pursuant to fixed-price contracts,
and approximately 74% were pursuant to cost reimbursement contracts. Total
Hughes Telecom net sales to the U.S. government in 1996 were approximately $0.9
billion.
Hughes Telecom's fixed-price government contracts contain contract financing
provisions under which Hughes Telecom may receive payments in advance of
delivery in amounts ranging from over 75% to 100% of cumulative total costs
incurred, with the remainder, including profit, billed upon delivery and
acceptance or upon the completion of performance milestones. Under cost
reimbursement contracts, Hughes Telecom is periodically reimbursed for
allowable costs and paid a portion of the fee component based on progress
and/or performance. Under either type of contract, certain costs, including
certain financing, research and development and marketing expenses, are not
reimbursable under currently applicable regulations. Also, under either type of
contract, all or a portion of the profit or fee is typically subject to pay-
back due to degraded or failed performance in-orbit.
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CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
Most of Hughes Telecom's contracts with the U.S. government which are the
basis of Hughes Telecom's backlog are incrementally funded and therefore are
subject to appropriations decisions subsequent to award. Once awarded,
contracts may be contested by other bidders. In addition, Hughes Telecom's
contracts with the U.S. government are subject to termination by the U.S.
government either for its convenience or for default by Hughes Telecom. The
costs recovered for terminations for convenience may not fully reimburse Hughes
Telecom, and the profit or fee received by Hughes Telecom may be lower than
that which it had expected for the portion of the contract performed. In cases
of termination for default, normal contract remedies generally apply. In
addition, the U.S. government has broad discretion to suspend or debar
contractors from engaging in new government business, including discretion as
to the period of suspension or debarment. A contractor may be debarred based on
a conviction or civil judgment involving certain offenses, including fraud in
connection with obtaining or performing a public contract (or subcontract
thereunder), and may be suspended, if indicted for such an offense or if there
is other adequate evidence that such an offense has been committed. Like other
government contractors, Hughes Telecom is subject to civil and criminal audits
and investigations of its contracting activity. This liability includes
potential contract cost reductions due to defective pricing claims.
COMPETITION
Hughes Telecom has certain competitive advantages in its telecommunications
and space business. In the construction of satellites, Hughes Telecom's family
of satellite bus designs gives it the flexibility to respond to varying
customer requirements, and its relatively lighter weight satellites are less
expensive to launch than heavier competing models. The new HS 702 spacecraft
keeps Hughes Telecom on the cutting edge of satellite technology as it boasts
up to double the transponder capacity and power of other satellites currently
available in the marketplace. Hughes Telecom faces competition from companies
such as TRW, Loral Space and Communications Ltd. and Lockheed Martin in the
satellite construction segment. In the sale and leasing of satellite
transponders, Hughes Telecom enjoys advantages from its economies of scale and
the location of many
of its orbital positions, many of which are the most desirable in North
America. Hughes Telecom believes that the merger of Hughes Telecom's satellite
fleet with Old PanAmSat's fleet strengthens this competitive position. Loral
Space & Communications Ltd.'s recent purchase of AT&T Skynet, as well as
Intelsat's and Inmarsat's current spacecraft fleets keep this an exceptionally
competitive market. Hughes Telecom also believes that its experience acquired
through the development and operation in North America of the DIRECTV(R)
service, and its early entry into the Latin American satellite-based direct
broadcast market, will provide it with competitive advantages in such markets
and in its efforts to expand direct broadcast services to other markets, such
as Japan. The various DIRECTV services face stiff competition from local cable
operations as well as other DTH satellite systems such as Primestar, Echostar
and the various "Sky" services (ASkyB; BSkyB; and JSkyB). The Network Systems
business of Hughes Telecom faces global competition from firms such as Lucent
Technologies Inc., Telefonaktiebolaget LM Ericsson, AT&T Corporation, as well
as other large telecommunications companies and the various regional Bell
operating companies.
Notwithstanding the competitive advantages described above, Hughes Telecom
participates in markets that involve a high level of competition by other
companies that have similar or better financial, technological and personnel
resources as Hughes Telecom. Hughes Telecom's telecommunications businesses
compete with other communications technologies and systems, such as, with
respect to telecommunications systems for fixed and mobile applications, fiber
optics networks, cable systems, wire telephony and radio-based systems and
other satellite-based systems. In addition to existing and other planned
operations of DTH broadcasting services Hughes Telecom's direct broadcasting
service competes and will compete in present and future telecommunications
markets with telephone companies, cable television, other broadcast television
and other entertainment services, including video rentals. No assurance can be
given as to the effect that any such competition may have on the financial
condition or results of operations of Hughes Telecom.
RESEARCH AND INTELLECTUAL PROPERTY
The ability to continue to generate technological innovations is critical to
ensure Hughes Telecom's long-term success and competitiveness of the Hughes
Telecom business. See "Risk Factors Relating to the Business
193
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
of New Hughes Electronics--New Hughes Electronics' Ability to Maintain Leading
Technological Capabilities" in Chapter 2. The continued development of new
technologies may provide new and improved products which will continue to fuel
business opportunities and product improvements which, among other things, will
enable the extension of profitable production programs. Research and
development is carried on in each of Hughes Telecom's business units in
connection with ongoing product improvement efforts. Hughes Research Labs
located in Malibu, California, which will be 50% owned by Hughes Telecom after
the Hughes Reorganization, conducts long-range applied research in the
specialized fields of physics, chemistry, electronics and information sciences.
See "Separation and Transition Arrangements--Summary of Other Agreements
Contemplated by the Master Separation Agreement--Intellectual Property" and
"Separation and Transition Arrangements--Summary of Other Agreements
Contemplated by the Master Separation Agreement--Hughes Research Labs" in
Chapter 3.
Hughes Telecom utilizes a large number of patents and trademarks which are
held by Hughes Electronics or its other affiliates, including Hughes Defense.
As part of the Hughes Transactions, Hughes Defense and Hughes Electronics and
its affiliates will implement certain cross-licenses to enable them to continue
to operate their respective businesses after the Hughes Transactions. See
"Separation and Transition Agreements--Summary of Other Agreements Contemplated
by the Master Separation Agreement--Intellectual Property" in Chapter 3. Hughes
Telecom believes that, in the aggregate, the rights existing under such
patents, trademarks and licenses are important. Hughes Telecom believes that
its competitive position is primarily dependent on research, engineering and
production capabilities. Hughes Telecom actively pursues patent and trademark
protections of its technological and engineering innovations, and actively
pursues enforcement of its intellectual property rights.
EMPLOYEES
As of September 30, 1997, Hughes Telecom employed approximately 15,500
persons (excluding Hughes Research Labs).
REAL PROPERTY
As of June 30, 1997, Hughes Telecom had approximately 165 locations operating
in 22 states and 55 cities in the United States and approximately 30 additional
locations in 22 cities in approximately 17 countries outside the United States.
At such date, approximately 3.2 million square feet of space was owned by
Hughes Telecom and an additional 3.3 million square feet of space was leased.
Leased properties consist primarily of office and warehouse facilities. Lease
terms on standard leases are generally five years or less. Upon the expiration
of its leases, Hughes Telecom does not anticipate any difficulty in obtaining
renewals or alternative space.
Hughes Telecom management believes that its facilities are suitable and
adequate for its business; however, Hughes Telecom periodically reviews its
space requirements to consolidate and dispose of or sublet facilities which are
no longer required in connection with its business and to acquire new space to
meet the needs of its business.
LEGAL PROCEEDINGS
From time to time Hughes Telecom is involved in various litigation matters
arising in the ordinary course of its business. Hughes Telecom management does
not believe that disposition of any current matter will have a material adverse
effect on Hughes Telecom's combined financial position or results of
operations.
194
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
THE "WILLIAMS PATENT"
Hughes Electronics has maintained a suit against the U.S. government since
September 1973 regarding the U.S. government's infringement and use of a Hughes
Electronics patent (the "Williams Patent") covering "Velocity Control and
Orientation of a Spin Stabilized Body," principally satellites. On June 17,
1994, the U.S. Court of Claims awarded Hughes Electronics damages of $114
million. Because Hughes Electronics believed that the record supported a higher
royalty rate, it appealed that decision. The U.S. government, contending that
the award was too high, also appealed. On June 19, 1996, the Court of Appeals
for the Federal Circuit affirmed the decision of the Court of Claims which
awarded Hughes Electronics $114 million in damages, together with interest. The
U.S. government petitioned the Court of Appeals for the Federal Circuit for a
rehearing. That petition was denied in October 1996. The U.S. government then
filed a petition with the U.S. Supreme Court seeking review. On April 21, 1997
the U.S. Supreme Court, citing a recent decision it had rendered in a separate
patent matter, remanded Hughes Electronics' suit over the Williams Patent back
to the Court of Appeals along with patent cases involving other parties then
pending before the U.S. Supreme Court, in order to have the Court of Appeals
determine whether the results of prior proceedings in those cases are
consistent with the U.S. Supreme Court's recent decision in such other matter.
The previous liability decision of the Court of Claims in the Williams Patent
matter, and its $114 million damage award to Hughes Electronics, currently
remain in effect pending reconsideration by the Court of Appeals. Hughes
Electronics is unable to estimate the duration of this reconsideration process.
While no amount has been recorded in the financial statements of Hughes
Electronics to reflect the $114 million award or the interest accumulating
thereon, a resolution of this matter could result in a gain that would be
material to the earnings of General Motors attributable to New GM Class H
Common Stock.
LANE AND VILLALPANDO LITIGATION
In October 1994, a California jury awarded a total of $89.5 million in
damages against Hughes Telecom, including punitive damages of $40 million to
each of two former Hughes Telecom employees, Lane (race
discrimination/retaliation) and Villalpando (retaliation), based on claims of
mistreatment and denials of promotions. The trial court granted Hughes
Telecom's motion to set aside the verdicts because of insufficient evidence. On
January 6, 1997, the Court of Appeal reversed the trial court's decision to set
aside the verdicts, reinstated the jury verdicts, but reduced the two $40
million punitive damage awards to $5 million and $2.83 million, resulting in an
aggregate judgment of $17.33 million. Hughes Telecom filed a petition for
review by the California Supreme Court, which was supported by various amicus
briefs. On March 19, 1997, the California Supreme Court granted Hughes
Telecom's request for review of the $17.33 million judgment, and ordered the
Court of Appeal to vacate its decision and reconsider the case. On March 27,
1997, the Court of Appeal issued such an order and requested supplemental
briefs. On July 28, 1997, the Court of Appeal reissued essentially the same
opinion and award. Hughes Telecom's petition for reconsideration was denied.
Hughes Telecom has petitioned the California Supreme Court for review. Because
review by the California Supreme Court is in the discretion of that court, no
assurance can be given that the case will be accepted for review, or that if
accepted, the California Supreme Court's decision will be favorable to Hughes
Telecom.
GOVERNMENT REGULATIONS
Hughes Telecom and its subsidiaries are subject to potential liability under
government regulations and various claims and legal actions which are pending
or may be asserted against them. Some of the pending actions purport to be
class actions. The aggregate ultimate liability of Hughes Telecom and its
subsidiaries under these government regulations, and under these claims and
actions, was not determinable as of the date of this document. After discussion
with counsel, it is the opinion of Hughes Telecom management that such
liability is not expected to have a material adverse effect on the Hughes
Telecom's consolidated operations or financial position.
195
DIRECTORS AND EXECUTIVE OFFICERS OF NEW HUGHES ELECTRONICS
After the Hughes Transactions, it is expected that all eight of the current
members of the Hughes Electronics Board will initially serve as directors of
New Hughes Electronics, including three directors who are also independent
directors of General Motors (one of whom is also a member of the Capital Stock
Committee of the GM Board), three directors who are executive officers of
General Motors and two directors who will be executive officers of Hughes
Telecom.
Set forth below are the names, ages and positions with New Hughes Electronics
upon the consummation of the Hughes Transactions of the persons expected to be
directors and executive officers of New Hughes Electronics immediately after
such consummation.
DIRECTORS
NAME AGE POSITION
---- --- --------
C. Michael Armstrong 59 Chairman of the Board
Charles T. Fisher, III 67 Director
J. Michael Losh 51 Director
Harry J. Pearce 55 Director
Eckhard Pfeiffer 56 Director
John F. Smith, Jr. 59 Director
Michael T. Smith 54 Director
Thomas H. Wyman 67 Director
EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
C. Michael Armstrong 59 Chief Executive Officer
Michael T. Smith 54 Vice Chairman
Steven D. Dorfman 62 Executive Vice President
Roxanne S. Austin 36 Senior Vice President and
Chief Financial Officer
Gareth C. C. Chang 54 Senior Vice President
Jack A. Shaw 58 Senior Vice President
Marcy Tiffany 48 Vice President and
General Counsel
Ted G. Westerman 61 Senior Vice President
Set forth below are the persons expected to have primary responsibility for
the business segments of New Hughes Electronics after the consummation of the
Hughes Transactions.
NAME AGE BUSINESS SEGMENT
---- --- ----------------
Steven D. Dorfman 62 Satellite Manufacturing
Jack A. Shaw 58 Network Systems
Eddy W. Hartenstein 46 Direct-To-Home Broadcast
Frederick C. Landman 49 Satellite Services
Kenneth J. McNamera 51 Hughes Avicom
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
196
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
RAYTHEON SELECTED COMBINED HISTORICAL
AND PRO FORMA FINANCIAL DATA
The following Raytheon selected combined historical financial data have been
derived from the financial statements of Raytheon. The unaudited pro forma
combined condensed financial statements of New Raytheon have been derived from
the historical consolidated financial statements of Raytheon and the historical
combined financial statements of Texas Instruments Defense and Hughes Defense,
and give effect to the Raytheon Merger and the Texas Instruments Defense
Acquisition using the purchase method of accounting as well as consistent
application of Raytheon accounting practices. The data should be read in
conjunction with Raytheon's Consolidated Financial Statements (including the
notes thereto) which are incorporated into this document by reference. The
consolidated historical financial data as of and for the years ended December
31, 1996, 1995, 1994, 1993 and 1992 have been derived from the consolidated
financial statements of Raytheon audited by Coopers & Lybrand L.L.P.,
independent public accountants. The Raytheon consolidated historical financial
data as of and for the six-month periods ended June 29, 1997 and June 30, 1996
have been derived from the unaudited financial statements of Raytheon for such
periods included in Raytheon's Form 10-Q dated August 13, 1997, which is
incorporated into this document by reference. In the opinion of Raytheon
management, the unaudited consolidated historical financial statements reflect
all adjustments (consisting of only normal recurring items) that are necessary
for fair presentation of financial position and results of operations for such
periods. The Raytheon unaudited summary pro forma operating results for the six
months ended June 29, 1997 and for the year ended December 31, 1996 give effect
to the Hughes Transactions, the Raytheon Merger and the Texas Instruments
Defense Acquisition as if they had occurred at the beginning of each respective
period. The Raytheon unaudited summary pro forma balance sheet data as of June
29, 1997 give effect to the Hughes Transactions, the Raytheon Merger and the
Texas Instruments Defense Acquisition as if they had occurred at that date.
Operating results for the six-month periods ended June 29, 1997 and June 30,
1996 are not necessarily indicative of the results that may be expected for the
entire year. Pro forma data are not necessarily indicative of future financial
position or operating results.
FOR SIX MONTHS ENDED FOR THE YEARS ENDED
----------------------------- --------------------------------------------------------------------
PRO FORMA
JUNE 29 JUNE 29 JUNE 30 PRO FORMA
1997(D) 1997 1996 1996(D) 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- --------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS:
Net Sales............... $10,461 $ 6,223.9 $ 5,914.4 $20,514 $12,330.5 $11,804.2 $10,097.7 $9,334.1 $9,121.7
Costs and Expenses...... 9,736 5,631.7 5,318.5 19,114(a) 11,247.0(a) 10,612.5(b) 9,197.8(c) 8,286.8 8,165.7
Income before Taxes..... 725 592.2 595.9 1,400(a) 1,083.5(a) 1,191.7(b) 899.9(c) 1,047.3 956.0
Income Taxes............ 277 199.3 200.0 499 322.3 399.2 303.0 354.3 320.9
Net Income.............. 448 392.9 395.9 901(a) 761.2(a) 792.5(b) 596.9(c) 693.0 635.1
Earnings per common
share.................. 1.32 1.66 1.66 2.65(a) 3.21(a) 3.25(b) 2.26(c) 2.56 2.36
Dividend declared per
common share........... 0.40 0.40 0.80 0.75 0.738 0.70 0.663
BALANCE SHEET DATA:
Cash and marketable
securities............. $ 181 $ 181.3 $ 212.3 $ 138.8 $ 210.3 $ 202.2 $ 190.2 $ 88.8
Current assets.......... 9,444 6,177.5 6,147.5 5,603.9 5,275.2 4,985.5 4,609.2 3,775.8
Total assets............ 28,281 11,843.1 11,620.9 11,126.1 9,840.9 7,395.4 7,257.7 6,015.1
Current Liabilities..... 10,006 5,136.1 5,427.0 4,691.8 3,690.4 3,283.1 2,800.3 2,136.8
Long-term debt.......... 6,650 1,496.6 1,496.1 1,500.5 1,487.7 24.5 24.4 25.3
Stockholders' Equity.... 9,943 4,877.5 4,337.5 4,598.0 4,292.0 3,982.2 4,297.9 3,843.2
OTHER DATA:
Depreciation and
amortization........... $ 193.0 $ 175.6 $ 368.9 $ 371.4 $ 304.2 $ 296.4 $ 302.1
Capital Expenditures.... $ 201.4 $ 203.9 $ 406.0 $ 328.6 $ 267.4 $ 256.1 $ 307.7
- ------------
(a) Includes special charge of $34.0 million pre-tax, $22.1 million after-tax,
or $.09 per share
(b) Includes one-time gain of $8.0 million pre-tax, $5.2 million after-tax, or
$.02 per share.
(c) Includes restructuring charge of $249.8 million pre-tax, $162.3 million
after-tax, or $.61 per share.
(d) Pro forma balance sheet as of December 31, 1996 and pro forma other data
have not been determined.
197
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
OVERVIEW OF RAYTHEON BUSINESS
For additional information regarding the business of Raytheon, see Raytheon
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Raytheon 1996 Form 10-K, which is incorporated into
this document by reference.
GENERAL
Raytheon is an international high technology company which operates in the
following principal businesses: defense and commercial electronics, engineering
and construction and aircraft. Historically, Raytheon's principal business has
been the design, manufacture and servicing of advanced electronic devices,
equipment and systems for government and commercial use. Raytheon is a major
defense contractor in the United States and internationally.
ELECTRONICS SEGMENT
DEFENSE ELECTRONICS
Raytheon's defense electronics business consists of Raytheon Electronics
Systems and Raytheon
E-Systems. Raytheon Electronic Systems is a major provider of ground-based air
defense systems, air intercept missiles, ground-based and shipboard radars,
military communications systems and naval combat control, sonar and minehunting
systems. Raytheon E-Systems is a leader in defense systems integration and
provides reconnaissance and surveillance, command, control, communications and
intelligence systems, mass data collection, interpretation and dissemination,
specialized aircraft modification services and shipboard and airborne
countermeasures systems to a wide variety of customers worldwide. In addition
to defense electronics systems, Raytheon has been successful in the conversion
of certain defense electronics technologies to commercial applications such as
air traffic control, environmental monitoring and communications.
On July 11, 1997 Raytheon consummated the acquisition of Texas Instruments
Defense. Since that date, Texas Instruments Defense has been conducted through
Raytheon TI Systems, a wholly owned subsidiary of Raytheon ("RTIS"). RTIS is a
premier supplier of advanced defense systems, including tactical missiles,
precision-guided weapons, radar, night vision systems and electronic warfare
systems.
COMMERCIAL ELECTRONICS
Raytheon's commercial electronics business consists of Raytheon Marine
Company, Raytheon Microelectronics, Raytheon Semiconductor, Seiscor
Technologies, Inc. and Switchcraft, Inc. These entities produce, among other
things, marine radars and other marine electronics, transmit/receive modules
for satellite communications projects, silicon semiconductor components,
telephone transmission, switching and connection equipment and other electronic
components for a wide range of applications.
ENGINEERING AND CONSTRUCTION SEGMENT
Raytheon Engineers & Constructors ("RE&C") is one of the largest engineering,
construction and operation and maintenance firms in the world, supporting
customers in thirteen industries. RE&C is engaged in the design, construction
and maintenance of facilities and plants operated by a range of customers,
including independent power producers, utilities, petroleum companies, pulp and
paper companies, industrial concerns and governments. Raytheon Service Company,
a unit of RE&C, provides operations, maintenance and technical services for
many U.S. defense systems and agencies. Another unit of RE&C designs and
manufactures a wide range of equipment used for infrastructure building and
repair, including aggregate producing equipment, asphalt paving equipment,
mixing plants and soil remediation systems.
198
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
AIRCRAFT SEGMENT
Raytheon's Aircraft segment offers one of the broadest product lines in the
general aviation market. Raytheon Aircraft manufactures, markets and supports
piston-powered aircraft, jet props and light and medium jets for the world's
commercial, regional airline and military aircraft markets. Raytheon Aircraft
is the prime contractor for the U.S. Air Force/U.S. Navy Joint Primary Aircraft
Training System ("JPATS").
APPLIANCES SEGMENT
On September 10, 1997, Raytheon consummated the sale of its home appliance,
heating and air conditioning and commercial cooking businesses to Goodman
Manufacturing Company, L.P. for an aggregate amount of $550 million in cash.
Raytheon believes that the 1996 sales, operating income, net income and total
assets of the businesses sold were not material and does not expect the sale to
have a significant effect on results of operations. In the appliances segment,
Raytheon is retaining its commercial laundry and electronic controls
businesses, but is continuing its strategic review of these remaining
businesses.
See "--Recent Developments--Raytheon--Sale of Portions of the Appliances
Business" above.
199
CHAPTER 5: NEW RAYTHEON
CHAPTER 5
NEW RAYTHEON
PAGE
----
NEW RAYTHEON UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS....................................................... 201
OVERVIEW OF NEW RAYTHEON BUSINESS................................. 208
NEW RAYTHEON MANAGEMENT........................................... 210
Directors and Executive Officers................................. 210
Director and Executive Compensation.............................. 213
Stock Ownership of Directors, Executive Officers and Five Percent
Stockholders.................................................... 213
Change of Control Employment Agreements.......................... 213
NEW DEBT OF HUGHES DEFENSE TO BE ASSUMED BY NEW RAYTHEON.......... 214
200
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed financial statements of New
Raytheon have been derived from the historical consolidated financial
statements of Raytheon and the historical combined financial statements of
Texas Instruments Defense and Hughes Defense, and give effect to the Hughes
Transactions, the Raytheon Merger and the Texas Instruments Defense Acquisition
using the purchase method of accounting as well as consistent application of
Raytheon accounting practices. The unaudited pro forma combined condensed
statements of income for the six months ended June 29, 1997 and for the year
ended December 31, 1996 have been prepared as if the Hughes Transactions, the
Raytheon Merger and the Texas Instruments Defense Acquisition had occurred at
the beginning of each respective period. The unaudited pro forma combined
condensed balance sheet has been prepared as if the Hughes Transactions, the
Raytheon Merger and the Texas Instruments Defense Acquisition occurred on June
29, 1997. The purchase price has been allocated to the assets and liabilities
based upon preliminary estimates of their respective fair values and the pro
forma adjustments do not give effect to any synergies.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with Raytheon's Consolidated Financial Statements
(including the notes thereto) included in the Raytheon 1996 Form 10-K, which is
incorporated into this document by reference, Hughes Defense's Combined
Financial Statements (including the notes thereto) included in Appendix C to
this document and the Defense Business of Texas Instruments' Financial
Statements (including the notes thereto) included in Raytheon's Form 8-K dated
March 14, 1997, which is incorporated into this document by reference, each as
of and for the period ended December 31, 1996, and the unaudited consolidated
financial statements (including the notes thereto) of Raytheon included in
Raytheon's Form 10-Q dated August 13, 1997, which is incorporated into this
document by reference, the unaudited combined financial statements of Hughes
Defense (including the notes thereto) included in Appendix C to this document
and the unaudited financial statements of the Defense Business of Texas
Instruments (including the notes thereto) included in Raytheon's Form 8-K dated
October 7, 1997, which is incorporated into this document by reference, each as
of and for the six-month period ended June 30, 1997 or June 29, 1997, as
applicable.
The pro forma combined condensed balance sheet is not necessarily indicative
of the financial position of Raytheon that would have been attained had the
Hughes Transactions, the Raytheon Merger and the Texas Instruments Defense
Acquisition been consummated on June 29, 1997. The pro forma combined condensed
statements of income are not necessarily indicative of the results of
operations of New Raytheon that would have been attained had the Hughes
Transactions, the Raytheon Merger and the Texas Instruments Defense Acquisition
been consummated on January 1, 1996 and 1997, nor are they necessarily
indicative of future operating results.
201
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL HUGHES
HISTORICAL HISTORICAL PRO FORMA PRO FORMA HUGHES DEFENSE PRO FORMA PRO FORMA
RAYTHEON TI DEFENSE ADJUSTMENTS COMBINED DEFENSE RECLASSES ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ---------- --------- ----------- ---------
Net sales............... $6,224 $824 $7,048 $3,413 $10,461
------ ---- ---- ------ ------ ---- ---- -------
Cost of sales........... 4,791 638 $ (4)(2c) 5,444 2,804 $ 17 $(12)(3c) 8,284
(6)(2d) (48)(3d)
35 (2g) 93 (3g)
(10)(2e) (14)(3e)
Amortization of push-
down goodwill.......... 50 (50)(3c) --
Administration and
selling expenses....... 542 55 597 188 (8) 777
Depreciation and
amortization........... 76 (76) --
Research and development
expenses............... 170 44 214 83 297
------ ---- ---- ------ ------ ---- ---- -------
Operating income....... 721 87 (15) 793 295 (16) 31 1,103
Interest expense........ 143 143 50 (50)(3i) 143
Interest income......... (15) (15) (15)
Acquisition interest
expense................ 110 (2f) 110 150 (3f) 260
Other (Income)/expense.. 1 2 3 (13) (10)
------ ---- ---- ------ ------ ---- ---- -------
Income before tax...... 592 85 (125) 552 258 (16) (69) 725
Federal and foreign
income taxes........... 199 32 (44)(2h) 187 119 (16) (13)(3h) 277
------ ---- ---- ------ ------ ---- ---- -------
Net income............. $ 393 $ 53 $(81) $ 365 $ 139 -- $(56) $ 448
====== ==== ==== ====== ====== ==== ==== =======
Earnings per common
shares
Outstanding shares..... $ 1.66 $ 1.55 $ 1.32
Fully diluted.......... $ 1.64 $ 1.53 $ 1.31
Average common shares
Outstanding............ 236 236 103 339
Fully diluted.......... 239 239 103 342
The Accompanying Notes are an Integral Part of the
Unaudited Pro Forma Combined Condensed Financial Statements.
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CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL HUGHES
HISTORICAL HISTORICAL PRO FORMA PRO FORMA HUGHES DEFENSE PRO FORMA PRO FORMA
RAYTHEON TI DEFENSE ADJUSTMENTS COMBINED DEFENSE RECLASSES ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ---------- --------- ----------- ---------
Net sales............... $12,331 $1,800 $14,131 $6,383 $20,514
------- ------ ----- ------- ------ ----- ----- -------
Cost of sales........... 9,755 1,415 $ (6)(2c) 11,169 5,211 $ 5 $ (18)(3c) 16,430
(12)(2d) (95)(3d)
69 (2g) 187 (3g)
(52)(2e) (29)(3e)
Amortization of push-
down goodwill.......... 101 (101)(3c) --
Administration and
selling expenses....... 1,021 129 1,150 322 (21) 1,451
Depreciation and
amortization........... 146 (146) --
Research and development
expenses............... 323 78 401 192 593
Special charges......... 34 34 34
------- ------ ----- ------- ------ ----- ----- -------
Operating income....... 1,198 178 1 1,377 603 (30) 56 2,006
Interest expense........ 256 256 92 (92)(3i) 256
Interest income......... (102) (102) (102)
Acquisition interest
expense................ 198 (2f) 198 300 (3f) 498
Other (Income)/expense.. (40) 3 (37) (9) (46)
------- ------ ----- ------- ------ ----- ----- -------
Income before tax...... 1,084 175 (197) 1,062 520 (30) (152) 1,400
Federal and foreign
income taxes........... 322 66 (69)(2h) 319 239 (30) (29)(3h) 499
------- ------ ----- ------- ------ ----- ----- -------
Net income............. $ 762 $ 109 $(128) $ 743 $ 281 -- $(123) $ 901
======= ====== ===== ======= ====== ===== ===== =======
Earnings per common
share
Outstanding shares..... $ 3.21 $ 3.14 $ 2.65
Fully diluted.......... $ 3.16 $ 3.08 $ 2.62
Average common shares
Outstanding............ 237 237 103 340
Fully Diluted.......... 241 241 103 344
The accompanying notes are an integral part of the
Unaudited Pro Forma Combined Condensed Financial Statements.
203
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 29, 1997
(IN MILLIONS)
HISTORICAL
HISTORICAL HISTORICAL RECLASSI- PRO FORMA PRO FORMA HUGHES PRO FORMA PRO FORMA
RAYTHEON TI DEFENSE FICATIONS ADJUSTMENTS COMBINED DEFENSE ADJUSTMENTS COMBINED
---------- ---------- --------- ----------- --------- ---------- ----------- ---------
ASSETS
Current assets
Cash and marketable
securities............ $ 181 $ 181 $ 82 $ (82)(3b) $ 181
Accounts receivable.... 812 $237 $(207)(2i) 842 683 1,525
Contracts in process... 2,994 395 (2i) $ (85)(2b,d) 3,304 1,672 (190)(3b) 4,786
Inventories............ 1,709 218 (188)(2i) 1,739 427 2,166
Other.................. 481 2 483 303 786
------- ---- ----- ------ ------- ------ ------- -------
Total current assets.... 6,177 457 (85) 6,549 3,167 (272) 9,444
Property, plant and
equipment, net........ 1,923 307 2,230 1,146 8 (3b) 3,384
Cost in excess of net
assets acquired....... 3,073 41 (41) (2b) 5,847 2,930 (2,930)(3b) 13,288
2,774 (2b) 7,441 (3b)
Pension asset.......... 1,075 (3b) 1,075
Other assets........... 670 1 66 (2b) 737 139 214 (3b) 1,090
------- ---- ------ ------- ------ ------- -------
Total assets............ $11,843 $806 $2,714 $15,363 $7,382 $ 5,536 $28,281
======= ==== ====== ======= ====== ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and
current portion of
long-term debt........ $ 2,510 $ 2,510 $ 101 $ 2,310 (3a) $ 4,921
Advance payments....... 358 358 388 746
Accounts payable....... 1,258 $211 1,469 271 1,740
Other.................. 1,010 63 $ 78 (2b) 1,151 905 543 (3b) 2,599
------- ---- ------ ------- ------ ------- -------
Total current
liabilities............ 5,136 274 78 5,488 1,665 2,853 10,006
Long-term debt and
capitalized leases.... 1,497 2,990 (2a) 4,487 33 2,130 (3a) 6,650
Other.................. 332 178 510 311 861 (3b) 1,682
Stockholders' equity:
Common stock at par.... 236 236 103 (3a) 339
Additional paid-in-
capital............... 294 294 4,962 (3a) 5,256
Retained earnings...... 4,348 354 (354) 4,348 5,373 (5,373)(3b) 4,348
------- ---- ------ ------- ------ ------- -------
Total stockholders'
equity................. 4,878 354 (354) 4,878 5,373 (308) 9,943
Total liabilities and
stockholders' equity... $11,843 $806 $2,714 $15,363 $7,382 $ 5,536 $28,281
======= ==== ====== ======= ====== ======= =======
The Accompanying Notes are an Integral Part of the Unaudited Pro Forma Combined
Condensed Financial Statements.
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CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma combined condensed financial statements of New
Raytheon have been derived from the historical consolidated financial
statements of Raytheon and the historical combined financial statements of
Texas Instruments Defense and Hughes Defense, and give effect to the Hughes
Transactions, the Raytheon Merger and the Texas Instruments Defense Acquisition
using the purchase method of accounting as well as consistent application of
Raytheon accounting practices. The unaudited pro forma combined condensed
statements of income for the six months ended June 29, 1997 and for the year
ended December 31, 1996 have been prepared as if the Hughes Transactions, the
Raytheon Merger and the Texas Instruments Defense Acquisition had occurred at
the beginning of each respective period. The unaudited pro forma combined
condensed balance sheet has been prepared as if the Hughes Transactions, the
Raytheon Merger and the Texas Instruments Defense Acquisition occurred on June
29, 1997. The purchase price has been allocated to the assets and liabilities
based upon preliminary estimates of their respective fair values and the pro
forma adjustment do not give effect to any synergies.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with Raytheon's Consolidated Financial Statements
(including the notes thereto) included in the Raytheon 1996 Form 10-K, which is
incorporated into this document by reference, Hughes Defense's Combined
Financial Statements (including the notes thereto) included in Appendix C to
this document and the Defense Business of Texas Instruments' Financial
Statements (including the notes thereto) included in Raytheon's Form 8-K dated
May 23, 1997 which is incorporated into this document by reference, each as of
and for the period ended December 31, 1996, and the unaudited consolidated
financial statements (including the notes thereto) of Raytheon included in
Raytheon's Form 10-Q dated August 13, 1997 which is incorporated into this
document by reference, the unaudited combined financial statements of Hughes
Defense (including the notes thereto) included in Appendix C to this document
and the unaudited financial statements of the Defense Business of Texas
Instruments (including the notes thereto) included in Raytheon's Form 8-K dated
October 7, 1997, which is incorporated into this document by reference, each as
of and for the six-month period ended June 30, 1997 or June 29, 1997, as
applicable.
The pro forma combined condensed balance sheet is not necessarily indicative
of the financial position of Raytheon that would have been attained had the
Hughes Transactions, the Raytheon Merger and the Texas Instruments Defense
Acquisition been consummated on June 29, 1997. The pro forma combined condensed
statements of income are not necessarily indicative of the results of
operations of New Raytheon that would have been attained had the Hughes
Transactions, the Raytheon Merger and the Texas Instruments Defense Acquisition
been consummated on January 1, 1996 and 1997, nor are they necessarily
indicative of any future operating results.
Certain reclassifications have been made to the historical financial
statements of Ratheon, Texas Instruments Defense and Hughes Defense to conform
to the pro forma combined condensed financial statement presentation on a
consistent basis.
2. Pro Forma Adjustments--Texas Instruments Defense
The following adjustments give pro forma effect to the Texas Instruments
Defense Acquisition (in millions):
(a) To record the exchange consideration at closing:
Consideration....................................................... $2,950
======
205
CHAPTER 5: NEW RAYTHEON
(Assumed financing of $2,990 fixed rate medium- and long-term
borrowings at an aggregate interest rate of 7.05% including acquisition
costs of $40)
(b) To adjust the assets and liabilities to their estimated fair values:
Net assets of Texas Instruments Defense at June 29, 1997.......... $ 354
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................ 2,774
Acquisition costs................................................. (40)
Elimination of Texas Instruments Defense goodwill................. (41)
------
$2,950
======
(c) Adjustment to eliminate the amortization of intangible assets of Texas
Instruments Defense which would not have been incurred if the Texas
Instruments Defense Acquisition had occurred on January 1, 1996.
(d) Adjustment to reflect the effect on 1996 and 1997 results relating to a
net reduction of accumulated contract costs as an allowance for
Raytheon's normal profit on its efforts to complete such contracts, and
other contract valuation adjustments.
(e) Elimination of $32 of non-recurring employee related costs and $20 of
non-recurring corporate allocations from the parent of Texas
Instruments Defense as a result of the Texas Instruments Defense
Acquisition for the year ended December 31, 1996 and $10 of non-
recurring corporate allocations for the six months ending June 29,
1997.
(f) Adjustments which represent additional estimated interest expense
resulting from the use of borrowings to finance the Texas Instruments
Defense Acquisition and incremental interest on Raytheon's pre-Texas
Instruments Defense Acquisition variable rate borrowings to reflect the
change in credit rating as a result of the Texas Instruments Defense
Acquisition.
(g) The amortization of excess of costs over acquired net assets over an
estimated life of 40 years. Such amortization expense is subject to
possible adjustment resulting from the completion of the valuation
analyses. Raytheon expects that any subsequent adjustment would not
materially affect the combined pro forma results.
(h) The estimated tax effect on the applicable pro forma adjustments.
(i) Reclassifications made to conform the Texas Instruments Defense
historical financial statements to the unaudited pro forma combined
condensed financial statement presentation.
3. Pro Forma Adjustments--Hughes Defense
The following adjustments give pro forma effect to the Raytheon Merger (in
millions):
(a) To record the exchange consideration at closing:
Consideration ($9,500 less acquired debt of $120)................... $9,380
======
(Assumed financing is based on the following assumptions:
Equity--102,634 thousand shares at assumed market value of $49.35
totals $5,065. $49.35 represents the mid-point of the market price
collar mechanism. The use of other market price assumptions within
the range would not have a significant effect on pro forma results.
Debt--$4,435 less $120 of debt assumed plus acquisition costs of
$125 totals $4,440 to be financed with a combination of variable
rate short-term borrowings of $2,310 and fixed rate medium- and
long-term borrowings of $2,130 at an average interest rate of 6.37%)
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CHAPTER 5: NEW RAYTHEON
(b) To adjust the assets and liabilities to their estimated fair values:
Net assets of Hughes Defense at June 29, 1997.................... $ 5,373
Additional assets to be recorded in the Raytheon Merger.......... 56
Additional liabilities to be recorded in the Raytheon Merger..... (96)
Cash not included in the Raytheon Merger......................... (82)
Contracts in process valuation adjustments....................... (190)
Accrual for future lease cost in excess of fair market value..... (264)
Provision for the estimated exit costs of integrating acquired
operations...................................................... (495)
To include pension assets and reflect fair market value less the
projected benefit obligation.................................... 892
To include the liability for post-retirement benefits other than
pensions........................................................ (366)
Deferred tax benefits............................................ 166
Costs in excess of net assets of Hughes Defense.................. 7,441
Raytheon Merger costs............................................ (125)
Elimination of Hughes Defense goodwill........................... (2,930)
-------
$ 9,380
=======
(c) Adjustment to eliminate the amortization of intangible assets of Hughes
Defense which would not have been incurred if the Raytheon Merger had
occurred on January 1, 1996.
(d) Adjustment to reflect the effect on 1996 and 1997 results relating to a
net reduction of accumulated contract costs as an allowance for
Raytheon's normal profit on its efforts to complete such contracts.
(e) Elimination of $29 of non-recurring corporate allocation from the
parent of Hughes Defense as a result of the Raytheon Merger for the
year ended December 31, 1996 and $14 for the six months ended June 29,
1997.
(f) Adjustments which represent additional estimated interest expense
resulting from the use of borrowings to finance the Raytheon Merger and
incremental interest on Raytheon's pre-Raytheon Merger variable rate
borrowings to reflect the change in credit rating as a result of the
Raytheon Merger.
(g) The amortization of excess of costs over acquired net assets over an
estimated life of 40 years. Such amortization expense is subject to
possible adjustment resulting from the completion of the valuation
analyses. Raytheon expects that any subsequent adjustment would not
materially affect the combined pro forma results.
(h) The estimated tax effect on the applicable pro forma adjustments.
(i) Elimination of Hughes Defense interest expense.
(j) The consideration to be paid is subject to adjustment based on the
actual net assets at the time of the closing and the amount of debt and
equity to be issued is subject to adjustment based on the price of
Raytheon Common Stock at the closing of the Raytheon Merger.
207
CHAPTER 5: NEW RAYTHEON
OVERVIEW OF NEW RAYTHEON BUSINESS
In early January 1997, Raytheon announced its agreements to acquire Texas
Instruments Defense (now Raytheon TI Systems) and to merge with Hughes Defense,
thereby creating a unique technology company and a world leader in what it
considers to be the most appealing segment of the defense business--defense
electronics. Representing the best-of-the-best of the three companies in terms
of people, processes and technologies, this dynamic new combination will
enhance Raytheon's global competitiveness by fully integrating operations for
greater efficiency and effectiveness.
Having completed the acquisition of Texas Instruments Defense on July 11,
1997, the strategic combination of Raytheon and Hughes Defense offers an even
broader range of products and services, outstanding returns to New Raytheon
stockholders, and a more secure and promising future for its people. The
compelling benefits of the powerful Raytheon, Hughes Defense and Texas
Instruments combination include:
. critical mass of programs, skills and investment to compete effectively on
cost and performance against top-tier defense companies such as Lockheed
Martin and the newly created Boeing/McDonnell Douglas. This same critical
mass also provides the technological discriminators and capability to
support fully those same primes in areas where teaming is more appropriate;
. a position of strength in core market areas such as air- and ground-based
radar systems, air defense systems, air traffic control systems, airborne
and space surveillance systems, communication equipment, information
systems, missiles, night vision systems, surface and undersea naval
systems, simulation, technical services and training;
. integration and consolidation of the substantial research and development
capabilities of the combined companies, long renowned for their innovative
R&D; and
. annual cost savings and a stronger cash flow through the creation of
"centers of excellence" for design and manufacturing and consolidation of
operations.
Shortly after the acquisition of Texas Instruments Defense and the Raytheon
Merger were announced in January 1997, planning for the new company began with
the formation of the Management Transition Committee, which includes personnel
from Raytheon and Hughes Defense. Cross-company teams were established in areas
such as engineering, facilities, finance, human resources, material
procurement, quality and others. Throughout the process, the emphasis has been
on achieving efficiencies and refining business operations rapidly while
expanding global market presence. In order to accomplish this, the teams have
formulated a strategy to integrate and consolidate New Raytheon's businesses,
serve its customers and extend its defense technologies and capabilities into
related commercial areas. This strategy is currently being used to guide the
integration of the operations of Texas Instruments Defense into Raytheon. The
end result will be a world-class defense electronics and systems integration
company with strong operational management.
The defense operations of New Raytheon will be organized along major product
lines, emphasizing weapons systems, sensor systems, information systems,
communications systems, training and technical services. Although the defense
operations of New Raytheon will be primarily focused on its core capabilities
in defense, it will continue to pursue and expand business opportunities in
related and growing non-defense areas such as air traffic control, information
technology, technical services, telecommunications, training and transportation
systems. Furthermore, New Raytheon will be a multi-industry, global enterprise
with established commercial businesses in aircraft, engineering and
construction and commercial electronics.
After the Raytheon Merger is completed, the business of New Raytheon will
consist of:
. the combined operations of the Raytheon defense business, Hughes Defense
and Texas Instruments Defense;
. the Commercial Electronics business (See "Business of Raytheon--Electronics
Segment--Commercial Electronics" in Chapter 4);
208
CHAPTER 5: NEW RAYTHEON
. the Engineering and Construction business (See "Business of Raytheon--
Engineering and Construction Segment" in Chapter 4);
. the Aircraft business (See "Business of Raytheon--Aircraft Segement" in
Chapter 4); and
. the Commercial Laundry and Electronic Controls business (See "Business of
Raytheon--Appliances Segment" in Chapter 4).
For additional information regarding the business of Raytheon, see Raytheon
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Raytheon 1996 Form 10-K, which is incorporated into
this document by reference.
209
CHAPTER 5: NEW RAYTHEON
NEW RAYTHEON MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
The Hughes Defense Board currently has three members. The Raytheon Merger
Agreement provides that, effective as of the Raytheon Merger Effective Time,
the New Raytheon Board will be constituted as set forth below. A majority of
such persons will not be employees of New Raytheon.
NAME AGE
------------------------------------- ---
C. Michael Armstrong................. 59
Ferdinand Colloredo-Mansfeld......... 57
Steven D. Dorfman.................... 62
Theodore L. Eliot, Jr................ 69
Thomas E. Everhart................... 65
John R. Galvin....................... 68
Barbara B. Hauptfuhrer............... 69
Richard D. Hill...................... 78
L. Dennis Kozlowski.................. 57
James N. Land, Jr.................... 68
A. Lowell Lawson..................... 59
Thomas L. Phillips................... 73
Dennis J. Picard..................... 65
Warren B. Rudman..................... 67
Alfred M. Zeien...................... 67
The New Raytheon Board will be divided into three classes serving staggered
terms. Directors in each class will be elected to serve for three-year terms
and until their successors are elected and qualified. Each year, the directors
of one class will stand for election as their terms of office expire.
Set forth below is a description of the backgrounds of the persons expected
to be directors of New Raytheon.
C. Michael Armstrong. Chairman and Chief Executive Officer, Hughes
Electronics Corporation, since March 1992. Prior thereto, Senior Vice
President, International Business Machines Corporation (1989-1992).
Ferdinand Colloredo-Mansfeld. Current director of Raytheon. Chairman and
Chief Executive Officer, Cabot Partners, since October 1990. Prior thereto,
Chairman and Chief Executive Officer, Cabot, Cabot & Forbes Realty Advisers,
Inc. (predecessor of Cabot Partners) and Chairman, Chief Executive Officer and
President of Cabot, Cabot and Forbes from 1986. Principal Business: Real Estate
Investment and Management. Director: Shawmut National Corporation; Data General
Corporation.
Steven D. Dorfman. Executive Vice President of Hughes Electronics; Chairman
of the Hughes Telecommunications and Space Company; Member of the Hughes
Electronics Office of the Chairman. Prior thereto, President and Chief
Executive Officer of Hughes Space and Communications Company. Director:
DIRECTV; Hughes Network Systems; American Mobile Satellite Corporation and
Galaxy Latin America.
Theodore L. Eliot, Jr. Current director of Raytheon. Dean Emeritus of the
Fletcher School Law and Diplomacy, Tufts University; former U.S. Ambassador.
Director: Neurobiological Technologies, Inc. and Fiberstars, Inc.
Thomas E. Everhart. President and Professor of Electrical Engineering and
Applied Physics, California Institute of Technology, Pasadena. Prior thereto,
Chancellor of University of Illinois, Urbana-Champaign. Director: General
Motors Corporation; Hewlett-Packard Corporation; Saint-Gobain Corporation;
Reveo, Inc.; Corporation for National Research Initiatives; Community
Television of Southern California (KCET).
John R. Galvin. Current director of Raytheon. Dean of the Fletcher School of
Law and Diplomacy, Tufts University. General Galvin retired from the U.S. Army
in 1992 after a 38-year career which included positions
210
CHAPTER 5: NEW RAYTHEON
as NATO Supreme Allied Commander Europe and Commander-in-Chief, U.S. European
Command. From 1992 to 1994, General Galvin served as the Olin Distinguished
Professor of National Security at the U.S. Military Academy at West Point. In
1994 and 1995 he was a visiting professor at the Mershon Center, The Ohio State
University. Director: USLife Corporation and Director or Trustee the Seligman
Group of Investment Companies. Trustee: Institute for Defense Analyses.
Barbara B. Hauptfuhrer. Current director of Raytheon. Principal Business:
Corporate Director. Director: The Vanguard Group of Investment Companies and
each of the mutual funds in the Vanguard Group; The Great Atlantic and Pacific
Tea Co., Inc.; Knight-Ridder, Inc.; Massachusetts Mutual Life Insurance
Company; Alco Standard Corporation.
Richard D. Hill. Current director of Raytheon. Retired Chairman, Bank of
Boston Corporation and The First National Bank of Boston. Principal Business:
Corporate Director.
L. Dennis Kozlowski. Current director of Raytheon. Chairman of the Board and
Chief Executive Officer of Tyco International Ltd. since 1992. Prior thereto
Mr. Kozlowski served as President of Tyco from 1989. Principal business: Fire
Protection Systems. Director: Tyco International Ltd.; Dynatech Corporation;
Thiokol Corporation and Applied Power, Inc.
James N. Land, Jr. Current director of Raytheon. Principal Business:
Corporate Financial Advisor. Director: E.W. Blanch Holdings, Inc.
A. Lowell Lawson. Current director of Raytheon. Executive Vice President of
the Company since April 1995 and Chairman of the Board and Chief Executive
Officer of E-Systems, Inc. since January 1994. Prior thereto Mr. Lawson served
as President of E-Systems from April 1989 and Executive Vice President of E-
Systems from April 1987.
Thomas L. Phillips. Current director of Raytheon. Retired Chairman of the
Board and Chief Executive Officer, Raytheon Company. Director: John Hancock
Mutual Life Insurance Company; Knight-Ridder, Inc.; Digital Equipment
Corporation; Systems Research and Applications. Trustee: State Street Research
Funds; MetLife-State Street Funds.
Dennis J. Picard. Chairman of the Board and Chief Executive Officer of
Raytheon since March 1, 1991. Prior thereto, President from 1989 and Senior
Vice President, General Manager of the Missile Systems Division of Raytheon
from 1983. Director: State Street Boston Corporation.
Warren B. Rudman. Current director of Raytheon. Partner, law firm of Paul,
Weiss, Rifkind, Wharton and Garrison since January 1992. Principal Business:
Law. Prior thereto, United States Senator from 1980 through January 1992.
Director: Chubb Corporation; several mutual funds managed by Dreyfus
Corporation.
Alfred M. Zeien. Current director of Raytheon. Chairman of the Board and
Chief Executive Officer of The Gillette Company since 1991. Prior thereto,
President of Gillette from 1991 and as Vice Chairman, Gillette
International/Diversified Operations from 1988. Principal Business: Consumer
Goods and Services. Director: Bank of Boston; The Gillette Company; Polaroid
Corporation; Massachusetts Mutual Life Insurance Company; Repligen Corporation.
COMMITTEES
Pursuant to the Raytheon Merger Agreement, from and after the Raytheon Merger
Effective Time, the following three new committees will be created: (1) the
Board Transition Committee; (2) the Management Transition Committee; and (3)
the Defense Business Executive Council. Set forth below is a brief description
of the duties and composition of these new committees as well as the
composition of the Audit Committee and the Nominating Committee of New
Raytheon.
Board Transition Committee. The Board Transition Committee will be
responsible for resolving issues relating to the integration of the businesses,
facilities, functions and employees of Hughes Defense, Raytheon and Texas
Instruments Defense at the New Raytheon Board level. The Board Transition
Committee will be comprised of two directors formerly affiliated with Raytheon
and two directors formerly affiliated with Hughes Defense (Messrs. Dorfman and
Armstrong) and will be chaired by Mr. Armstrong.
211
Other Board Committees. As of the Raytheon Merger Effective Time, the Audit
Committee will be comprised of three directors formerly affiliated with
Raytheon and one director formerly affiliated with Hughes Defense (Mr. Dorfman)
and the Nominating Committee will be comprised of five directors formerly
affiliated with Raytheon and one director formerly affiliated with Hughes
Defense (Mr. Everhart).
Management Committees. The Management Transition Committee, which will be
comprised of three management personnel formerly affiliated with Raytheon and
three management personnel formerly affiliated with Hughes Defense, will be
responsible for supervising and implementing the integration of the businesses,
facilities, functions and employees of Hughes Defense, Raytheon and Texas
Instruments Defense. The Defense Business Executive Council, which will be
comprised of four management personnel formerly affiliated with Raytheon and
four management personnel formerly affiliated with Hughes Defense, will
supervise and manage the combined defense businesses of Hughes Defense,
Raytheon and Texas Instruments Defense on an ongoing basis and will serve as a
vehicle for planning, communication and decision making on issues involving
such combined businesses.
The New Raytheon Board may, from time to time, establish other committees to
facilitate the management of New Raytheon or for other purposes it may deem
appropriate.
OFFICERS
The Raytheon Merger Agreement provides that the officers of Raytheon
immediately prior to the Raytheon Merger Effective Time will be the officers of
New Raytheon immediately following the Raytheon Merger Effective Time.
Accordingly, effective as of the Raytheon Merger Effective Time, the executive
officers of New Raytheon are expected to be as set forth below.
NAME AGE POSITIONS
---------------------- --- -------------------------------------------------
Gail P. Anderson...... 55 Vice President--Human Resources
Shay D. Assad......... 47 Vice President--Contracts
Senior Vice President Engineering and Business
Renso L. Caporali..... 64 Development
Vice President and Group Executive--Commercial
Philip W. Cheney...... 61 Electronics
Kenneth H. Colburn.... 46 Vice President--Project and International Finance
Peter R. D'Angelo..... 59 Executive Vice President--Chief Financial Officer
Herbert Deitcher...... 64 Senior Vice President--Treasurer
David S. Dwelley...... 58 Vice President--Strategic Business Development
Vice President--Corporate Controller and Investor
Michele C. Heid....... 43 Relations
Executive Vice President--Law, Corporate
Christoph L. Hoffmann. 53 Administration, and Secretary
Thomas D. Hyde........ 48 Vice President and General Counsel
A. Lowell Lawson...... 59 Executive Vice President and Chairman and Chief
Executive Officer of Raytheon E-Systems, Inc.
Vice President--Corporate Affairs and
Robert S. McWade...... 41 Communications
Charles Q. Miller..... 52 Executive Vice President and Chairman and Chief
Executive Officer of Raytheon Engineers &
Constructors International, Inc.
Dennis J. Picard...... 65 Chairman and Chief Executive Officer
Robert A. Skelly...... 55 Vice President--Assistant to the Executive Office
Robert L. Swam........ 57 Executive Vice President and Group Executive--
Commercial Laundry/Electronic Controls
William H. Swanson.... 49 Executive Vice President and General Manager--
Raytheon Electronic Systems Division
Arthur E. Wegner...... 60 Executive Vice President and Chairman and Chief
Executive Officer of Raytheon Aircraft Company
Executive officers serve at the discretion of the New Raytheon Board.
For a brief description of the backgrounds of the persons expected to be
executive officers of New Raytheon upon the consummation of the Hughes
Transactions and the Raytheon Merger, please refer to the Raytheon 1996 Form
10-K, which is incorporated into this document by reference. See "Where You Can
Find More Information" in Chapter 7.
212
CHAPTER 5: NEW RAYTHEON
DIRECTOR AND EXECUTIVE COMPENSATION
The New Raytheon Board will rely on its Compensation Committee, which will be
composed of non-employee directors, to recommend the form and amount of
compensation to be paid to New Raytheon's executive officers. Raytheon's
current retirement, incentive and stock purchase plans for its directors and
executive officers generally will apply to New Raytheon's directors and
executive officers. These plans are and will continue to be subject to change
from time to time. In addition, the following plans were specifically adopted
pursuant to the Raytheon Merger Agreement and will continue in full force and
effect as plans of New Raytheon following the Raytheon Merger: the Raytheon
Company 1991 Stock Plan and the Raytheon Company 1995 Stock Option Plan. For
information regarding these plans, as well as compensation committee interlocks
and insider participation, please refer to the Raytheon 1996 Form 10-K, which
is incorporated into this document by reference. See "Where You Can Find More
Information" in Chapter 7.
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND FIVE PERCENT STOCKHOLDERS
No director or executive officer is expected to own more than one percent of
the outstanding shares of New Raytheon Capital Stock after giving effect to the
Raytheon Merger. The directors and executive officers of New Raytheon as a
group are expected to beneficially own less than five percent of the
outstanding shares of New Raytheon Capital Stock after giving effect to the
Raytheon Merger. No person is expected to beneficially own more than ten
percent of the outstanding shares of New Raytheon after giving effect to the
Raytheon Merger (based upon publicly available information).
CHANGE OF CONTROL EMPLOYMENT AGREEMENTS
In connection with the Hughes Transactions, Hughes Defense entered into
change in control agreements and retention agreements with 17 of its senior
executives and has entered into retention agreements with 86 of its key
employees (in addition to the senior executives). New Raytheon will assume
Hughes Defense's obligations under these agreements after the Raytheon Merger
Effective Time.
The change of control agreements are effective for three years following the
GM Spin-Off Merger Effective Time. In the event of an involuntary termination
or constructive termination of employment following a change in control (as
defined in the agreements), the agreements provide for cash payments, medical
and life insurance, an increase in pension benefits (for six of the senior
executives), outplacement services, legal fees (if necessary to resolve any
dispute thereunder) and gross up payments if excise taxes are assessed. The
aggregate liability for the benefits provided in all of the change of control
agreements will not exceed $11 million (exclusive of gross up payments, if
any). The retention agreements provide for cash payments, and gross up payments
if excise taxes are assessed, to employees covered by such agreements if still
employed by New Raytheon at the end of the second and third years (in the case
of senior executives) and at the end of the first and second years (in the case
of other key employees) after the GM Spin-Off Merger Effective Time. A pro-rata
portion of such cash payments will be paid if there is an involuntary
termination prior to the benefit payment dates. The aggregate liability for
cash payments under all of the retention agreements will not exceed $60 million
(exclusive of gross up payments, if any). Up to $25 million will be paid if
there is a termination or constructive termination of employment following a
change of control. The Raytheon Merger is a "change of control" for purposes of
the agreements.
Raytheon has entered into Change in Control Severance Agreements with 25
senior executives. These agreements provide the executive with severance pay
and the continuation of certain benefits upon the occurrence of a "Change in
Control" (as defined in the agreements). Specifically, the agreements will
provide a cash payment, continuation of fringe benefits pursuant to all of
Raytheon's welfare, benefit and retirement plans, an increase in pension
benefit, outplacement services, legal fees if necessary to resolve any dispute
thereunder and gross up payments if an excise tax is assessed. None of the
Change in Control Severance Agreements will be triggered as a result of the
consummation of the Raytheon Merger.
213
CHAPTER 5: NEW RAYTHEON
NEW DEBT OF HUGHES DEFENSE TO BE ASSUMED BY NEW RAYTHEON
In preparation for the consummation of the Hughes Transactions, Hughes
Electronics has made arrangements for two revolving credit facilities with a
59-bank syndicate to provide for the new debt to be incurred by Hughes Defense
under the terms of the Raytheon Merger Agreement. As noted elsewhere in this
document, the obligation to repay this indebtedness will remain with New
Raytheon after the Raytheon Merger. These facilities consist of a commitment
for $3 billion due over a period of five years and $2 billion due over a period
of 364 days. With respect to each of its loans obtained under the credit
facilities, Hughes Defense has the option thereunder, in accordance with
specified procedures, to seek competitive bids from among the syndicate of
lenders party to the credit facilities with respect to the interest rate to be
applicable to such loans. If Hughes Defense elects not to seek such competitive
bids, interest on each loan will be based on, at the option of Hughes Defense,
the London interbank market rate for U.S. dollar deposits ("LIBOR") or an
adjusted base rate of the administrative agent tied to its prime rate, CD rate
or federal funds rate. Prior to the Raytheon Merger, the LIBOR rate will vary
based on the ratio of Hughes Defense's total debt to total capitalization and,
upon consummation of the Raytheon Merger, the rate will vary based upon New
Raytheon's credit ratings.
The funds accessible to Hughes Defense pursuant to these revolving credit
facilities will be available after the following principal conditions have been
satisfied: (1) all requisite government authorities have approved or consented
to the Raytheon Merger; (2) GM's common stockholders have consented to the
Hughes Transactions; (3) Raytheon's common stockholders have consented to the
Raytheon Merger; and (4) Hughes Aircraft, which is the subsidiary of Hughes
Defense which principally operates the defense electronics business, has merged
with and into Hughes Defense in preparation for the Hughes Defense Spin-Off (as
part of the Hughes Reorganization). In addition, as a condition to funding
under these facilities, there can be no actual or threatened litigation or
administrative proceedings that, in the judgment of the lenders, might prohibit
or impose burdensome conditions on the Raytheon Merger or the financings. It is
a condition to GM's obligation to consummate the Hughes Transactions that the
proceeds of the new debt permitted to be incurred by Hughes Defense be made
available to Hughes Telecom and, if applicable, General Motors.
The credit agreements which document these facilities contain covenants
typical of such agreements involving an investment grade borrower, including
restrictions on liens and sale and leaseback transactions. In addition, the
agreements contain a single financial covenant that specifies a maximum debt to
total capitalization ratio of 60% at the time of the Raytheon Merger. Absent an
unanticipated material adverse change in Hughes Defense's business, the
financial and other covenants will not restrict Hughes Defense's ability to use
these facilities for the purposes described in this document.
214
CHAPTER 5: NEW RAYTHEON
CHAPTER 6: CAPITAL STOCK
CHAPTER 6
CAPITAL STOCK
PAGE
----
COMPARISON OF GM CLASS H COMMON STOCK, NEW GM CLASS H COMMON
STOCK AND CLASS A COMMON STOCK................................. 216
Introduction................................................... 216
Comparison..................................................... 217
CONSIDERATIONS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL
STRUCTURE...................................................... 226
Overview....................................................... 226
Board of Directors............................................. 227
New GM Board Policy Statement.................................. 227
GM CLASS H COMMON STOCK......................................... 230
Introduction................................................... 230
Price Range and Dividends Paid................................. 230
GM Certificate of Incorporation Provisions Regarding Dividends. 231
Dividend Policy................................................ 231
Voting Rights.................................................. 232
Liquidation Rights............................................. 232
Recapitalization............................................... 233
Subdivision or Combination..................................... 233
NEW GM CLASS H COMMON STOCK..................................... 234
Introduction................................................... 234
GM Certificate of Incorporation Provisions Regarding Dividends. 234
Dividend Policy................................................ 236
Voting Rights.................................................. 237
Liquidation Rights............................................. 237
Recapitalization and Certain Other Transactions................ 237
Subdivision or Combination..................................... 238
Stock Exchange Listing......................................... 238
Transfer Agent and Registrar................................... 238
NEW RAYTHEON CAPITAL STOCK...................................... 239
Introduction................................................... 239
Common Stock................................................... 239
Preferred Stock................................................ 240
New Raytheon Rights Agreement.................................. 241
Limitation on New Raytheon Directors' Liability................ 244
Section 203 of the Delaware General Corporation Law............ 244
Limitations on Changes in Control.............................. 245
Stock Exchange Listing......................................... 247
Transfer Agent and Registrar................................... 247
215
CHAPTER 6: CAPITAL STOCK
COMPARISON OF GM CLASS H COMMON STOCK, NEW GM CLASS H
COMMON STOCK AND CLASS A COMMON STOCK
INTRODUCTION
OVERVIEW OF GM COMMON STOCK
General Motors currently has two classes of common stock: GM $1 2/3 Common
Stock and GM Class H Common Stock. Upon the consummation of the Hughes
Transactions, General Motors will continue to have two classes of common stock:
GM $1 2/3 Common Stock and New GM Class H Common Stock. See "Description of the
Hughes Transactions" in Chapter 3. For considerations relating to GM's dual-
class common stock capital structure, including a policy statement adopted by
the GM Board in connection with the establishment of the terms of the New GM
Class H Common Stock, see "Considerations Relating to GM's Dual-Class Common
Stock Capital Structure."
GM CLASS H COMMON STOCK AND NEW GM CLASS H COMMON STOCK
Under the GM Certificate of Incorporation, the financial performance of
Hughes Electronics currently determines the earnings pool out of which
dividends may be paid on GM Class H Common Stock. Accordingly, GM Class H
Common Stock is sometimes described as a "tracking stock" of General Motors
with respect to Hughes Electronics. The portion of earnings of Hughes
Electronics not included in the earnings pool for GM Class H Common Stock is
available for the payment of dividends on GM $1 2/3 Common Stock. New GM Class
H Common Stock, into which the GM Class H Common Stock will be recapitalized
and converted in the GM Spin-Off Merger, will also be a "tracking stock" of
General Motors, tracking the financial performance of New Hughes Electronics.
Accordingly, the portion of earnings of New Hughes Electronics not included in
the earnings pool for New GM Class H Common Stock will be available for the
payment of dividends on GM $1 2/3 Common Stock.
GM Class H Common Stockholders are stockholders of General Motors (not Hughes
Electronics) and, as a result, have voting, liquidation and other rights with
respect to General Motors (not Hughes Electronics), as described below. Upon
the consummation of the Hughes Transactions, New GM Class H Common Stockholders
will continue to be stockholders of General Motors (not New Hughes Electronics)
and, as a result, will continue to have voting, liquidation and other rights
with respect to General Motors (not New Hughes Electronics), as described
below.
GM $1 2/3 COMMON STOCK
GM $1 2/3 Common Stock will remain outstanding following the Hughes
Transactions, with no changes in its terms. However, the terms of the New GM
Class H Common Stock include a formula for determining the per share
liquidation and voting rights of the New GM Class H Common Stock based on the
relative prices of the two classes of GM common stock in a specified period
prior to the consummation of the Hughes Transactions. Based on current market
prices, we expect the per share liquidation and voting rights of the New GM
Class H Common Stock to equal 0.50, the same as for the GM Class H Common
Stock. To the extent, however, that the formula results in per share
liquidation and voting rights for the New GM Class H Common Stock in excess of
0.50, the effect will be to reduce the percentage of the aggregate liquidation
and voting rights in General Motors attributable to the GM $1 2/3 Common
Stockholders, even though the stated per share liquidation and voting rights of
the GM $1 2/3 Common Stock will remain unchanged at 1.0. In addition, as a
result of the Hughes Transactions, 100% of the earnings of Delco will be
available for the payment of dividends on GM $1 2/3 Common Stock after the
completion of the Hughes Transactions.
NEW RAYTHEON COMMON STOCK
After the completion of the Hughes Transactions and the Raytheon Merger, New
Raytheon will have two classes of common stock: Class A Common Stock and Class
B Common Stock. Class A Common Stock will be distributed to GM's common
stockholders in the Hughes Defense Spin-Off. Class B Common Stock will be
issued upon conversion of outstanding Raytheon Common Stock on a share-for-
share basis in the Raytheon Merger. Neither Class A Common Stock nor Class B
Common Stock will be a "tracking stock." As stockholders of New Raytheon, the
rights of Class A Common Stockholders will be governed by the New
216
Raytheon Certificate of Incorporation and the New Raytheon By-Laws, which
differ in certain material respects from the GM Certificate of Incorporation
and the GM By-Laws as summarized below.
Holders of both classes of New Raytheon Common Stock will have identical
rights, except that Class A Common Stockholders will be entitled, in the
aggregate, to 80.1% and Class B Common Stockholders will be entitled, in the
aggregate, to 19.9% of the total voting power of New Raytheon in the election
and removal of directors. With respect to all stockholder matters other than
the election and removal of directors, separate class approvals of the Class A
Common Stockholders and Class B Common Stockholders will be required. As
described below, the Class A Common Stockholders (and the Class B Common
Stockholders) will have voting, liquidation and other rights with respect to
New Raytheon.
COMPARISON
The following chart compares the terms of the GM Class H Common Stock, the
New GM Class H Common Stock and the Class A Common Stock (and, in the case of
the New GM Class H Common Stock and the Class A Common Stock, gives effect to
the consummation of the Hughes Transactions and the Raytheon Merger). More
detailed descriptions of the terms, as well as the applicable provisions of
Delaware law and the certificates of incorporation and the by-laws of both
General Motors and New Raytheon, follow this comparison table. THE COMPARISON
CHART BELOW, AS WELL AS THE DESCRIPTIONS WHICH FOLLOW, ARE SUMMARIES AND DO NOT
PURPORT TO BE COMPLETE.
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
ISSUER General Motors, a General Motors, a New Raytheon, a
Delaware Delaware Delaware
corporation, is corporation, will corporation, will
the issuer of GM be the issuer of be the issuer of
Class H Common New GM Class H Class A Common
Stock. Common Stock. Stock.
PRINCIPAL The defense The business of Not applicable.
TRACKED electronics, Hughes Telecom
BUSINESS(ES) automotive (which will be
electronics and renamed "Hughes
telecommunications Electronics
and space Corporation").
businesses of
Hughes
Electronics.
DIVIDENDS Under the GM Under the GM Subject to the
Certificate of Certificate of rights of
Incorporation, Incorporation, as the holders of
dividends on GM proposed to be New Raytheon
Class H Common amended in the GM Preferred Stock
Stock may be Spin-Off Merger, (if any) and
declared by the the GM Board will applicable law,
GM Board and paid be able to under the New
out of the assets declare and pay Raytheon
of General Motors dividends on New Certificate of
only to the GM Class H Common Incorporation the
extent of the sum Stock out of the Class A Common
of (1) the paid assets of General Stockholders and
in surplus of Motors only to the Class B
General Motors the extent of the Common
attributable to sum of (1) the Stockholders will
the GM Class H paid in surplus be entitled to
Common Stock plus of General Motors receive the same
(2) an allocated attributable to amount per share
portion of the the New GM Class of any cash
earnings of H Common Stock dividend. The
Hughes plus (2) an dividend policy
Electronics, allocated portion with respect to
which is referred of the earnings Class A Common
to in this of New Hughes Stock and Class B
document as the Electronics, Common Stock will
"Available which is referred be determined by
Separate to in this the New Raytheon
Consolidated Net document as the Board. It is
Income of Hughes currently
Electronics" and expected that New
in the Raytheon's
dividend
CHAPTER 6: CAPITAL STOCK
217
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
GM Certificate of "Available policy with
Incor- Separate respect to the
poration as the Consolidated Net Class A Common
"Available Sepa- Income of New Stock after the
rate Consolidated Hughes Raytheon Merger
Net Income of Electronics" and will not differ
Hughes." in the GM from Raytheon's
Certificate of current dividend
The current Incorporation, as policy with
dividend policy proposed to be respect to
of the GM Board amended in the GM Raytheon Common
is to pay Spin-Off Merger, Stock, which is
quarterly as the "Available to pay a
dividends on GM Separate quarterly
Class H Common Consolidated Net dividend of $0.20
Stock, when, as Income of per share. See
and if declared Hughes." "New Raytheon
by the GM Board, Capital Stock--
at an annual rate Common Stock"
equal to General Motors below.
approximately 35% does not
of the Available currently
Separate anticipate paying
Consolidated Net any cash
Income of Hughes dividends
Electronics for initially on the
the prior year. New GM Class H
Notwithstanding Common Stock
the current following the
dividend policy Hughes
of the GM Board, Transactions. See
the quarterly "New GM Class H
dividend paid on Common Stock--
GM Class H Common Dividend Policy"
Stock of $0.25 below.
per share during
1997 was based on With respect to
an annual rate the relationship
higher than 35% between dividends
of the Available (if any) paid by
Separate New Hughes
Consolidated Net Electronics to
Income of Hughes General Motors
Electronics for and dividends (if
the preceding any) paid by
year. General Motors to
its common
stockholders, see
the policy
statement of the
GM Board adopted
in connection
with the
establishment of
the terms of the
New GM Class H
Common Stock set
forth below under
"Considerations
Relating to GM's
Dual-Class Common
Stock Capital
Structure."
VOTING RIGHTS GM Class H Common New GM Class H With respect to
Stockholders are Common the election and
entitled to cast Stockholders will removal of
one-half of a be entitled to a directors, Class
vote per share on fixed number of A Common
all matters votes per share Stockholders will
submitted to GM's determined as be entitled to
common described below such number of
stockholders for on all matters votes for each
a vote and, with submitted to GM's share of Class A
specified common Common Stock as
exceptions, vote stockholders for shall be
together as a a vote and, with necessary to
single class with specified entitle the
the GM $1 2/3 exceptions, will holders of all
Common vote together as shares of Class A
Stockholders on a single class Common Stock to
all matters with the GM vote, in the
(including the $1 2/3 aggregate,
CHAPTER 6: CAPITAL STOCK
218
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
election and Common 80.1% of the
removal of Stockholders on total voting
directors), based all matters power of all
on their (including the holders of New
respective voting election and Raytheon Common
rights as set removal of Stock. With
forth in the GM directors), based respect to all
Certificate of on their other matters
Incorporation. respective voting submitted to a
The number of rights as set vote of New
votes per share forth in the GM Raytheon's common
is subject to Certificate of stockholders, the
certain anti- Incorporation (as Class A Common
dilution proposed to be Stockholders and
adjustments for amended the
stock in the GM Spin- Class B Common
subdivisions and Off Merger). The Stockholders will
combinations and number of votes each be entitled
certain other to which each to a single vote
events, as set share of New GM per share and the
forth in the GM Class H Common approval of any
Certificate of Stock will be such matter will
Incorporation. entitled will be require the
the greater of approval of both
(1) one-half or classes of New
(2) a number Raytheon Common
(rounded to the Stock, each
nearest one- voting as a
tenth) which separate class.
reflects the Except as may be
relative market provided in
value of New GM connection with
Class H Common any class or
Stock compared to series of New
the market value Raytheon
of GM $1 2/3 Preferred Stock
Common Stock, issued from time
based on the to time or as may
average trading be required by
prices of such law, New Raytheon
stocks during a Common Stock will
specified period be the only New
following the Raytheon Capital
consummation of Stock entitled to
the Hughes vote in the
Transactions. election and
Based on current removal of
market prices, we directors and
expect this other matters
number to be 0.50 presented to the
per share. The stockholders of
number of votes New Raytheon from
per share will be time to time.
subject to
certain anti- Class A Common
dilution Stockholders will
adjustments for have the right to
stock vote directly on
subdivisions and matters relating
combinations and to New Raytheon,
certain other while GM Class H
events, as set Common
forth in the GM Stockholders vote
Certificate of directly on
Incorporation (as matters relating
proposed to be to General
amended in the GM Motors.
Spin-Off Merger).
LIQUIDATION The GM The GM The New Raytheon
RIGHTS Certificate of Certificate of Certificate of
Incorporation Incorporation, as Incorporation
provides that proposed to be provides that
upon the amended in the GM upon the
liquidation, Spin-Off Merger, liquidation,
dissolution or provides that dissolution or
winding up of upon the winding up
General Motors, liquidation,
after
CHAPTER 6: CAPITAL STOCK
219
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
---------------- --------------- ----------------
the holders of GM dissolution or of New Raytheon,
Preferred Stock winding up whether voluntary
(if any) and GM of the business or involuntary,
Preference Stock of General Class A Common
receive the full Motors, after the Stockholders and
preferential holders of GM Class B Common
amounts to which Preferred Stock Stockholders will
they are (if any) and GM be entitled to
entitled, GM $1 Preference Stock receive the
2/3 Common receive the full assets of New
Stockholders and preferential Raytheon
GM Class H Common amounts to which available for
Stockholders will they are distribution
receive the entitled, GM $1 to its
remaining assets 2/3 Common stockholders in
of General Motors proportion to the
on a per share Stockholders and number of shares
basis in New GM Class H held by such
proportion to Common holders, provided
their respective Stockholders will that the full
per share receive the amounts necessary
liquidation remaining assets to satisfy any
units, which are of General Motors creditors and
approximately one on a per share preferential or
per share of GM basis in participating
$1 2/3 Common proportion to amounts owing to
Stock and one- their respective the holders of
half per share of per share New Raytheon
GM Class H Common liquidation Preferred Stock
Stock. The number units. GM $1 2/3 (if any) have
of liquidation Common Stock is been paid or set
units per share entitled to one aside for payment
is subject to liquidation unit previously.
adjustment as per share. New GM
described below Class H Common The liquidation
with respect to Stock will be rights of Class A
voting rights entitled to a Common
under "GM Class H number of Stockholders will
Common Stock -- liquidation units relate to New
Voting Rights." equal to the Raytheon, while
number of votes the liquidation
GM Class H Common to which each rights of GM
Stockholders have such share is Class H Common
no direct rights entitled, Stockholders
in the equity or determined as relate to General
assets of Hughes described below Motors.
Electronics, but under "New GM
rather have Class H Common
rights in the Stock--Voting
equity and assets Rights," subject
of General Motors New GM Class H
(which includes Common
100% of the stock Stockholders will
of Hughes have no direct
Electronics). rights in the
equity or assets
of New Hughes
Electronics, but
rather will have
rights in the
equity and assets
of General Motors
(which will
include 100% of
the stock of New
Hughes
Electronics).
RECAPITALIZATION, Under the GM Under the GM Class A Common
REPURCHASE Certificate of Certificate of Stockholders will
RIGHTS AND Incorporation, Incorporation, as have no
CERTAIN all outstanding proposed to be comparable right
DISPOSITIONS AND shares of GM amended in the GM to that which
OTHER Class H Common Spin-Off Merger, they possess as
TRANSACTIONS Stock may be all outstanding GM Class H Common
recapitalized as
CHAPTER 6: CAPITAL STOCK
220
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
shares of GM $1 shares of New GM Stockholders with
2/3 Common Stock Class H Common respect to the
(1) at any time Stock may be potential
in the sole recapitalized as recapitalization
discretion of the shares of GM $1 of their GM Class
GM Board 2/3 Common Stock H Common
(provided that (1) at any time Stock into GM $1
certain after December 2/3 Common Stock
requirements are 31, 2002 in the at a 120%
met) or (2) sole discretion exchange ratio,
automatically, if of the GM Board, as currently
at any time or (2) provided for
General Motors automatically, if under certain
disposes of at any time circumstances in
substantially all General Motors, the GM
of the business in one Certificate of
of Hughes transaction or a Incorporation.
Aircraft (or its series of related Class A Common
successors) or transactions, Stockholders may,
substantially all disposes of however, have the
of the other substantially all potential to
business of of the business realize premiums
Hughes of New Hughes over prevailing
Electronics to a Electronics (or market prices for
person, entity or its successors) Class A Common
group of which to a person, Stock in
General Motors is entity or group connection with
not a majority of which General certain corporate
owner. In the Motors is not a transactions,
event of such majority owner. including tender
recapitalization, For purposes of offers for New
each GM Class H this Raytheon Common
Common recapitalization Stock and change
Stockholder would provision of the in control
receive shares of GM Certificate of transactions
GM $1 2/3 Common Incorporation, involving New
Stock having a "substantially Raytheon,
market value, as all of the although there
of a specified business" of New can be no
date provided for Hughes assurance in this
in the GM Electronics will regard. See "New
Certificate of mean at least 80% Raytheon Capital
Incorporation, of the business Stock--
equal to 120% of of New Hughes Limitations on
the market value Electronics, Changes in
of such holder's based on the fair Control" below.
GM Class H Common market value of Such premiums, if
Stock on such the assets, both any, will not be
date. tangible and limited by any
As a result of intangible, of formula in the
the GM Spin-Off New Hughes New Raytheon
Merger, the GM Electronics as of Certificate of
Certificate of the time of the Incorporation
Incorporation proposed comparable to
will be amended transaction. In that relating to
so that the the event of any the
Hughes such recapitalization
Transactions will recapitalization, of GM Class H
not result in a each New GM Class Common Stock or
recapitalization H Common New GM Class H
of GM Class H Stockholder would Common Stock as
Common Stock into receive shares of described above.
GM $1 2/3 Common GM $1 2/3 Common New Raytheon may
Stock at a 120% Stock having a not directly or
exchange ratio, market value, as indirectly
as described of a specified redeem, purchase,
above. date provided for repurchase or
in the GM otherwise acquire
Certificate of for consideration
Incorporation (as any shares of New
proposed to be Raytheon Common
in the GM Stock
Spin-Off Merger),
equal to 120% of
22the market value
of such
CHAPTER 6: CAPITAL STOCK
221
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
holder's New GM unless such
Class H Common action is (1)
Stock on such effected ratably
date. No in accordance
automatic with the number
recapitalization of outstanding
will occur upon a shares of Class A
disposition in Common Stock and
connection with Class B Common
the dissolution, Stock, (2) for
liquidation and consideration of
winding up of the same type and
General Motors amount as to
and the shares of each
distribution of class and (3) not
the net assets of in any other way
General Motors to prejudicial to
GM's common the rights of the
stockholders. holders of one
class of New
Raytheon Common
Stock in favor of
the other class
of New Raytheon
Common Stock.
With respect to
certain transfers
of assets by New
Hughes
Electronics to
General Motors or
the common
stockholders of
General Motors,
see the policy
statement of the
GM Board adopted
in connection
with the
establishment of
the terms of the
New GM Class H
Common Stock set
forth below under
"Considerations
Relating to GM's
Dual-Class Common
Stock Capital
Structure."
In the event of
any corporate
merger,
consolidation,
purchase or
acquisition of
property or
stock, or other
reorganization in
which any
consideration is
to be received by
the Class A
Common
Stockholders or
the Class B
Common
Stockholders, the
holders of each
class will
receive the same
type and amount
of consideration
on a per share
basis.
CERTAIN Not applicable. Not applicable. The New Raytheon
LIMITATIONS ON Certificate of
CHANGES IN Incorporation and
CONTROL the New Raytheon
By-Laws contain
certain
provisions, such
as a classified
board of
directors, a
provision
prohibiting
stockholder
action by written
consent, a
provision
prohibiting
stockholders from
calling special
meetings and a
provision
authorizing the
New Raytheon
Board to consider
factors other
than
stockholders'
short-term
interests in
evaluating an
CHAPTER 6: CAPITAL STOCK
222
CHAPTER 6: CAPITAL STOCK
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
offer involving a
change in
control, which
are not present
in the GM
Certificate of
Incorporation or
the GM By-Laws
and which could
have the effect
of delaying,
deferring or
preventing a
change in control
of New Raytheon
or the removal of
existing
management, of
deterring
potential
acquirors from
making an offer
to stockholders
of New Raytheon
and of limiting
any opportunity
to realize
premiums over
prevailing market
prices for New
Raytheon Common
Stock in
connection
therewith.
The New Raytheon
Rights Agreement,
which also has no
equivalent at
General Motors,
will provide for
preferred stock
purchase rights
that could have
the same effect.
New Raytheon,
like General
Motors, will be
subject to
Section 203 of
the Delaware
General
Corporation Law.
In order to
preserve the tax-
free status of
the Hughes
Defense Spin-Off,
the Hughes
Telecom Spin-Off
and the Raytheon
Merger, New
Raytheon will be
subject to
certain covenants
under the Spin-
Off Separation
Agreement which
will act to
prohibit New
Raytheon from
entering into or
permitting (to
the extent that
New Raytheon has
223
CHAPTER 6: CAPITAL STOCK
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
the right to
prohibit) certain
transactions and
taking certain
actions with
respect to the
New
Raytheon
Certificate of
Incorporation or
the New Raytheon
By-Laws. Such
prohibitions, to
which General
Motors is not
subject, could
have the effect
of delaying,
deferring or
preventing a
change in control
of New Raytheon
and of limiting
the opportunity
to realize
premiums over
prevailing market
prices for New
Raytheon Common
Stock in
connection
therewith during
the period of
their
applicability.
For additional
information
regarding these
prohibitions, see
"Separation and
Transition
Arrangements--
Summary of Spin-
Off Separation
Agreement--
Preservation of
Tax-Free Status
of the Hughes
Transactions and
the Raytheon
Merger" in
Chapter 3.
NUMBER OF SHARES 102,459,163 102,459,163 102,630,503
OUTSTANDING
IMMEDIATELY
AFTER THE HUGHES
TRANSACTIONS
(BASED ON THE
NUMBER OF SHARES
OF GM CLASS H
COMMON STOCK
OUTSTANDING AS
OF SEPTEMBER 30,
1997)
STOCK EXCHANGE GM Class H Common Application has Application has
LISTING Stock is listed been made to list been made to list
on the NYSE under New GM Class H Class A Common
the symbol "GMH." Common Stock on Stock on the
the NYSE and such NYSE. It is
application has expected
been granted
subject to notice
of issuance. It
is
224
GM CLASS H NEW GM CLASS H CLASS A
COMMON STOCK COMMON STOCK COMMON STOCK
------------ -------------- ------------
expected that New that Class A
GM Class H Common Common Stock will
Stock will be be listed on the
listed on the NYSE under the
NYSE under the symbol "RTNA"
symbol "GMH."
FORM OF STOCK Certificated. Uncertificated Uncertificated
OWNERSHIP (unless otherwise (unless otherwise
requested). requested).
CHAPTER 6: CAPITAL STOCK
225
CHAPTER 6: CAPITAL STOCK
CONSIDERATIONS RELATING TO GM'S DUAL-CLASS
COMMON STOCK CAPITAL STRUCTURE
OVERVIEW
General Motors currently has a dual-class common stock capital structure with
two classes of common stock outstanding: GM $1 2/3 Common Stock and GM Class H
Common Stock. After the completion of the Hughes Transactions, General Motors
will continue to have a dual-class common stock capital structure with two
classes of common stock outstanding: GM $1 2/3 Common Stock and New GM Class H
Common Stock. The following discussion addresses certain considerations
relating to GM's dual-class common stock structure.
The GM Certificate of Incorporation, both in its current form and as proposed
to be amended in the GM Spin-Off Merger, restricts the power of the GM Board to
declare and pay dividends on either class of common stock to certain defined
amounts which are attributable to each separate class of common stock and
subject to the amount legally available for the payment of dividends by General
Motors. For dividend purposes, this restriction serves to preserve the interest
in retained earnings of holders of each class of GM common stock in relation to
the interests therein of holders of the other class. However, this restriction
does not result in a physical segregation of the assets of General Motors on
the one hand and Hughes Electronics (before the Hughes Transactions) or New
Hughes Electronics (after the Hughes Transactions) on the other, nor does it
result in the establishment of separate accounts or dividend or liquidation
preferences with respect to such assets for the benefit of the holders of
either of the separate classes of GM common stock. GM Class H Common
Stockholders have no direct rights in the equity or assets of Hughes
Electronics but rather, together with GM $1 2/3 Common Stockholders, have
certain liquidation rights in the equity and assets of General Motors (which
include 100% of the stock of Hughes Electronics). Similarly, New GM Class H
Common Stockholders will have no direct rights in the equity or assets of New
Hughes Electronics but rather, together with GM $1 2/3 Common Stockholders,
will have certain liquidation rights in the equity and assets of General Motors
(which include 100% of the stock of New Hughes Electronics) after the Hughes
Transactions.
The existence of two classes of common stock with separate dividend rights as
provided for in the GM Certificate of Incorporation, both in its current form
and as proposed to be amended in the GM Spin-Off Merger, can give rise to
potential divergences among the interests of the holders of the two classes of
GM common stock with respect to various intercompany transactions and other
matters. Because General Motors is incorporated under the Delaware General
Corporation Law (and will continue to be so after the Hughes Transactions), the
laws of Delaware govern, and will continue to govern, the duties of the GM
Board with respect to such divergences. Under Delaware law, the GM Board owes
an equal fiduciary duty to all holders of GM common stock and must act with due
care and on an informed basis in the best interest of General Motors and all
such common stockholders, regardless of class. In this regard, the GM Board, in
the discharge of its fiduciary duties, principally through its Capital Stock
Committee (which is and will continue to be comprised entirely of independent
directors of General Motors), oversees the policies, programs and practices of
General Motors which may impact the potentially divergent interests of the two
classes of GM common stock (and will continue to do so after the Hughes
Transactions).
The GM By-Laws, in defining the role of the Capital Stock Committee,
currently provide that such Committee shall oversee those matters in which the
two classes of stockholders may have divergent interests, particularly as they
relate to: (1) the business and financial relationships between General Motors
or any of its units and Hughes Electronics; (2) dividends in respect of,
disclosures to stockholders and the public concerning, and transactions by
General Motors or any of its subsidiaries in, shares of GM Class H Common
Stock; and (3) any matters arising in connection therewith, all to the extent
the Committee may deem appropriate, and to recommend such changes in such
policies, programs and practices as the Committee may deem appropriate. In
performing this function, the Capital Stock Committee's role is not to make
decisions concerning matters referred to its attention, but rather to oversee
the process by which decisions concerning such matters are made. The Committee
does this with a view towards, among other things, assuring a process
226
CHAPTER 6: CAPITAL STOCK
of fair dealing between General Motors and Hughes Electronics as well as fair
consideration of the interests of all of GM's common stockholders in the
resolution of such matters.
After the Hughes Transactions, the Capital Stock Committee will continue to
have the same oversight role with respect to the relationship between General
Motors and New Hughes Electronics, dividend policies and practices of General
Motors and such other matters as have the potential to have differing effects
on holders of both classes of GM common stock as it currently does with respect
to General Motors and Hughes Electronics.
BOARD OF DIRECTORS
The Hughes Electronics Board currently has eight members. Three directors are
independent directors of General Motors (one of whom is also a member of the
Capital Stock Committee of the GM Board), three directors are executive
officers of General Motors and two directors are executive officers of Hughes
Electronics. Those directors of Hughes Electronics who are also executive
officers of General Motors devote a substantial amount of their time to the
business and affairs of General Motors and its other subsidiaries or to the
oversight thereof.
We expect that the persons currently serving as directors of Hughes
Electronics will become directors of New Hughes Electronics. We are continuing
to review the composition of the New Hughes Electronics board of directors and
may make changes to the composition of the board following the completion of
the Hughes Transactions. For additional information regarding the New Hughes
Electronics board, see "Business of Hughes Telecom--Directors and Executive
Officers of New Hughes Electronics" in Chapter 4.
NEW GM BOARD POLICY STATEMENT
In connection with its determination of the terms of the New GM Class H
Common Stock, the GM Board reviewed its policies and practices with respect to
GM's dual-class common stock capital structure and adopted, subject to the
consummation of the Hughes Transactions, the following policy statement:
GENERAL MOTORS CORPORATION
BOARD OF DIRECTORS
GM BOARD POLICY STATEMENT REGARDING CERTAIN CAPITAL STOCK MATTERS
(A) GENERAL POLICY. It is the policy of the Board of Directors of General
Motors Corporation (the "GM Board"):
(1) that all material matters as to which the holders of the two classes
of GM common stock may have potentially divergent interests shall be
resolved in a manner which the GM Board determines to be in the best
interests of General Motors Corporation and all of its common stockholders
after giving fair consideration to the potentially divergent interests and
all other relevant interests of the holders of the separate classes of GM
common stock; and
(2) that a process of fair dealing shall govern the relationship between
GM and HEC and the means by which the terms of any material transaction
between them shall be determined.
(B) ADDITIONAL MATTERS. In relation to the foregoing policy, it is the
further policy of the GM Board that:
(1) QUARTERLY DIVIDENDS.
(a) In contemplation of the GM Board's duty periodically to consider
an appropriate dividend policy and practice in relation to Class H
Common Stock and its expectation that the Board of Directors of HEC
(the "HEC Board") shall, at least annually, consider and determine a
quarterly dividend policy with respect to the common stock of HEC (100%
of which is held by GM), the GM Board shall, at least annually,
determine a quarterly dividend policy with respect to the Class H
Common Stock.
227
CHAPTER 6: CAPITAL STOCK
(b) The quarterly dividend policy of the GM Board with respect to the
Class H Common Stock shall be to declare and pay quarterly dividends on
the Class H Common Stock in an amount equal to the product of (i) the
aggregate amount of each quarterly dividend received by GM as a
stockholder of HEC, if any, multiplied by (ii) the fraction used to
determine the Available Separate Consolidated Net Income of Hughes (as
such term is used in GM's Restated Certificate of Incorporation, as
amended) at the time such dividend was declared by HEC.
(c) GM's payment of a quarterly dividend on the Class H Common Stock
shall be made as soon as practicable after receipt of the corresponding
dividend payment from HEC.
(2) PRINCIPLES GOVERNING DIVIDENDS AND DISTRIBUTIONS OTHER THAN QUARTERLY
DIVIDENDS.
(a) Except as provided in paragraph (B)(2)(b) below, in the event
that HEC directly or indirectly makes any transfer of material assets
to GM or to GM's stockholders:
(i) TRANSFERS OF HEC ASSETS TO GM. If such transfer of assets by
HEC is to GM, the GM Board shall as soon thereafter as practicable
declare and pay a dividend or make other provision with respect to a
distribution on the Class H Common Stock so that there shall be
distributed to the holders of Class H Common Stock a portion of such
assets transferred to GM that is not less than the fraction used to
determine the Available Separate Consolidated Net Income of Hughes
at the time of such transfer to GM; provided that, if the GM Board
determines that it is not reasonably practicable or not in the best
interests of the holders of Class H Common Stock for GM to
distribute any such assets to the holders of Class H Common Stock,
GM shall distribute to such holders cash or other noncash assets
having an equivalent fair value; and
(ii) TRANSFERS OF HEC ASSETS TO GM'S STOCKHOLDERS. If such
transfer of assets by HEC is to GM's stockholders, the portion of
such assets transferred to the holders of Class H Common Stock shall
be not less than the fraction used to determine the Available
Separate Consolidated Net Income of Hughes at the time of such
transfer.
(b) EXCEPTIONS TO FOREGOING PRINCIPLES. The provisions of paragraph
(B)(2)(a) above shall not apply to any of the following asset
transfers:
(i) any transfer that results in the recapitalization of Class H
Common Stock into $1 2/3 Par Value Common Stock pursuant to the
provisions of paragraph (c) of Division I of Article Fourth of GM's
Restated Certificate of Incorporation, as amended;
(ii) any transfer that is made pursuant to the quarterly dividend
policy described in paragraph (B)(1) above;
(iii) any transfer that is made in the ordinary course of HEC's
business;
(iv) any transfer for which HEC shall have received fair
compensation as determined pursuant to this policy as described in
paragraph (A) above, provided that, where required by paragraph
(B)(3) below, stockholder consent to such transfer shall have been
received; and
(v) any transfer which shall have received the consent of the
holders of a majority of the outstanding shares of Class H Common
Stock, voting as a separate class, and $1 2/3 Par Value Common
Stock, voting as a separate class.
(3) SEPARATE CLASS VOTES OF GM'S STOCKHOLDERS AS A CONDITION TO GM'S
ACQUISITION OF A SIGNIFICANT PORTION OF HEC ASSETS. GM shall not acquire in
one transaction or a series of related transactions a significant portion
of the business of HEC for compensation without receiving the consent of
the holders of a majority of the outstanding shares of Class H Common
Stock, voting as a separate class, and $1 2/3 Par Value Common Stock,
voting as a separate class. For purposes of this paragraph, "significant
portion of the business of HEC" shall mean more than 33% of the business of
HEC, based on the fair market value of the assets, both tangible and
intangible, of HEC as of the time that the proposed transaction is approved
by the GM Board.
228
CHAPTER 6: CAPITAL STOCK
(4) BASIS FOR COMMERCIAL TRANSACTIONS BETWEEN GM AND HEC. GM and HEC
shall operate on the principle that all material commercial transactions
between them shall be based on commercially reasonable terms.
(C) MEANING OF "GM" AND "HEC" WITHIN THIS POLICY. For purposes of this
policy, "GM" shall mean General Motors Corporation and its affiliates (other
than HEC), and "HEC" shall mean Hughes Electronics Corporation, including any
person controlled by Hughes Electronics Corporation.
(D) ROLE OF CAPITAL STOCK COMMITTEE RELATING TO THIS POLICY. The Capital
Stock Committee of the GM Board shall oversee the implementation of, and shall
have authority to interpret, this policy.
(E) DELEGATION. In administering this policy, the GM Board may, at its
option, delegate its authority, including to the Capital Stock Committee, and
may delegate to members of management the authority to implement any matter
pursuant to this policy.
(F) FIDUCIARY OBLIGATIONS. In making any and all determinations in connection
with this policy, either directly or by appropriate delegation of authority,
the GM Board shall act in its fiduciary capacity and pursuant to legal guidance
concerning its obligations under applicable law.
(G) GM BOARD MAY MAKE FUTURE PROPOSALS TO STOCKHOLDERS FOR RECAPITALIZATION
TRANSACTIONS WHICH WOULD BE ON TERMS DIFFERENT FROM THOSE IN GM'S CURRENT
RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED. Consistent with the terms of
both GM's Restated Certificate of Incorporation, as amended, and Delaware
General Corporation Law, the GM Board may, in the future, propose
recapitalization transactions to GM stockholders on terms different from those
provided for under GM's Restated Certificate of Incorporation, as amended.
(Such alternative proposals were utilized by GM's Board of Directors in
connection with the split-off of Electronic Data Systems Corporation in 1996
and the spin-off of the defense electronics business of HEC in 1997.)
(H) INTERPRETATION, AMENDMENTS AND MODIFICATIONS OF THIS POLICY. This policy
may at any time and from time to time be modified, rescinded and interpreted by
the GM Board, and the GM Board may adopt additional or other policies or make
exceptions with respect to the application of this policy in connection with
particular facts and circumstances, all as the GM Board may determine,
consistent with its fiduciary duties to General Motors Corporation and all of
its common stockholders, to be in the best interests of General Motors
Corporation and all of its common stockholders, and any such action may be
taken with or without the approval of the stockholders of General Motors
Corporation.
* * * * *
As set forth therein, this policy statement may be modified or rescinded at
any time and from time to time by the GM Board and the GM Board may propose to
GM stockholders alternative recapitalization proposals. The GM Board has no
present intention to modify or rescind this policy statement or to propose a
recapitalization of the New GM Class H Common Stock. See "Risk Factors--Risk
Factors Relating to GM's Dual-Class Common Stock Capital Structure--GM Board
Policies and Practices Are Subject to Change" in Chapter 2.
Notwithstanding this policy statement or the provisions concerning
recapitalization of the New GM Class H Common Stock into GM $1 2/3 Common Stock
at a 120% exchange ratio as provided under certain circumstances in the GM
Certificate of Incorporation, as proposed to be amended in the GM Spin-Off
Merger, the GM Board may propose to GM's common stockholders for their approval
one or more transactions on terms different from those provided for by such
provisions or by this policy statement. See "Risk Factors--Risk Factors
Relating to GM's Dual-Class Common Stock Capital Structure--Potentially
Diverging Interests of GM's Common Stockholders; Fiduciary Duties of the GM
Board" in Chapter 2.
229
CHAPTER 6: CAPITAL STOCK
GM CLASS H COMMON STOCK
INTRODUCTION
GM Class H Common Stock is one of two classes of GM common stock. The other
class of common stock is GM $1 2/3 Common Stock. On the Record Date,
approximately million shares of GM Class H Common Stock, held by
approximately record holders, were issued and outstanding.
GM Class H Common Stockholders have no direct rights in the equity or assets
of Hughes Electronics or Hughes Defense, but rather have rights in the equity
and assets of General Motors (which includes 100% of the stock of Hughes
Electronics). GM Class H Common Stock is designed to provide holders with
financial returns based on the performance of Hughes Electronics. The intent of
this design objective is achieved through (1) allocations under the GM
Certificate of Incorporation of the earnings of General Motors attributable to
Hughes Electronics between amounts available for the payment of dividends on GM
Class H Common Stock and amounts available for the payment of dividends on the
GM $1 2/3 Common Stock and (2) the announced current dividend policies and
practices of the GM Board with respect to the GM Class H Common Stock, all as
more fully described below. The GM Board is free at any time to change dividend
policies and practices with respect to GM Class H Common Stock or the GM $1 2/3
Common Stock.
PRICE RANGE AND DIVIDENDS PAID
The GM Class H Common Stock is listed and traded on the NYSE under the symbol
"GMH." The table below shows the range of reported per share sale prices on the
NYSE Composite Tape for the GM Class H Common Stock for the periods indicated,
and the dividends paid per share on the GM Class H Common Stock in such
periods. The last reported sale price of the GM Class H Common Stock on the
NYSE on October 10, 1997 was $67.00 per share.
DIVIDENDS
CALENDAR YEAR HIGH LOW PAID
------------- ------ ------ ---------
1995
First Quarter.................................. $41.75 $33.25 $0.23
Second Quarter................................. 41.63 37.75 0.23
Third Quarter.................................. 42.75 39.13 0.23
Fourth Quarter................................. 50.00 39.50 0.23
1996
First Quarter.................................. 63.38 45.00 0.24
Second Quarter................................. 68.25 57.50 0.24
Third Quarter.................................. 61.38 53.13 0.24
Fourth Quarter................................. 59.25 49.50 0.24
1997
First Quarter.................................. 64.88 54.25 0.25
Second Quarter................................. 60.25 49.00 0.25
Third Quarter.................................. 67.50 56.13 0.25
Fourth Quarter (through October 10, 1997)...... 68.19 66.81 --
On January 15, 1997, the day prior to the day on which General Motors
announced that it intended to pursue the Hughes Transactions, the closing price
of the GM Class H Common Stock, as reported on the NYSE Composite Tape, was $62
5/8, and the aggregate market value of the outstanding GM Class H Common Stock
was approximately $6.3 billion. On such date, the closing price of the GM $1
2/3 Common Stock, as reported on the NYSE Composite Tape, was $60 1/8 and the
aggregate market value of the outstanding GM $1 2/3 Common Stock was
approximately $45.4 billion.
On October 6, 1997, the day on which General Motors announced that the GM
Board had approved the final terms of the Hughes Transactions, including the
Distribution Ratio, the closing price of the GM Class H
230
CHAPTER 6: CAPITAL STOCK
Common Stock, as reported on the NYSE Composite Tape, was $67.00, and the
aggregate market value of the outstanding GM Class H Common Stock was
approximately $6.9 billion. On such date, the closing price of the GM $1 2/3
Common Stock, as reported on the NYSE Composite Tape, was $68.50 and the
aggregate market value of the outstanding GM $1 2/3 Common Stock was
approximately $48.4 billion.
GM CERTIFICATE OF INCORPORATION PROVISIONS REGARDING DIVIDENDS
Subject to the rights of the holders of GM Preferred Stock (if any) and GM
Preference Stock, under the GM Certificate of Incorporation, dividends on GM
Class H Common Stock may be declared and paid out of the assets of General
Motors only to the extent of the sum of (1) the paid in surplus of General
Motors attributable to the GM Class H Common Stock plus (2) an allocated
portion of the earnings of Hughes Electronics after December 31, 1985, the date
that General Motors acquired Hughes Aircraft, which is referred to as the
Available Separate Consolidated Net Income of Hughes Electronics (determined as
described below).
The Available Separate Consolidated Net Income of Hughes Electronics for any
quarterly period represents the separate consolidated net income of Hughes
Electronics for such period, excluding the effects of GM purchase accounting
adjustments arising at the time of GM's acquisition of Hughes Aircraft,
calculated for such period and multiplied by a fraction, the numerator of which
is a number equal to the weighted average number of shares of GM Class H Common
Stock outstanding during the quarter (100 million during the second quarter of
1997) and the denominator of which was 400 million for the second quarter of
1997, provided that such fraction shall never be greater than one. The GM
Certificate of Incorporation permits the denominator to be adjusted from time
to time as deemed appropriate by the GM Board (1) to reflect subdivisions and
combinations of GM Class H Common Stock and stock dividends payable in shares
of GM Class H Common Stock to GM Class H Common Stockholders, (2) to reflect
the fair market value of contributions of cash or property by General Motors or
its subsidiaries to Hughes Electronics or its subsidiaries and to reflect such
contributions or contributions of GM capital stock by General Motors to, or for
the benefit of, employees of Hughes Electronics or its subsidiaries in
connection with employee benefit plans or arrangements and (3) to reflect
payments by Hughes Electronics to General Motors of amounts applied to the
repurchase by General Motors of shares of GM Class H Common Stock and purchases
by Hughes Electronics of shares of GM Class H Common Stock. The GM Board has
determined the denominator will be automatically adjusted at the end of each
quarter to reflect on a weighted-average basis the number of shares of GM Class
H Common Stock acquired or sold by Hughes Electronics during such quarter. For
all purposes, determination of the Available Separate Consolidated Net Income
of Hughes Electronics is in the discretion of the GM Board, subject to the
provisions described above of the GM Certificate of Incorporation.
As described above, under the GM Certificate of Incorporation, the
amortization of intangible assets arising from the purchase accounting
adjustments related to GM's acquisition of Hughes Aircraft is charged against
earnings attributable to GM $1 2/3 Common Stock and not against earnings
attributable to GM Class H Common Stock. For additional information regarding
these purchase accounting adjustments, see the Hughes Electronics financial
information set forth in Exhibit 99 to the GM 1996 Form 10-K.
For purposes of determining the approximate earnings per share attributable
to GM Class H Common Stock for financial reporting purposes, an investor may
divide the quarterly earnings allocated to GM Class H Common Stock (the
Available Separate Consolidated Net Income of Hughes Electronics) by the
weighted average number of shares of GM Class H Common Stock outstanding during
such quarter, which is the numerator of the fraction described above. You can
obtain approximately the same mathematical result by dividing the quarterly
earnings used for computation of the Available Separate Consolidated Net Income
of Hughes Electronics (i.e., net income) by the denominator of the fraction
described above.
DIVIDEND POLICY
The declaration of any dividend on either class of GM common stock is a
matter to be acted upon by the GM Board upon the recommendation of GM
management. Dividend policy with respect to GM Class H
231
Common Stock is, and with respect to New GM Class H Common Stock will be, one
of the matters reviewed by the Capital Stock Committee of the GM Board. See
"Considerations Relating to GM's Dual-Class Common Stock Capital Structure"
above. The current dividend policy of the GM Board is to pay quarterly
dividends on GM Class H Common Stock, when, as and if declared by the GM Board,
at an annual rate equal to approximately 35% of the Available Separate
Consolidated Net Income of Hughes Electronics for the prior year.
Notwithstanding this dividend policy, the GM Board has decided that a quarterly
dividend of $0.25 per share shall be paid on GM Class H Common Stock during
1997, an annual rate somewhat higher than 35% of the Available Separate
Consolidated Net Income of Hughes Electronics for the preceding year.
Under Delaware law and the GM Certificate of Incorporation, the GM Board is
not required to declare dividends on any class of GM common stock. If and to
the extent the GM Board chooses to declare dividends on either or both of the
classes of its common stock, neither Delaware law nor the GM Certificate of
Incorporation requires that there be any proportionate or other fixed
relationship between the amount of dividends declared with respect to such
different classes of common stock. The GM Board reserves the right to
reconsider from time to time its policies and practices regarding dividends on
GM common stock and to increase or decrease the dividends paid on GM common
stock on the basis of GM's consolidated financial position, including
liquidity, and other factors, including, with regard to GM Class H Common
Stock, the earnings and consolidated financial position of Hughes Electronics.
There is no fixed relationship, on a per share or aggregate basis, between the
cash dividends that may be paid by General Motors to GM Class H Common
Stockholders and cash dividends or other amounts that may be paid by Hughes
Electronics to General Motors. However, it has been the practice of the Hughes
Electronics Board to pay quarterly cash dividends to General Motors in an
aggregate amount equal to the quarterly dividend per share paid by General
Motors on GM Class H Common Stock multiplied by the denominator of the fraction
used to determine the Available Separate Consolidated Net Income of Hughes
Electronics. In addition, under the current dividend policies and practices of
the GM Board, dividends on GM Class H Common Stock are not materially affected
by developments involving the performance (operations, liquidity or financial
condition) of General Motors (excluding Hughes Electronics).
VOTING RIGHTS
Under the GM Certificate of Incorporation and subject to adjustment as
described below under "--Subdivision or Combination," GM Class H Common
Stockholders are entitled to cast one-half of a vote per share on all matters
submitted to GM's common stockholders for a vote (including the election and
removal of directors), while GM $1 2/3 Common Stockholders may cast one vote
per share. Holders of both classes of GM common stock vote together as a single
class on all matters, except that separate class votes are required for certain
amendments to the GM Certificate of Incorporation, including any amendment
which adversely affects the rights, powers or privileges of any class, which
must also be approved by the holders of that class voting separately as a
class.
LIQUIDATION RIGHTS
In the event of the liquidation, dissolution or winding up of the business of
General Motors, whether voluntary or involuntary, the GM Certificate of
Incorporation provides that, after the holders of GM Preferred Stock (if any)
and GM Preference Stock receive the full preferential amounts to which they are
entitled, GM Class H Common Stockholders and GM $1 2/3 Common Stockholders will
receive the assets remaining for distribution to the GM's stockholders on a per
share basis in proportion to the respective per share liquidation units of such
classes. Subject to adjustment as described below under "--Subdivision or
Combination," each share of GM Class H Common Stock and GM $1 2/3 Common Stock
would be entitled to liquidation units of approximately one-half and one,
respectively. GM Class H Common Stockholders have no direct rights in the
equity or assets of Hughes Electronics, but rather have rights in the equity
and assets of General Motors (which includes 100% of the stock of Hughes
Electronics).
232 CHAPTER 6: CAPITAL STOCK
RECAPITALIZATION
Under the GM Certificate of Incorporation, all outstanding shares of GM Class
H Common Stock may be recapitalized as shares of GM $1 2/3 Common Stock (1) at
any time in the sole discretion of the GM Board (provided that, during each of
the five full fiscal years preceding the exchange, the aggregate cash dividends
on the GM Class H Common Stock have been no less than the product of the Payout
Ratio (as defined below) for such year multiplied by the Available Separate
Consolidated Net Income of Hughes Electronics for the prior fiscal year) or (2)
automatically, if at any time General Motors disposes of substantially all of
the business of Hughes Aircraft (or its successors) or of substantially all of
the other business of Hughes Electronics to a person, entity or group of which
General Motors is not a majority owner. In the event of such a
recapitalization, each GM Class H Common Stockholder would receive shares of GM
$1 2/3 Common Stock having a market value, as of a specified date provided for
in the GM Certificate of Incorporation, equal to 120% of the market value of
such holder's GM Class H Common Stock on such date. Based on the dividends paid
on GM Class H Common Stock in 1992 through 1996, the conditions described in
clause (1) above would be satisfied during 1997.
No fractional shares of GM $1 2/3 Common Stock would be issued in any such
exchange. In lieu of fractional shares, GM Class H Common Stockholders would
receive cash equal to the product of (A) the fraction of a share of GM $1 2/3
Common Stock to which the holder would otherwise have been entitled multiplied
by (B) the average market price per share of GM $1 2/3 Common Stock on such
valuation date.
The "Payout Ratio" equals the lesser of (A) 0.25 or (B) the quotient of (x)
the total cash dividends paid on the GM $1 2/3 Common Stock in respect of such
fiscal year, divided by (y) the consolidated net income of General Motors and
its subsidiaries for each such fiscal year minus the Available Separate
Consolidated Net Income of EDS (as defined in Article Fourth of the GM
Certificate of Incorporation) for any portion of such fiscal year during which
EDS was a direct or indirect wholly owned subsidiary of General Motors and the
Available Separate Consolidated Net Income of Hughes Electronics for such
fiscal year.
SUBDIVISION OR COMBINATION
If General Motors subdivides (by stock split or otherwise) or combines (by
reverse stock split or otherwise) the outstanding shares of the GM $1 2/3
Common Stock or the GM Class H Common Stock, the voting and liquidation rights
of shares of GM Class H Common Stock relative to GM $1 2/3 Common Stock will be
appropriately adjusted. In the event of the issuance of shares of GM Class H
Common Stock as a dividend on shares of GM $1 2/3 Common Stock, the liquidation
rights of the applicable class of common stock would be adjusted so that the
relative aggregate liquidation rights of each stockholder would not be changed
as a result of such dividend.
233 CHAPTER 6: CAPITAL STOCK
NEW GM CLASS H COMMON STOCK
INTRODUCTION
Upon the consummation of the Hughes Transactions, each outstanding share of
GM Class H Common Stock will be recapitalized and converted into one share of
New GM Class H Common Stock and will be entitled to receive a distribution of
Class A Common Stock in accordance with the Distribution Ratio. Persons who
currently hold GM Class H Common Stock will be holders of New GM Class H Common
Stock and Class A Common Stock. Reference is also made to the more detailed
provisions of, and such descriptions are qualified in their entirety by
reference to, Article Fourth of the GM Certificate of Incorporation, as
proposed to be amended in the GM Spin-Off Merger, a copy of which is attached
as Exhibit A to Appendix A to this document. WE URGE YOU TO READ APPENDIX A
(INCLUDING EXHIBIT A THERETO) CAREFULLY.
New GM Class H Common Stockholders will have no direct rights in the equity
or assets of New Hughes Electronics, but rather will have rights in the equity
and assets of General Motors (which will include 100% of the stock of New
Hughes Electronics). New GM Class H Common Stock has been designed to provide
holders with financial returns based on the performance of New Hughes
Electronics. The intent of this design objective has been achieved through (1)
allocations under the GM Certificate of Incorporation, as proposed to be
amended in the GM Spin-Off Merger, of the earnings of General Motors
attributable to New Hughes Electronics between amounts available for the
payment of dividends on New GM Class H Common Stock and amounts available for
the payment of dividends on the GM $1 2/3 Common Stock and (2) the dividend
policies and practices of the GM Board with respect to the New GM Class H
Common Stock, including the policy statement of the GM Board regarding certain
capital stock matters, all as more fully described elsewhere in this document.
General Motors, not New Hughes Electronics, will be the issuer of New GM Class
H Common Stock. The GM Board will be free at any time to change dividend
policies and practices with respect to New GM Class H Common Stock or the GM $1
2/3 Common Stock. See "Risk Factors--Risk Factors Relating to GM's Dual-Class
Common Stock Structure--GM Board Policies and Practices Are Subject to Change"
in Chapter 2.
GM CERTIFICATE OF INCORPORATION PROVISIONS REGARDING DIVIDENDS
Under the GM Certificate of Incorporation, as proposed to be amended in the
GM Spin-Off Merger, dividends may be paid on GM's two classes of common stock
to the extent of the assets of General Motors legally available for the payment
of dividends, subject to the rights of the holders of GM Preferred Stock (if
any) and GM Preference Stock, and subject to the allocation of the legally
available amount between GM's two classes of common stock, as described below.
The total amount legally available for the payment of dividends by a Delaware
corporation is generally the excess of the fair market value of the
corporation's net assets over amounts constituting the corporation's capital;
this excess amount is referred to as "surplus." Dividends may also be paid, if
there is no surplus, to the extent of the net profits for the then current
and/or the preceding fiscal year.
The GM Certificate of Incorporation, as proposed to be amended, will allocate
the total amount legally available for the payment of dividends on GM's common
stock between GM's two classes of common stock as follows:
. Dividends may be paid on the GM $1 2/3 Common Stock to the extent of the
assets of General Motors legally available for the payment of dividends
reduced by the sum of (1) the amount initially attributed by the GM Board
to the New GM Class H Common Stock as described below plus the paid in
surplus attributable to shares of New GM Class H Common Stock issued after
the closing of the Hughes Transactions, plus (2) the portion of the net
earnings of General Motors after the closing of the Hughes Transactions
attributed to the New GM Class H Common Stock in accordance with the GM
Certificate of Incorporation, which is based on the Available Separate
Consolidated Net Income of New Hughes Electronics, as described below, plus
or minus (3) the amount of any adjustment made by the GM Board as described
below.
234 CHAPTER 6: CAPITAL STOCK
. Dividends may be paid on the New GM Class H Common Stock to the extent of
the assets of General Motors legally available for the payment of dividends
reduced by the sum of (1) the amount initially attributed by the GM Board
to the GM $1 2/3 Common Stock as described below plus the paid in surplus
attributable to shares of GM $1 2/3 Common Stock issued after the closing
of the Hughes Transactions, plus (2) all of the earnings of General Motors
after the closing of the Hughes Transactions other than the earnings
attributed to the New GM Class H Common Stock in accordance with the GM
Certificate of Incorporation, which is based on the Available Separate
Consolidated Net Income of New Hughes Electronics, as described below, plus
or minus (3) the amount of any adjustment made by the GM Board as described
below.
. The GM Board has determined that the amount available for the payment of
dividends on the outstanding shares of GM $1 2/3 Common Stock as of the
closing of the Hughes Transactions will be the cumulative amount available
for dividends on such shares as of immediately before the closing, reduced
by a pro rata portion (approximately 74.4% based on the current Class H
Fraction) of the net reduction in GM's total stockholders' equity resulting
from the Hughes Transactions. The impact of this reduction is described
below on a pro forma basis as of June 30, 1997.
. The GM Board has determined that the amount initially available for the
payment of dividends on the shares of New GM Class H Common Stock to be
issued in the Hughes Transactions will be the cumulative amount available
for dividends on shares of GM Class H Common Stock as of immediately before
the closing of the Hughes Transactions, reduced by a pro rata portion
(approximately 25.6% based on the current Class H Fraction) of the net
reduction in GM's total stockholders' equity resulting from the Hughes
Transactions. The impact of this reduction is described below on a pro
forma basis as of June 30, 1997.
The amount available for dividends on each class of GM common stock will be
reduced from time to time by dividends paid on that class and will be adjusted
from time to time for changes to the amount of surplus attributed to the class
resulting from the repurchase or issuance of shares of that class. In addition,
the amount of surplus, and therefore the amount available for dividends on each
class, may be adjusted as provided by Delaware law for any reason deemed
appropriate by the GM Board. Delaware law permits the board of directors of a
corporation to adjust the total amount legally available for the payment of
dividends to reflect a re-valuation of the assets and liabilities of the
corporation in the exercise of its business judgment.
Subject to the foregoing, the declaration and payment of dividends on each
class of GM common stock, and the amount thereof, shall at all times be solely
in the discretion of the GM Board. The GM Board may, in its sole discretion,
declare dividends payable exclusively to the holders of GM $1 2/3 Common Stock,
exclusively to the holders of GM Class H Common Stock or to the holders of both
such classes in equal or unequal amounts, notwithstanding the respective
amounts of surplus available for dividends to each class, the respective voting
and liquidation rights of each class, the amount of prior dividends declared on
each class or any other factor.
As of June 30, 1997, based on the stockholders' equity of General Motors
reflected in its consolidated balance sheet at such date prepared in accordance
with generally accepted accounting principles and subject to the authority of
the GM Board to make adjustments as described above, the cumulative amount
available for payment of dividends on GM common stock was approximately $26.5
billion, of which approximately $23 billion was available for dividends on the
GM $1 2/3 Common Stock and approximately $3.5 billion was available for
dividends on the GM Class H Common Stock. Based on the Recent Raytheon Stock
Price, the estimated net effect of the Hughes Transactions on total
stockholders' equity would be a reduction of approximately $1.5 billion. The GM
Board has determined that it would be appropriate in the context of the Hughes
Transactions to allocate the net reduction in total stockholders' equity
between the two classes of GM common stock following the completion of the
Hughes Transactions in proportion to the derivative interests of the two
existing classes of common stock in the earnings of Hughes Electronics, which
are reflected in the
235 CHAPTER 6: CAPITAL STOCK
Class H Fraction. Accordingly, the GM Board determined to allocate
approximately 74.4% of the net reduction to the GM $1 2/3 Common Stock,
resulting in a pro forma amount available for dividends on such stock of
approximately $21.6 billion as of June 30, 1997 (after giving effect to the
impact of the preferred stock exchange that occurred on July 9, 1997).
Similarly, the GM Board has set the initial amount available for dividends on
the New GM Class H Common Stock to be issued upon the closing of the Hughes
Transactions as the amount available for the payment of dividends on the GM
Class H Common Stock immediately before the closing of the Hughes Transactions
less approximately 25.6% of the net reduction in total stockholders' equity
resulting from the Hughes Transactions, resulting in an initial amount
available for dividends on the New GM Class H Common Stock that would have been
approximately $3.1 billion on a pro forma basis as of June 30, 1997.
As described above, under the GM Certificate of Incorporation, as proposed to
be amended in the GM Spin-Off Merger, the amortization of intangible assets
arising from the purchase accounting adjustments related to GM's acquisition of
Hughes Aircraft applicable to the telecommunications and space business of
Hughes Electronics will be charged against earnings attributable to GM $1 2/3
Common Stock and not against earnings attributable to New GM Class H Common
Stock. For additional information regarding these purchase accounting
adjustments, see the Hughes Telecom financial information set forth in Appendix
E to this document.
For purposes of determining the approximate earnings per share attributable
to New GM Class H Common Stock for financial reporting purposes, an investor
will be able to divide the quarterly earnings allocated to New GM Class H
Common Stock (the Available Separate Consolidated Net Income of New Hughes
Electronics) by the weighted average number of shares of New GM Class H Common
Stock outstanding during such quarter, which is the numerator of the fraction
described above. You will be able to obtain approximately the same mathematical
result by dividing the quarterly earnings used for computation of the Available
Separate Consolidated Net Income of New Hughes Electronics (i.e., net income)
by the denominator of the fraction described above.
DIVIDEND POLICY
Under Delaware law and the GM Certificate of Incorporation, as proposed to be
amended in the GM Spin-Off Merger, the GM Board will not be required to declare
dividends on any class of GM common stock. If and to the extent the GM Board
chooses to declare dividends on either or both of the classes of its common
stock, neither Delaware law nor the GM Certificate of Incorporation, as
proposed to be amended in the GM Spin-Off Merger, will require that there be
any proportionate or other fixed relationship between the amount of dividends
declared with respect to such different classes of common stock. The GM Board
reserves the right to reconsider from time to time its policies and practices
regarding dividends on GM common stock and to increase or decrease the
dividends paid on GM common stock on the basis of GM's consolidated financial
position, including liquidity, and other factors, including, with regard to New
GM Class H Common Stock, the earnings and consolidated financial position of
New Hughes Electronics. Information concerning General Motors and its
consolidated financial performance, including Management's Discussion and
Analysis, may be found in the documents incorporated into this document by
reference, including the GM 1996 Form 10-K.
In connection with its determination of the terms of the New GM Class H
Common Stock to be issued in the Hughes Transactions, the GM Board reviewed its
policies and practices with respect to GM's dual-class common stock capital
structure and, as described above, subject to consummation of the Hughes
Transactions, adopted a policy statement which will provide, among other
things, that the quarterly dividend policy of the GM Board with respect to the
New GM Class H Common Stock will be to declare and pay quarterly dividends on
the New GM Class H Common Stock in an amount equal to the product of (1) the
aggregate amount of each quarterly dividend received by General Motors as a
stockholder of New Hughes Electronics, if any, multiplied by (2) the fraction
used to determine the Available Separate Consolidated Net Income of New Hughes
Electronics at the time such dividend was declared by New Hughes Electronics.
The policy statement
236 CHAPTER 6: CAPITAL STOCK
further provides that GM's payment of a quarterly dividend on the New GM Class
H Common Stock will be made as soon as practicable after receipt of the
corresponding dividend payment from New Hughes Electronics. As set forth
therein, this policy statement may at any time and from time to time be
modified or rescinded by the GM Board. The GM Board has no present intention to
modify or rescind this policy statement. See "Considerations Relating to GM's
Dual-Class Common Stock Capital Structure--New GM Board Policy Statement"
above.
Following the completion of the Hughes Transactions, future earnings (if any)
from the telecommunications and space business of New Hughes Electronics will
be retained for the development of that business. As a result, it is not
currently expected that dividends will initially be paid by New Hughes
Electronics to General Motors. Accordingly, the GM Board does not currently
intend to pay initially any cash dividends on New GM Class H Common Stock.
VOTING RIGHTS
New GM Class H Common Stockholders will be entitled to a fixed number of
votes per share on all matters submitted to GM's common stockholders for a vote
and, with specified exceptions, as described below, will vote together as a
single class with the GM $1 2/3 Common Stockholders on all matters (including
the election and removal of directors), based on their respective voting rights
as set forth in the GM Certificate of Incorporation, as proposed to be amended
in the GM Spin-Off Merger. The number of votes to which each share of New GM
Class H Common Stock will be entitled to the greater of (1) one-half or (2) a
number (rounded to the nearest one-tenth) which reflects the relative market
value of New GM Class H Common Stock compared to the market value of GM $1 2/3
Common Stock, to be determined based on the average trading prices of such
stocks during the 20-trading day period starting on the eleventh trading day
following the consummation of the Hughes Transactions. Each share of GM $1 2/3
Common Stock will continue to be entitled to one vote after the Hughes
Transactions. The number of votes to which each share of GM Class H Common
Stock and GM $1 2/3 Common Stock will be entitled will be subject to adjustment
as described below under "--Subdivision or Combination." New GM Class H Common
Stock will be entitled to vote separately as a class only on (1) any amendment
to the GM Certificate of Incorporation which adversely affects the rights,
powers or privileges of the New GM Class H Common Stock and (2) any increase in
the number of authorized shares of New GM Class H Common Stock.
LIQUIDATION RIGHTS
In the event of the liquidation, dissolution or winding up of the business of
General Motors, whether voluntary or involuntary, the GM Certificate of
Incorporation, as proposed to be amended in the GM Spin-Off Merger, provides
that, after the holders of GM Preferred Stock (if any) and GM Preference Stock
receive the full preferential amounts to which they are entitled, New GM Class
H Common Stockholders and GM $1 2/3 Common Stockholders will receive the assets
remaining for distribution to GM's stockholders on a per share basis in
proportion to the respective per share liquidation units of such classes.
Subject to adjustment as described below under "--Subdivision or Combination,"
each share of New GM Class H Common Stock will be entitled to liquidation units
equal to the number of votes to which each such share is entitled, determined
as described above under "--Voting Rights," and each share of GM $1 2/3 Common
Stock will be entitled to one liquidation unit. New GM Class H Common
Stockholders will have no direct rights in the equity or assets of New Hughes
Electronics, but rather will have rights in the equity and assets of General
Motors (which will include 100% of the stock of New Hughes Electronics).
RECAPITALIZATION AND CERTAIN OTHER TRANSACTIONS
Under the GM Certificate of Incorporation, as proposed to be amended in the
GM Spin-Off Merger, all outstanding shares of New GM Class H Common Stock may
be recapitalized as shares of GM $1 2/3 Common Stock (1) at any time after
December 31, 2002 in the sole discretion of the GM Board or (2) automatically,
if at
237 CHAPTER 6: CAPITAL STOCK
any time General Motors, in one transaction or a series of related
transactions, disposes of substantially all of the business of New Hughes
Electronics (or its successors) to a person, entity or group of which General
Motors is not a majority owner. For purposes of this recapitalization provision
of the GM Certificate of Incorporation, "substantially all of the business" of
New Hughes Electronics will mean at least 80% of the business of New Hughes
Electronics, based on the fair market value of the assets, both tangible and
intangible, of New Hughes Electronics as of the time of the proposed
transaction. No automatic recapitalization will occur upon a disposition in
connection with the dissolution, liquidation and winding up of General Motors
and the distribution of the net assets of General Motors to GM's common
stockholders. In the event of any recapitalization, each New GM Class H Common
Stockholder would receive shares of GM $1 2/3 Common Stock having a market
value, as of a specified date provided for in the GM Certificate of
Incorporation, as proposed to be amended in the GM Spin-Off Merger, equal to
120% of the market value of such holder's New GM Class H Common Stock on such
date.
No fractional shares of GM $1 2/3 Common Stock would be issued in any such
exchange. In lieu of fractional shares, a New GM Class H Common Stockholder
would receive cash equal to the product of (A) the fraction of a share of GM $1
2/3 Common Stock to which the holder would otherwise have been entitled
multiplied by (B) the average market price per share of GM $1 2/3 Common Stock
on such valuation date.
As described above, the GM Board has adopted, subject to consummation of the
Hughes Transactions, a policy statement which will provide, among other things,
that, subject to certain exceptions, in the event that New Hughes Electronics
transfers any material assets to General Motors, the GM Board shall declare and
pay a dividend or make a distribution so that there will be distributed to New
GM Class H Common Stockholders a portion of such assets (or cash or other
assets having an equivalent fair value) that is not less than their
proportionate tracking stock interest in New Hughes Electronics (determined
accordingly to the fraction used to calculate the Available Separate
Consolidated Net Income of New Hughes Electronics) at the time of such
transfer. The policy statement further provides that, subject to certain
exceptions, in the event that New Hughes Electronics transfers any such
material assets to GM's stockholders, the portion of such assets transferred to
the New GM Class H Common Stockholders will not be less than their
proportionate tracking stock interest in New Hughes Electronics (determined as
described above) at the time of such transfer. The policy statement further
provides that General Motors will not acquire in one transaction or a series of
transactions a significant portion (more than 33%) of the business of New
Hughes Electronics for compensation without receiving the consent of the
holders of a majority of the outstanding shares of New GM Class H Common Stock,
voting as a separate class, and GM $1 2/3 Common Stock, voting as a separate
class.
SUBDIVISION OR COMBINATION
If General Motors subdivides (by stock split or otherwise) or combines (by
reverse stock split or otherwise) the outstanding shares of the GM $1 2/3
Common Stock or the New GM Class H Common Stock, the voting and liquidation
rights of shares of New GM Class H Common Stock relative to GM $1 2/3 Common
Stock will be appropriately adjusted. In the event of the issuance of shares of
New GM Class H Common Stock as a dividend on shares of GM $1 2/3 Common Stock,
the liquidation rights of the applicable class of common stock would be
adjusted so that the relative aggregate liquidation rights of each stockholder
would not be changed as a result of such dividend.
STOCK EXCHANGE LISTING
Application has been made to list the New GM Class H Common Stock on the
NYSE. It is expected that New GM Class H Common Stock will be listed on the
NYSE under the symbol "GMH."
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. will serve as the Transfer Agent and Registrar for the New
GM Class H Common Stock.
238 CHAPTER 6: CAPITAL STOCK
NEW RAYTHEON CAPITAL STOCK
INTRODUCTION
Under the New Raytheon Certificate of Incorporation, the authorized capital
stock of New Raytheon will consist of Class A Common Stock, par value $0.01 per
share, Class B Common Stock, par value $0.01 per share, and New Raytheon
Preferred Stock, par value $0.01 per share.
Holders of both classes of GM common stock will receive Class A Common Stock
in the GM Spin-Off Merger. Upon the consummation of the Raytheon Merger
(pursuant to which the then outstanding Raytheon Common Stock will be converted
on a share-for-share basis into Class B Common Stock of New Raytheon), Class A
Common Stock will be one of two classes of common stock of New Raytheon,
neither of which will be a "tracking stock." There are no current plans for the
New Raytheon Board to issue New Raytheon Preferred Stock.
THE FOLLOWING DESCRIPTIONS OF NEW RAYTHEON CAPITAL STOCK (1) ARE SUMMARIES
AND DO NOT PURPORT TO BE COMPLETE AND (2) GIVE EFFECT TO THE CONSUMMATION OF
THE HUGHES DEFENSE SPIN-OFF AND THE RAYTHEON MERGER. SEE "DESCRIPTION OF THE
HUGHES TRANSACTIONS" AND "DESCRIPTION OF THE RAYTHEON MERGER" IN CHAPTER 3 AND
"COMPARISON OF GM CLASS H COMMON STOCK, NEW GM CLASS H COMMON STOCK AND CLASS A
COMMON STOCK" ABOVE. REFERENCE IS ALSO MADE TO THE MORE DETAILED PROVISIONS OF,
AND SUCH DESCRIPTIONS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, THE
FORMS OF THE NEW RAYTHEON CERTIFICATE OF INCORPORATION AND THE NEW RAYTHEON BY-
LAWS, COPIES OF WHICH ARE FILED WITH THE SEC AS EXHIBITS TO A REGISTRATION
STATEMENT OF WHICH THIS DOCUMENT IS A PART.
COMMON STOCK
With respect to the election or removal of directors, (1) Class A Common
Stockholders, representing approximately 30% of the equity ownership of New
Raytheon as of immediately after the Raytheon Merger Effective Time, will be
entitled to such number of votes for each share of Class A Common Stock as
shall be necessary to entitle the holders of all shares of Class A Common Stock
to vote, in the aggregate, 80.1% of the total voting power of all holders of
New Raytheon Common Stock and (2) Class B Common Stockholders, representing
approximately 70% of the equity ownership of New Raytheon as of immediately
after the Raytheon Merger Effective Time, will be entitled to one vote for each
share of Class B Common Stock, which votes shall represent, in the aggregate,
19.9% of the total voting power of all holders of New Raytheon Common Stock.
The New Raytheon Board will determine the number of votes for each share of
Class A Common Stock outstanding promptly following the fixing of a record date
for each annual or special meeting of stockholders at which directors are to be
elected or a vote with respect to removal of directors is to be taken. A
plurality of votes cast shall elect directors. With respect to all stockholder
matters other than the election and removal of directors, the Class A Common
Stockholders and the Class B Common Stockholders will each be entitled to a
single vote per share and the approval of any such matter will require the
approval of both classes of New Raytheon Common Stock, each voting as a
separate class. Except as may be provided in connection with any class or
series of New Raytheon Preferred Stock issued from time to time or as may
otherwise be required by law or the New Raytheon Certificate of Incorporation,
the New Raytheon Common Stock will be the only capital stock of New Raytheon
entitled to vote in the election and removal of directors and other matters
presented to the stockholders of New Raytheon from time to time. The New
Raytheon Common Stock will not have cumulative voting rights.
Subject to the rights of holders of New Raytheon Preferred Stock (if any) and
applicable law, the Class A Common Stockholders and the Class B Common
Stockholders will be entitled to receive such dividends as may be lawfully
declared from time to time by the New Raytheon Board. The Class A Common
Stockholders and the Class B Common Stockholders will be entitled to receive
the same amount per share of any such dividends, provided that the New Raytheon
Board may declare a dividend or distribution of shares of Class A Common Stock
to Class A Common Stockholders and shares of Class B Common Stock to Class B
Common Stockholders so long as, immediately following such dividend or other
distribution, the number of shares of Class A Common Stock and Class B Common
Stock then outstanding bears the same relationship to each other
239 CHAPTER 6: CAPITAL STOCK
as immediately prior to such dividend or other distribution. Raytheon's current
dividend policy is to pay a quarterly dividend of $0.20 per share on Raytheon
Common Stock. Raytheon does not expect to change its policy prior to the
Raytheon Merger. It is currently expected that New Raytheon's dividend policy
with respect to the Class A Common Stock and the Class B Common Stock after the
Raytheon Merger will not differ from Raytheon's current dividend policy with
respect to Raytheon Common Stock.
In the case of any split, subdivision, combination or reclassification of
Class A Common Stock or Class B Common Stock, the shares of Class A Common
Stock or the Class B Common Stock, as the case may be, shall also be split,
subdivided, combined or reclassified so that the number of shares of Class A
Common Stock and Class B Common Stock outstanding immediately following such
split, subdivision, combination or reclassification shall bear the same
relationship to each other as immediately prior to such split, subdivision,
combination or reclassification.
Upon any liquidation, dissolution or winding up of New Raytheon, whether
voluntary or involuntary, the Class A Common Stockholders and the Class B
Common Stockholders will be entitled to receive such assets as are available
for distribution to stockholders in proportion to the number of shares held by
such holders, respectively, without regard to class, after there shall have
been paid or set aside for payment the full amounts necessary to satisfy any
creditors and any preferential or participating rights to which the holders of
each outstanding series of New Raytheon Preferred Stock (if any) are entitled
by the express terms of such series.
New Raytheon may not directly or indirectly redeem, purchase, repurchase or
otherwise acquire for consideration any shares of New Raytheon Common Stock
unless such action is (1) effected ratably in accordance with the number of
outstanding shares of Class A Common Stock and Class B Common Stock, (2) for
consideration of the same type and amount as to shares of each class and (3)
not in any other way prejudicial to the rights of the holders of one class of
New Raytheon Common Stock in favor of the other class of New Raytheon Common
Stock. In the case of an offer to purchase shares of New Raytheon Common Stock
by New Raytheon made to all holders of New Raytheon Common Stock, New Raytheon
will purchase shares of New Raytheon Common Stock ratably in accordance with
the number of shares of each class of New Raytheon Common Stock tendered
thereunder.
Under the New Raytheon Certificate of Incorporation, in the event of any
corporate merger, consolidation, purchase or acquisition of property or stock,
or other reorganization in which any consideration is to be received by the
Class A Common Stockholders or the Class B Common Stockholders, the holders of
each class must receive the same type and amount of consideration on a per
share basis.
The outstanding shares of New Raytheon Common Stock will be fully paid and
nonassessable. The New Raytheon Common Stock will not have any preemptive,
subscription or conversion rights. Additional shares of authorized New Raytheon
Common Stock may be issued, as authorized by the New Raytheon Board from time
to time, without stockholder approval, except as may be required by applicable
stock exchange requirements.
Except as indicated above, the rights of the Class A Common Stockholders and
the Class B Common Stockholders are in all respects and for all purposes and in
all circumstances identical, and New Raytheon will not in any other manner
directly or indirectly take any other action or in any other fashion agree to,
facilitate, condone or support any transaction in which the Class A Common
Stockholders and the Class B Common Stockholders are subject to discriminatory
or unequal treatment.
The dual-class capitalization of New Raytheon is designed, among other
things, to allow the Hughes Defense Spin-Off and the Hughes Telecom Spin-Off to
each be treated as a tax-free distribution for U.S. federal income tax
purposes. However, the dual-class capitalization may have certain adverse
consequences. In particular, while we expect the shares of both Class A Common
Stock and Class B Common Stock to trade on the NYSE, the listing policies of
the NYSE with respect to corporations with dual-class capitalizations may
change in the future, and there can be no assurance that such policies will
allow for the continued listing of the lower vote Class B Common Stock.
PREFERRED STOCK
The New Raytheon Board is empowered, without approval of its stockholders, to
cause shares of New Raytheon Preferred Stock to be issued in one or more
series, with the numbers of shares of each series and the powers, preferences,
rights and limitations of each series to be determined by it. Among the
specific matters
240 CHAPTER 6: CAPITAL STOCK
that may be determined by the New Raytheon Board are the rate of dividends (if
any), the terms of redemption (if any), the obligation to purchase or redeem
pursuant to a sinking fund or otherwise, and the terms thereof (if any), the
amount payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of New Raytheon, rights and terms of
conversion or exchange (if any) and voting rights (if any). The Series A
Preferred Stock of New Raytheon described under "--New Raytheon Rights
Agreement" below is a series of New Raytheon Preferred Stock that has been
authorized by the Hughes Defense Board.
Although the New Raytheon Board currently has no plans to issue New Raytheon
Preferred Stock, the issuance of shares of New Raytheon Preferred Stock, or the
issuance of rights to purchase such shares, could be used to discourage an
unsolicited acquisition proposal. For example, a business combination could be
impeded by the issuance of a series of New Raytheon Preferred Stock containing
class voting rights that would enable the holder or holders of such series to
block any such transaction. Alternatively, a business combination could be
facilitated by the issuance of a series of New Raytheon Preferred Stock having
sufficient voting rights to provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of New
Raytheon Preferred Stock could adversely affect the voting power of the holders
of the New Raytheon Common Stock. Although the New Raytheon Board is required
to make any determination to issue any such stock based on its judgment as to
the best interests of the stockholders of New Raytheon, the New Raytheon Board
could act in a manner that would discourage an acquisition attempt or other
transaction that some, or a majority, of the stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over prevailing market prices of such stock. The New Raytheon Board
does not at present intend to seek stockholder approval prior to any issuance
of currently authorized stock, unless otherwise required by law or applicable
stock exchange requirements. The New Raytheon Board's ability to issue New
Raytheon Preferred Stock, however, is limited by certain provisions of the
Spin-Off Separation Agreement for a specified period of time after the GM Spin-
Off Merger Effective Time. See "Separation and Transition Arrangements--Summary
of Spin-Off Separation Agreement--Preservation of the Tax-Free Status of the
Hughes Transactions and the Raytheon Merger" in Chapter 3.
NEW RAYTHEON RIGHTS AGREEMENT
In connection with the Raytheon Merger, the Hughes Defense Board intends to
adopt the New Raytheon Rights Agreement, effective as of immediately prior to
the Raytheon Merger Effective Time. Immediately prior to the Raytheon Merger
Effective Time, the Hughes Defense Board will declare a dividend of one New
Raytheon Right to be paid at the GM Spin-Off Merger Effective Time in the case
of Class A Common Stock and at the Raytheon Merger Effective Time in respect of
each share of the Class B Common Stock to the holder of record thereof as of
such effective time. Thus, each share of Class A Common Stock distributed to
GM's common stockholders in the Hughes Defense Spin-Off will have a New
Raytheon Right attached. The following description of the New Raytheon Rights
and the New Raytheon Rights Agreement (1) is a summary and does not purport to
be complete and (2) gives effect to the consummation of the Hughes Transactions
and the Raytheon Merger.
Each New Raytheon Right will entitle the registered holder to purchase from
New Raytheon one one-hundredth of a share of New Raytheon Junior Preferred
Stock at a price per one one-hundredth of a share to be determined by the
Hughes Defense Board prior to the Raytheon Merger Effective Time (the "Exercise
Price"), subject to adjustment. The terms of the New Raytheon Rights will be
set forth in the New Raytheon Rights Agreement.
The New Raytheon Rights (1) will not be exercisable until the New Raytheon
Rights Effective Date (as defined below) and (2) will expire on the 10th
anniversary of the Raytheon Merger Effective Date (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the New Raytheon
Rights are earlier redeemed or exchanged by New Raytheon, in each case, as
described below.
The Exercise Price payable, and the number of shares of Series A Junior
Participating Preferred Stock, $0.01 par value of New Raytheon (the "New
Raytheon Junior Preferred Stock") or other securities or property issuable,
upon exercise of the New Raytheon Rights are subject to adjustment from time to
time to prevent dilution under the following circumstances:
241 CHAPTER 6: CAPITAL STOCK
. in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of New Raytheon Junior Preferred Stock;
. upon the grant to holders of the shares of New Raytheon Junior Preferred
Stock of certain rights or warrants to subscribe for or purchase shares of
New Raytheon Junior Preferred Stock at a price, or securities convertible
into shares of New Raytheon Junior Preferred Stock with a conversion price,
less than the then-current market price of the shares of New Raytheon
Junior Preferred Stock; or
. upon the distribution to holders of the shares of New Raytheon Junior
Preferred Stock of evidences of indebtedness or assets (other than certain
dividend payments) or of subscription rights or warrants (other than those
referred to above).
The number of outstanding New Raytheon Rights and the number of one one-
hundredths of a share of New Raytheon Junior Preferred Stock issuable upon
exercise of each New Raytheon Right are also subject to adjustment in the event
of a stock split of New Raytheon Common Stock or a stock dividend on New
Raytheon Common Stock payable in New Raytheon Common Stock or subdivisions,
consolidations or combinations of New Raytheon Common Stock occurring, in any
such case, prior to the New Raytheon Rights Effective Date.
The New Raytheon Rights received on the Raytheon Merger Effective Date will
be evidenced by the certificates representing shares of New Raytheon Common
Stock which will be on deposit with BankBoston, N.A. as Transfer Agent and
Registrar for New Raytheon, until the New Raytheon Rights Effective Date.
Ownership of New Raytheon Rights will be reflected on the account statements
received in connection with the book-entry ownership of shares of New Raytheon
Common Stock, including the Class A Common Stock distributed in the Hughes
Defense Spin-Off. See "--Book-Entry Registration" below. The "New Raytheon
Rights Effective Date" is a date which is the earlier to occur of (1) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of (a) the outstanding shares of Class A Common Stock, (b) the
outstanding shares of Class B Common Stock, or (c) the aggregate voting power
in the election of directors (each, a "Triggering Holding") or (2) 10 business
days (or a later date determined by the New Raytheon Board prior to any person
or group becoming an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of a Triggering Holding.
The New Raytheon Rights Agreement will provide that, until the New Raytheon
Rights Effective Date (or earlier redemption or expiration of the New Raytheon
Rights):
. the New Raytheon Rights will be transferred with and only with the shares
of New Raytheon Common Stock;
. certificates representing shares of New Raytheon Common Stock will contain
a notation incorporating the terms of the New Raytheon Rights by reference;
and
. the surrender for transfer of any certificates representing shares of New
Raytheon Common Stock will also constitute the transfer of the New Raytheon
Rights associated with the shares of New Raytheon Common Stock represented
by such certificate.
As soon as practicable following the New Raytheon Rights Effective Date,
separate certificates evidencing the New Raytheon Rights ("New Raytheon Rights
Certificates") will be mailed to holders of record of the shares of New
Raytheon Common Stock as of the close of business on the New Raytheon Rights
Effective Date. Such separate New Raytheon Rights Certificates alone will then
evidence the New Raytheon Rights.
Flip-in Right. In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person, each holder of a New Raytheon
Right, other than New Raytheon Rights beneficially owned by the Acquiring
Person (which rights become void upon acquisition of a Triggering Holding),
will thereafter have the right to receive, upon exercise thereof at the then-
current Exercise Price, that number of shares of Class B Common Stock having a
market value of two times the Exercise Price of the New Raytheon Right
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CHAPTER 6: CAPITAL STOCK
(such right being referred to as a "Flip-in Right"). Thus, if Class B Common
Stock at the time the Flip-in Right became exercisable were trading at $30 per
share and the Exercise Price at such time were $120, each New Raytheon Right
would thereafter be exercisable at $120 for eight shares of Class B Common
Stock.
Flip-over Right. In the event that, at any time on or after the date that any
person has become an Acquiring Person, New Raytheon is acquired in a merger or
other business combination transaction or 50% or more of consolidated assets or
earning power are sold, each holder of a New Raytheon Right will thereafter
have the right to receive, upon the exercise thereof at the then-current
Exercise Price, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
Exercise Price of the New Raytheon Right (such right being referred to as a
"Flip-over Right"). Thus, if the acquiring company's common stock at the time
of such transaction were trading at $30 per share and the Exercise Price of the
New Raytheon Rights at such time were $120, each New Raytheon Right would
thereafter be exercisable at $120 for eight shares (i.e., the number of shares
that could be purchased for $240, or two times the exercise price of the
rights) of the acquiring company's common stock.
Exchange. At any time after any person or group of affiliated or associated
persons becomes an Acquiring Person and prior to the acquisition by such person
or group of 50% or more of the outstanding shares of New Raytheon Common Stock,
the New Raytheon Board may exchange the New Raytheon Rights (other than New
Raytheon Rights owned by such person or group which will have become void), in
whole or in part, at an exchange ratio of one share of Class B Common Stock, or
one one-hundredth of a share of New Raytheon Junior Preferred Stock, per New
Raytheon Right (subject to adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of a Triggering Holding of New
Raytheon Common Stock, the New Raytheon Board may redeem the New Raytheon
Rights in whole, but not in part, at a price of $0.01 per New Raytheon Right
(the "Redemption Price"). The redemption of the New Raytheon Rights may be made
effective at such time, on such basis and with such conditions as the New
Raytheon Board, in its sole discretion, may establish. Immediately upon any
redemption of the New Raytheon Rights, the right to exercise the New Raytheon
Rights will terminate and the only right of the holders of New Raytheon Rights
will be to receive the Redemption Price.
Shares of New Raytheon Junior Preferred Stock purchasable upon exercise of
the New Raytheon Rights will not be redeemable. Each share of New Raytheon
Junior Preferred Stock will be entitled to a minimum preferential quarterly
dividend payment of $1.00 per share but will be entitled to an aggregate
dividend equal to 100 times the dividend declared per share of New Raytheon
Common Stock. In the event of liquidation, the holders of the New Raytheon
Junior Preferred Stock will be entitled to a minimum preferential liquidation
payment of $100 per share but will be entitled to an aggregate payment equal to
100 times the payment made per share of New Raytheon Common Stock. Each share
of New Raytheon Junior Preferred Stock will have 100 votes, and will vote on
all matters together with the Class B Common Stockholders. Finally, in the
event of any merger, consolidation or other transaction in which New Raytheon
Common Stock is exchanged, each share of New Raytheon Junior Preferred Stock
will be entitled to receive an amount equal to 100 times the amount received
per share of New Raytheon Common Stock. These rights are protected by customary
antidilution provisions.
Because of the nature of the dividend, liquidation and voting rights of New
Raytheon Junior Preferred Stock, the value of the one one-hundredth interest in
a share of New Raytheon Junior Preferred Stock purchasable upon exercise of
each New Raytheon Right should approximate the value of one share of Class B
Common Stock.
With certain exceptions, no adjustment in the Exercise Price will be required
until cumulative adjustments require an adjustment of at least 1% in such
Exercise Price. No fractional shares of New Raytheon Junior Preferred Stock
will be issued (other than fractions which are integral multiples of one one-
hundredth of a share of New Raytheon Junior Preferred Stock, which may, at the
election of the New Raytheon Board, be
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CHAPTER 6: CAPITAL STOCK
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the shares of New Raytheon Junior
Preferred Stock on the last trading day prior to the date of exercise.
The terms of the New Raytheon Rights may be amended by the New Raytheon Board
without the consent of the holders of the New Raytheon Rights, including an
amendment to lower (1) the threshold at which a person becomes an Acquiring
Person and (2) the percentage of New Raytheon Common Stock proposed to be
acquired in a tender or exchange offer that would cause the New Raytheon Rights
Effective Date to occur, to not less than the greater of (a) the sum of .001%
and the largest percentage of the outstanding New Raytheon Common Stock then
known to New Raytheon to be beneficially owned by any person or group of
affiliated or associated persons and (b) 10%, except that, from and after such
time as any person or group of affiliated or associated persons becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the New Raytheon Rights.
Until a New Raytheon Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of New Raytheon, including, without limitation,
the right to vote or to receive dividends.
The New Raytheon Rights related to the shares of Class A Common Stock
distributed in the Hughes Defense Spin-Off are being registered under the
Exchange Act, with such shares. In the event that the New Raytheon Rights
become exercisable, New Raytheon will register the shares of New Raytheon
Junior Preferred Stock for which the New Raytheon Rights may be exercised in
accordance with applicable law.
The New Raytheon Rights will have certain antitakeover effects. The New
Raytheon Rights will cause substantial dilution to any person or group that
attempts to acquire New Raytheon without the approval of the New Raytheon
Board. As a result, the overall effect of the New Raytheon Rights may be to
render more difficult or discourage any attempt to acquire New Raytheon even if
such acquisition may be favorable to the interests of New Raytheon's
stockholders. Because the New Raytheon Board can redeem the New Raytheon
Rights, the New Raytheon Rights should not interfere with a merger or other
business combination approved by the New Raytheon Board. The New Raytheon
Rights will be distributed to protect New Raytheon's stockholders from coercive
or abusive takeover tactics and to give the New Raytheon Board more negotiating
leverage in dealing with prospective acquirors.
LIMITATION ON NEW RAYTHEON DIRECTORS' LIABILITY
The New Raytheon Certificate of Incorporation provides, as authorized by
Section 102(b)(7) of the Delaware General Corporation Law, that a director of
New Raytheon will not be personally liable to New Raytheon or its stockholders
for monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption or limitation is prohibited under the Delaware General
Corporation Law.
The inclusion of this provision in the New Raytheon Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefited New Raytheon and its stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Like General Motors, New Raytheon is a Delaware corporation and subject to
Section 203 of the Delaware General Corporation Law. Generally, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the time such stockholder became an interested stockholder, unless (1) prior to
such time, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (2) upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced or (3) at
or subsequent to such
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time, the business combination is approved by the board of directors and
authorized by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder. A "business
combination" includes (a) any merger or consolidation of the corporation with
the interested stockholder, (b) any sale, lease, exchange or other disposition,
except proportionately as a stockholder of such corporation, to or with the
interested stockholder of assets of the corporation having an aggregate market
value equal to 10% or more of either the aggregate market value of all the
assets of the corporation or the aggregate market value of all the outstanding
stock of the corporation, (c) certain transactions resulting in the issuance or
transfer by the corporation of stock of the corporation to the interested
stockholder, (d) certain transactions involving the corporation which have the
effect of increasing the proportionate share of the stock of any class or
series of the corporation which is owned by the interested stockholder or (e)
certain transactions in which the interested stockholder receives financial
benefits provided by the corporation. An "interested stockholder" generally is
(1) any person that owns 15% or more of the outstanding voting stock of the
corporation, (2) any person that is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period prior to the date on
which it is sought to be determined whether such person is an interested
stockholder and (3) the affiliates or associates of any such person.
LIMITATIONS ON CHANGES IN CONTROL
The New Raytheon By-Laws contain provisions requiring that advance notice be
delivered to New Raytheon of any business to be brought by a stockholder before
an annual meeting of stockholders and providing for certain procedures to be
followed by stockholders in nominating persons for election to the New Raytheon
Board. Generally, such advance notice provisions provide that the stockholder
must give written notice to the Secretary of New Raytheon not less than 90 days
nor more than 120 calendar days before the first anniversary of the preceding
year's annual meeting. In the event that the date of the annual meeting is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be delivered to
the Secretary of New Raytheon not earlier than the close of business on the
120th calendar day prior to such annual meeting and not later than the close of
business on the later of the 90th calendar day prior to such annual meeting or
the 10th calendar day following the calendar day on which public announcement
of the date of such meeting is first made by New Raytheon. In the event that
the number of directors to be elected to the New Raytheon Board is increased
and there is no public announcement by New Raytheon naming all of the nominees
for director or specifying the size of the increased New Raytheon Board at
least 100 calendar days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice will also be considered timely if it is
delivered not later than the close of business on the 10th calendar day
following the day on which public announcement is first made by New Raytheon.
The notice must set forth specific information regarding such stockholder and
such business or director nominee, as described in the New Raytheon By-Laws.
The New Raytheon Certificate of Incorporation provides that, except as may be
provided by the New Raytheon Certificate of Incorporation or in the resolution
or resolutions providing for the issuance of any series of New Raytheon
Preferred Stock, the number of directors shall not be fewer than three nor more
than fifteen and provides for a classified board of directors, consisting of
three classes as nearly equal in size as practicable. Each class holds office
until the third annual stockholders' meeting for election of directors
following the most recent election of such class, except that the initial terms
of the three classes expire in 1998, 1999 and 2000, respectively. See Chapter
5, "New Raytheon." A director of New Raytheon may be removed only for cause.
The New Raytheon Certificate of Incorporation provides that stockholders may
not act by written consent in lieu of a meeting. Special meetings of the
stockholders may be called by the Chairman of the New Raytheon Board or by the
New Raytheon Board (if approved by a majority of directors which New Raytheon
would have if there were no vacancies), but may not be called by stockholders.
No business other than that stated in the notice shall be transacted at any
special meeting. In the event New Raytheon calls a special meeting for the
purpose of electing one or more directors to the New Raytheon Board, any
stockholder may nominate a person or persons (as the case may be), for election
to such position(s) as specified in the notice of special meeting, if
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notice by the stockholder is delivered to the Secretary of New Raytheon not
earlier than the close of business on the 120th calendar day prior to such
special meeting and not later than the close of business on the later of the
90th calendar day prior to such special meeting or the 10th calendar day
following the calendar day on which public announcement of the date of such
meeting and the nominees proposed by the New Raytheon Board to be elected at
such meeting is first made by New Raytheon.
The New Raytheon Certificate of Incorporation provides that the New Raytheon
Board, in determining whether to take or refrain from taking corporate action
on any matter, including making or declining to make any recommendation to the
stockholders of New Raytheon, may in its discretion consider the long-term as
well as short-term best interests of New Raytheon (including the possibility
that these interests may be best served by the continued independence of New
Raytheon), taking into account, and weighing as the directors deem appropriate,
the effects of such action on employees, suppliers and customers of New
Raytheon and its subsidiaries, the effect upon communities in which offices or
other facilities of New Raytheon are located and any other factors the
directors consider pertinent.
In order to preserve the tax-free status of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off and the Raytheon Merger, New Raytheon will be subject
to certain covenants under the Spin-Off Separation Agreement which will act to
prohibit New Raytheon from entering into or permitting (to the extent that New
Raytheon has the right to prohibit) certain transactions, such as (1) certain
acquisition transactions, stock issuance transactions and stock buyback
transactions for two years following the Raytheon Merger Effective Time and (2)
certain recapitalizations, reincorporations and similar transactions affecting
the rights and privileges of New Raytheon Common Stock, in each case unless
General Motors has, in its sole and absolute discretion, which discretion shall
be exercised in good faith solely to preserve the tax-free status of the Hughes
Defense Spin-Off, the Hughes Telecom Spin-Off and the Raytheon Merger,
determined that such transactions would not jeopardize the tax-free status of
any of the Hughes Defense Spin-Off, the Hughes Telecom Spin-Off and the
Raytheon Merger. In addition, for three years following the Hughes Defense
Spin-Off, New Raytheon will be prohibited from amending or changing the New
Raytheon Certificate of Incorporation or the New Raytheon By-Laws in such a way
as to affect the composition or size of the New Raytheon Board, the manner in
which the New Raytheon Board is elected or the duties and responsibilities of
the New Raytheon Board unless General Motors has, in its sole and absolute
discretion, which discretion shall be exercised in good faith solely to
preserve the tax-free status of the Hughes Defense Spin-Off, the Hughes Telecom
Spin-Off and the Raytheon Merger, determined that such actions would not
jeopardize the tax-free status of any of the Hughes Defense Spin-Off, the
Hughes Telecom Spin-Off and the Raytheon Merger. For additional information
regarding these prohibitions, see "Separation and Transition Arrangements--
Summary of Spin-Off Separation Agreement--Preservation of Tax-Free Status of
the Hughes Transactions and the Raytheon Merger" in Chapter 3.
The foregoing provisions of the New Raytheon Certificate of Incorporation,
the New Raytheon By-Laws and the Spin-Off Separation Agreement, together with
the New Raytheon Rights Agreement and the provisions of Section 203 of the
Delaware General Corporation Law, could have the effect of delaying, deferring
or preventing a change in control of New Raytheon or the removal of existing
management, of deterring potential acquirors from making an offer to
stockholders of New Raytheon and of limiting any opportunity to realize
premiums over prevailing market prices for New Raytheon Common Stock in
connection therewith. For a description of certain other factors that could
limit such changes in control and offers, see "Risk Factors--Risk Factors
Regarding New Raytheon After the Raytheon Merger--Certain Limitations on
Changes in Control of New Raytheon; New Raytheon's Ability to Participate in
Future Defense Industry Consolidation" in Chapter 2. This could be the case
notwithstanding that a majority of New Raytheon's stockholders might benefit
from such a change in control or offer.
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