AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997     
                                                   
                                                REGISTRATION NO. 333-37223     
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                ---------------
                                
                             AMENDMENT NO. 1     
                                       
                                    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
 
    THE COMMON STOCKHOLDERS OF GENERAL MOTORS CORPORATION ARE BEING ASKED 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
  54.1% TO OUR CLASS H COMMON STOCKHOLDERS AND 45.9% 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.................................. 87 DESCRIPTION OF THE RAYTHEON MERGER...................................... 99 SEPARATION AND TRANSITION ARRANGEMENTS.................................. 120 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS................................. 132 RECENT DEVELOPMENTS..................................................... 134 GENERAL MOTORS PRO FORMA CONSOLIDATED CAPITALIZATION.................... 135 INTRODUCTION TO THE FINANCIAL AND BUSINESS REVIEWS OF HUGHES DEFENSE, DELCO AND HUGHES TELECOM............................... 137 HUGHES DEFENSE SELECTED COMBINED HISTORICAL FINANCIAL DATA.............. 138 HUGHES DEFENSE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 139 BUSINESS OF HUGHES DEFENSE.............................................. 143 DELCO SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA......... 151 DELCO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....... 152 DELCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................. 156 BUSINESS OF DELCO....................................................... 160 HUGHES TELECOM SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA................................................................... 167 HUGHES TELECOM UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............................................................. 168 HUGHES TELECOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 175 BUSINESS OF HUGHES TELECOM.............................................. 180 RAYTHEON SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA...... 194 OVERVIEW OF RAYTHEON BUSINESS........................................... 195
i TABLE OF CONTENTS TABLE OF CONTENTS
PAGE ---- CHAPTER 5: NEW RAYTHEON................................................. 197 NEW RAYTHEON UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS.......................................................... 199 OVERVIEW OF NEW RAYTHEON BUSINESS.................................... 205 NEW RAYTHEON MANAGEMENT.............................................. 207 CHAPTER 6: CAPITAL STOCK................................................ 211 COMPARISON OF GM CLASS H COMMON STOCK, NEW GM CLASS H COMMON STOCK AND CLASS A COMMON STOCK............................................ 212 CONSIDERATIONS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL STRUCTURE........................................................... 222 GM CLASS H COMMON STOCK.............................................. 226 NEW GM CLASS H COMMON STOCK.......................................... 230 NEW RAYTHEON CAPITAL STOCK........................................... 235 CHAPTER 7: CONSENT SOLICITATION AND CERTAIN OTHER MATTERS............... 244 SOLICITATION OF WRITTEN CONSENT OF GM'S COMMON STOCKHOLDERS.......... 245 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GENERAL MOTORS...................................................... 248 FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE..................... 249 ESTIMATED FEES AND EXPENSES.......................................... 250 LEGAL MATTERS........................................................ 251 EXPERTS.............................................................. 251 WHERE YOU CAN FIND MORE INFORMATION.................................. 252 GLOSSARY................................................................ 254 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 Certain Historical and Pro Forma Per Share Data................. 9 General Motors Selected Consolidated Historical Financial Data.. 11 Introduction to Hughes Electronics Summary Financial Review..... 13 Overview....................................................... 13 Purchase Accounting Adjustments................................ 13 Hughes Electronics Summary Consolidated Financial Data (Including Purchase Accounting Adjustments).................... 15 Hughes Electronics Unaudited Summary Consolidated Financial Data (Excluding Purchase Accounting Adjustments).................... 16 Hughes Defense Summary Combined Financial Data.................. 17 Delco Summary Combined Historical and Pro Forma 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 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 7, 1997 closing price of Raytheon Common Stock of $57.00 per share (the "Recent Raytheon Stock Price"). These calculated values include the percentage of Class A Common Stock that will be distributed to holders of each class of GM common stock, the indicated value of the Class A Common Stock to be distributed, the amount of debt that Hughes Defense will be permitted to have when it is spun off and the amount of new capital to be made available to Hughes Telecom. These calculations are illustrative only and will change based on changes in the market price of Raytheon Common Stock between now and the closing. We also refer throughout this document to the tracking stock interest of the GM Class H Common Stockholders in the earnings of our Hughes Electronics subsidiary as being approximately 25%. This percentage amount, which we call the "Class H Fraction," changes depending on the number of shares of GM Class H Common Stock outstanding at any time. For most calculations in this document which use the Class H Fraction, we have used the Class H Fraction as of September 30, 1997 (approximately 25.6%). INTRODUCTION TO THE HUGHES TRANSACTIONS THE HUGHES TRANSACTIONS We are proposing three related transactions to enhance the value of the businesses operated by our Hughes Electronics subsidiary. We need your consent in order to accomplish these "Hughes Transactions." (1) HUGHES DEFENSE We propose to spin off the defense electronics business of Hughes Electronics to our common stockholders. We call this business "Hughes Defense." Immediately after the spin-off, Hughes Defense will merge with Raytheon Company. Based on the Recent Raytheon Stock Price, these transactions have an indicated value of approximately $9.8 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 $5.8 billion based on the Recent Raytheon Stock Price. Approximately 54.1% of the Class A Common Stock would be distributed to GM Class H Common Stockholders and approximately 45.9% 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 common stockholders will have an approximately 30% equity interest). The indicated transaction value of approximately $9.8 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 integrate 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 54.1% 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 ($57.00 per share on October 7, 1997) for illustrative calculations of the amount of the Class A Common Stock to be distributed to the holders of each class of GM common stock and the value of those distributions. Second, under our agreement with Raytheon, changes in Raytheon's stock price within a "collar" range will affect the amount of debt that Hughes Defense is permitted to have when it is spun off, and thus the amount available as capital for Hughes Telecom. The actual amount of permitted debt and the allocation of Class A Common Stock between the two classes of GM common stockholders will depend on the average stock price of Raytheon during a specified period prior to the closing of the Hughes Transactions. The Recent Raytheon Stock Price is not necessarily indicative of this average price or the market value of Raytheon common stock at the time of or after the closing of the transactions. The collar range for Raytheon's stock price is between $44.42 and $54.29 per share. If the price of Raytheon Common Stock is within the collar (which it was in January 1997 when the agreement was entered into with Raytheon), the amount of debt that Hughes Defense is permitted to have will be adjusted so that the total transaction value will be $9.5 billion. Raytheon stock prices above $54.29 per share would result in transaction values higher than $9.5 billion, while Raytheon stock prices below $44.42 per share would result in transaction values less than $9.5 billion. Based on the Recent Raytheon Stock Price, the Class A Common Stock distributed in the spin-off would be worth approximately $5.8 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 $9.8 billion. 3 CHAPTER 1: INTRODUCTION The following table shows a range of illustrative Raytheon Common Stock prices and how they affect the total value of the transaction:
RAYTHEON VALUE OF HUGHES TOTAL COMMON CLASS A DEFENSE INDICATED STOCK PRICE COMMON STOCK DEBT VALUE - ----------- ------------ ------- --------- ($ 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 54.1% of these shares will be distributed to GM Class H Common Stockholders and approximately 45.9% 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 4 CHAPTER 1: INTRODUCTION immediately before the 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 29,216,058 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 54.1% of the Class A Common Stock to GM Class H Common Stockholders. The balance of 45.9% 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 0.06662 shares of Class A Common Stock with an indicated market value of $3.80. ---------------- One share of GM One share of New GM Class H Common Stock Class H Common Stock AND 0.54178 shares of Class A Common Stock with an indicated market value of $30.88.
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. 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 7 CHAPTER 1: INTRODUCTION 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 CERTAIN HISTORICAL AND PRO FORMA PER SHARE DATA The following table presents certain historical per share data for the GM $1 2/3 Common Stock, the GM Class H Common Stock and Raytheon Common Stock and certain pro forma per share data for the GM $1 2/3 Common Stock, the New GM Class H Common Stock and the two classes of New Raytheon Common Stock. The historical per share data as of and for the year ended December 31, 1996 have been derived from GM's Consolidated Financial Statements and should be read in conjunction with such 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 to the GM 1996 Form 10-K. The historical per share data for GM $1 2/3 Common Stock and GM Class H Common Stock as of and for the six months ended June 30, 1997 have been derived from GM's unaudited consolidated financial statements for such period, which in the opinion of GM management, reflect all adjustments (consisting of only normal recurring items) that are necessary to fairly present the historical per share data for such period. The pro forma per share data for the two classes of GM common stock as of and for the six months ended June 30, 1997 and for the year ended December 31, 1996 give effect to the PanAmSat Merger and Hughes Transactions. The pro forma per share data for the two classes of New Raytheon Common Stock as of and 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. The pro forma per share data for the two classes of New Raytheon Common Stock have been derived from, and should be read in conjunction with, the financial data set forth under "New Raytheon Unaudited Pro Forma Combined Condensed Financial Statements" in Chapter 5. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year. The pro forma per share data for the two classes of GM common stock and the two classes of New Raytheon Common Stock are not necessarily indicative of future operating results. GM COMMON STOCK HISTORICAL PER SHARE DATA
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 (a)................ $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 (B)
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 (a)................. $27.95 $13.98 (c) (c) 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
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 9 CHAPTER 1: INTRODUCTION NEW RAYTHEON COMMON STOCK PRO FORMA PER SHARE DATA (D)
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 (e).................. $29.33 $29.33 (c) (c) Earnings per share........................ 1.32 1.32 $ 2.65 $ 2.65
GM COMMON STOCK PRO FORMA EQUIVALENT PER SHARE INFORMATION
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 (a)........................ $27.95 $13.98 Book value per share of New Raytheon (f).......................... 1.92 16.05
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 continung operations of General Motors................................ $4.63 $0.16 $5.90 $0.31 Earnings per share of New Raytheon (f)......... 0.09 0.72 0.17 1.45
- ------------ (a) Determined based on the liquidation rights with respect to the assets of General Motors associated with the two classes of GM common stock. For a description of such liquidation rights, see "GM Class H Common Stock" in Chapter 6. (b) Pro forma amounts reflect the removal of the assets, liabilities and operating results of Hughes Defense, including acquisition goodwill allocated to Hughes Defense and related amortization that was previously charged against the earnings available for the payment of dividends on GM $1 2/3 Common Stock, the impact of the PanAmSat Merger, the transfer of Delco from Hughes Electronics to General Motors such that 100% of the earnings of Delco are available for the payment of dividends on GM $1 2/3 Common Stock and other items related to the Hughes Defense Spin-Off. In addition, the earnings per share on New GM Class H Common Stock reflect the earnings of New Hughes Electronics that would have become available for the payment of dividends on New GM Class H Common Stock during the respective periods. For additional information regarding the amounts available for the payment of dividends on the two classes of GM common stock, see "New GM Class H Common Stock--GM Certificate of Incorporation Provisions Regarding Dividends" in Chapter 6. (c) Pro forma book values per share as of December 31, 1996 for the two classes of GM common stock and the two classes of New Raytheon Common Stock have not been determined. (d) Pro forma amounts include adjustments to reflect the impact of the Hughes Defense Spin-Off and the Raytheon Merger and Raytheon's acquisition of Texas Instruments Defense. (e) Calculated by dividing the pro forma book value of the net assets of New Raytheon by the number of shares of New Raytheon Common Stock expected to be outstanding upon the consummation of the Hughes Defense Spin-Off and the Raytheon Merger. (f) Amount determined by calculating the ratio (based on the Recent Raytheon Stock Price) of the number of shares of Class A Common Stock to be issued to holders of GM $1 2/3 Common Stock and GM Class H Common Stock, respectively, on the date of the Hughes Defense Spin-Off, to the number of shares of GM $1 2/3 Common Stock and Class H Common Stock outstanding at June 30, 1997 multiplied by the Class A Common Stock pro forma book value per share and earnings per share, as applicable. On January 16, 1997, 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 5/8 and the aggregate market value of the outstanding GM $1 2/3 Common Stock was approximately $45.8 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 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. 10 GENERAL MOTORS SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA The following General Motors selected consolidated historical financial data have been derived from the consolidated financial statements of General Motors. Such data 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 to the GM 1996 Form 10-K. The General Motors selected consolidated historical financial data as of and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from GM's Consolidated Financial Statements, which have been audited by Deloitte & Touche LLP, independent public accountants. The selected consolidated historical financial data presented with financing and insurance operations on an equity basis as of and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 are unaudited. The General Motors selected consolidated historical financial data as of and for the six months ended June 30, 1997 and 1996 have been derived from GM's unaudited consolidated financial statements for such periods, which, in the opinion of GM management, reflect all adjustments (consisting of only normal recurring items) that are necessary to fairly present the selected consolidated historical financial data for such periods. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year. Pro forma financial statements for General Motors have not been prepared because the Hughes Transactions will not have an ongoing material impact on GM's overall results of operations or financial condition. The Hughes Transactions will, however, initially increase GM's net liquidity by an amount equal to the debt proceeds received by Hughes Defense prior to the Hughes Defense Spin-Off, reduced by the transaction costs (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 (A) 1994 (B) 1993 1992 (C) ---------- ---------- -------- -------- -------- -------- -------- (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) ---------- ---------- -------- -------- -------- -------- --------
CHAPTER 1: INTRODUCTION 11 CHAPTER 1: INTRODUCTION
AS OF AND FOR THE SIX AS OF AND FOR THE MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, --------------------- ----------------------------------------------- 1997 1996 1996 1995 (A) 1994 (B) 1993 1992 (C) ---------- ---------- -------- -------- -------- -------- -------- 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 (d) 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 ========== ========== ======== ======== ======== ======== ======== 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) In November 1995, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus on its Issue No. 95-1, "Revenue Recognition of Sales with a Guaranteed Minimum Resale Value." Adoption of this consensus, effective January 1, 1995, resulted in an unfavorable cumulative effect of $52 million, or $0.07 per share, attributable to GM $1 2/3 Common Stock. (b) Effective January 1, 1994, General Motors adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits." The unfavorable cumulative effect of adopting SFAS No. 112 was $758 million, or $751 million, or $1.05 per share, attributable to GM $1 2/3 Common Stock and $7 million, or $0.08 per share, attributable to GM Class H Common Stock. (c) 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. (d) Amount of funds legally available as of such date for the payment of dividends on each class of GM common stock under the GM Certificate of Incorporation. For additional information, see "New GM Class H Common Stock--GM Certificate of Incorporation Provisions Regarding Dividends" in Chapter 6. 12 CHAPTER 1: INTRODUCTION INTRODUCTION TO HUGHES ELECTRONICS SUMMARY FINANCIAL REVIEW 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. 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 Certain purchase accounting adjustments arose at the time of GM's acquisition of Hughes Aircraft in 1985. 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), such remaining 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) set forth immediately below reflect 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 13 CHAPTER 1: INTRODUCTION 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 such purchase accounting adjustments applicable to each of Hughes Defense and Hughes Telecom. 14 CHAPTER 1: INTRODUCTION HUGHES ELECTRONICS SUMMARY CONSOLIDATED FINANCIAL DATA (INCLUDING PURCHASE ACCOUNTING ADJUSTMENTS) The following Hughes Electronics summary consolidated financial data have been derived from the consolidated financial statements of Hughes Electronics. The data should be read in conjunction with Hughes Electronics' Consolidated Financial Statements (including the notes thereto) included in Exhibit 99 to the GM 1996 Form 10-K, which is incorporated into this document by reference. The income statement data for the years ended, and the balance sheet data as of, December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the consolidated financial statements of Hughes Electronics audited by Deloitte & Touche LLP, independent public accountants. The income statement data for the six-month periods ended, and the balance sheet data as of, June 30, 1997 and 1996 have been derived from unaudited consolidated financial statements of Hughes Electronics. In the opinion of management, the unaudited 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. 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 (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. 15 CHAPTER 1: INTRODUCTION 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. 16 CHAPTER 1: INTRODUCTION HUGHES DEFENSE SUMMARY COMBINED FINANCIAL DATA The following Hughes Defense summary 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 years 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 years ended December 31, 1993 and 1992 and the six-month periods ended 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 of only 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. 17 CHAPTER 1: INTRODUCTION DELCO SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA The following Delco summary 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 years 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 years ended December 31, 1993 and 1992 and the six-month periods ended 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 Delco. In the opinion of management, the unaudited combined 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 Delco unaudited summary 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 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 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. 18 CHAPTER 1: INTRODUCTION HUGHES TELECOM SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA The following Hughes Telecom summary 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 years 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 years ended December 31, 1993 and 1992 and the six-month periods ended 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 of only normal recurring items) that are necessary for the fair presentation of financial position and results of operations for such periods. The Hughes Telecom 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 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............ $2,349.4 $ 342.8 $ 5.6 $ 6.7 $ 7.6 $ 5.8 $ 10.2 $ 6.4 Current assets.......... 4,239.7 2,195.1 1,417.9 1,535.7 1,242.9 1,175.9 1,120.5 1,339.5 Total assets............ 11,654.1 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............. 7,143.8 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. 19 CHAPTER 1: INTRODUCTION RAYTHEON SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA The following Raytheon summary 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 the 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 data as of December 31, 1996 and pro forma other data have not been determined. 20 CHAPTER 1: INTRODUCTION RECENT DEVELOPMENTS RAYTHEON SALE OF PORTIONS OF THE APPLIANCES BUSINESS On September 10, 1997, Raytheon consummated the sale of its home appliance, heating and air conditioning and commercial cooking businesses to Goodman Manufacturing Company, L.P. for an aggregate amount of $550 million in cash, subject to 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. 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, 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. Because the Texas Instruments Defense Acquisition involved the purchase of assets, a significant portion of the goodwill created by the acquisition will be deductible for tax purposes. 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, $4.0 billion of which has a maturity of 5 years and $3.0 billion of which has a maturity of 364 days (collectively, the "Raytheon Facilities"). Raytheon incurred indebtedness in the amount of $2.95 billion under the Raytheon Facilities in order to finance the 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. 21 22 CHAPTER 2: RISK FACTORS 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
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. 23 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 $1.6 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. 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. Nothing in the GM Certificate of Incorporation, as proposed to be amended in the Hughes Transactions, or in the new GM Board policy statement referred to above, will restrict the GM Board's ability to submit from time to time to the GM common stockholders for their consideration and approval one or more 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. 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. 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 Telecom is $0.31. Furthermore, 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. 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 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. 30 31 CHAPTER 2: RISK FACTORS 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. 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 34 THE RAYTHEON MERGER 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........................................................ 65 Requisite Stockholder Approval of the Hughes Transactions........ 80 Certain U.S. Federal Income Tax Considerations Relating to Certain of the Hughes Transactions.............................. 81 Certain U.S. Federal Income Tax Considerations Relating to the Raytheon Merger................................................. 83 Stockholder Litigation Relating to the Hughes Transactions....... 85 DESCRIPTION OF THE HUGHES TRANSACTIONS............................ 87 General.......................................................... 87 GM Spin-Off Merger Agreement..................................... 90 Allocation of Hughes Defense New Debt Prodeeds; Hughes Telecom Funding......................................................... 95 No Recapitalization at a 120% Exchange Ratio..................... 95 Stockholder Approval of the Hughes Transactions.................. 96 No Appraisal Rights.............................................. 97 Certain U.S. Federal Income Tax Considerations................... 97 Certain Litigation............................................... 97 Accounting Treatment............................................. 97 Regulatory Requirements.......................................... 97 Sales to General Motors.......................................... 98 DESCRIPTION OF THE RAYTHEON MERGER................................ 99 General.......................................................... 99 Raytheon Merger Agreement........................................ 101 Implementation Agreement......................................... 111 GM Stockholder Approval Not Required for the Raytheon Merger..... 114 Approvals by the Capital Stock Committee and the GM Board; Fairness of the Raytheon Merger................................. 115 Raytheon Merger Fairness Opinion: Goldman Sachs ................. 115 Certain U.S. Federal Income Tax Considerations................... 119 Accounting Treatment............................................. 119 SEPARATION AND TRANSITION ARRANGEMENTS............................ 120 Introduction..................................................... 120 Summary of Master Separation Agreement........................... 120 Summary of Spin-off Separation Agreement......................... 123 Summary of Tax Sharing Agreement................................. 127 Summary of Other Agreements Contemplated by the Master Separation Agreement....................................................... 128
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. 35 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. In September 1997, Ford Motor Company ("Ford") announced its intention to reorganize its component operations into a unit called "Visteon." Ford's objectives with respect to Visteon appear to be similar to GM's strategy with respect to the integration of Delco and Delphi, and include, among other things, increasing sales to other original equipment manufacturers 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 original equipment manufacturers ("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 36 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 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. 37 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 be deprived of their tracking stock investment in Hughes Electronics; and the loss of GM's flexibility to finance Hughes Electronics through the tax-free issuance of tracking stock. 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 proposed 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 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 38 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 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 39 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 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. 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. 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 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. 40 CHAPTER 3: THE HUGHES TRANSACTIONS AND 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 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 41 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER terminate such negotiations and pursue other alternatives after they were unable to reach agreements on certain management issues. 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 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 42 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 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 43 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 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 50% of the common stock of the new company. On January 6 and 7, 1997, the joint management team, working together with its financial, tax and legal advisors, reviewed each party's submission and discussed the proposals with each party and its advisors in an attempt to seek clarification with respect to certain matters. These matters included, among other things, total value of the proposals, the treatment of stock options held by Hughes Defense employees and, in the case of Northrop Grumman, the addition of a "collar" mechanism to its proposal. Based on these discussions, as requested by the joint management team, each of Raytheon and Northrop Grumman submitted final proposals to General Motors and Hughes Electronics on the evening of January 8, 1997. The final proposals of Raytheon and Northrop Grumman were substantially comparable, other than with respect to the total value of the consideration offered (which consisted, in each case, of a combination of common stock in the new company and debt to be assumed by the new company, protected by an equity collar). Raytheon's final proposal was valued at approximately $9.5 billion and Northrop Grumman's final proposal was valued at approximately $9.3 billion. 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 on the foregoing, 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 44 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER joint management team presented its recommendation that Raytheon be selected as the merger partner for Hughes Defense. Goldman Sachs made a presentation to and 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 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 the recommendations of the joint management team and the GM President's Council were discussed. The Hughes Defense Spin-Off Committee also considered information presented 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 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. 45 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER John F. Smith, Jr., Chairman, Chief Executive Officer and President of General Motors, 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 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 46 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. Materials used in connection with Goldman Sachs' presentation have been filed as an exhibit to the Schedule 13E-3 filed by General Motors in connection with the registration statement that includes 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 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 47 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. 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 48 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 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND 49 THE RAYTHEON MERGER 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 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND 50 THE RAYTHEON MERGER 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 then explained that the allocation of the Class A Common Stock to be distributed to GM's common stockholders in the Hughes Defense Spin-Off between the GM $1 2/3 Common Stockholders and the GM Class H Common Stockholders in accordance with the Distribution Ratio would be an important element of the fairness of the Hughes Transactions to the holders of both classes of GM's common stock. He explained that, in accordance with the proposed Distribution Ratio, the GM Class H Common Stockholders as a whole would receive an amount of the Class A Common Stock which represents their current approximately 25% tracking stock interest in Hughes Defense plus an additional amount in order to reflect the net effect on them of all other aspects of the Hughes Transactions, principally the transfer of Delco to General Motors (which would result in the elimination of their tracking stock interest in Delco). Similarly, the GM $1 2/3 Common Stockholders as a whole would receive a distribution of the Class A Common Stock which represents less than their current approximately 75% interest in Hughes Defense in order to reflect the net effect on them of all other aspects of the Hughes Transactions, principally the transfer of Delco to General Motors. Mr. Finnegan then reviewed the GM Board's January 1997 decision to reserve for later determination the Distribution Ratio. He noted that the key elements in determining the Distribution Ratio were the value of the combined Hughes Defense/Raytheon, the value of Delco and the value effects of all other aspects of the Hughes Transactions and that the GM Board should also consider, among the other things, stockholder expectations regarding the Hughes Transactions. With respect to the combined Hughes Defense/Raytheon, Mr. Finnegan stated that the value was based upon the market price of Raytheon Common Stock. He reported that GM's financial advisors had completed due diligence and were expected to conclude that the use of the market price was supportable. With respect to Delco, he reported that customary valuation methodologies had been utilized, as would be described in greater detail. He noted that the value of the other factors (which would be reviewed later) were more directional than quantifiable. He also reported that, as to Hughes Telecom, the CHAPTER 3: THE HUGHES TRANSACTIONS AND 51 THE RAYTHEON MERGER 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 and the GM President's Council. 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. The valuations of Delco (including the valuation techniques utilized) by each of Merrill Lynch and Salomon Brothers are described below under "--Hughes Transactions Fairness Opinions-- Merrill Lynch and Salomon Brothers." Mr. Finnegan then described certain other factors to be considered in determining the Distribution Ratio formula and the Net Transaction Effect Base Amount. He explained that acquisition goodwill allocated to Hughes Defense (in an amount currently requiring amortization charges at the rate of approximately $100 million per year) would be included in the value of the net assets of Hughes Defense at the time of the Hughes Defense Spin-Off and thus would no longer result in a charge to earnings attributable to GM $1 2/3 Common Stockholders. He further explained that the Hughes Defense Spin-Off would generate a substantial one-time gain, which would 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. 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND 52 THE RAYTHEON MERGER 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 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND 53 THE RAYTHEON MERGER 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 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 profit sharing payments under GM's collective bargaining agreements. 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND 54 THE RAYTHEON MERGER 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 Committee Meeting" above. She also reported that management expected Hughes Telecom to use a portion of 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. 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 that, subject to the assumptions, limitations and other matters set forth in its written opinion, to the effect that 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND 55 THE RAYTHEON MERGER 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 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 is 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. 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 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 is 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. 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." CHAPTER 3: THE HUGHES TRANSACTIONS AND 56 THE RAYTHEON MERGER 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 determination of the Distribution Ratio. 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. 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND 57 THE RAYTHEON MERGER 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 generally referred to it in this document as "approximately 25%." Although it may vary, we do not expect this fraction to change significantly between now and the closing. The Class H Dividend Base is the denominator of the fraction that is used in the GM Certificate of Incorporation to allocate the earnings of Hughes Electronics between GM's two classes of common stock for dividend purposes. (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 CHAPTER 3: THE HUGHES TRANSACTIONS AND 58 THE RAYTHEON MERGER CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 ($57.00 per share on October 7, 1997), (2) the Class H Fraction is 25.6% and (3) there will be no existing indebtedness of Hughes Defense at the time of the Hughes Defense Spin-Off. As a result of the assumed Class A Share Value, 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. 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: that is, 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) 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 $57.00, or 29,216,058 shares. Based on the assumptions stated above, the Class H Distribution would be equal to the sum of the two components, amounting to 55,510,234 shares of Class A Common Stock in total, and 0.54178 shares of Class A Common Stock per share of GM Class H Common Stock. Accordingly, the Class H Distribution would amount to approximately 54.1% 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 55,510,234, or 47,120,269 shares of Class A Common Stock in total, and 0.06662 shares of Class A Common Stock per share of GM $1 2/3 Common Stock. This would amount to approximately 45.9% of the total distribution of Class A Common Stock to GM common stockholders. 59 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. 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 $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. CHAPTER 3: THE HUGHES TRANSACTIONS AND 60 THE RAYTHEON MERGER CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 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 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 and 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 satisfy the criteria set forth above as to fairness and the delivery by Merrill Lynch and Salomon Brothers of certain fairness opinions. 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 and determination of a Distribution Ratio satisfying the criteria 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 as to the fairness of 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 61 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). 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. The GM Board also determined that the Distribution Ratio would be determined shortly before the Hughes Transactions would be submitted for stockholder approval so that the GM Board could then consider the most current business and financial information. 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. 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 62 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. Thereafter, 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 approving the Hughes Transactions in January 1997, the GM Board had reserved for future determination the Distribution Ratio, 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 possibility of fluctuations in the factors contributing to the determination of the Distribution Ratio that might occur in the marketplace or otherwise during such interval. In determining to recommend that the GM Board approve the definitive terms of the Hughes Transactions, 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. In determining the fairness of the Hughes Transactions, the GM Board attributed principal importance to the determination of the Distribution Ratio. In reviewing and approving 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). Accordingly, 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) as a key factor in the determination of the Net Transaction Effect in the Distribution Ratio formula and, ultimately, of the fairness of the Hughes Transactions to the holders of each class of GM common stock. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 63 In determining the value to be ascribed to Delco for purposes of setting the Distribution Ratio, the GM Board placed substantial reliance on the Capital Stock Committee's review and approval of 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 GM management and Hughes Electronics management, the assessments by GM management and Hughes Electronics management that such business plan was realistic and reasonably achievable, and the Capital Stock Committee's approval of its 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 GM common stock. 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. 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 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, if structured in a manner similar to the Hughes Transactions, would be subject to these legislative provisions and would thus cause General Motors to recognize taxable gain for U.S. federal income tax purposes if consummated. With respect to the fairness of the Hughes Transactions, the GM Board considered the process by which the definitive terms were developed and 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, and that these approvals would together constitute 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, as required by applicable law. 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 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. 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. 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 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, CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 64 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 the post-closing payment between General Motors and New Hughes Electronics, 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. 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 65 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. 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 66 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 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 67 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. 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 68 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 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, CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 69 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 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 70 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 an agreement with the United Auto Workers; and (7) the nature and terms of certain other transactions that Salomon Brothers believes to be relevant. Salomon Brothers took into account its assessment of general economic, market and financial conditions and its knowledge of the defense, telecommunications and automotive component industries as well as its experience in connection with similar transactions and securities valuation generally. Salomon Brothers was not requested to solicit, and accordingly did not solicit, alternative proposals with respect to the disposition of, or any other extraordinary transaction involving, any of Hughes Defense, Delco or Hughes Telecom. Salomon Brothers is an internationally recognized investment banking firm engaged, among other things, in the valuation of businesses and their securities in connection with restructurings, mergers and acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. General Motors selected Salomon Brothers to act as its financial advisor on the basis of Salomon Brothers' international reputation. Salomon Brothers has previously rendered certain other investment banking and financial advisory services to General Motors and its subsidiaries, including Hughes Electronics, and to Raytheon, including advice with respect to various acquisitions and capital market transactions, for which it received substantial compensation. In the ordinary course of business, Salomon Brothers may actively trade the debt and equity securities of General Motors (including its subsidiaries) and Raytheon for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. Pursuant to a letter agreement dated November 22, 1996 (the "Salomon Brothers Engagement Letter"), General Motors engaged Salomon Brothers to act as its financial advisor in connection with the Hughes Transactions. Pursuant to the terms of the Salomon Brothers Engagement Letter, General Motors has already paid Salomon Brothers $5 million and will be obligated to pay Salomon Brothers additional fees of $15 million in the event that the Hughes Transactions (or certain similar transactions) are completed on or before December 31, 2000. General Motors has also agreed to reimburse Salomon Brothers for its reasonable travel and other out-of-pocket expenses incurred in connection with its engagement (including the reasonable fees and disbursements of its counsel) and to indemnify Salomon Brothers against certain liabilities and expenses relating to or arising out of its engagement, including certain liabilities under the federal securities laws. As noted 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 71 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 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 offices of General Motors Corporation at General Motors Corporation, Room 11-243, General Motors Building, 3044 West Grand Boulevard, Detroit, Michigan 48202-3091 during regular business hours by any interested common stockholder of General Motors or his or her representative who has been so designated in writing. Overview of Analyses. In reviewing the Hughes Transactions, Merrill Lynch and Salomon Brothers noted that, as a result thereof, the GM Class H Common Stockholders will (1) relinquish their approximately 25% tracking stock interest in Hughes Defense but will receive approximately 25% of the Class A Common Stock, which will reflect the benefits of the Hughes Defense Spin-Off and the Raytheon Merger; (2) relinquish their approximately 25% tracking stock interest in Delco (in addition to that percentage of any funding from Hughes Defense transferred by Hughes Telecom to General Motors) but will receive additional shares of Class A Common Stock to compensate them for the Net Transaction Effect and (3) will maintain an approximately 25% tracking stock interest in Hughes Telecom (which will have received approximately $3.9 to $4.0 billion in new funding) through their ownership of New GM Class H Common Stock. Merrill Lynch and Salomon Brothers also noted that, as a result of the Hughes Transactions, the GM $1 2/3 Common Stockholders will (1) relinquish their approximately 75% tracking stock interest in Hughes Defense but will receive, subject to clause (2) below, approximately 75% of the Class A Common Stock, which will reflect the benefits of the Hughes Defense Spin-Off and the Raytheon Merger; (2) acquire the approximately 25% tracking stock interest in Delco currently held by the GM Class H Common Stockholders in exchange for shares of Class A Common Stock transferred to the GM Class H Common Stockholders and (3) maintain an approximately 75% tracking stock interest in Hughes Telecom through their continued ownership of GM $1 2/3 Common Stock. In connection with the October Presentation, Merrill Lynch and Salomon Brothers each performed certain valuation analyses of Hughes Defense and New Raytheon, as described below. In addition, Merrill Lynch and Salomon Brothers identified for the GM Board, but did not quantify, certain effects of the Hughes Transactions and the Raytheon Merger on the GM Class H Common Stockholders, 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, including (1) the ownership of an asset-based investment in New Raytheon, (2) the elimination of a charge to GM's earnings for goodwill related to the acquisition of Hughes Defense, (3) the ownership of a 100% interest in the Delco/Delphi Combination, (4) 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, (5) that the consummation of the Delco/Delphi Combination facilitates a possible partial initial public offering of the combined company, (6) the potential tracking stock discount and potential conglomerate discount reflected in their approximately 75% tracking stock interest in Hughes Telecom, (7) 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 (8) 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 72 funding of approximately $3.9 to $4.0 million 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. Merrill Lynch and Salomon Brothers also noted that the management of General Motors expects that the Hughes Defense Spin-Off will result in an incremental profit sharing charge for 1997 of $236 million, 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. Hughes Defense Comparable Public Companies Analysis. Merrill Lynch performed a comparable public companies analysis pursuant to which it compared certain publicly available historical financial and operating data, estimates of future financial performance (based on First Call estimates and available equity research analyst reports) and market statistics (calculated based upon closing stock prices on September 26, 1997) of Litton Industries and Lockheed Martin, both of which are publicly traded companies that Merrill Lynch deemed to be engaged in businesses that are reasonably similar to Hughes Defense (together, the "Merrill Lynch Hughes Defense Comparable Public Companies"). Historical financial information used in connection with this analysis was as of the date of the most recent financial statements publicly available for each company. For each of the Merrill Lynch Hughes Defense Comparable Public Companies, Merrill Lynch calculated multiples of (1) closing stock price to estimated 1998 earnings, (2) closing stock price to adjusted estimated 1998 earnings (which eliminate from earnings the effects of amortization of intangible assets, including goodwill), (3) market capitalization (which was defined, for purposes of this analysis, as the market value of equity, plus debt minus cash ("net debt")) to estimated 1997 earnings before interest, taxes, depreciation and amortization ("EBITDA") and (4) market capitalization to estimated 1998 EBITDA. Such analysis yielded multiples of (1) closing stock price to estimated 1998 earnings ranging from 14.6x to 15.8x, (2) closing stock price to adjusted estimated 1998 earnings ranging from 12.3x to 12.8x, (3) market capitalization to estimated 1997 EBITDA ranging from 6.1x to 7.4x and (4) market capitalization to estimated 1998 EBITDA ranging from 6.9x to 7.8x. Salomon Brothers performed a similar comparable companies analysis using financial information with respect to Boeing 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 LTM, 1997 estimated and 1998 estimated EBITDA and 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 73 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. 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 last twelve months' ("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 a 87% to 169% premium on the range of estimated implied equity values, of Hughes Defense. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 74 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. 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 earnings before interest and taxes ("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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 75 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 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 76 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. 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, 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, including (1) the potential positive impact of (a) owning as asset-based investment 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; (2) the potential neutral impact of (a) any effects on GM's credit rating and (b) any impact on profit-sharing costs; and (3) 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. 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 77 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. 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"). CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 78 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 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 79 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 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. CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 80 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS RELATING TO CERTAIN OF THE HUGHES TRANSACTIONS The following discussion is a general summary of the material U.S. federal income tax consequences of certain of the Hughes Transactions. This discussion does not address all aspects of U.S. federal income taxation that might be relevant to you in light of your status or personal investment circumstances; nor does it discuss the consequences to those of you who are subject to special treatment under the U.S. federal income tax laws, such as non-U.S. persons, dealers in securities, regulated investment companies, life insurance companies, other financial institutions, tax-exempt organizations, pass-through entities, or taxpayers who will hold GM $1 2/3 Common Stock, New GM Class H Common Stock or Class A Common Stock as part of a "straddle," "hedge" or "conversion transaction" or who have a "functional currency" other than the U.S. dollar. In addition, this discussion does not address the tax consequences to holders of options in respect of GM common stock or other persons who have received their GM common stock as compensation. Also, this discussion does not address the tax consequences of the Hughes Transactions under U.S. state or local and non-U.S. tax laws. Furthermore, the following discussion does not cover the tax consequences of every transaction included in the Hughes Transactions or the Raytheon Merger. We assume for purposes of this discussion that the GM common stock you now hold, and the Class A Common Stock to be distributed to you in the Hughes Defense Spin-Off, will be held by you as a capital asset on the date of the Hughes Defense Spin- Off. This discussion is based upon the Code, regulations proposed or promulgated thereunder, judicial precedent relating thereto and current rulings and administrative practice of the IRS, in each case as in effect as of the date of this document and all of which are subject to change at any time, possibly with retroactive effect. Any such change could alter the tax consequences to General Motors or you as its common stockholders as described directly below. YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE HUGHES TRANSACTIONS, INCLUDING THE APPLICABILITY AND EFFECT OF U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX LAWS. For a description of certain U.S. federal income tax considerations relating to the Raytheon Merger, see "--Certain U.S. Federal Income Tax Considerations Relating to the Raytheon Merger" below. HUGHES DEFENSE SPIN-OFF The following discussion summarizes those U.S. federal income tax considerations resulting from the Hughes Defense Spin-Off that materially affect General Motors and you (its common stockholders). General Motors has received the IRS Ruling, which holds, among other things, that the Hughes Defense Spin-Off will be treated as a reorganization under Section 368(a) of the Code and as a tax-free distribution under Section 355 of the Code. Based on the foregoing IRS Ruling, for U.S. federal income tax purposes: . no gain or loss will be recognized by General Motors upon the distribution of the Class A Common Stock to you (as part of the Hughes Defense Spin- Off); . no gain or loss will be recognized by you (and no amount will otherwise be included in your income) upon your receipt of the Class A Common Stock (as part of the Hughes Defense Spin-Off); . the tax basis in the Class A Common Stock which you will receive will be determined by allocating your existing tax basis in your GM common stock immediately before the Hughes Defense Spin-Off between your Class A Common Stock and GM common stock immediately after the consummation of the Hughes Defense Spin-Off, based on the stocks' relative fair market values immediately after such consummation; and . the holding period of the Class A Common Stock which you will receive will include the holding period of your GM common stock upon which such Class A Common Stock will have been distributed. 81 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 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. 82 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER RECAPITALIZATION AND CONVERSION OF GM CLASS H COMMON STOCK The following discussion summarizes those U.S. federal income tax considerations that materially affect General Motors and you as its stockholders resulting from the recapitalization and conversion of each issued and outstanding share of GM Class H Common Stock into one share of New GM Class H Common Stock and the right to receive a distribution of Class A Common Stock in accordance with the Distribution Ratio. For a description of the GM Recapitalization, see "Description of the Hughes Transactions--GM Spin-Off Merger Agreement--Recapitalization and Conversion of GM Class H Common Stock" below. The GM Spin-Off Merger is conditioned on the receipt by General Motors of an opinion of GM's outside tax counsel, Kirkland & Ellis, to the effect that (1) the recapitalization of GM Class H Common Stock into New GM Class H Common Stock will be tax-free to General Motors and the GM Class H Common Stockholders and (2) each of GM Class H Common Stock and New GM Class H Common Stock is stock of General Motors for U.S. federal income tax purposes. Based on the foregoing opinion of counsel, for U.S. federal income tax purposes: . no gain or loss will be recognized by General Motors upon the issuance of New GM Class H Common Stock in exchange for GM Class H Common Stock as part of the Hughes Defense Spin-Off; . no gain or loss will be recognized by you (and no amount will otherwise be included in your income) upon your receipt of the New GM Class H Common Stock in exchange for GM Class H Common Stock as part of the Hughes Defense Spin-Off; . the tax basis in the New GM Class H Common Stock which you will receive will be equal to your existing tax basis in your GM Class H Common Stock immediately before the Hughes Defense Spin-Off, but reduced by the amount of such existing tax basis which is allocated to the Class A Common Stock which you receive in the Hughes Defense Spin-Off; and . the holding period of the New GM Class H Common Stock which you will receive will include the holding period of your GM Class H Common Stock. 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, 83 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER judicial precedent relating thereto and current rulings and administrative practice of the IRS, in each case as in effect as of the date of this document and all of which are subject to change at any time, possibly with retroactive effect. Any such change could alter the tax consequences to General Motors, Hughes Defense or you as a stockholder of these corporations as described directly below. We assume for purposes of this discussion that the Class A Common Stock to be distributed to you in the Hughes Defense Spin-Off will be held by you as a capital asset on the date of the Raytheon Merger. This discussion does not address all aspects of U.S. federal income taxation that might be relevant to you in light of your status or personal investment circumstances; nor does it discuss the consequences to those of you who are subject to special treatment under the U.S. federal income tax laws, such as non-U.S. persons, dealers in securities, regulated investment companies, life insurance companies, other financial institutions, tax-exempt organizations, pass-through entities, or taxpayers who will hold Class A Common Stock as part of a "straddle," "hedge" or "conversion transaction" or who have a "functional currency" other than the U.S. dollar. In addition, this discussion does not address the tax consequences to holders of options in respect of GM Class H Common Stock or other persons who have received their GM common stock as compensation. YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE RAYTHEON MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX LAWS. We intend that the Raytheon Merger qualify as a reorganization under Section 368(a) of the Code. It is a condition to Hughes Defense's obligation to consummate the Raytheon Merger that Hughes Defense receive an opinion from its outside tax counsel, Weil, Gotshal & Manges LLP, to the effect that the Raytheon Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code. It is a condition to Raytheon's obligation to consummate the Raytheon Merger that Raytheon receive an opinion from its outside tax counsel, Wachtell, Lipton, Rosen & Katz, to the same effect. Based on the foregoing opinion of counsel to Hughes Defense, for U.S. federal income tax purposes: . no gain or loss will be recognized by Hughes Defense or Raytheon as a result of the Raytheon Merger; . no gain or loss will be recognized by you (and no amount will otherwise be included in your income) as a result of the Raytheon Merger (other than with respect to cash received instead of fractional shares of Class A Common Stock, as discussed below); and . neither the tax basis nor the holding period of your Class A Common Stock will be affected as a result of the Raytheon Merger. In rendering the Raytheon Merger Opinions, counsel to each of Hughes Defense and Raytheon will rely upon certain assumptions and certain representations made by Hughes Defense and Raytheon, and such opinions are subject to certain limitations and qualifications set forth therein. We are not aware of any facts or circumstances which would cause any such representations or assumptions to be incorrect or untrue in any material respect. The Raytheon Merger Opinions neither bind the IRS or the courts, nor preclude the IRS from adopting a contrary position. If the Raytheon Merger were held to be taxable, Raytheon, its stockholders and Hughes Defense potentially would incur material tax liabilities. In addition, the IRS Ruling relating to the Hughes Defense Spin- Off is based in part on a representation that the Raytheon Merger qualifies as a tax-free reorganization for U.S. federal income tax purposes. Hughes Defense and Raytheon expect to receive their respective Raytheon Merger Opinions as described above prior to the Raytheon Merger Effective Time. Although the Hughes Defense condition regarding receipt of its Raytheon Merger Opinion above is waivable by Hughes Defense, Hughes Defense does not 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 84 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 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. 85 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 86 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 87 THE RAYTHEON MERGER CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER BEFORE THE HUGHES TRANSACTIONS LOGO AFTER THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER LOGO 88 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 89 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 90 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER . 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. 91 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 92 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 93 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 94 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 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. 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 "--Hughes Transactions Fairness Opinions: Merrill Lynch and Salomon Brothers." 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, such as the flexibility of General Motors to finance the business through the tax-free issuance of tracking stock and the ability of General Motors to use tracking stock as a focused security for management compensation. 95 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 any proposed 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. 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. 96 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 ($57.00 per share on October 7, 1997) is above the collar range and would indicate a total transaction value of approximately $9.8 billion, with a resulting gain of approximately $4.3 billion based on the net book value of Hughes Defense at June 30, 1997 (approximately $6.10 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 $1.6 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 97 THE RAYTHEON MERGER CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 98 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 $9.8 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 $5.8 billion based on the Recent Raytheon Stock Price; and 99 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER . 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 7, 1997)....................... 60.59 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 100 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 101 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER after the Raytheon Merger. Each fractional share of Class A Common Stock that is issued and outstanding immediately prior to the Raytheon Merger Effective Time will be converted into and represent an equivalent number of fractional shares of Class B Common Stock, which will be sold by the Raytheon Merger Exchange Agent as described below under "--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 102 CHAPTER 3: THE HUGHES TRANSACTIONS AND 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. 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. 103 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). 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, therefor, since Delco is being transferred to General Motors as part of the Hughes Transactions, any such proceeds will be available to General Motors. See "--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. 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND 104 THE RAYTHEON MERGER CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 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 105 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 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 106 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 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 107 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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, 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; 108 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER . 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 (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 109 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 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. 110 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER "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. 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, 111 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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; . 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. 112 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 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. 113 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 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. 114 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 Capital Stock Committee, the Hughes Defense Spin-Off Committee, the GM Board and the Hughes Electronics Board, and certain factors considered at these and other meetings, is set forth above under "Special Factors-- Background of the Hughes Transactions." 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 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 OFFICES OF GENERAL MOTORS AT GENERAL MOTORS CORPORATION, ROOM 11-243, GENERAL MOTORS BUILDING, 3044 WEST GRAND BOULEVARD, DETROIT, MICHIGAN 48202-3091 DURING REGULAR BUSINESS HOURS BY ANY INTERESTED COMMON STOCKHOLDER OF GENERAL MOTORS OR HIS OR HER REPRESENTATIVE WHO HAS BEEN SO DESIGNATED IN WRITING. 115 CHAPTER 3: THE HUGHES TRANSACTIONS AND 116 THE RAYTHEON MERGER 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. (1) Selected Companies Analysis. Goldman Sachs reviewed certain financial information, ratios and public market multiples for six publicly traded corporations: The Boeing Company (adjusted pro forma for the acquisition of Rockwell International Corporation's Aerospace and Defense business but not including the impact of the then-pending acquisition of McDonnell Douglas Corporation), General Dynamics Corporation, Hughes Electronics, Lockheed Martin Corporation, Northrop Grumman Corporation and Raytheon (adjusted for the then-pending acquisition of Texas Instruments Defense) (the "Selected Companies"). The Selected Companies were chosen because they are publicly traded companies with operations (or, in the case of Hughes Electronics, track operations) that for purposes of analysis may be considered similar to Hughes Defense. Goldman Sachs calculated and compared various financial multiples and ratios. With respect to the Selected Companies, Goldman Sachs considered levered market capitalization (i.e., market value of common equity plus estimated market value of debt less cash) as a multiple of 1997 estimated earnings before interest, taxes, depreciation and amortization ("EBITDA") and stock price as a multiple of 1997 and 1998 estimated earnings per share ("EPS"). The levered market capitalizations were based on closing stock prices as of January 11, 1997 and balance sheet data as of September 30, 1996. January 11, 1997 represented the most recent closing stock prices and September 30, 1996 represented the most recent publicly-available balance sheet information for the selected companies at the time the analysis was performed. The analysis was performed in advance of the GM Board meeting on January 16, 1997 in order to distribute material to the GM Board prior to such meeting. The 1997 EBITDA multiples estimates for each of the Selected Companies were based on Goldman Sachs research as of November 1996 (excluding pension and non-cash income). The 1997 and 1998 price/earnings ("P/E") multiples were based on stock prices as of January 11, 1997 and Institutional Brokers Estimate Service ("IBES") estimates for EPS as of January 8, 1997 (estimates for companies with non-calendar fiscal years ends were calendarized). Goldman Sachs' analysis of the Selected Companies indicated levered market capitalization multiples of 1997 estimated EBITDA ranging from 6.6x to 9.5x with a median of 8.4x and a mean of 8.2x. Goldman Sachs also considered for the Selected Companies estimated 1997 P/E multiples, which ranged from 13.1x to 23.6x with a median of 14.7x and a mean of 16.5x, estimated 1998 P/E multiples, which ranged from 11.8x to 20.4x with a median of 13.8x and a mean of 14.5x, and debt to capitalization ratios, which ranged from 3.0% to 62.6%. (2) Selected Transactions Analysis. Goldman Sachs analyzed certain information relating to eight selected transactions in the aerospace and defense industry since 1994 (listed by acquirer/target): (1) Raytheon Company/Texas Instruments Defense, (2) The Boeing Company/McDonnell Douglas Corporation, (3) The Boeing Company/Rockwell International Corporation's Aerospace and Defense business, (4) Lockheed Martin Corporation/Loral Corporation, (5) Northrop Grumman Corporation/Westinghouse's Electronic Systems Group business, (6) Raytheon Company/E-Systems, (7) Martin Marietta Corp./Lockheed Corporation, and (8) Northrop Corporation/Grumman Corporation (the "Selected Transactions"). Such analysis indicated that for the Selected Transactions levered consideration as a multiple of (1) current year sales ranged from 0.56x to 1.68x, as compared to 1.53x for the Raytheon Merger, (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, (3) current year EBITDA ranged from 5.4x to 10.6x, as compared to 11.7x for the Raytheon Merger, (4) next year sales ranged from 0.57x to 1.66x, as compared to 1.43x for the Raytheon Merger, (5) next year EBIT ranged from 8.2x to 12.9x, as compared to 13.0x for the Raytheon Merger, and (6) book value ranged from 1.9x to 9.6x, as compared to 1.9x for the Raytheon Merger. (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. Goldman Sachs performed a discounted cash flow analysis of the Synergies using Raytheon's management projections. Goldman Sachs calculated the net present value of the cash flows as of January 1, 1997 using discount rates from 10% to 12%. Goldman Sachs calculated the terminal values based on a multiple of trailing EBIT in the year 2001 ranging from 8.0x EBIT to 10.0x EBIT. These terminal values were then discounted to present value (as of January 1, 1997) using discount rates from 10% to 12%. Such analysis indicated a range from $2.87 billion to $3.687 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) Contribution Analysis. 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 CHAPTER 3: THE HUGHES TRANSACTIONS AND 117 THE RAYTHEON MERGER CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER (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 11, 1997, Hughes Defense would receive 34.1% of the combined levered value. (6) Pro Forma Merger Analysis. 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. 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. 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 118 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER connection with the acquisition of Chrysler Technologies Airborne Systems in June 1996 and acting as a dealer in connection with Raytheon's issuance of commercial paper. Goldman Sachs is a full service securities firm and as such may from time to time effect transactions, for its own account or the account of customers, and hold positions in the securities or options on securities of General Motors and/or Raytheon. Pursuant to a letter agreement dated October 23, 1996 (the "Engagement Letter"), General Motors and Hughes Electronics engaged Goldman Sachs to act as their financial advisor in connection with the Hughes Defense Spin-Off and the Raytheon Merger. Pursuant to the terms of the Engagement Letter, General Motors and Hughes Electronics have agreed to pay Goldman Sachs upon the consummation of the Raytheon Merger a transaction fee based on 0.30% of the aggregate consideration of the Raytheon Merger. General Motors and Hughes Electronics have agreed to reimburse Goldman Sachs for its reasonable out-of-pocket expenses, including the reasonable fees and disbursements of its attorneys, and to indemnify Goldman Sachs against certain liabilities, including certain liabilities under the U.S. federal securities laws. 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. 119 CHAPTER 3: THE HUGHES TRANSACTIONS AND 120 THE RAYTHEON MERGER 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, THE TAX SHARING AGREEMENT AND THE VARIOUS OTHER AGREEMENTS CONTEMPLATED BY THE MASTER SEPARATION 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 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. 121 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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. 122 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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; 123 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER . 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 124 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 125 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 126 CHAPTER 3: THE HUGHES TRANSACTIONS AND 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; 127 CHAPTER 3: THE HUGHES TRANSACTIONS AND 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. See "--Introduction" above. 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, 128 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. 129 CHAPTER 3: THE HUGHES TRANSACTIONS AND 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 products and technical services to each other 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. 130 CHAPTER 3: THE HUGHES TRANSACTIONS AND THE RAYTHEON MERGER 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 to the extent commercially reasonable and consistent with the advice of GM's legal counsel until completion of New Raytheon's participation in such program. 131 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS CHAPTER 4 FINANCIAL AND BUSINESS REVIEWS
PAGE ---- RECENT DEVELOPMENTS............................................... 134 Raytheon......................................................... 134 GENERAL MOTORS PRO FORMA CONSOLIDATED CAPITALIZATION................................................... 135 INTRODUCTION TO THE FINANCIAL AND BUSINESS REVIEWS OF HUGHES DEFENSE, DELCO AND HUGHES TELECOM...................... 137 Overview......................................................... 137 Purchase Accounting Adjustments.................................. 137 HUGHES DEFENSE SELECTED COMBINED HISTORICAL FINANCIAL DATA................................................... 138 HUGHES DEFENSE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................... 139 BUSINESS OF HUGHES DEFENSE........................................ 143 Introduction..................................................... 143 Sensors & Communications Systems................................. 144 Weapons Systems.................................................. 146 Information Systems.............................................. 148 Defense Systems.................................................. 150 U.S. Government Contracts........................................ 150 DELCO SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA... 151 DELCO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS. 152 DELCO NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....................................................... 155 DELCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 156 BUSINESS OF DELCO................................................. 160 Introduction..................................................... 160 Principal Products and Sales..................................... 161 Automotive....................................................... 162 Sales to GM NAO.................................................. 162 International and Other Sales.................................... 164 Acquisitions and Alliances....................................... 165 Competition...................................................... 165 Integration of Delco and Delphi.................................. 166 HUGHES TELECOM SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA......................................... 167 HUGHES TELECOM UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.......................... 168 HUGHES TELECOM NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............................................. 172 HUGHES TELECOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 175
132 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
PAGE ---- BUSINESS OF HUGHES TELECOM........................................ 180 Introduction..................................................... 180 Satellite Manufacturing.......................................... 180 Network Systems.................................................. 182 Direct-to-Home Broadcast......................................... 183 Satellite Services............................................... 186 Hughes Avicom.................................................... 187 Corporate and Other.............................................. 188 Strategy......................................................... 188 Acquisitions, Strategic Alliances and Divestitures............... 188 Regulation....................................................... 189 U.S. Government Contracts........................................ 189 Competition...................................................... 190 Research and Intellectual Property............................... 190 Employees........................................................ 191 Real Property.................................................... 191 Legal Proceedings................................................ 191 Directors and Executive Officers of New Hughes Electronics....... 193 RAYTHEON SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA............................................................. 194 OVERVIEW OF RAYTHEON BUSINESS..................................... 195 General.......................................................... 195 Electronics Segment.............................................. 195 Engineering and Construction Segment............................. 195 Aircraft Segment................................................. 196 Appliances Segment............................................... 196
133 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS RECENT DEVELOPMENTS RAYTHEON SALE OF PORTIONS OF THE APPLIANCES BUSINESS On September 10, 1997, Raytheon consummated the sale of its home appliance, heating and air conditioning and commercial cooking businesses to Goodman Manufacturing Company, L.P. for an aggregate amount of $550 million in cash, subject to 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. 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, 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. Because the Texas Instruments Defense Acquisition involved the purchase of assets, a significant portion of the goodwill created by the acquisition will be deductible for tax purposes. 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, $4.0 billion of which has a maturity of 5 years and $3.0 billion of which has a maturity of 364 days (collectively, the "Raytheon Facilities"). Raytheon incurred indebtedness in the amount of $2.95 billion under the Raytheon Facilities in order to finance the 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 $3.0 billion aggregate principal amount of notes offered with final maturities of three, five, ten and thirty years (the "Raytheon Notes"). The net proceeds from the sale of the Raytheon Notes were used primarily to reduce amounts outstanding under the Raytheon Facilities and to refinance other debt incurred in the Texas Instruments Defense Acquisition, including commercial paper borrowings. Additional proceeds have been and will continue to be used by Raytheon for capital expenditures, working capital requirements and general corporate purposes. 134 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS GENERAL MOTORS PRO FORMA CONSOLIDATED CAPITALIZATION The following table sets forth the capitalization of General Motors and its consolidated subsidiaries at June 30, 1997, and as adjusted to reflect consummation of the Hughes Transactions and a preferred stock exchange that occurred on July 9, 1997. The following table should be read in conjunction with GM's Consolidated Financial Statements (including the notes thereto) and Management's Discussion and Analysis in the GM 1996 Form 10-K, which is incorporated into this document by reference, including the information with respect to Hughes Electronics in Exhibit 99 thereto.
JUNE 30, 1997 --------------------------------- PRO ACTUAL ADJUSTMENTS FORMA ---------- ----------- -------- ($ IN MILLIONS) Notes and loans payable .................... $ 89,918 $ 3,862 (c) (3,900)(d) $ 89,880 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(f) 79 General Motors--obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of General Motors-- Series G................................... -- 143(f) 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).............................. 17,250 981 (e) (196)(f) 18,035 Retained earnings.......................... 9,201 4,277 (b) (5,850)(d) (106)(d) (981)(e) (26)(f) 6,515 -------- ------- -------- Subtotal.................................. 27,664 (1,901) 25,763 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 (1,795) 22,236 -------- ------- -------- Total capitalization...................... $115,067 $(1,611) $113,456 ======== ======= ======== PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- -------- ($ IN MILLIONS) Amount Available for the Payment of Dividends GM $1 2/3 Common Stock..................... $ 22,986 $(1,249)(g) (222)(f) $ 21,515 GM Class H Common Stock.................... 3,465 (430)(g) (3,035)(e) -- New GM Class H Common Stock................ -- 3,035 (e) 3,035 -------- ------- -------- $ 26,451 $(1,901) $ 24,550 ======== ======= ========
135 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 $57.00 (i.e., the Recent Raytheon Stock Price) at the time of the Hughes Defense Spin-Off, calculated as follows: Assumed market value of Hughes Defense Net Assets before additional borrowing by Hughes Defense........................................ $9,750 Less: Net Book Value of Hughes Defense Net Assets at June 30, 1997.. 5,373 Estimated Transaction Costs......................................... 100 ------ Gain............................................................. $4,277 ======
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 ($57.00 per share on October 7, 1997) was above the collar range and would indicate a total transaction value of approximately $9.8 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) 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. (g) Based on the Recent Raytheon Stock Price, reflects the allocation of the estimated net reduction in the Amounts Available for the Payment of Dividends on the GM common stocks. For additional information, see "New GM Class H Common Stock--GM Certificate of Incorporation Provisions Regarding Dividends" in Chapter 6. 136 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. 137 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. 138 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 139 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 140 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. 141 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. 142 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. 143 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.
144 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"). 145 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. 146 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. 147 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 148 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. 149 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. 150 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. 151 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. 152 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 153 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. 154 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. 155 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. 156 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. 157 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. 158 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. 159 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. 160 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. 161 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 162 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 163 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 164 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 165 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. 166 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............ $ 2,349.4 $ 342.8 $ 5.6 $ 6.7 $ 7.6 $ 5.8 $ 10.2 $ 6.4 Current assets.......... 4,239.7 2,195.1 1,417.9 1,535.7 1,242.9 1,175.9 1,120.5 1,339.5 Total assets............ 11,654.1 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............. 7,143.8 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. 167 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. 168 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. 169 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. 170 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 $ 654.6 (m) $ 2,349.4 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 2,044.6 4,239.7 -------- --------- --------- 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 $ 2,477.0 $11,654.1 ======== ========= ========= 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 3,532.9 (u) 7,143.8 Additional paid-in capital................ -------- --------- --------- Total Stockholders' Equity.............. 3,610.9 3,532.9 7,143.8 -------- --------- --------- Total Liabilities and Stockholders' Equity................................. $9,177.1 $ 2,477.0 $11,654.1 ======== ========= =========
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS 171 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 172 (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 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 173 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................ $ 654.6 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) -------- $3,532.9 ========
CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS 174 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. 175 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 176 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. 177 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. 178 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. 179 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. 180 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS
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 39 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 181 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS services worldwide. This will be the first commercial program to utilize a payload with a 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 182 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS 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, 183 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. 184 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS 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 185 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. 186 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 187 CHAPTER 4: FINANCIAL AND BUSINESS REVIEWS 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 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 188 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. 189 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 190 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. 191 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. 192 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 58 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 58 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 193 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. 194 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. 195 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. 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. 196 CHAPTER 5: NEW RAYTHEON CHAPTER 5 NEW RAYTHEON
PAGE ---- NEW RAYTHEON UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS....................................................... 198 OVERVIEW OF NEW RAYTHEON BUSINESS................................. 205 NEW RAYTHEON MANAGEMENT........................................... 207 Directors and Executive Officers................................. 207 Director and Executive Compensation.............................. 210 Stock Ownership of Directors, Executive Officers and Five Percent Stockholders.................................................... 210 Change of Control Employment Agreements.......................... 210
197 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. 198 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. 199 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. 200 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. 201 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 ======
202 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 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%) 203 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. 204 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); 205 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. 206 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................. 58 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. [Information to be provided.] 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). 207 CHAPTER 5: NEW RAYTHEON John P. Galvin. Current director of Raytheon. [Information to be provided.] 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. [Information to be provided.] 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. [Information to be provided.] 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. 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). 208 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. 209 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 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 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 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 not 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 Merger. 210 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................................. 212 Introduction................................................... 212 Comparison..................................................... 213 CONSIDERATIONS RELATING TO GM'S DUAL-CLASS COMMON STOCK CAPITAL STRUCTURE...................................................... 222 Overview....................................................... 222 Board of Directors............................................. 223 New GM Board Policy Statement.................................. 223 GM CLASS H COMMON STOCK......................................... 226 Introduction................................................... 226 Price Range and Dividends Paid................................. 226 GM Certificate of Incorporation Provisions Regarding Dividends. 226 Dividend Policy................................................ 227 Voting Rights.................................................. 228 Liquidation Rights............................................. 228 Recapitalization............................................... 228 Subdivision or Combination..................................... 229 NEW GM CLASS H COMMON STOCK..................................... 230 Introduction................................................... 230 GM Certificate of Incorporation Provisions Regarding Dividends. 230 Dividend Policy................................................ 232 Voting Rights.................................................. 233 Liquidation Rights............................................. 233 Recapitalization and Certain Other Transactions................ 233 Subdivision or Combination..................................... 234 Stock Exchange Listing......................................... 234 Transfer Agent and Registrar................................... 234 NEW RAYTHEON CAPITAL STOCK...................................... 235 Introduction................................................... 235 Common Stock................................................... 235 Preferred Stock................................................ 236 New Raytheon Rights Agreement.................................. 237 Limitation on New Raytheon Directors' Liability................ 240 Section 203 of the Delaware General Corporation Law............ 240 Limitations on Changes in Control.............................. 241 Stock Exchange Listing......................................... 242 Transfer Agent and Registrar................................... 242
211 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 212 CHAPTER 6: CAPITAL STOCK 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 ------------ -------------- ------------ 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 ISSUER 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"). DIVIDENDS businesses of Hughes Electronics. 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. For a Income of Hughes description of Electronics" and New Raytheon's in the anticipated 213 CHAPTER 6: CAPITAL STOCK GM CLASS H NEW GM CLASS H CLASS A COMMON STOCK COMMON STOCK COMMON STOCK ------------ -------------- ------------ "Available dividend policy Separate following the Consolidated Net Raytheon Merger, Income of New see "New Raytheon GM Certificate of Hughes Capital Stock-- Incor- Electronics" and Common Stock" poration as the in the GM below. "Available Sepa- Certificate of rate Consolidated Incorporation, as Net Income of proposed to be Hughes." amended in the GM Spin-Off Merger, as the "Available Separate Consolidated Net Income of Hughes." The current dividend policy of the GM Board is to pay quarterly dividends on GM Class H Common Stock, when, as and if declared by the GM Board, at an annual rate equal to approximately 35% of the Available Separate Consolidated Net Income of Hughes Electronics for the prior year. Notwithstanding the current dividend policy of the GM Board, the quarterly dividend paid on GM Class H Common Stock of $0.25 per share during 1997 was based on an annual rate higher than 35% of the Available Separate Consolidated Net Income of Hughes Electronics for the preceding year. General Motors does not currently anticipate paying any cash dividends initially on the New GM Class H Common Stock following the Hughes Transactions. See "New GM Class H Common Stock-- Dividend Policy" below. With respect to the relationship between dividends (if any) paid by New Hughes Electronics to General Motors and dividends (if any) paid by General Motors to its common stockholders, see the policy statement of the GM Board adopted in connection with the establishment of the terms of the New GM Class H Common Stock set forth below under "Considerations Relating to GM's Dual-Class Common Stock Capital Structure." VOTING RIGHTS GM Class H 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 $1 vote, in the (including the 2/3 aggregate, 214 CHAPTER 6: CAPITAL STOCK GM CLASS H NEW GM CLASS H CLASS A COMMON STOCK COMMON STOCK COMMON STOCK ------------ -------------- ------------ Common 80.1% of the Stockholders on total voting all matters (including the power of all election and election and holders of New removal of removal of Raytheon Common directors), based directors), based Stock. With on their on their respect to all respective voting respective voting other matters rights as set rights as set submitted to a forth in the GM forth in the GM vote of New Certificate of Certificate of Raytheon's common Incorporation. Incorporation (as stockholders, the The number of proposed to be Class A Common votes per share amended Stockholders and is subject to the certain anti- in the GM Spin- Class B Common dilution Off Merger). The Stockholders will adjustments for number of votes each be entitled stock to which each to a single vote subdivisions and share of New GM per share and the combinations and Class H Common approval of any certain other Stock will be such matter will events, as set entitled will be require the forth in the GM the greater of approval of both Certificate of (1) one-half or classes of New Incorporation. (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- dilution adjustments for stock subdivisions and combinations and certain other events, as set forth in the GM Certificate of Incorporation (as proposed to be amended in the GM Spin-Off Merger). Class A Common Stockholders will have the right to vote directly on matters relating to New Raytheon, while GM Class H Common Stockholders vote directly on matters relating to General Motors. 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 215 CHAPTER 6: CAPITAL STOCK GM CLASS H NEW GM CLASS H CLASS A COMMON STOCK COMMON STOCK COMMON STOCK ------------ -------------- ------------ dissolution or of New Raytheon, winding up whether voluntary or involuntary, Class A Common Stockholders and Class B Common Stockholders will be entitled to of the business receive the of General assets of New Motors, after the Raytheon holders of GM available for Preferred Stock distribution (if any) and GM Preference Stock the holders of GM receive the full Preferred Stock preferential (if any) and GM amounts to which Preference Stock they are receive the full entitled, GM $1 preferential 2/3 Common to its amounts to which stockholders in they are Stockholders and proportion to the entitled, GM $1 New GM Class H number of shares 2/3 Common Common held by such Stockholders and Stockholders will holders, provided GM Class H Common receive the that the full Stockholders will remaining assets amounts necessary receive the of General Motors to satisfy any remaining assets on a per share creditors and of General Motors basis in preferential or on a per share proportion to participating basis in their respective amounts owing to proportion to per share the holders of their respective liquidation New Raytheon per share units. GM $1 2/3 Preferred Stock liquidation Common Stock is (if any) have units, which are entitled to one been paid or set approximately one liquidation unit aside for payment per share of GM per share. New GM previously. $1 2/3 Common Class H Common Stock and one- Stock will be half per share of entitled to a GM Class H Common number of Stock. The number liquidation units of liquidation equal to the units per share number of votes is subject to to which each adjustment as such share is described below entitled, with respect to determined as voting rights described below under "GM Class H under "New GM Common Stock -- Class H Common Voting Rights." Stock--Voting Rights," subject to adjustment as described above with respect to such voting rights. The liquidation rights of Class A Common Stockholders will relate to New Raytheon, while the liquidation rights of GM Class H Common Stockholders relate to General Motors. 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). 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, 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 216 CHAPTER 6: CAPITAL STOCK GM CLASS H NEW GM CLASS H CLASS A COMMON STOCK COMMON STOCK COMMON STOCK ------------ -------------- ------------ shares of New GM Stockholders with Class H Common respect to the Stock may be potential recapitalized as recapitalization shares of GM $1 shares of GM $1 of their GM Class 2/3 Common Stock 2/3 Common Stock H Common (1) at any time (1) at any time in the sole after December Stock into GM $1 discretion of the 31, 2002 in the 2/3 Common Stock GM Board sole discretion at a 120% (provided that of the GM Board, exchange ratio, certain or (2) as currently requirements are automatically, if provided for met) or (2) at any time under certain automatically, if General Motors, circumstances in at any time in one the GM General Motors transaction or a Certificate of disposes of series of related Incorporation. substantially all transactions, Class A Common of the business disposes of Stockholders may, of Hughes substantially all however, have the Aircraft (or its of the business potential to successors) or of New Hughes realize premiums substantially all Electronics (or over prevailing of the other its successors) market prices for business of to a person, Class A Common Hughes entity or group Stock in Electronics to a of which General connection with person, entity or Motors is not a certain corporate group of which majority owner. transactions, General Motors is For purposes of including tender not a majority this offers for New owner. In the recapitalization Raytheon Common event of such provision of the Stock and change recapitalization, GM Certificate of in control each GM Class H Incorporation, transactions Common "substantially involving New Stockholder would all of the Raytheon, receive shares of business" of New although there GM $1 2/3 Common Hughes can be no Stock having a Electronics will assurance in this market value, as mean at least 80% regard. See "New of a specified of the business Raytheon Capital date provided for of New Hughes Stock-- in the GM Electronics, Limitations on Certificate of based on the fair Changes in Incorporation, market value of Control" below. equal to 120% of the assets, both Such premiums, if the market value tangible and any, will not be of such holder's intangible, of limited by any GM Class H Common New Hughes formula in the Stock on such Electronics as of New Raytheon date. the time of the Certificate of proposed Incorporation transaction. In comparable to the event of any that relating to such the recapitalization, recapitalization each New GM Class of GM Class H H Common Common Stock or Stockholder would New GM Class H receive shares of Common Stock as GM $1 2/3 Common described above. 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 As a result 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 described above. New Raytheon may not directly or indirectly redeem, purchase, repurchase or otherwise acquire for consideration any shares of New Raytheon Common Stock 217 CHAPTER 6: CAPITAL STOCK 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 218 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 219 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. It is NYSE. It is expected 220 GM CLASS H NEW GM CLASS H CLASS A COMMON STOCK COMMON STOCK COMMON STOCK ------------ -------------- ------------ expected that New GM Class H Common that Class A Stock will be Common Stock will listed on the be listed on the NYSE under the NYSE under the symbol "GMH." symbol "RTNA" FORM OF STOCK Certificated. Uncertificated Uncertificated OWNERSHIP (unless otherwise (unless otherwise requested). requested). 221 CHAPTER 6: CAPITAL STOCK 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 based on the legally available retained earnings of 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 222 CHAPTER 6: CAPITAL STOCK of fair dealing between General Motors and Hughes Electronics as well as fairness to 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. 223 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. 224 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) INTERPRETATION, AMENDMENTS AND MODIFICATIONS OF THIS POLICY. All interpretations of this policy shall be made exclusively by the GM Board. Nothing in this policy shall be construed to limit the ability of the GM Board to propose to GM's common stockholders for their approval one or more transactions on terms different from those currently provided for under certain circumstances by the GM Certificate of Incorporation or this policy statement. 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. The GM Board has no present intention to modify or rescind this policy statement. 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. 225 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, 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 7, 1997 was $68.00 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 7, 1997)....... 68.00 66.81 --
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). 226 CHAPTER 6: CAPITAL STOCK 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 criteria set forth in 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 Dividend policy is 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 the current dividend policy of the GM Board, the quarterly dividend paid on GM Class H Common Stock of $0.25 per share during 1997 was based on an annual rate 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 227 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). 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. 228 CHAPTER 6: CAPITAL STOCK 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. 229 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 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 GM $1 2/3 Common Stock to the extent of the total surplus available for the payment of dividends on common stock reduced by the amount of surplus attributed to the New GM Class H Common Stock, and dividends may be paid on the New GM Class H Common Stock to the extent of the total surplus available for the payment of dividends on common stock reduced by the amount of surplus attributed to the GM $1 2/3 Common Stock. . The amount of surplus from time to time attributed to the New GM Class H Common Stock (which will reduce the amount of surplus available for dividends on the GM $1 2/3 Common Stock) will be the sum of (1) the amount of paid-in surplus initially attributed to the shares of New GM Class H Common Stock issued in the Hughes Transactions and the paid-in surplus attributable to any 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 New Hughes Electronics after the closing of the Hughes Transactions attributed to the New 230 CHAPTER 6: CAPITAL STOCK 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 of paid-in surplus initially to be attributed to the shares of New GM Class H Common Stock to be issued in the Hughes Transactions will equal the cumulative amount available for the payment of dividends on GM Class H Common Stock immediately prior to the consummation of the Hughes Transactions, reduced by an allocable portion (based on the Class H Fraction) of the net reduction in GM stockholders' equity resulting from the Hughes Transactions. . The amount of surplus from time to time attributed to the GM $1 2/3 Common Stock will be the surplus of General Motors reduced by the sum of (1) the paid-in surplus attributable to the New GM Class H Common Stock and (2) all of the earnings of General Motors that are attributed to the New GM Class H Common Stock, plus or minus the amount of any adjustment made by the GM Board as described below. This amount will reduce the amount of surplus from time to time available for dividends on New GM Class H Common Stock. As described below, the amount of the surplus attributed to the shares of GM $1 2/3 Common Stock will be reduced by that portion of the net reduction in GM stockholders' equity resulting from the Hughes Transactions that is not allocated to the GM Class H Common Stock. The amount available for dividends on each class of GM common stock will be reduced by dividends paid on that class and adjusted 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 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 adjustment as described above, the cumulative amount of surplus 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 would be to reduce the cumulative amount of surplus available for the payment of dividends on GM common stock by approximately $1.7 billion. The GM Board has determined that it would be appropriate in the context of the Hughes Transactions to allocate the net reduction between the two classes of GM common stock in proportion to the derivative interests of the two classes of common stock in the earnings of Hughes Electronics. Accordingly, the GM Board deems it appropriate in these circumstances to reduce the cumulative amount available for payment of dividends on the GM $1 2/3 Common Stock by approximately 74.4% of the net reduction, to approximately $21.5 billion (including the impact of the preferred stock exchange that occurred on July 9, 1997), and to cause the amount that will initially be available for dividends on the New GM Class H Common Stock to be the amount currently available on the GM Class H Common Stock, reduced by approximately 25.6% of the net reduction, or approximately $3.0 billion. 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 231 CHAPTER 6: CAPITAL STOCK 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 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. 232 CHAPTER 6: CAPITAL 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 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. 233 CHAPTER 6: CAPITAL STOCK 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. 234 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