1 EXHIBIT 13 Five-Year Statistical Summary (In millions except share amounts) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Results of Operations ======================================================================================================= Net sales $ 19,419(1) $ 13,593 $ 12,257 $ 11,836 $ 10,070 Operating income 2,006(2) 1,060(4) 1,192(6) 1,122(7) 888(9) Interest expense 739 397 256 197 49 Net income 844(3) 511(5) 757(6) 795(8) 592(9) Diluted earnings per share $2.47(3) $2.11(5) $3.15(6) $3.24(8) $2.23(9) Dividends declared per share 0.80 0.80 0.80 0.75 0.738 Average diluted shares outstanding (in thousands) 341,861 241,886 240,165 245,397 265,650 Financial Position at Year-End ======================================================================================================= Current assets $ 8,965 $ 9,155 $ 5,688 $ 5,279 $ 5,013 Property, plant, and equipment, net 2,275 2,891 1,802 1,584 1,361 Total assets 28,232 28,520 11,358 9,999 7,568 Current liabilities 7,032 11,176 4,875 3,801 3,425 Long-term debt 8,163 4,406 1,500 1,488 25 Total debt 8,990 10,062 3,727 2,704 1,058 Stockholders' equity 10,797 10,386 4,575 4,273 3,906 General Statistics ======================================================================================================= Total backlog $ 24,045(10) $ 21,515 $ 12,251 $ 10,662 $ 8,213 U.S. government backlog included above 14,622(10) 12,547 5,637 5,142 3,641 Capital expenditures 509 459 406 329 267 Depreciation and amortization 761 457 369 371 304 Number of employees (actual) 108,200 119,200 75,300 73,200 60,200 2 (1) Includes a charge of $310 million. (2) Includes a charge of $310 million and restructuring and special charges of $252 million. (3) Includes a charge of $310 million pretax, restructuring and special charges of $252 million pretax, and a net gain on sales of operating units of $141 million pretax. The impact of these items combined was a net charge of $271 million after-tax, or $0.79 per diluted share. (4) Includes restructuring and special charges of $495 million. (5) Includes restructuring and special charges of $495 million pretax and a net gain on sales of operating units of $72 million pretax. The impact of these items combined was a net charge of $275 million after-tax, or $1.14 per diluted share. (6) Includes a special charge of $34 million pretax, $22 million after-tax, or $0.09 per diluted share. (7) Includes a charge of $77 million and a special charge of $125 million. (8) Includes a charge of $77 million pretax, a special charge of $125 million pretax, and a net gain on sales of operating units of $210 million pretax. The impact of these items combined was a net gain of $5 million after-tax, or $0.02 per diluted share. (9) Includes a restructuring charge of $250 million pretax, $162 million after-tax, or $0.61 per diluted share. (10) During 1998, the Company changed its method of reporting backlog at certain locations as discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations. Note: Certain prior year amounts have been reclassified to conform to the current year presentation. In December 1997, the Company issued 102.6 million shares of Class A common stock and converted each share of Raytheon common stock into one share of Class B common stock in connection with the merger with Hughes Defense. All share and per share amounts have been restated to reflect the two-for-one stock split in October 1995. Overview Raytheon Company (the "Company") is a global technology leader that operates in three major business areas: Electronics, both defense and commercial, Engineering and Construction, and Aircraft. The Electronics segments were established in conjunction with the consolidation and reorganization of the Company's Electronics businesses and the creation of Raytheon Systems Company in December 1997 in order to create a premier electronics company. The Company is a leader in defense electronics, including missiles; radar; sensors and electro- optics; reconnaissance, surveillance, and intelligence; command, control, communication, and information; training; simulation and services; naval and air traffic control systems; and aircraft integration systems. The Company's results of operations include the results of Texas Instruments' defense business (TI Defense) which was acquired on July 11, 1997 and the defense business of Hughes Electronics Corporation (Hughes Defense) which merged with the Company on December 17, 1997. Raytheon Systems Company is comprised of the Defense Systems segment, the Sensors and Electronic Systems segment, the Intelligence, Information, and Aircraft Integration Systems segment, and the defense electronics portion of the segment that includes Command, Control, and Communication Systems, Training and Services, Commercial Electronics, and Other. The Engineering and Construction segment offers full-service engineering and construction capabilities to clients worldwide. The Aircraft segment is one of the leading providers of business and special mission aircraft and delivers a broad line of jet, turboprop, and piston-powered airplanes to corporate and military customers worldwide. 3 Consolidated Results of Operations On December 6, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance, clarifies certain conditions to be met in order to recognize revenue. After reexamining the terms underlying certain transactions of Raytheon Aircraft, the Company has determined that revenue related to these transactions should be reversed. In view of the cumulative effect of the unrecorded adjustment on the results of future periods, the Company has restated its annual and quarterly consolidated financial statements. The restatements were required to reverse sales that the Company believed were properly recorded as bill and held sales when the manufacturing process was substantially complete and the rights of ownership of the aircraft had passed to the buyer, but before minor modifications had been completed and the physical delivery of the aircraft occurred. The restated financial statements reflect sales when final delivery of the aircraft occurred. As these adjustments relate to the timing of revenue recognition all reversals are recognized in later periods. The financial statements and related notes set forth in this Form 10-K/A reflect all such restatements. Net sales in 1998 were $19.4 billion compared with $13.6 billion in 1997 and $12.3 billion in 1996. Sales to the U.S. Department of Defense were 56 percent of sales in 1998, 34 percent in 1997, and 33 percent in 1996. Total sales to the U.S. government were 66 percent of sales in 1998, 46 percent in 1997, and 42 percent in 1996. The increases are primarily a result of the merger with Hughes Defense and the acquisition of TI Defense. Total international sales, including foreign military sales, were 26 percent of sales in 1998, 29 percent in 1997, and 28 percent in 1996. The decrease is due to lower international sales at Hughes Defense and TI Defense; however, the Company is working to increase its international presence and expects continued growth in this area. Gross margin in 1998 was $4.3 billion compared with $2.7 billion in 1997 and $2.5 billion in 1996 or 21.9 percent of sales in 1998, 19.6 percent in 1997, and 20.7 percent in 1996. Excluding the restructuring and special charges described below of $85 million in 1998, $401 million in 1997, and $34 million in 1996, gross margin was $4.3 billion in 1998, $3.1 billion in 1997, and $2.6 billion in 1996 or 22.3 percent of sales in 1998, 22.5 percent in 1997, and 21.0 percent in 1996. The increases in 1997 from 1996 are principally a result of the acquisition of TI Defense. Administrative and selling expenses increased to $1,664 million in 1998 from $1,189 million in 1997 due primarily to the merger with Hughes Defense and the acquisition of TI Defense, partially offset by the sale of the Company's home appliance, heating, air conditioning, and commercial cooking operations in September 1997. Administrative and selling expenses were $1,021 million in 1996. Administrative and selling expenses were 8.6 percent of sales in 1998, 8.7 percent in 1997, and 8.3 percent in 1996. Excluding the special charges described below of $167 million in 1998 and $94 million in 1997, administrative and selling expenses decreased to 7.7 percent of sales in 1998 from 8.1 percent in 1997 and 8.3 percent in 1996 reflecting increased efficiencies resulting from the merger with Hughes Defense and the acquisition of TI Defense. Research and development expenses increased to $582 million in 1998 from $415 million in 1997 and $323 million in 1996, due principally to the merger with Hughes Defense and the acquisition of TI Defense. Research and development expenses were 3.0 percent of sales in 1998, 3.1 percent in 1997, and 2.6 percent in 1996. In January 1998, the Company announced plans to reduce the newly formed Raytheon Systems Company (RSC) workforce by 8,700 employees, close 20 facilities, and partially close an additional 6 facilities, reducing space by approximately 8 million square feet. This announcement was made in conjunction with the consolidation and reorganization of RSC in order to remain competitive in the defense industry. In October 1998, the Company announced previously planned actions to accelerate and expand these initiatives, reducing employment by approximately 14,000 positions by the end of 1999. RSC will also vacate an additional 3 million square feet at 8 facilities through sales, subleases and lease terminations. During the fourth quarter of 1998, the estimated number of employee terminations increased by approximately 1,200 employees, primarily comprised of manufacturing employees, however, the actual cost of termination per employee was lower than the original estimate. As a result of these changes in estimate, the total cost of employee severance decreased by $37 million. Also during the fourth quarter of 1998, the Company determined that facilities exit cost would run lower than the original estimate by $30 million because many of the facility actions were progressing ahead of the original schedule reducing the amount of rent and occupancy costs. Additionally, costs to return facilities to the required condition were less than originally planned. In addition, during the fourth quarter of 1998, the Company committed to close two additional facilities and further reduce employment by approximately 1,400 positions. The total program cost of the actions is estimated at $67 million, comprised of $14 million of severance and other employee related costs and $53 million of facility closure and related costs. The principal actions involve the consolidation of missile and other electronics systems' manufacturing and engineering, as well as the consolidation of certain component manufacturing into Centers of Excellence. 4 The total program cost of the RSC actions is estimated at $1.1 billion, of which $804 million pertains to exit costs. Approximately $385 million of the exit costs relate to employee severance and $419 million relate to facilities exit. In connection with these actions, the Company recorded a $220 million restructuring charge in the fourth quarter of 1997, which is included in cost of sales. The Company also accrued $584 million as liabilities assumed in connection with the merger with Hughes Defense and the acquisition of TI Defense as part of the allocation of purchase price and not as a charge to operations. Through December 31, 1998, RSC employment has been reduced by approximately 9,000 people (which includes a 2,400 net reduction due to attrition) to approximately 79,000 employees, and 3.3 million square feet have been vacated. The Company expects to essentially complete these restructuring actions in 1999 and terminate an additional 8,800 employees which will be partially offset by new hire additions. Cash expenditures pertaining to exit costs under the restructuring initiatives outlined above were $104 million for employee severance and related items and $130 million for facility and office closures. Lower than expected costs of severance per employee have reduced the Company's estimates of employee related costs; however, these cost savings have been more than offset by higher than expected facilities exit costs and the cost of the additional fourth quarter actions. While these actions are intended to improve the Company's competitive position, there can be no assurances as to their ultimate success or that additional restructuring actions will not be required. Note S to the financial statements contains additional information pertaining to these restructuring actions. In January 1998, the Company also announced plans to reduce the Raytheon Engineers & Constructors (RE&C) workforce by 1,000 employees and close or partially close 16 offices, or approximately 1.1 million square feet. In connection with these actions and other committed but unannounced actions, the Company recorded a $75 million restructuring charge in the fourth quarter of 1997, which is included in cost of sales. The restructuring charge included $31 million for employee severance for approximately 2,300 people, including the 1,000 positions announced in January 1998, and $44 million for facilities exit. During the fourth quarter of 1998, the Company modified the plan for RE&C that was committed to in January 1998 to close fewer facilities. As a result of this modification, the number of employee terminations was reduced from approximately 2,300 to approximately 1,400 and the total cost of employee severance decreased by $11 million. Because higher than expected facility exit costs were incurred at the locations being closed, the total estimated cost of facilities exit increased by $11 million. In October 1998, the Company also announced plans for an additional 260 person reduction in the RE&C workforce and recorded an additional $33 million restructuring charge, which is included in cost of sales. The total costs of these actions are currently estimated at $108 million, of which $53 million relate to employee severance and $55 million relate to facilities exit. In 1998, the Company also recorded a $52 million special charge for asset impairment related to the RE&C restructuring actions to exit two operations which are scheduled to be closed in 1999. The charge, which is included in cost of sales, consists of $45 million of goodwill associated with one of the operations to be exited and $7 million for the estimated loss on disposition of the other operation. 5 Through December 31, 1998, RE&C employment had been reduced by approximately 1,200 people and 900,000 square feet had been vacated. Cash expenditures in 1998 under the restructuring initiatives outlined above were $19 million for employee severance and related items and $23 million for facility and office closures. While these actions are intended to improve the Company's competitive position, there can be no assurances as to their ultimate success or that additional restructuring actions will not be required. In 1998, the Company recorded special charges of $167 million, discussed below, which are included in administrative and selling expenses. In the second quarter of 1998, the Company's partner in a Commercial Electronics joint venture in Korea began to experience financial difficulties. As a result, the Company recorded a $42 million special charge to recognize a permanent impairment of its investment in the joint venture, reducing the book value of the investment to estimated fair value. During the third quarter of 1998, the financial condition of the joint venture deteriorated further, and the Company recorded an additional $83 million special charge to exit a line of business, which included writing off its remaining investment in the Korean joint venture. Also in 1998, the Company recorded a $42 million special charge to write down the assets of two operations in the Electronics businesses that the Company had decided to sell to estimated fair value of approximately $125 million. One sale was completed during 1998. The other sale is expected to close in 1999. The operating results, which are not material, continue to be included in the Company's results of operations. In 1997, the Company recorded special charges of $200 million, discussed below, of which $106 million is included in cost of sales and $94 million is included in administrative and selling expenses. In 1997, the Company recorded a $63 million special charge primarily for one-time costs in the Electronics businesses associated with the merger with Hughes Defense and the acquisition of TI Defense. The Company also recorded a $57 million special charge primarily to write down to estimated fair value certain assets in the Electronics businesses that the Company had decided to sell. The sale of these assets was completed in 1998 and the proceeds and loss on disposition were not material. Also in 1997, the Company recorded a $50 million special charge for contract valuations at RE&C and a $30 million special charge to recognize a permanent impairment at Raytheon Aircraft. In 1996, the Company recorded a $34 million special charge, which is included in cost of sales, to close a Major Appliances operation. 6 The Company recorded the following restructuring and special charges, which were included in the statements of income and classified as either cost of sales (cos) or administrative and selling expenses (A&S) as indicated below (in millions): 1998 1997 1996 --------------------- ---------------------- ------------ COS A&S Total COS A&S Total COS Total --- --- ----- --- --- ----- --- ----- Restructuring charges Electronics $220 $220 RE&C $33 $ 33 75 75 Special charges RE&C Asset impairment 52 52 Contract valuations 50 50 Electronics Asset impairment $ 42 42 9 9 Exit a line of 83 83 business Writedown assets to 42 42 48 48 be sold One time merger 17 46 63 costs Aircraft Asset impairment 30 30 Major Appliances Operation closure $34 $34 --- ---- ---- ---- --- ---- --- --- Total impact, pretax $85 $167 $252 $401 $94 $495 $34 $34 === ==== ==== ==== === ==== === === Operating income was $2,006 million or 10.3 percent of sales in 1998, $1,060 million or 7.8 percent of sales in 1997, and $1,192 million or 9.7 percent of sales in 1996. Excluding the restructuring and special charges of $252 million in 1998, $495 million in 1997, and $34 million in 1996, operating income as a percent of sales was 11.6 percent, 11.4 percent, and 10.0 percent in 1998, 1997, and 1996, respectively. The changes in operating income by segment are discussed below. Interest expense in 1998 increased to $739 million from $397 million in 1997 due principally to the higher debt level resulting from the merger with Hughes Defense and the acquisition of TI Defense. During 1998, the Company issued $3.8 billion of long-term notes and debentures in order to secure favorable long-term rates. The weighted average cost of borrowing was 6.9 percent in 1998 versus 6.8 percent in 1997. Interest expense increased to $397 million in 1997 from $256 million in 1996. The increase was due principally to the debt-financed acquisition of TI Defense in July 1997 and higher short-term interest rates available to the Company. Interest and dividend income decreased to $28 million in 1998 from $38 million in 1997 and $102 million in 1996. The 1996 amount included accrued interest on a retroactive federal income tax refund claim. Other income, net of $142 million in 1998 includes a $141 million net gain on sales of operating units. Other income, net was $65 million in 1997 versus $39 million in 1996. The 1997 amount includes a $72 million net gain on sales of operating units. The effective tax rate was 41.3 percent in 1998, 33.3 percent in 1997, and 29.7 percent in 1996. The effective tax rate reflects primarily the United States statutory rate of 35 percent reduced by foreign sales corporation tax credits and research and development tax credits applicable to certain government contracts, increased by non-deductible amortization of goodwill. The increase in the effective tax rate in 1998 was primarily due to the increase in non-deductible amortization of goodwill resulting from the merger with Hughes Defense. The increase in the effective tax rate in 1997 from 1996 was due to accrued retroactive research and development tax credits applicable to certain government contracts recorded in 1996. The impact of the 1998 charges, and net gain on sales of operating units combined was a net charge of $421 million pretax and $271 million after-tax. The impact of the 1997 charges and net gain on sales of operating units combined was a net charge of $423 million pretax and $275 million after-tax. The impact of the 1996 charge was $34 million pretax and $22 million after-tax. Net income for 1998 was $844 million, or $2.47 per diluted share on 341.9 million average shares outstanding. Net income for 1997 was $511 million, or $2.11 per diluted share on 241.9 million average shares outstanding. Net income for 1996 was $757 million, or $3.15 per diluted share on 240.2 million average shares outstanding. The Company issued 102.6 million shares of Class A common stock in December 1997 in connection with the merger with Hughes Defense. Total employment was approximately 108,200 at December 31, 1998, approximately 119,200 at December 31, 1997, and approximately 75,300 at December 31, 1996. The decrease between 1998 and 1997 is primarily a result of the restructuring initiatives at RSC and RE&C outlined above. The increase between 1997 and 1996 was due principally to the merger with Hughes Defense and the acquisition of TI Defense. 7 Segment Results Sales (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Defense Systems $ 4,958 Sensors and Electronic Systems 3,011 Intelligence, Information, and Aircraft Integration Systems 2,667 Command, Control, and Communication Systems, Training and Services, Commercial Electronics, and Other 4,186 - ------------------------------------------------------------------------------- Total Electronics 14,822 $ 8,972 $ 6,186 Engineering and Construction 2,065 2,255 2,291 Aircraft 2,532 2,366 2,271 Major Appliances -- -- 1,509 - ------------------------------------------------------------------------------- Total $19,419 $13,593 $12,257 =============================================================================== Operating Income (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Defense Systems $ 885 Sensors and Electronic Systems 540 Intelligence, Information, and Aircraft Integration Systems 305 Command, Control, and Communication Systems, Training and Services, Commercial Electronics, and Other 302 - ------------------------------------------------------------------------------- Total Electronics 2,032 $ 856 $ 793 Engineering and Construction (253) 19 184 Aircraft 227 185 175 Major Appliances -- -- 40 - ------------------------------------------------------------------------------- Total $ 2,006 $ 1,060 $ 1,192 =============================================================================== Certain prior year segment amounts were reclassified to conform to the current year presentation. The Major Appliances segment was substantially divested in 1997 with the remaining operations sold in 1998. As a result of these dispositions, the Company has included the remaining operations of the Major Appliances segment within Total Electronics in 1998 and 1997. Information for the segments that comprise Total Electronics has not been presented for 1997 and 1996 because the Company determined that it was impracticable to obtain the comparative information due to the significant acquisitions, divestitures, and reorganizations that took place during 1998 and 1997. During the first quarter of 1999, the Company completed a reorganization of certain business segments to better align the operations with customer needs and to eliminate management redundancy. Note O to the financial statements contains additional information about this change. This organizational change will be reflected in the Company's 1999 financial statements. 8 The Electronics businesses reported 1998 sales of $14.8 billion, an increase of 65 percent compared with 1997, and 1998 operating income of $2,032 million, a 137 percent increase compared with 1997. The significant increase was attributable primarily to the merger with Hughes Defense and the acquisition of TI Defense. Additionally, the previously discussed restructuring and special charges decreased to $167 million in 1998 from $340 million in 1997. The Electronics businesses reported 1997 sales of $9.0 billion, an increase of 45 percent compared with 1996, and 1997 operating income of $856 million, an 8 percent increase compared with 1996. The increase was attributable primarily to the acquisition of TI Defense offset by the restructuring and special charges discussed above. The Electronics businesses reported 1996 sales of $6.2 billion and operating income of $793 million. RE&C reported 1998 sales of $2.1 billion and an operating loss of $253 million and 1997 sales of $2.3 billion and operating income of $19 million. During 1998, RE&C recorded a non-recurring charge of $310 million for a change in estimate on certain contracts and contract claims. The $310 million charge consisted of a $153 million change in estimate on certain contracts and a $157 million charge related to certain contract claims. The change in estimate was due to increased cost projections on several large turnkey projects. The charge related to contract claims was due to a change in methodology employed by the Company to pursue outstanding claims. In accordance with contract accounting rules, this charge was recorded as a reduction in net sales. In addition, RE&C recorded previously discussed restructuring and special charges of $85 million in 1998 and $125 million in 1997. The decrease in sales and operating income was due primarily to the $310 million charge. In addition, new orders have not progressed as anticipated. This lower growth combined with operational performance on certain contracts resulted in continued margin pressure. In response to these circumstances, RE&C announced corrective actions which included strengthening the management team, improving cash flow management by revising contractual terms where possible and shortening the billing cycle. In addition, reductions in the overhead structure are expected to occur as a result of eliminating layers of management, being more selective in the bidding process, and the closing or partial closing of 16 offices. RE&C reported 1996 sales of $2.3 billion and operating income of $184 million. Raytheon Aircraft reported 1998 sales of $2.5 billion, up slightly compared with 1997, and 1998 operating income of $227 million, an improvement of 23 percent compared with 1997. The increase in sales is primarily due to increased shipments of general aviation aircraft. The increase in operating income is primarily due to the 1997 special charge of $30 million discussed above. Raytheon Aircraft reported 1997 sales of $2.4 billion, up slightly compared with 1996, and 1997 operating income of $185 million, an increase of 6 percent compared with 1996. The increases reflect increased shipments of general aviation aircraft and contracts for services. The increase in operating income was offset by the 1997 special charge discussed above. Raytheon Aircraft reported 1996 sales of $2.3 billion and operating income of $175 million. Backlog consisted of the following at: (In millions) December 31: 1998 1997 1996 (Restated) (Restated) (Restated) - ------------------------------------------------------------------------------- Electronics $17,648 $16,641 $ 7,559 Engineering and Construction 3,888 2,900 3,309 Aircraft 2,509 1,974 1,348 Major Appliances -- -- 35 - ------------------------------------------------------------------------------- Total backlog $24,045 $21,515 $12,251 U.S. government backlog included above $14,622 $12,547 $ 5,637 - ------------------------------------------------------------------------------- 9 During the third quarter of 1998, the Company changed its method of reporting backlog at certain locations in order to provide a consistent method of reporting across and within the Company's businesses. Backlog includes the full value of contract awards when received, excluding awards and options expected in future periods. Prior to the change, contract values which were awarded but incrementally funded were excluded from reported backlog for some parts of the business. The one-time impact of this change was a $1.1 billion increase to Electronics backlog and a $0.9 billion increase to Engineering and Construction backlog, related principally to U.S. government contracts. Prior periods have not been restated for this change. Excluding this change, backlog remained essentially unchanged from December 31, 1997. Financial Condition and Liquidity Net cash provided by operating activities for the year ended December 31, 1998 was $994 million versus $1,044 million for the year ended December 31, 1997. The decrease is due principally to increased working capital requirements and restructuring activities at the Electronics businesses. In 1998, the Company incurred cash expenditures of $276 million on restructuring and exit costs and $56 million of capital expenditures and period expenses related to restructuring and consolidation activities for RSC and RE&C combined. The Company expects to spend approximately $534 million on exit costs and approximately $225 million on capital expenditures and period costs related to restructuring actions in 1999. For the year ended December 31, 1996, net cash provided by operating activities was $522 million. While the Company expects that the completion of restructuring and consolidation activities will reduce cash flow in the near term, over the next five years the Company expects to generate significant cash from operations. The Company maintains an ongoing program under which it sells general and commuter aviation long-term receivables. During the fourth quarter of 1998, the Company initiated a program under which it sells government short-term receivables. Proceeds from the sale of government short-term receivables were $225 million in 1998. In addition, the Company maintains an ongoing program under which it sells engineering and construction short-term receivables. The Company changed its method of reporting cash flows related to the origination and sale of financing receivables which are now classified as cash flows from investing activities. Prior to the change, these amounts were classified as cash flows from operating activities. Prior year amounts have been reclassified to conform with the current year presentation. Net cash provided by investing activities was $617 million in 1998 versus net cash used in investing activities of $2,937 million and $1,169 million in 1997 and 1996, respectively. Origination of financing receivables was $1,339 million in 1998, $1,317 million in 1997, and $1,336 million in 1996. Sale of financing receivables was $1,105 million in 1992, $1,182 million in 1998, and $1,031 in 1996. Capital expenditures of $509 million in 1998 increased slightly from $459 million in 1997, primarily due to the merger with Hughes Defense and the acquisition of TI Defense. Capital expenditures in 1999 are expected to approximate 1998 levels. Capital expenditures were $406 million in 1996. Proceeds from sales of property, plant, and equipment include a $490 million property sale and five-year operating lease facility. The transaction was intended to diversify the Company's sources of funding and extend the term for a portion of the Company's financing obligations. Remaining lease payments approximate $109 million in 1999, $94 million in 2000, $77 million in 2001, $63 million in 2002, and $212 million in 2003. The lease facility contains covenants that are substantially similar to those in the Company's senior credit facilities. Also during 1998, the Company received proceeds of $210 million from various property sales. 10 During 1998, the Company made net payments for the purchase of acquired companies of $96 million, including $63 million for the acquisition of AlliedSignal's Communications Systems business. During 1997, net payments of $3,087 million were made in connection with the merger with Hughes Defense and the acquisition of TI Defense. Pursuant to the terms of the Master Separation Agreement (the "Separation Agreement"), which requires an adjustment based on net assets, the final purchase price for Hughes Defense has not been determined. Based on the terms and conditions of the Separation Agreement, the Company believes that it is entitled to a reduction in the purchase price, a position that Hughes Electronics disputes. The Company and Hughes Electronics have begun the process of negotiating a possible resolution of this matter. If the matter is not successfully resolved through negotiation, the Separation Agreement provides for binding arbitration. Accordingly, while the Company expects a reduction in purchase price from the original terms of the agreement, the amount, timing, and effect on the Company's financial position are uncertain. As a result of this uncertainty, no amounts have been recorded in the financial statements related to this gain contingency. Pursuant to the terms of the Separation Agreement, Hughes Electronics delivered to the Company a balance sheet for Hughes Defense (the "Closing Balance Sheet"), as of December 17, 1997, the effective time of the merger of the Company and Hughes Defense. During the course of the Company's review of the Closing Balance Sheet, the Company identified numerous items requiring adjustment. As a result of this review, as well as the accrual of additional exit costs, the Company recorded a total of approximately $1 billion of adjustments, exit costs accruals and additional goodwill during 1998. The Closing Balance Sheet included: . Contracts in process of $2,226 million, which the Company reduced by $1,170 million to record additional contract loss provisions of $693 million, other contract adjustments of $272 million, billed and unbilled contract write-offs of $139 million, and contract claim write-offs of $66 million . Inventories of $343 million, which the Company reduced by $84 million primarily to record write-offs of excess and obsolete inventory . Other current assets of $208 million, which the Company increased by $612 million primarily to record additional deferred tax assets related to the Company's adjustments to the Hughes Defense closing balance sheet . Property, plant, and equipment of $1,103 million, which the Company reduced by $78 million to record an estimated fair value adjustment . Other long-term assets of $1,023 million, which the Company increased by $119 million primarily to record an increase in the value of certain prepaid pension assets . Current liabilities of $1,701 million, which the Company increased by $931 million to record $584 million of exit costs, $245 million of adjustments for unfavorable leases, $29 million related to liabilities for employee compensation and related taxes and benefits, $14 million for additional environmental liabilities . Long-term liabilities of $1,069 million, which the Company reduced by $83 million primarily to reduce certain liabilities to estimated fair value As noted above, the adjustments recorded during 1998 were made as a result of the Company's review of the Closing Balance Sheet. The Company believes many of the same types of adjustments may also have been required in the September 28, 1997 Hughes Defense balance sheet which is included in the Company's Solicitation Statement/Prospectus dated November 10, 1997. As a result, the Company believes that the September 28, 1997 Hughes Defense balance sheet may contain items that are material departures from Generally Accepted Accounting Principles, therefore, investors are cautioned that the pro forma combined condensed financial statements contained in the Company's November 10, 1997 Solicitation Statement/Prospectus and the unaudited pro forma financial information included above may not be representative of the combined company's actual financial position. Hughes Electronics and their independent accountants do not agree with the Company's assessment. During 1998, the Company sold its commercial laundry business unit for $315 million in cash and $19 million in securities and its Raytheon Aircraft Montek subsidiary for $160 million. Also during 1998, the Company sold other non-core business operations for $273 million. Total sales and operating income related to these divested businesses were $372 million and $8 million, respectively in 1998. During 1997, the Company sold its home appliance, heating, air conditioning, and commercial cooking operations for $522 million. Also during 1997, the Company sold its Switchcraft and Semiconductor divisions, which were part of Commercial Electronics, for $183 million. The Company has been divesting non-core assets as part of its strategy to focus and streamline its core businesses. Dividends paid to stockholders were $271 million in 1998, $189 million in 1997, and $190 million in 1996. The quarterly dividend rate was $0.20 per share for each of the four quarters of 1998, 1997, and 1996. The increase in dividends paid in 1998 was due to the issuance of 102.6 million shares in connection with the merger with Hughes Defense. Outstanding shares were reduced by the repurchase of 4.6 million shares for $247 million in 1998 and 1.7 million shares for $94 million in 1997. Total debt was $9.0 billion at December 31, 1998 as compared with $10.1 billion at December 31, 1997 and $3.7 billion at December 31, 1996. The increase is principally due to the financing requirements of the merger with Hughes Defense and the acquisition of TI Defense, partially offset by the sale of certain appliance and other non-core operations. The Company's outstanding debt has interest rates ranging from 5.7% to 7.375% and matures at various dates through 2028. Total debt, as a percentage of total capital, was 45.4 percent, 49.2 percent, and 44.9 percent at December 31, 1998, 1997, and 1996, respectively. The Company issued $3.8 billion of long-term notes and debentures during 1998 and $3.0 billion during 1997. These financings were used to refinance the debt associated with the merger with Hughes Defense and the acquisition of TI Defense and to take advantage of favorable long-term interest rates in order to reduce short-term borrowings. Note J to the financial statements contains additional disclosures related to long-term debt. 11 Credit ratings for the Company were established by Moody's at P-2 for short-term borrowing and Baa1 for senior debt, Standard and Poor's at A-2 for short-term borrowing and BBB for senior debt, and Duff & Phelps at D-2 for short-term borrowing and BBB+ for senior debt. Lines of credit with certain commercial banks totaling $4.4 billion at December 31, 1998 exist as standby facilities to support the issuance of commercial paper by the Company. These lines of credit bear interest based upon LIBOR and mature at various dates through 2002. At December 31, 1998, there were no borrowings under these lines of credit. At December 31, 1997, the Company had lines of credit totaling $9.0 billion as a source of direct borrowing and as a standby facility to support the issuance of commercial paper of which $3.5 billion was outstanding. Given the present state of the financial markets and economic conditions, the Company does not currently anticipate making future borrowings under the remaining lines of credit. The Company's need for, cost of, and access to funds are dependent on future operating results, as well as conditions external to the Company. The Company believes that its cash position will be sufficient to maintain investment grade credit ratings and its sources of and access to capital markets are adequate to support current operations. The following discussion covers quantitative and qualitative disclosures about the Company's market risk. The Company's primary market exposures are to interest rates and foreign exchange rates. The Company meets its working capital requirements with a combination of variable rate short-term and fixed rate long-term financing. The Company enters into interest rate swap agreements with commercial banks primarily to reduce the impact of changes in interest rates on short-term financing arrangements. The Company also enters into foreign exchange contracts with commercial banks to minimize fluctuations in the value of payments to international vendors and the value of foreign currency denominated receipts. The market-risk sensitive instruments used by the Company for hedging are entered into with commercial banks and are directly related to a particular asset, liability, or transaction for which a firm commitment is in place. The Company also sells receivables through various special purpose entities and retains a partial interest that may include servicing rights, interest only strips, and subordinated certificates. Financial instruments held by the Company which are subject to interest rate risk include notes payable, commercial paper, long-term debt, long-term receivables, investments, and interest rate swap agreements. The aggregate hypothetical loss in earnings for one year of those financial instruments held by the Company at December 31, 1998 which are subject to interest rate risk resulting from a hypothetical increase in interest rates of 10 percent is $1 million, after-tax. The hypothetical loss was determined by calculating the aggregate impact of a 10 percent increase in the interest rate of each variable rate financial instrument held by the Company at December 31, 1998 which is subject to interest rate risk. Fixed rate financial instruments were not evaluated, as the risk exposure is not material. 12 The Company's outstanding foreign currency forward exchange contracts include contracts to buy and/or sell British Pounds, Netherlands Guilders, German Marks, Canadian Dollars, Swiss Francs, and Norwegian Kroner. All foreign exchange contracts were related to specific transactions for which a firm commitment existed, and therefore the associated market risk of the market risk sensitive instruments and the underlying firm commitments in the aggregate is not material. On January 1, 1999, eleven participating countries of the European Union converted to a common currency, the Euro, which became their official currency. National currencies will initially remain legal tender. The Company recently conducted an internal analysis to determine the impact of the Euro conversion which is not expected to have a material impact on the Company's business. Year 2000 Date Conversion The Year 2000 problem concerns the inability of information systems to recognize properly and process date-sensitive information beyond January 1, 2000. In January 1998, the Company initiated a formal comprehensive enterprise-wide program to identify and resolve Year 2000 related issues. The scope of the program includes the investigation of all Company functions and products, and all internally used hardware and software systems, including embedded systems in what are not traditionally considered information technology systems. The program has developed standard processes and an internal service center in support of Year 2000 readiness. The Company is following an eight-step risk management process grouped into two major phases, detection (planning and awareness, inventory, triage, and detailed assessment) and correction (resolution, test planning, test execution, and deployment). The Company has identified eight system types that could have risk as follows: application, infrastructure, test equipment, engineering computing, manufacturing, delivered product, facilities, and supply chain. The completion of several large acquisitions in recent years through which the Company inherited a large number of systems, products, and facilities adds to the complexity of this task. As the Company continues to acquire new businesses, these businesses must then be brought into the program. The detection phase of the program is currently estimated to be 95 percent complete. On the basis of expected total cost, the detection phase is 73 percent complete. The remaining work in this phase is expected to be completed in early 1999. The work in the detection phase has covered all eight system types, including delivered product and supply chain. 13 The Company has made substantial progress in the corrective action phase of the program, with 82 percent of the tasks required in this phase completed, up from 19 percent at the end of the third quarter of 1998. On the basis of expected total cost, the corrective action phase is 45 percent complete. The Company expects to complete corrective activities by the third quarter of 1999. The Company has instituted and is executing a formal audit program to assess the state of readiness. Also, the Company is assessing the risk of supplier readiness, and in selected cases will review the preparedness of individual suppliers for Year 2000. Finally, the Company plans to audit Year 2000 compliance of selected vendors. When the corrective action phase of the program is completed the Company expects to have developed contingency plans, augmenting existing disaster recovery plans and sourcing strategies, for identified risks. Since January 1998, the Company has spent approximately $67 million on the Year 2000 program, $16 million on the detection phase, and $51 million on the corrective action phase. Prior to 1998, expenditures on the program were insignificant. Total cost at completion of the program is currently estimated to be $136 million. Of the total $136 million estimated costs, $22 million relates to the detection phase and $114 million is for correction. All costs, except those for long-lived assets, are expensed as incurred. These costs include employees, inside and outside consultants and services, system replacements, and other equipment requirements. The Company has employed consultants in an advisory capacity, primarily in the detection phase. Total estimated costs of the Year 2000 program are predominantly internal. Although a number of minor information technology projects have been deferred as a result of the priority given to the Year 2000 program, no significant projects which would materially affect the Company's financial position or results of operations have been delayed. While the Company expects to resolve all Year 2000 risks without a material adverse effect on its results of operations, liquidity, or financial condition, there can be no assurances as to the ultimate success of the program. Uncertainties exist as to the Company's ability to detect all Year 2000 problems as well as its ability to achieve successful and timely resolution of all Year 2000 issues. Uncertainties also exist concerning the preparedness of the Company's critical suppliers to avoid Year 2000 related service and delivery interruptions. A "reasonably likely worst case" scenario of Year 2000 risks for the Company could include isolated performance problems with manufacturing or administrative systems, isolated interruption of deliveries from critical suppliers, and product liability issues. The consequences of these issues may include increases in manufacturing and administrative costs until the problems are resolved, lost revenues, lower cash receipts, and product liability; however, the Company is unable to quantify the potential effect of these items on its results of operations, liquidity, or financial condition should some or a combination of these events come to pass. 14 Accounting Standards Effective January 1, 1999, the Company adopted the American Institute of Certified Public Accountants (AICPA) Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5). This accounting standard requires that certain start-up and pre-contract award costs be expensed as incurred. The Company will report a first quarter 1999 charge of $53 million, or $0.16 per diluted share, reflecting the initial application of SOP 98-5 and the cumulative effect of the change in accounting principle as of January 1, 1999. In March 1998, the AICPA issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). This accounting standard, which is effective for fiscal years beginning after December 15, 1998, requires that certain costs incurred in connection with internal-use computer software projects be capitalized. The adoption of SOP 98-1 is not expected to have a material effect on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). This accounting standard, which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, requires that all derivatives be recognized as either assets or liabilities at estimated fair value. The adoption of SFAS No. 133 is not expected to have a material effect on the Company's financial position or results of operations. Forward-Looking Statements Statements which are not historical facts contained in this 1998 Annual Report are forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. These risks include, in addition to the specific uncertainties referenced in this report, the effect of worldwide political and market conditions, the impact of competitive products and pricing, the timing of awards and contracts, particularly international contracts, and risks inherent with large long-term fixed price contracts. Further information regarding the factors that could cause actual results to differ materially from projected results can be found in "Item 1-Business" in Raytheon's Annual Report on Form 10-K/A for the year ended December 31, 1998. 15 Raytheon Company Consolidated Balance Sheets (In millions except share amounts) December 31, 1998 December 31, 1997 (Restated) (Restated) - ------------------------------------------------------------------------------- Assets =============================================================================== Current assets Cash and cash equivalents $ 421 $ 296 Accounts receivable, less allowance for doubtful accounts of $21 in 1998 and $22 in 1997 618 1,056 Deferred federal and foreign income taxes (note K) 840 1,265 Contracts in process (note F) 4,859 4,361 Inventories (note G) 1,991 2,038 Prepaid expenses and other current assets 236 139 - ------------------------------------------------------------------------------- Total current assets 8,965 9,155 Property, plant, and equipment, net (note H) 2,275 2,891 Goodwill, net of accumulated amortization of $669 in 1998 and $308 in 1997 14,396 13,836 Other assets, net (notes I and N) 2,596 2,638 - ------------------------------------------------------------------------------- Total assets $28,232 $28,520 =============================================================================== 16 Liabilities and Stockholders' Equity =============================================================================== Current liabilities Notes payable and current portion of long-term debt (note J) $ 827 $ 5,656 Advance payments, less contracts in process of $1,159 in 1998 and $420 in 1997 1,251 797 Accounts payable 2,071 1,844 Accrued salaries and wages 703 680 Other accrued expenses (note E) 2,180 2,199 - --------------------------------------------------------------------------- Total current liabilities 7,032 11,176 Accrued retiree benefits and other long-term liabilities (notes E and N) 1,679 1,766 Deferred federal and foreign income taxes (note K) 561 786 Long-term debt (note J) 8,163 4,406 Commitments and contingencies (note L) Stockholders' equity (note R) Preferred stock, $0.01 par value, 200,000,000 shares authorized, none outstanding in 1998 and 1997 Class A common stock, par value $0.01 per share, 450,000,000 shares authorized, 101,503,000 and 102,630,000 shares outstanding in 1998 and 1997, respectively after deducting 839,000 treasury shares in 1998 1 1 Class B common stock, par value $0.01 per share, 1,000,000,000 shares authorized, 235,295,000 and 235,935,000 shares outstanding in 1998 and 1997, respectively after deducting 3,889,000 treasury shares in 1998 2 2 Additional paid-in capital 6,272 6,151 Accumulated other comprehensive income (50) (23) Treasury stock (257) -- Retained earnings 4,829 4,255 - ------------------------------------------------------------------------------ Total stockholders' equity 10,797 10,386 - ------------------------------------------------------------------------------- Total liabilities and stockholders' equity $28,232 $28,520 =============================================================================== 17 Raytheon Company Consolidated Statements of Income (In millions except per share amounts) Years Ended December 31: 1998 1997 1996 (Restated) (Restated) (Restated) - ------------------------------------------------------------------------------- Net sales $19,419 $13,593 $12,257 Cost of sales 15,167 10,929 9,721 Administrative and selling expenses 1,664 1,189 1,021 Research and development expenses 582 415 323 - ------------------------------------------------------------------------------- Total operating expenses 17,413 12,533 11,065 - ------------------------------------------------------------------------------- Operating income 2,006 1,060 1,192 - ------------------------------------------------------------------------------- Interest expense, net 711 359 154 Other income, net (142) (65) (39) - ------------------------------------------------------------------------------- Non-operating expense, net 569 294 115 - ------------------------------------------------------------------------------- Income before taxes 1,437 766 1,077 Federal and foreign income taxes 593 255 320 - ------------------------------------------------------------------------------- Net income $ 844 $ 511 $ 757 =============================================================================== Earnings per common share Basic $ 2.50 $ 2.14 $ 3.20 Diluted $ 2.47 $ 2.11 $ 3.15 18 Raytheon Company Consolidated Statements of Stockholders' Equity (In millions except per share amounts) Accumulated Compre- Total Years Ended December 31, Common Stock Additional Other Compre- Treasury Retained hensive Stockholders' 1998, 1997 and 1996: Class A Class B Paid-in Capital hensive Income Stock Earnings Income Equity (Restated) (Restated) (Restated) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $241 $259 $ 5 $3,768 $ 4,273 Net income 757 $757 757 Other comprehensive income Foreign exchange translation adjustments (3) (3) SFAS No. 115 valuation adjustment (15) (15) SFAS No. 87 pension adjustment 1 1 Other comprehensive income (17) (17) Comprehensive income-1996 $740 Dividends declared-$0.80 per share (190) (190) Common stock plan activity 1 64 65 Treasury stock activity (6) (15) (292) (313) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 236 308 (12) 4,043 4,575 Net income 511 $511 511 Other comprehensive income Foreign exchange translation adjustments (32) (32) SFAS No. 115 valuation adjustment 26 26 SFAS No. 87 pension adjustment (5) (5) Other comprehensive income (11) (11) Comprehensive income-1997 $500 Dividends declared-$0.80 per share (209) (209) Common stock plan activity 2 172 174 Treasury stock activity (2) (23) (90) (115) Reduction of par value (234) 234 -- Issuance of class A common stock $1 5,460 5,461 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 1 2 6,151 (23) 4,255 10,386 Net income 844 $844 844 Other comprehensive income Foreign exchange translation adjustments (9) (9) SFAS No. 115 valuation adjustment (6) (6) SFAS No. 87 pension adjustment (12) (12) Other comprehensive income (27) (27) Comprehensive income-1998 $817 Dividends declared-$0.80 per share (270) (270) Common stock plan activity 121 121 Treasury stock activity (note R) $(257) (257) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 $1 $2 $6,272 $(50) $(257) $4,829 $10,797 ==================================================================================================================================== 19 Raytheon Company Consolidated Statements of Cash Flows (In millions) Years Ended December 31: 1998 1997 1996 (Restated) (Restated) (Restated) - ----------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 844 $ 511 $ 757 Adjustments to reconcile net income to net cash provided by operating activities, net of the effect of acquisitions and divestitures Depreciation and amortization 761 457 369 Net gain on sales of operating units (141) (72) -- Decrease in accounts receivable 209 233 215 Increase in contracts in process (746) (585) (581) Increase in inventories (247) -- (104) Decrease in current deferred federal and foreign income taxes 816 122 45 (Increase) decrease in prepaid expenses and other current assets (106) (60) -- Increase in advance payments 459 32 30 Increase in accounts payable 264 128 49 Increase in accrued salaries and wages 28 363 21 Decrease in other accrued expenses (776) (283) (398) Other adjustments, net (371) 198 119 - --------------------------------------------------------------------------------------- Net cash provided by operating activities 994 1,044 522 - --------------------------------------------------------------------------------------- Cash flows from investing activities Sale of financing receivables 1,105 1,182 1,031 Origination of financing receivables (1,339) (1,317) (1,336) Collection of financing receivables not sold 60 54 74 Expenditures for property, plant, and equipment (509) (459) (406) Proceeds from sales of property, plant, and equipment 700 69 16 Increase in other assets (52) (84) (31) Payment for purchase of acquired companies, net of cash received (note D) (96) (3,087) (584) Proceeds from sales of operating units and investments 748 705 67 - --------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 617 (2,937) (1,169) - --------------------------------------------------------------------------------------- Cash flows from financing activities Dividends (271) (189) (190) (Decrease) increase in short-term debt (4,828) (597) 1,007 Increase in long-term debt 3,757 2,889 4 Purchase of treasury shares (247) (94) (306) Proceeds under common stock plans 103 44 57 All other, net -- -- 3 - --------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (1,486) 2,053 575 - --------------------------------------------------------------------------------------- Effect of foreign exchange rates on cash -- (1) -- - --------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 125 159 (72) Cash and cash equivalents at beginning of year 296 137 209 - --------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 421 $ 296 $ 137 ======================================================================================= 20 Note A: Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Raytheon Company (Raytheon or the "Company") and all domestic and foreign subsidiaries. All material intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation. Revenue Recognition Sales under long-term contracts are recorded under the percentage of completion method. Costs and estimated gross margins are recorded as sales as work is performed based on the percentage that incurred costs bear to estimated total costs utilizing the most recent estimates of costs and funding. Some contracts contain incentive provisions based upon performance in relation to established targets which are recognized in the contract estimates when deemed realizable. Since many contracts extend over a long period of time, revisions in cost and funding estimates during the progress of work have the effect of adjusting earnings applicable to performance in prior periods in the current period. When the current contract estimate indicates a loss, provision is made for the total anticipated loss in the current period. Sales from TI Defense fixed price contracts in process at the time of acquisition were recorded as products were shipped or services were rendered. Revenue from aircraft sales are recognized at the time of physical delivery of the aircraft. Revenue from certain qualifying non-cancelable aircraft lease contracts are accounted for as sales-type leases. The present value of all payments, net of executory costs, are recorded as revenue, and the related costs of the aircraft are charged to cost of sales. Associated interest, using the interest method, is recorded over the term of the lease agreements. All other leases for aircraft are accounted for under the operating method wherein revenue is recorded as earned over the rental aircraft lives. Service revenue is recognized ratably over contractual periods or as services are performed. Research and Development Expenses Expenditures for company-sponsored research and development projects are expensed as incurred. Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term, highly liquid investments with original maturities of 90 days or less. Under the Company's cash management program, checks and amounts in transit prior to December 31, 1998 were not considered reductions of cash or accounts payable until presented to the appropriate banks for payment. At December 31, 1997, checks and amounts in transit were $290 million. Cash equivalents are valued in accordance with the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). Contracts in Process Contracts in process are stated at cost plus estimated profit but not in excess of realizable value. 21 Inventories Inventories at Raytheon Aircraft are stated at the lower of cost (principally last-in, first-out) or market. All other inventories are stated at cost (principally first-in, first-out or average cost) but not in excess of realizable value. Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Major improvements are capitalized while expenditures for maintenance, repairs, and minor improvements are charged to expense. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in income. Provisions for depreciation are generally computed on a combination of accelerated and straight-line methods. Depreciation provisions are based on estimated useful lives as follows: buildings - 20 to 45 years, machinery and equipment - 3 to 10 years, and equipment leased to others - 5 to 10 years. Leasehold improvements are amortized over the lesser of the remaining life of the lease or the estimated useful life of the improvement. Goodwill Goodwill is amortized on the straight-line method over its estimated useful life, but not in excess of 40 years. The Company evaluates the possible impairment of goodwill at each reporting period based on the undiscounted projected cash flows of the related business unit. Impairment of Long-lived Assets The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the related estimated undiscounted future cash flows. When an evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value of the asset, the asset is adjusted to its estimated fair value. Investments Investments include equity ownership of 20 percent to 50 percent in affiliated companies and of less than 20 percent in other companies. Investments in affiliated companies are accounted for under the equity method, wherein the Company's share of earnings and income taxes applicable to the assumed distribution of such earnings are included in net income. Other investments are stated at the lower of cost or fair value, and certain available for sale investments are accounted for in accordance with the provisions of SFAS No. 115. Federal and Foreign Income Taxes The Company and its domestic subsidiaries provide for federal income taxes on pretax accounting income at rates in effect under existing tax law. Foreign subsidiaries have recorded provisions for income taxes at applicable foreign tax rates in a similar manner. 22 Translation of Foreign Currencies Assets and liabilities of foreign subsidiaries are translated at current exchange rates, and the effects of these translation adjustments are reported as a component of accumulated other comprehensive income in stockholders' equity. The balance at December 31, 1998 and 1997 was $(37) million and $(28) million, respectively. Foreign exchange transaction gains and losses in 1998, 1997, and 1996 were not material. Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130), during 1998. SFAS No. 130 established standards for reporting comprehensive income and its components, and is presented in the Consolidated Statements of Stockholders' Equity. The SFAS No. 115 valuation adjustment is shown net of tax benefits (provisions) of $3 million, $(14) million, and $8 million in 1998, 1997, and 1996, respectively. Effective January 1, 1999, the Company adopted the American Institute of Certified Public Accountants Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5). This accounting standard requires that certain start-up and pre-contract award costs be expensed as incurred. The Company will report a first quarter 1999 charge of $53 million, or $0.16 per diluted share, reflecting the initial application of SOP 98-5 and the cumulative effect of the change in accounting principle as of January 1, 1999. Pension Costs The Company has several pension and retirement plans covering the majority of employees, including certain employees in foreign countries. Annual charges to income are made for the cost of the plans, including current service costs, interest on projected benefit obligations, and net amortization and deferrals, increased or reduced by the return on assets. Unfunded accumulated benefit obligations are accounted for as a long-term liability on the balance sheet. The Company annually funds those pension costs which are calculated in accordance with Internal Revenue Service regulations and standards issued by the Cost Accounting Standards Board. Interest Rate Swap Agreements and Foreign Exchange Contracts The Company meets its working capital requirements with a combination of variable rate short-term and fixed rate long-term financing. The Company enters into interest rate swap agreements with commercial banks primarily to reduce the impact of changes in interest rates on short-term financing arrangements. Settlement accounting is used for interest rate swaps. The Company also enters into foreign exchange contracts to minimize fluctuations in the value of payments due to international vendors and the value of foreign currency denominated receipts. The hedges used by the Company are transaction driven and are directly related to a particular asset, liability, or transaction for which a commitment is in place. Hedge accounting is used for foreign exchange contracts. Unrealized gains and losses are classified in the same manner as the item being hedged and are recognized in income when the transaction is complete. Interest rate swap agreements and foreign exchange contracts are held to maturity and no exchange-traded or over-the-counter instruments have been purchased. Cash flows are recognized in the statement of cash flows in the same category as the related item. The impact on the financial position and results of operations from likely changes in foreign exchange rates and interest rates is not material due to the minimizing of risk through the hedging of transactions related to specific assets, liabilities, or commitments. 23 Employee Stock Plans Proceeds from the exercise of stock options under employee stock plans are credited to common stock at par value, and the excess is credited to additional paid-in capital. There are no charges or credits to income for stock options. The fair value at the date of award of restricted stock is credited to common stock at par value, and the excess is credited to additional paid-in capital. The fair value is also charged to income as compensation expense over the vesting period. Income tax benefits arising from restricted stock transactions, employees' premature disposition of stock option shares, and exercise of non-qualified stock options are credited to additional paid-in capital. The Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) in 1996. The standard defines a fair value based method of accounting for employee stock options. The pro forma net income and earnings per share effect of the fair value based accounting are disclosed in Note M, Employee Stock Plans. Risks and Uncertainties Companies, such as Raytheon, which are engaged in supplying defense-related equipment to the government, are subject to certain business risks peculiar to that industry. Sales to the government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad, and other factors. The Company has maintained a solid foundation of defense systems which meet the needs of the United States and its allies, as well as serving a broad government program base and range of commercial electronics businesses. These factors lead management to believe that there is high probability of continuation of the Company's current major defense programs. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. B. Restatement of Financial Statements On December 6, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance, clarifies certain conditions to be met in order to recognize revenue. After reexamining the terms underlying certain transactions of Raytheon Aircraft, the Company has determined that revenue related to these transactions should be reversed. In view of the cumulative effect of the unrecorded adjustment on the results of future periods, the Company has restated its annual and quarterly consolidated financial statements. The restatements were required to reverse sales that the Company believed were properly recorded as bill and hold sales when the manufacturing process was substantially complete and the rights of ownership of the aircraft had passed to the buyer, but before minor modifications had been completed and the physical delivery of the aircraft occurred. The restated financial statements reflect sales when final delivery of the aircraft occurred. As these adjustments relate to the timing of revenue recognition all reversals are recognized in later periods. The financial statements and related notes set forth in this Form 10-K/A reflect all such restatements. A summary of the impact of the restatements for the years ended December 31, 1998, 1997, and 1996 follows (in millions except per share amounts): Results of Operations - --------------------- Year Ended Year Ended Year Ended December 31, 1998 December 31, 1997 December 31, 1996 --------------------- --------------------- --------------------- Previously As Previously As Previously As Reported Restated Reported Restated Reported Restated Net sales $19,530 $19,419 $13,673 $13,593 $12,331 $12,257 Cost of sales 15,248 15,167 10,985 10,929 9,789 9,721 Operating income 2,036 2,006 1,084 1,060 1,198 1,192 Net income 864 844 527 511 761 757 Diluted earnings per share $ 2.53 $ 2.47 $ 2.18 $ 2.11 $ 3.17 $ 3.15 Financial Position - ------------------ December 31, 1998 December 31, 1997 --------------------- --------------------- Previously As Previously As Reported Restated Reported Restated Inventories $ 1,711 $ 1,991 $ 1,837 $ 2,038 Deferred taxes 809 840 1,244 1,265 Current assets 8,637 8,965 9,233 9,155 Total assets 27,939 28,232 28,598 28,520 Advance payments 865 1,251 525 797 Accounts payable 2,091 2,071 1,845 1,844 Other accrued expenses 2,194 2,180 2,509 2,499 Current liabilities 6,680 7,032 11,215 11,176 Stockholders' equity 10,856 10,797 10,425 10,386 C. Certain Reclassifications Certain reclassifications have been made to contracts in process, accounts payable, and goodwill to correct immaterial errors discovered in 1999. These items did not impact reported earnings but rather were balance sheet only reclassifications. The Company has also adjusted the contracts in process footnote to correct for the misclassification of the type of certain contracts between fixed price and cost (see note F). 24 Note D: Acquisitions and Divestitures The Company acquired the Texas Instruments' defense business (TI Defense) in July 1997 and merged with the defense business of Hughes Electronics Corporation (Hughes Defense) in December 1997. The following unaudited pro forma financial information combines the results of operations of Raytheon, TI Defense, and Hughes Defense as if the acquisition and merger had taken place on January 1, 1997 and January 1, 1996: (In millions except per share amounts) 1997 1996 (Restated) (Restated) - ------------------------------------------------------------------------------- Net sales $ 21,279 $ 20,440 Net income 548 913 Basic earnings per share 1.62 2.69 Diluted earnings per share 1.60 2.65 - ------------------------------------------------------------------------------- The pro forma results are not necessarily indicative of what the results of operations would have been if the transactions had occurred on the applicable dates indicated, do not reflect the cost and revenue synergies expected to be realized, and are not intended to be indicative of future results of operations. The Hughes transaction, valued at $9.5 billion subject to post-closing adjustments, was comprised of approximately $5.5 billion in common stock and $4.0 billion in debt, which was assumed by the merged company. Pursuant to the terms of the Master Separation Agreement (the "Separation Agreement"), which requires an adjustment based on net assets, the final purchase price for Hughes Defense has not been determined. Based on the terms and conditions of the Separation Agreement, the Company believes that it is entitled to a reduction in the purchase price, a position that Hughes Electronics disputes. The Company and Hughes Electronics have begun the process of negotiating a possible resolution of this matter. If the matter is not successfully resolved through negotiation, the Separation Agreement provides for binding arbitration. Accordingly, while the Company expects a reduction in purchase price from the original terms of the agreement, the amount, timing, and effect on the Company's financial position are uncertain. As a result of this uncertainty, no amounts have been recorded in the financial statements related to this gain contingency. Pursuant to the terms of the Separation Agreement, Hughes Electronics delivered to the Company a balance sheet for Hughes Defense (the "Closing Balance Sheet"), as of December 17, 1997, the effective time of the merger of the Company and Hughes Defense. During the course of the Company's review of the Closing Balance Sheet, the Company identified numerous items requiring adjustment. As a result of this review, as well as the accrual of additional exit costs, the Company recorded a total of approximately $1 billion of adjustments, exit costs accruals and additional goodwill during 1998. The Closing Balance Sheet included: . Contracts in process of $2,226 million, which the Company reduced by $1,170 million to record additional contract loss provisions of $693 million, other contract adjustments of $272 million, billed and unbilled contract write-offs of $139 million, and contract claim write-offs of $66 million . Inventories of $343 million, which the Company reduced by $84 million primarily to record write-offs of excess and obsolete inventory . Other current assets of $208 million, which the Company increased by $612 million primarily to record additional deferred tax assets related to the Company's adjustments to the Hughes Defense closing balance sheet . Property, plant, and equipment of $1,103 million, which the Company reduced by $78 million to record an estimated fair value adjustment . Other long-term assets of $1,023 million, which the Company increased by $119 million primarily to record an increase in the value of certain prepaid pension assets . Current liabilities of $1,701 million, which the Company increased by $931 million to record $584 million of exit costs, $245 million of adjustments for unfavorable leases, $29 million related to liabilities for employee compensation and related taxes and benefits, $14 million for additional environmental liabilities . Long-term liabilities of $1,069 million, which the Company reduced by $83 million primarily to reduce certain liabilities to estimated fair value Assets acquired in conjunction with the merger with Hughes Defense, including the adjustments noted above, include contracts in process of $1,056 million, inventories of $259 million, other current assets of $820 million, property, plant, and equipment of $1,025 million, and other assets of $1,142 million (primarily pension related). Liabilities assumed include debt of $4,033 million, current liabilities of $2,632 million, and long-term liabilities of $986 million. Goodwill resulting from the fair value of this transaction was $8,930 million. As noted above, the adjustments recorded during 1998 were made as a result of the Company's review of the Closing Balance Sheet. The Company believes many of the same types of adjustments may also have been required in the September 28, 1997 Hughes Defense balance sheet which is included in the Company's Solicitation Statement/Prospectus dated November 10, 1997. As a result, the Company believes that the September 28, 1997 Hughes Defense balance sheet may contain items that are material departures from General Accepted Accounting Principles, therefore, investors are cautioned that the pro forma combined condensed financial statements contained in the Company's November 10, 1997 Solicitation Statement/Prospectus and the unaudited pro forma financial information included above may not be representative of the combined company's actual financial position. Hughes Electronics and their independent accountants do not agree with the Company's assessment. TI Defense was acquired for $2.9 billion in cash. Assets acquired in conjunction with the acquisition of TI Defense include accounts receivable of $229 million, inventories of $223 million, other current assets of $126 million, and property, plant, and equipment of $306 million. Liabilities assumed include current liabilities of $646 million and long-term liabilities of $147 million. Goodwill resulting from the fair value of this transaction was $2,929 million. In 1998, the Company acquired AlliedSignal's Communications Systems business for $63 million. Also in 1998, the Company sold its commercial laundry business unit for $315 million in cash and $19 million in securities, its Raytheon Aircraft Montek subsidiary for $160 million, and other non-core business operations for $273 million. The net gain resulting from these dispositions was $141 million. 25 In 1997, the Company sold its home appliance, heating, air conditioning, and commercial cooking operations for $522 million. Also in 1997, the Company sold its Switchcraft and Semiconductor divisions for $183 million. The net gain resulting from these dispositions was $72 million. The Company has included in its consolidated results of operations the following acquisitions made in June 1996, under the purchase method of accounting: the aircraft modification and defense electronics businesses of Chrysler Technologies, the engineering and construction assets of Rust International, and the marine communication assets of Standard Radio AB of Sweden. The cost of the acquisitions, net of cash acquired, was $584 million. No pro forma results have been presented since they would not be material to the Company's consolidated results. In April 1996, the Company sold Xyplex, its data-networking subsidiary, for $118 million in cash and securities. Note E: Restructuring and Special Charges Restructuring charges and exit costs recognized in connection with business combinations include the cost of involuntary employee termination benefits and related employee severance costs, facility closures, and other costs associated with the Company's approved plans. Employee termination benefits include severance, wage continuation, medical, and other benefits. Facility closure and related costs include disposal costs of property, plant, and equipment, lease payments, lease termination costs, and net gain or loss on sales of closed facilities. In 1998, the Company recorded restructuring and special charges totaling $252 million of which $85 million is included in cost of sales and $167 million is included in administrative and selling expenses. The charges included $33 million for costs pertaining to restructuring actions taken by the Engineering and Construction segment, $167 million for asset impairments in the Electronics businesses, and $52 million for asset impairments in the Engineering and Construction segment. In 1997, the Company recorded restructuring and special charges totaling $495 million of which $401 million is included in cost of sales and $94 million is included in administrative and selling expenses. The charges included $295 million for costs related to restructuring actions at the Electronics businesses ($220 million) and at the Engineering and Construction segment ($75 million). The charges also included $63 million for one-time costs associated with the merger with Hughes Defense and the acquisition of TI Defense. Special charges of $137 million related to asset impairments in the Electronics businesses ($57 million), contract valuations in the Engineering and Construction segment ($50 million), and a permanent impairment in the Aircraft segment ($30 million). In 1996, the Company recorded a $34 million special charge, which is included in cost of sales. 26 Exit Costs and Restructuring Charges -- Electronics In January 1998, the Company announced plans to consolidate and reorganize its Electronics businesses, including the operations of Hughes Defense and TI Defense. In connection with these actions, the Company recorded $804 million of restructuring and exit costs. The Company recorded a $220 million restructuring charge in the fourth quarter of 1997, including $148 million for employee separation costs and $72 million for facilities exit costs. During the fourth quarter of 1998, the estimated number of employee terminations increased by approximately 1,200 employees, primarily comprised of manufacturing employees, however, the actual cost of termination per employee was lower than the original estimate. As a result of these changes in estimate, the total cost of employee severance decreased by $37 million. Also during the fourth quarter of 1998, the Company determined that facilities exit cost would run lower than the original estimate by $30 million because many of the facility actions were progressing ahead of the original schedule. In addition, during the fourth quarter of 1998, the Company committed to close two additional facilities and further reduce employment by approximately 1,400 positions. The total program cost of the actions is estimated at $67 million, comprised of $14 million of severance and other employee related costs and $53 million of facility closure and related costs. The Company's revised estimate of exit costs include $125 million for employee separation costs and $95 million for facilities exit costs. The remaining $584 million of exit costs were recorded as liabilities assumed in connection with the merger with Hughes Defense and the acquisition of TI Defense. Costs of $300 million were recorded in 1997, reflecting the Company's initial plan related to the reorganization and consolidation of these operations. In 1998, as a result of finalization of these plans, additional exit costs of $284 million were accrued. The Company's final estimate of exit costs include $260 million for employee separation costs and $324 million for facilities exit costs. The $804 million of restructuring and exit costs provides for severance and related benefits for approximately 15,400 employees and costs to vacate and dispose of approximately 11 million square feet of facility space. The Company is exiting facility space and terminating employees made redundant as a result of the merger with Hughes Defense and the acquisition of TI Defense and the subsequent reorganization of RSC. There were no major activities that will not be continued as a result of these actions. Employee related exit costs include severance and other termination benefit costs for employees in various functional areas including manufacturing, engineering, and administration. Facility related exit costs include the costs for lease termination, building closure and disposal, and equipment disposition. Exit costs accrued in connection with the merger with Hughes Defense and the acquisition of TI Defense also include employee relocation and program moves. Owned facilities that will be vacated in connection with the restructuring activities will be sold. The Company will terminate leases or sublease space for non-owned facilities vacated in connection with restructuring. The Company expects to essentially complete these actions by the end of 1999. While these actions are intended to improve the Company's competitive position, there can be no assurances as to their ultimate success or that additional restructuring actions will not be required. Note S to the financial statements contains additional information pertaining to these restructuring actions. Electronics Exit Costs - ------------------------------------------------------------------------------- (In millions) 1998 1997 - ------------------------------------------------------------------------------- Accrued liability at beginning of year $ 300 Charges and liabilities accrued Severance and other employee related costs 58 $ 202 Facility closure and related costs 226 98 - ------------------------------------------------------------------------------- 284 300 - ------------------------------------------------------------------------------- Costs incurred Severance and other employee related costs 51 -- Facility closure and related costs 134 -- - ------------------------------------------------------------------------------- 185 -- - ------------------------------------------------------------------------------- Accrued liability at end of year $ 399 $ 300 =============================================================================== Cash expenditures $ 178 -- Number of employee terminations due to restructuring actions 3,600 -- - ------------------------------------------------------------------------------- Electronics Restructuring - ------------------------------------------------------------------------------- (In millions) 1998 1997 - ------------------------------------------------------------------------------- Accrued liability at beginning of year $ 220 Charges and liabilities accrued Severance and other employee related costs 14 $ 148 Facility closure and related costs 53 72 - ------------------------------------------------------------------------------- 67 220 - ------------------------------------------------------------------------------- Changes in estimate Severance and other employee related costs (37) -- Facility closure and related costs (30) -- - ------------------------------------------------------------------------------- (67) -- - ------------------------------------------------------------------------------- Costs incurred Severance and other employee related costs 53 -- Facility closure and related costs 3 -- - ------------------------------------------------------------------------------- 56 -- - ------------------------------------------------------------------------------- Accrued liability at end of year $ 164 $ 220 =============================================================================== Cash expenditures $ 56 -- Number of employee terminations due to restructuring actions 3,000 -- - ------------------------------------------------------------------------------- 27 In addition to the $241 million of restructuring and exit costs incurred in 1998, the Company also incurred $56 million of capital expenditures and period expenses in 1998 related to the implementation of the Electronics businesses consolidation and reorganization. Note O contains additional disclosures related to Electronics exit costs and restructuring activity by segment. Restructuring Charges -- Engineering and Construction In January 1998, the Company announced plans to reduce the Raytheon Engineers & Constructors (RE&C) workforce by 1,000 employees and to close or partially close 16 offices, or approximately 1.1 million square feet of facilities. In connection with these actions and other committed but unannounced actions, the Company recorded a $75 million restructuring charge in the fourth quarter of 1997. The restructuring charge included $31 million for employee severance for approximately 2,300 people, including the 1,000 positions announced in January 1998, and $44 million for facilities exit. During the fourth quarter of 1998, the Company modified the plan for RE&C that was committed to in January 1998 to close fewer facilities than originally estimated. As a result of this modification, the number of employee terminations was reduced from approximately 2,300 to approximately 1,400 and the total cost of employee severance decreased by $11 million. Because higher than expected facility exit costs were incurred at the locations being closed the total estimated cost of facilities exit increased by $11 million. In October 1998, the Company also announced plans for an additional 260 person reduction in the RE&C workforce and recorded an additional $33 million restructuring charge. The employee reductions, expected to be completed within one year, primarily affected engineering, business development, and administrative employees. While these actions are intended to improve the Company's competitive position, there can be no assurances as to their ultimate success or that additional restructuring actions will not be required. Engineering and Construction Restructuring Costs - ------------------------------------------------------------------------------- (In millions) 1998 1997 - ------------------------------------------------------------------------------- Accrued liability at beginning of year $ 75 -- Charges and liabilities accrued Severance and other employee related costs 22 $ 31 Facility closure and related costs 11 44 - ------------------------------------------------------------------------------- 33 75 - ------------------------------------------------------------------------------- Costs incurred Severance and other employee related costs 19 -- Facility closure and related costs 23 -- - ------------------------------------------------------------------------------- 42 -- - ------------------------------------------------------------------------------- Accrued liability at end of year $ 66 $ 75 =============================================================================== Cash expenditures $ 42 -- Number of employee terminations due to restructuring actions 1,300 -- - ------------------------------------------------------------------------------- 28 Special Charges In the second quarter of 1998, the Company's partner in a Commercial Electronics joint venture in Korea began to experience financial difficulties. As a result, the Company recorded a $42 million special charge to recognize a permanent impairment of its investment in the joint venture, reducing the book value of the investment to estimated fair value. During the third quarter of 1998, the financial condition of the joint venture deteriorated further, and the Company recorded an additional $83 million special charge to exit a line of business, which included writing off its remaining investment in the Korean joint venture. The Company's partner in this joint venture has filed for company reorganization, the Korean equivalent of Chapter 11 protection from creditors. As such, the Company does not expect to realize any future benefits from its remaining partnership interest in this joint venture. The remaining assets related to the joint venture consist of $20 million of inventory and a $20 million receivable. Any remaining exposure related to the operations of the joint venture is not expected to have a material adverse effect on the Company's financial position or results of operations. In 1998, the Company also recorded a $52 million special charge for asset impairment related to the RE&C restructuring actions to exit two operations which are scheduled to be closed in 1999. The charge includes $45 million of goodwill associated with one of the operations to be exited and $7 million for the estimated loss on disposition of the other operation. Also in 1998, the Company recorded a $42 million special charge to write down the assets of two operations in the Electronics businesses that the Company had decided to sell to estimated fair value of approximately $125 million. One sale was completed during 1998. The other sale is expected to close in 1999. The operating results, which are not material, continue to be included in the Company's results of operations. In 1997, the Company recorded a $63 million special charge primarily for one-time costs in the Electronics businesses associated with the merger with Hughes Defense and the acquisition of TI Defense. The Company also recorded a $57 million special charge primarily to write down to estimated fair value certain assets in the Electronics businesses that the Company had decided to sell. The sale of these assets was completed in 1998 and the proceeds and loss on disposition were not material. Also in 1997, the Company recorded a $50 million special charge for contract valuations at RE&C and a $30 million special charge to recognize a permanent impairment at Raytheon Aircraft. In 1996, the Company recorded a $34 million special charge to close a Major Appliances operation. 29 Note F: Contracts in Process (In millions) Contracts in process consisted of the following at December 31, 1998: Cost Type Fixed Price Type Total - ------------------------------------------------------------------------------- U.S. government end-use contracts Billed $ 367 $ 562 $ 929 Unbilled 873 4,205 5,078 Less progress payments -- (2,753) (2,753) - ------------------------------------------------------------------------------- Total 1,240 2,014 3,254 - ------------------------------------------------------------------------------- Other customers Billed 128 670 798 Unbilled 94 1,205 1,299 Less progress payments -- (492) (492) - ------------------------------------------------------------------------------- Total 222 1,383 1,605 - ------------------------------------------------------------------------------- $ 1,462 $ 3,397 $ 4,859 =============================================================================== (In millions) Contracts in process consisted of the following at December 31, 1997: Cost Type Fixed Price Type Total - ------------------------------------------------------------------------------- U.S. government end-use contracts Billed $ 534 $ 400 $ 934 Unbilled 314 3,519 3,833 Less progress payments -- (1,968) (1,968) - ------------------------------------------------------------------------------- Total 848 1,951 2,799 - ------------------------------------------------------------------------------- Other customers Billed 70 321 391 Unbilled 210 1,237 1,447 Less progress payments -- (276) (276) - ------------------------------------------------------------------------------- Total 280 1,282 1,562 - ------------------------------------------------------------------------------- $ 1,128 $ 3,233 $ 4,361 =============================================================================== The U.S. government has a security title to unbilled amounts associated with contracts that provide for progress payments. Unbilled amounts are primarily recorded on the percentage of completion method and are recoverable from the customer upon shipment of the product, presentation of billings, or completion of the contract. Included in contracts in process at December 31, 1998 is approximately $210 million related to unapproved change orders and claims on construction contracts. Unapproved change orders and claims, primarily due to owner-directed changes, owner-caused delays, unforeseen conditions or similar reasons, are included in contracts in process at their estimated realizable value. Management believes that Raytheon has contractual or legal bases for pursuing recovery of these unapproved change orders and claims and that collection is probable. The settlement of these amounts depends on individual circumstances and negotiations with the counterparty; accordingly, the timing of the collection will vary and approximately $160 million of collections are expected to extend beyond one year. Billed and unbilled contracts in process include retentions arising from contractual provisions. At December 31, 1998, retentions amounted to $279 million and are anticipated to be collected as follows: 1999-$132 million, 2000-$90 million, and the balance thereafter. 30 Note G: Inventories (In millions) Inventories consisted of the following at December 31: 1998 1997 (Restated) (Restated) - ------------------------------------------------------------------------------- Finished goods $ 317 $ 314 Work in process 1,193 1,541 Materials and purchased parts 746 509 Excess of current cost over LIFO values (148) (154) - ------------------------------------------------------------------------------- 2,108 2,210 Less progress payments (117) (172) - ------------------------------------------------------------------------------ $ 1,991 $ 2,038 ============================================================================== Included in inventories are amounts related to certain fixed price contracts under which sales are recorded as products are shipped. The inventory values from which the excess of current cost over LIFO values are deductible were $880 million and $704 million at December 31, 1998 and 1997, respectively. Note H: Property, Plant, and Equipment (In millions) Property, plant, and equipment consisted of the following at December 31: 1998 1997 - ------------------------------------------------------------------------------ Land $ 70 $ 78 Buildings and leasehold improvements 1,828 1,754 Machinery and equipment 2,376 3,299 Equipment leased to others 201 119 - ------------------------------------------------------------------------------ 4,475 5,250 Less accumulated depreciation and amortization (2,200) (2,359) - ------------------------------------------------------------------------------ $2,275 $2,891 ============================================================================== Depreciation expense was $380 million, $318 million, and $276 million in 1998, 1997, and 1996, respectively. During September 1998, the Company entered into a $490 million property sale and five-year operating lease facility. Accumulated depreciation of equipment leased to others was $10 million and $8 million at December 31, 1998 and 1997, respectively. Future minimum lease payments from non-cancelable aircraft operating leases, which extend to 2013, amounted to $90 million. 31 At December 31, 1998, these payments were due as follows: - ------------------------------------------------------------------------------ (In millions) 1999 $ 16 2000 16 2001 16 2002 13 2003 8 Thereafter 21 - ------------------------------------------------------------------------------ Note I: Other Assets (In millions) Other assets consisted of the following at December 31: 1998 1997 - ------------------------------------------------------------------------------ Long-term receivables Due from customers in installments to 2012 $ 222 $ 148 Sales-type leases, due in installments to 2015 20 27 Other, principally due through 2007 42 42 Investments 387 372 Prepaid pension and other noncurrent assets 1,925 2,049 - ------------------------------------------------------------------------------ $ 2,596 $ 2,638 ============================================================================== The Company provides long-term financing principally to its aircraft customers. Long-term receivables include commuter airline receivables of $113 million and $63 million at December 31, 1998 and 1997, respectively. Since it is the Company's policy to have the aircraft serve as collateral for the commuter airline receivables, the Company does not expect to incur any material losses against the net book value of the long-term receivables. The Company sells receivables, including government short-term receivables, general and commuter aviation long-term receivables, and engineering and construction short-term receivables, to a bank syndicate and other financial institutions. The banks have a first priority claim on all proceeds, including the underlying equipment and any insurance proceeds, and have recourse against the Company, at varying percentages, depending upon the character of the receivables sold. For the general and commuter aviation long-term receivables, the underlying aircraft serve as collateral for the aircraft receivables, and the future resale value of the aircraft is an important consideration in the transaction. Based on experience to date with resale activities and pricing, the Company believes that any liability arising from these transactions will not have a material effect on the Company's financial position, liquidity, or results of operations. 32 In connection with the sale of receivables, the following special purpose entities had been established as of December 31, 1998: Raytheon Receivables, Inc., Raytheon Aircraft Receivables Corporation, and Raytheon Engineers & Constructors Receivables Corporation. The Company sells receivables through these special purpose entities, retains the servicing rights, and receives a servicing fee which is recognized as collected over the remaining term of the related receivables sold. Estimated gains or losses from the sale of receivables are recognized in the period in which the sale occurs. In determining the gain or loss on each qualifying sale of receivables, the investment in the sold receivable pool is allocated between the portion sold and the portion retained based on their relative estimated fair values at the date of sale. The retained interest includes servicing rights, interest only strips, and subordinated certificates. These financial instruments are recorded at estimated fair value. The balance of receivables sold to banks or financial institutions outstanding at December 31, 1998 and 1997, was $3,002 million and $2,909 million, respectively. No material gain or loss resulted from the sales of receivables. Note J: Notes Payable and Long-term Debt (In millions) Debt consisted of the following at December 31: 1998 1997 - ------------------------------------------------------------------------------- Notes payable at a weighted average interest rate of 6.71% for 1998 and 6.30% for 1997 $ 34 $ 3,641 Commercial paper at a weighted average interest rate of 5.91% for 1998 and 6.46% for 1997 785 2,010 Current portion of long-term debt 8 5 - ------------------------------------------------------------------------------- Notes payable and current portion of long-term debt 827 5,656 - ------------------------------------------------------------------------------- Notes due through 2005, 5.70% to 6.50%, not redeemable prior to maturity 3,557 2,206 Notes due from 2007 to 2010, 6.15% to 6.75%, redeemable at any time 2,002 957 Debentures due from 2010 to 2028, 6.00% to 7.375%, redeemable at varying dates 2,212 826 Commercial paper backed by five year fixed for variable interest rate swap at 6.40% 375 375 Other notes with varying interest rates 25 47 Less installments due within one year (8) (5) - ------------------------------------------------------------------------------- Long-term debt 8,163 4,406 - ------------------------------------------------------------------------------- Total debt $8,990 $10,062 =============================================================================== 33 In 1998, the Company issued $500 million of 5.95% notes due in 2001, $450 million of 6.30% notes due in 2005, $400 million of 5.70% notes due in 2003, $750 million of 6.15% notes due in 2008, $300 million of 6.55% notes due in 2010, $250 million of 6.00% debentures due in 2010, $550 million of 6.40% debentures due in 2018, $350 million of 6.75% debentures due in 2018, and $250 million of 7.00% debentures due in 2028. The proceeds from these issues were used for acquisition refinancing and to reduce short-term borrowings. In 1997, the Company issued $500 million of 7.20% debentures due in 2027, $1,000 million of 6.75% notes due in 2007, $1,000 million of 6.45% notes due in 2002, and $500 million of 6.30% notes due in 2000. The proceeds from these issues were used for acquisition financing. Commercial paper in the amount of $375 million has been classified as long-term due to Company borrowings of that amount which are supported by a five year Syndicated Bank Credit Agreement combined with a five year fixed for variable interest rate swap which matures during 2000. Excluding commercial paper classified as long-term, the aggregate amounts of installments due on long-term debt for the next five years are: - ------------------------------------------------------------------------------- (In millions) 1999 $ 8 2000 877 2001 502 2002 1,002 2003 403 - ------------------------------------------------------------------------------- Lines of credit with certain commercial banks totaling $4.4 billion at December 31, 1998 exist as standby facilities to support the issuance of commercial paper by the Company. At December 31, 1998, there were no borrowings under these lines of credit. At December 31, 1997, the Company had lines of credit totaling $9.0 billion as a source of direct borrowing and as a standby facility to support the issuance of commercial paper of which $3.5 billion was outstanding. Credit lines or commitments with banks were maintained by subsidiary companies amounting to $202 million and $252 million at December 31, 1998 and 1997, respectively. Compensating balance arrangements are not material. The principal amounts of long-term debt were reduced by debt issue discounts and interest rate hedging costs of $76 million and $105 million respectively, on the date of issuance, and are reflected as follows at: (In millions) December 31: 1998 1997 - ------------------------------------------------------------------------------- Principal $8,317 $4,542 Unamortized issue discounts (66) (38) Unamortized interest rate hedging costs (88) (98) - ------------------------------------------------------------------------------- Long-term debt $8,163 $4,406 =============================================================================== 34 The Company has bank agreement covenants. The most restrictive requires that the earnings before interest and taxes be at least three times net interest expense for the prior four quarters. The Company was in compliance with this covenant during 1998, 1997, and 1996. Total interest payments were $778 million, $295 million, and $257 million for 1998, 1997, and 1996, respectively. Note K: Federal and Foreign Income Taxes Income reported for federal and foreign tax purposes differs from pretax accounting income due to variations between Internal Revenue Code requirements and the Company's accounting practices. The provisions for federal and foreign income taxes in 1998, 1997, and 1996 consisted of the following: (In millions) 1998 1997 1996 (Restated) (Restated) (Restated) - ------------------------------------------------------------------------------- Current income tax expense Federal $ 46 $191 $170 Foreign 7 9 34 Deferred income tax expense (benefit) Federal 549 53 149 Foreign (9) 2 (33) - ------------------------------------------------------------------------------- $593 $255 $320 =============================================================================== The provision for income taxes in 1998, 1997, and 1996 differs from the U.S. statutory rate due to the following: - ------------------------------------------------------------------------------- Tax at statutory rate 35.0% 35.0% 35.0% Research and development tax credit (0.3) (2.2) (4.6) Foreign sales corporation tax benefit (1.3) (2.2) (2.5) Goodwill amortization 7.9 3.3 1.7 Other, net -- (0.6) 0.1 - ------------------------------------------------------------------------------- 41.3% 33.3% 29.7% =============================================================================== In 1998, 1997, and 1996, domestic profit before taxes amounted to $1,401 million, $719 million, and $1,055 million, respectively, and foreign profit before taxes amounted to $36 million, $47 million, and $22 million, respectively. Cash (refunds) payments were $(16) million, $169 million, and $275 million in 1998, 1997, and 1996, respectively. In 1998 and 1997, net deferred tax assets were increased by $371 million and $393 million, respectively, in connection with acquisitions and subsequent adjustments to acquisitions. 35 Deferred federal and foreign income taxes consisted of the following at: (In millions) December 31: 1998 1997 (Restated) (Restated) - ------------------------------------------------------------------------------- Current deferred tax assets (liabilities) Inventory and other $ 115 $ 465 Long-term contracts 459 582 Restructuring reserves 262 126 Inventory capitalization (27) (24) Other 31 85 - ------------------------------------------------------------------------------- Net current deferred tax assets 840 1,234 Current period tax prepaid 31 Deferred federal and foreign income taxes -- current $ 840 $1,265 - ------------------------------------------------------------------------------- Noncurrent deferred tax assets (liabilities) Depreciation $(159) $ (284) Revenue on leases (104) (75) Pension (521) (588) Postretirement benefits 249 247 Other (26) (86) - ------------------------------------------------------------------------------- Deferred federal and foreign income taxes -- noncurrent $(561) $ (786) =============================================================================== At December 31, 1998, $105 million of taxes payable was included in accounts payable. Note L: Commitments and Contingencies At December 31, 1998, the Company had commitments under long-term leases requiring approximate annual rentals on a net lease basis as follows: - ------------------------------------------------------------------------------- (In millions) 1999 $366 2000 331 2001 292 2002 236 2003 355 Thereafter 881 - ------------------------------------------------------------------------------- Remaining lease payments under the Company's $490 million property sale and five-year operating lease facility, which are included in the table above, approximate $109 million in 1999, $94 million in 2000, $77 million in 2001, $63 million in 2002, and $212 million in 2003. The lease facility contains covenants that are substantially similar to those in the Company's senior credit facilities. Certain lease commitments will be terminated or reduced in connection with facility and office closures and the optimization of facility utilization. Rental expense for 1998, 1997, and 1996 amounted to $283 million, $136 million, and $113 million, respectively. 36 Defense contractors are subject to many levels of audit and investigation. Among agencies that oversee contract performance are the Defense Contract Audit Agency, the Inspector General, the Defense Criminal Investigative Service, the General Accounting Office, the Department of Justice, and Congressional Committees. Over recent years, the Department of Justice has convened Grand Juries from time to time to investigate possible irregularities by the Company in government contracting. Such investigations, individually and in the aggregate, are not expected to have a material adverse effect on the Company's financial position or results of operations. The Company self-insures for losses and expenses for aircraft product liability up to a maximum of $50 million annually. Insurance is purchased from third parties to cover excess aggregate liability exposure from $50 million to $1.2 billion. This coverage also includes the excess of liability over $10 million per occurrence. The aircraft product liability reserve was $30 million at December 31, 1998. Recurring costs associated with the Company's environmental compliance program are not material and are expensed as incurred. Capital expenditures in connection with environmental compliance are not material. The Company is involved in various stages of investigation and cleanup relative to remediation of various sites. All appropriate costs expected to be incurred in connection therewith have been accrued at December 31, 1998. Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage, and the unresolved extent of the Company's responsibility, it is difficult to determine the ultimate outcome of these matters; however, any additional liability is not expected to have a material effect on the Company's financial position, liquidity, or results of operations after giving effect to provisions previously recorded. The Company issues guarantees and has banks issue, on its behalf, letters of credit to meet various bid, performance, warranty, retention, and advance payment obligations. Approximately $1,527 million, $1,148 million, and $1,363 million of these contingent obligations, net of related outstanding advance payments, were outstanding at December 31, 1998, 1997, and 1996, respectively. These instruments expire on various dates through the year 2005. Pursuant to the terms of the Master Separation Agreement (the "Separation Agreement"), which requires an adjustment based on net assets, the final purchase price for Hughes Defense has not been determined. Based on the terms and conditions of the Separation Agreement, the Company believes that it is entitled to a reduction in the purchase price, a position that Hughes Electronics disputes. The Company and Hughes Electronics have begun the process of negotiating a possible resolution of this matter. If the matter is not successfully resolved through negotiation, the Separation Agreement provides for binding arbitration. Accordingly, while the Company expects a reduction in purchase price from the original terms of the agreement, the amount, timing, and effect on the Company's financial position are uncertain. As a result of this uncertainty, no amounts have been recorded in the financial statements related to this gain contingency. In addition, various claims and legal proceedings generally incidental to the normal course of business are pending or threatened against the Company. While the ultimate liability from these proceedings is presently indeterminable, any additional liability is not expected to have a material effect on the Company's financial position, liquidity, or results of operations after giving effect to provisions already recorded. 37 Note M: Employee Stock Plans The 1976 Stock Option Plan provides for the grant of both incentive and nonqualified stock options at an exercise price which is 100 percent of the fair value on the date of grant. No further grants are allowed under this plan. The 1991 Stock Plan provides for the grant of incentive stock options at an exercise price which is 100 percent of the fair value, and nonqualified stock options at an exercise price which may be less than the fair value on the date of grant. The 1995 Stock Option Plan provides for the grant of both incentive and nonqualified stock options at an exercise price which is not less than 100 percent of the fair value on the date of grant. The plans also provide that all stock options may be exercised in their entirety 12 to 24 months after the date of grant. Incentive stock options terminate 10 years from the date of grant, and those stock options granted after December 31, 1986 become exercisable to a maximum of $100,000 per year. Nonqualified stock options terminate 11 years from the date of grant or 10 years and a day if issued in connection with the 1995 Stock Option Plan. In 1997, the Company issued conversion stock options covering 4.8 million shares in substitution of nonqualified stock options held by employees of TI Defense and Hughes Defense. In accordance with the terms of the original grants, these replacement stock options have remaining exercise periods of up to nine years and become exercisable at various times through January 2001. The 1991 Stock Plan also provides for the award of restricted stock and restricted units. The 1997 Nonemployee Directors Restricted Stock Plan provides for the award of restricted stock to nonemployee directors. Restricted awards are made at prices determined by the Compensation Committee of the Board of Directors and are compensatory in nature. Restricted stock and restricted unit awards vest over a specified period of time of not less than one year and not more than 10 years. No further grants are allowed under the 1991 Stock Plan, 1995 Stock Option Plan, and 1997 Nonemployee Directors Restricted Stock Plan after March 26, 2001, March 21, 2005, and November 25, 2006, respectively. Restricted stock awards entitle the participant to full dividend and voting rights. Unvested shares are restricted as to disposition and subject to forfeiture under certain circumstances. Compensation expense is recognized over the vesting periods. Awards of 541,100, 315,900, and 19,500 shares of restricted stock and restricted units were made to employees and directors at a weighted average value at the grant date of $57.21, $47.92, and $50.87 in 1998, 1997, and 1996, respectively. There were 834,900, 1,678,700, and 1,443,400 shares of restricted stock and restricted units outstanding at December 31, 1998, 1997, and 1996, respectively. The amount of compensation expense recorded was $15 million, $22 million, and $7 million in 1998, 1997, and 1996, respectively. In 1997, $12 million of compensation expense was related to accelerated vesting of restricted stock as a result of the merger with Hughes Defense. There were 53.7 million, 52.8 million, and 49.6 million shares of common stock (including shares held in treasury) reserved for stock options and restricted stock awards at December 31, 1998, 1997, and 1996, respectively. The 1976 Stock Option Plan, 1991 Stock Plan, 1995 Stock Option Plan, and 1997 Nonemployee Directors Restricted Stock Plan utilize Class B common stock. 38 Information for 1998, 1997, and 1996 follows: Weighted Average (Share amounts in thousands) Shares Option Price - ------------------------------------------------------------------------------- Outstanding at December 31, 1995 10,781 $30.63 Granted 3,890 52.53 Exercised (1,845) 26.91 Expired (256) 45.47 - ------------------------------------------------------------------------------- Outstanding at December 31, 1996 12,570 $37.65 Granted 8,950 43.84 Exercised (1,698) 31.18 Expired (312) 49.13 - ------------------------------------------------------------------------------- Outstanding at December 31, 1997 19,510 $40.87 Granted 6,945 55.54 Exercised (2,917) 35.44 Expired (816) 51.13 - ------------------------------------------------------------------------------- Outstanding at December 31, 1998 22,722 $45.68 =============================================================================== The following table summarizes information about stock options outstanding at December 31, 1998 (share amounts in thousands): - ------------------------------------------------------------------------------- Options Outstanding Options Exercisable - ----------------------------------------------------- ------------------------ Weighted Shares Average Weighted Shares Weighted Outstanding Contractual Average Exercisable Average Exercise at December 31, Remaining Exercise at December 31, Exercise Price Range 1998 Life Price 1998 Price - ----------------------------------------------------- ------------------------ $14.51 to $29.63 2,705 5.2 years $22.65 2,537 $22.41 $31.13 to $49.75 6,589 6.8 years $38.27 5,355 $36.68 $51.06 to $54.69 7,156 7.6 years $52.14 6,921 $52.11 $55.59 to $59.31 6,272 9.5 years $56.02 134 $56.16 - ----------------------------------------------------- ------------------------ Total 22,722 14,947 ===================================================== ======================== Shares exercisable at the corresponding weighted average exercise price at December 31, 1998, 1997, and 1996, respectively, were 14.9 million at $41.58, 13.0 million at $37.35, and 8.8 million at $31.32. 39 The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for restricted stock. The Company has adopted the disclosure-only provisions of SFAS No. 123, accordingly, no compensation expense was recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 123, the Company's net income and earnings per share would have approximated the pro forma amounts indicated below: (In millions except per share amounts) 1998 1997 1996 (Restated) (Restated) (Restated) - ------------------------------------------------------------------------------- Net income-as reported $ 844 $ 511 $ 757 Net income-pro forma $ 800 $ 468 $ 735 Basic earnings per share- as reported $2.50 $2.14 $3.20 pro forma $2.37 $1.96 $3.11 Diluted earnings per share- as reported $2.47 $2.11 $3.15 pro forma $2.34 $1.93 $3.06 - ------------------------------------------------------------------------------- The weighted average fair value of each option granted in 1998, 1997, and 1996, respectively, is estimated as $10.40, $17.41, and $10.79 on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: - ------------------------------------------------------------------------------- Expected life 4 years Assumed annual dividend growth rate (5 year historical rate) 6% Expected volatility 15% Risk free interest rate (month-end yields on 4 year treasury strips equivalent zero coupon) 4.4% to 5.7% range Assumed annual forfeiture rate 5% - ------------------------------------------------------------------------------- The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. Note N: Pension and Other Employee Benefits The Company has several pension and retirement plans covering the majority of its employees, including certain employees in foreign countries. The major plans provide pension benefits that are based on the five highest consecutive years of the employee's annual compensation in the ten years before retirement. Some of the plans covering hourly and union employees also contain provisions based upon a stated benefit amount per year of service. The Company's funding policy, for the majority of the plans, is to contribute annually at a rate that is intended to remain at a level percentage of compensation for the covered employees. Unfunded prior service costs under the funding policy are generally amortized over periods from 10 to 30 years. 40 Total pension expense includes foreign pension expense of $10 million, $11 million, and $10 million in 1998, 1997, and 1996, respectively. Plan assets consist primarily of equity securities (including 13,919,000 shares of Raytheon Company Class A and Class B common stock combined, with a fair value of $736 million at December 31, 1998) and fixed income securities (including $15 million of Raytheon Company 6.75% notes due in 2007). In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all of the Company's U.S. employees may become eligible for these benefits if they reach normal retirement age while working for the Company. Some of the retiree health plans are paid for, in part, by retiree contributions, which are adjusted annually. Benefits are provided through various insurance companies whose charges are based either on the benefits paid during the year or annual premiums. Health benefits are provided to retirees, their covered dependents, and beneficiaries. Retiree life insurance plans cover the retiree only. In 1993, the Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions. At adoption, some of the plans began amortizing past service cost over 20 years, while others recognized the past service cost immediately. The Company is funding the liability for certain salaried and hourly employees and plans to continue to do so. The information presented below includes the effect of acquisitions, subsequent adjustments to acquisitions, and divestitures. Effective December 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This accounting standard revised the disclosure requirements for pension and other postretirement benefit plans. Change in Benefit Obligation =============================================================================== Pension Benefits Other Benefits - ------------------------------------------------------------------------------- (In millions) December 31: 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Benefit obligation at beginning of year $ 9,927 $ 4,267 $ 1,303 $ 732 Service cost 338 143 30 10 Interest cost 703 332 98 57 Plan participants' contributions 27 -- -- -- Amendments 3 3 (2) (1) Actuarial loss 384 422 30 34 Acquisitions 182 5,088 75 547 Divestitures (28) (44) (1) -- Curtailments 2 (7) -- -- Benefits paid (744) (277) (107) (76) - ------------------------------------------------------------------------------- Benefit obligation at end of year $10,794 $ 9,927 $ 1,426 $1,303 =============================================================================== 41 Change in Plan Assets =============================================================================== Pension Benefits Other Benefits - ------------------------------------------------------------------------------- (In millions) December 31: 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $12,188 $ 4,961 $ 289 $ 184 Actual return on plan assets 1,388 1,097 22 18 Acquisitions (203) 6,388 -- 94 Divestitures (40) (47) -- -- Company contribution 175 66 107 69 Plan participants' contributions 27 -- -- -- Benefits paid (744) (277) (100) (76) - ------------------------------------------------------------------------------- Fair value of plan assets at end of year $12,791 $12,188 $ 318 $ 289 =============================================================================== Funded Status -- unrecognized components =============================================================================== Pension Benefits Other Benefits - ------------------------------------------------------------------------------- (In millions) December 31: 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Funded status $1,997 $2,261 $(1,108) $(1,014) Unrecognized actuarial (gain) loss (894) (953) 21 (15) Unrecognized transition (asset) obligation (18) (26) 288 316 Unrecognized prior service cost 182 200 (14) (13) - ------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $1,267 $1,482 $ (813) $ (726) =============================================================================== Funded Status -- recognized in balance sheets =============================================================================== Pension Benefits Other Benefits - ------------------------------------------------------------------------------- (In millions) December 31: 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Prepaid benefit cost $1,674 $1,864 $ 11 $ 13 Accrued benefit liability (453) (406) (824) (739) Intangible asset 15 11 -- -- Accumulated other comprehensive income 31 13 -- -- - ------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $1,267 $1,482 $ (813) $ (726) =============================================================================== 42 Components of Net Periodic Benefit Cost =============================================================================== Pension Benefits Other Benefits - ------------------------------------------------------------------------------- (In millions) 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------- Service cost $ 338 $ 143 $ 127 $ 30 $ 10 $ 9 Interest cost 703 332 307 98 57 52 Expected return on plan assets (1,016) (401) (352) (25) (19) (16) Amortization of transition (asset) obligation (7) (8) (8) 25 27 27 Amortization of prior service cost 19 20 20 (2) (1) -- Recognized net actuarial gain (30) (21) (5) (1) (7) (6) (Gain) loss due to curtailment -- (6) 1 1 11 3 - ------------------------------------------------------------------------------- Net periodic benefit cost $ 7 $ 59 $ 90 $126 $ 78 $ 69 =============================================================================== Weighted Average Assumptions =============================================================================== Pension Benefits Other Benefits - ------------------------------------------------------------------------------- (In millions) December 31: 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Discount rate 7.00% 7.25% 7.00% 7.25% Expected return on plan assets 9.375% 9.375% 8.50% 8.50% Rate of compensation increase 4.50% 4.50% 4.50% 4.50% Health care trend rate in the next year 6.00% 6.50% Gradually declining to a trend rate of 5.00% 5.00% In the years 2001 & Beyond - ------------------------------------------------------------------------------- The effect of a one percent increase and decrease in the assumed health care trend rate for each future year for the aggregate of service and interest cost is $9 million and $(5) million, respectively, and for the accumulated postretirement benefit obligation is $99 million and $(66) million, respectively. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $515 million, $483 million, and $151 million, respectively, as of December 31, 1998 and $350 million, $322 million, and $47 million, respectively, as of December 31, 1997. Under the terms of various savings and investment plans (defined contribution plans), covered employees are allowed to contribute up to a specific percentage of their pay, generally limited to $30,000 per year. The Company matches the employee's contribution, up to a maximum of generally between three and four percent of the employee's pay. Total expense for defined contribution plans was $121 million, $78 million, and $71 million in 1998, 1997, and 1996, respectively. The increase in 1998 expense is attributable to the merger with Hughes Defense in December 1997. 43 The Company's annual contribution to the Raytheon Employee Stock Ownership Plans is approximately one-half of one percent of salaries and wages, limited to $160,000, of most United States salaried and hourly employees. The expense was $18 million, $15 million, and $15 million and the number of shares allocated to participant accounts was 271,000, 290,000, and 296,000 in 1998, 1997, and 1996, respectively. Note O: Business Segment Reporting The Company operates in three major business areas: Electronics, both defense and commercial, Engineering and Construction, and Aircraft. The Company is a leader in defense electronics, including missiles; radar; sensors and electro-optics; reconnaissance, surveillance and intelligence; command, control, communication, and information; training; simulation and services; naval and air traffic control systems; and aircraft integration systems. The Engineering and Construction segment offers full-service engineering and construction capabilities to clients worldwide. The Aircraft segment is one of the leading providers of business and special mission aircraft and delivers a broad line of jet, turboprop, and piston-powered airplanes to corporate and military customers worldwide. The Major Appliances segment was substantially divested in 1997 with the remaining operations sold in 1998. As a result of these dispositions, the Company has included the remaining operations of the Major Appliances segment within Total Electronics in 1998 and 1997. The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131) during the fourth quarter of 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments. It also established standards for related disclosures about products, services, and geographic areas. Reportable segments within Electronics have been determined based upon product lines and include the following: Defense Systems; Sensors and Electronics Systems; Intelligence, Information, and Aircraft Integration Systems; Command, Control, and Communication Systems; Training and Services; Commercial Electronics, and Other. Certain operating segments within Electronics have been aggregated as they exhibit similar long-term financial performance characteristics and do not meet the quantitative threshold. Of the four identifiable segments within Total Electronics, all except Intelligence, Information, and Aircraft Integration Systems have combined operations of Hughes Defense, TI Defense and Raytheon. During the first quarter of 1999, the Company completed a reorganization of certain business segments to better align the operations with customer needs and to eliminate management redundancy. The Intelligence, Information, and Aircraft Integration Systems segment, with the exception of its Aircraft Integration Systems division, will merge with Command, Control, and Communication Systems to create Command, Control, Communication, and Information Systems. The Aircraft Integration Systems division was established as a separate segment called Aircraft Integration Systems. This organizational change will be reflected in the Company's 1999 financial statements. 44 Operations by Business Segments =========================================================================================================== Sales Operating income - ----------------------------------------------------------------------------------------------------------- (In millions) 1998 1997 1996 1998 1997 1996 (Restated) (Restated) (Restated) (Restated) (Restated) (Restated) - ----------------------------------------------------------------------------------------------------------- Defense Systems $ 4,958 $ 885 Sensors and Electronics Systems 3,011 540 Intelligence, Information, and Aircraft Integration Systems 2,667 305 Command, Control, and Communication Systems, Training and Services, Commercial Electronics, and Other 4,186 302(1) - ----------------------------------------------------------------------------------------------------------- Total Electronics 14,822 $ 8,972 $ 6,186 2,032 $ 856(3) $ 793 Engineering and Construction 2,065 2,255 2,291 (253)(2) 19(4) 184 Aircraft 2,532 2,366 2,271 227 185(5) 175 Major Appliances -- -- 1,509 -- -- 40(6) - ----------------------------------------------------------------------------------------------------------- Total $19,419 $13,593 $12,257 $2,006 $1,060 $1,192 =========================================================================================================== Depreciation and Capital expenditures amortization - ----------------------------------------------------------------------------------------------------------- (In millions) 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Defense Systems $ 79 $ 190 Sensors and Electronics Systems 117 194 Intelligence, Information, and Aircraft Integration Systems 45 114 Command, Control, and Communication Systems, Training and Services, Commercial Electronics, and Other 79 158 - ----------------------------------------------------------------------------------------------------------- Total Electronics 320 $ 257 $ 160 656 $ 360 $ 233 Engineering and Construction 41 18 27 28 33 24 Aircraft 148 184 140 77 64 50 Major Appliances -- -- 79 -- -- 62 - ----------------------------------------------------------------------------------------------------------- Total $ 509 $ 459 $ 406 $ 761 $ 457 $ 369 =========================================================================================================== 45 Identifiable assets Change in net debt at December 31: - ------------------------------------------------------------------------------------------------ (In millions) 1998 1997 1996 1998 1997 1996 (Restated) (Restated) (Restated) - ------------------------------------------------------------------------------------------------ Defense Systems $ 3,499 $ (396) Sensors and Electronics Systems 1,722 (101) Intelligence, Information, and Aircraft Integration Systems 1,870 (161) Command, Control, and Communication Systems, Training and Services, Commercial Electronics, and Other 3,314 (322) Unallocated Electronics Items 12,872 387 - ------------------------------------------------------------------------------------------------ Total Electronics 23,277 $22,532 $ 6,177 (593) Engineering and Construction 1,495 1,758 1,564 (239) Aircraft 2,688 3,032 2,313 (130) Major Appliances -- -- 815 -- Corporate 772 1,198 489 (235) - ------------------------------------------------------------------------------------------------ Total $28,232 $28,520 $11,358 $(1,197) $6,178 $1,095 ================================================================================================ (1) Includes special charges of $167 million. (2) Includes restructuring and special charges of $85 million. (3) Includes restructuring and special charges of $340 million. (4) Includes restructuring and special charges of $125 million. (5) Includes special charges of $30 million. (6) Includes special charges of $34 million. Identifiable assets attributed to Unallocated Electronics Items primarily consist of goodwill and prepaid pension. While these assets have not been allocated back to the segments, the associated income statement impact, including goodwill amortization, has been included in the determination of the Electronics segments operating income. All material intercompany transactions have been eliminated at the segment level for sales and operating income. Intercompany receivables are included in identifiable assets. Change in net debt represents the Company's internal criteria for evaluating cash flow performance by the segments. This amount includes intercompany balances that are eliminated in consolidation and is not necessarily representative of actual cash flows determined in accordance with generally accepted accounting principles. Information for the segments that comprise Total Electronics and all information related to the change in net debt has not been presented for 1997 and 1996, because the Company determined that it was impracticable to obtain the comparative information due to the significant acquisitions, divestitures, and reorganizations that took place during 1998 and 1997. Electronics Restructuring and Exit Costs - ---------------------------------------- Charges Adjustments Costs Ending Accrued Decrease Increase Incurred Balance ------- -------- -------- -------- ------- Defense Systems $ 374 $ (28) $ 62 $ 106 $ 302 Sensors and Electronics 243 (42) 1 60 142 Systems Intelligence, Information, and Aircraft Integration Systems 11 (1) 1 9 2 Command, Control, and Communication Systems, Training and Services Commercial Electronics, and and Other 176 4 3 66 117 ----------------------------------------------------------- $ 804 $ (67) $ 67 $ 241 $ 563 =========================================================== Number of Square Feet Employee Exited Terminations (thousands) --------------------------------------------------------- Defense Systems 1,500 1,000 Sensors and Electronics Systems 2,000 1,400 Intelligence, Information, and Aircraft Integration Systems 300 - Command, Control, and Communication Systems, Training and Services, Commercial Electronics, and Other 2,800 900 --------------------------------------------------------- 6,600 3,300 ========================================================= 46 Operations by Geographic Areas =============================================================================== Outside United States (In millions) United States (Principally Europe) Consolidated - ------------------------------------------------------------------------------- Sales to unaffiliated customers (Restated) - ------------------------------------------------------------------------------- 1998 $18,417 $1,002 $19,419 1997 12,827 766 13,593 1996 11,496 761 12,257 - ------------------------------------------------------------------------------- Identifiable assets at (Restated) - ------------------------------------------------------------------------------- December 31, 1998 $27,227 $1,005 $28,232 December 31, 1997 27,898 622 28,520 December 31, 1996 10,705 653 11,358 - ------------------------------------------------------------------------------- The country of origin was used to attribute sales to either United States or Outside United States. United States (U.S.) sales of $18,417 million, $12,827 million, and $11,496 million include export sales, principally to Europe, the Middle East, and Far East, of $2,380 million, $2,756 million, and $2,137 million in 1998, 1997, and 1996, respectively. Sales to major customers, principally in Electronics, in 1998, 1997, and 1996, were: U.S. government (end user), $11,167 million, $5,787 million, and $4,638 million, respectively, U.S. Department of Defense, $10,816 million, $4,591 million, and $4,032 million, respectively, and U.S. government (foreign military sales), $1,660 million, $483 million, and $502 million, respectively. Note P: Quarterly Operating Results (unaudited) (In millions except per share amounts) First Second Third Fourth - ------------------------------------------------------------------------------- 1998 (Restated) - ------------------------------------------------------------------------------- Net sales $4,693 $5,037 $4,431 $5,258 Cost of sales 3,656 3,910 3,671 3,930 Net income 228 263(1) 12(2) 341(3) Earnings per share Basic 0.67 0.78(1) 0.04(2) 1.01(3) Diluted 0.66 0.77(1) 0.04(2) 1.00(3) Cash dividends per common share Declared 0.20 0.20 0.20 0.20 Paid 0.20 0.20 0.20 0.20 Common stock prices per the Composite Tape Class A-High 59.50 59.19 59.63 58.56 Class A-Low 44.88 50.38 39.88 48.69 Class B-High 60.69 60.19 60.75 59.81 Class B-Low 45.75 51.44 40.69 49.31 47 - ------------------------------------------------------------------------------- 1997 (Restated) - ------------------------------------------------------------------------------- Net sales $2,946 $3,292 $3,422 $3,933 Cost of sales 2,262 2,547 2,620 3,500 Net income 187 203 207(4) (86)(5) Earnings per share Basic 0.79 0.86 0.88(4) (0.35)(5) Diluted 0.78 0.85 0.86(4) (0.35)(5) Cash dividends per common share Declared 0.20 0.20 0.20 0.20 Paid 0.20 0.20 0.20 0.20 Common stock prices per the Composite Tape Class A-High 57.00 Class A-Low 48.00 Class B-High 51.25 53.88 60.56 60.50 Class B-Low 43.25 41.75 50.81 49.19 - ------------------------------------------------------------------------------- 1998 (Previously reported) - ------------------------------------------------------------------------------- Net sales $4,574 $5,078 $4,436 $5,442 Cost of sales 3,558 3,939 3,678 4,073 Net income 215 270(1) 11(2) 368(3) Earnings per share Basic 0.63 0.80(1) 0.03(2) 1.09(3) Diluted 0.63 0.79(1) 0.03(2) 1.08(3) - ------------------------------------------------------------------------------- 1997 (Previously reported) - ------------------------------------------------------------------------------- Net sales $2,899 $3,325 $3,445 $4,004 Cost of sales 2,221 2,570 2,636 3,558 Net income 183 210 211(4) (77)(5) Earnings per share Basic 0.78 0.89 0.90(4) (0.31)(5) Diluted 0.77 0.88 0.88(4) (0.31)(5) - ------------------------------------------------------------------------------- (1) - Includes special charges of $54 million after-tax and net gain on sales of operating units of $61 million after-tax. The impact of these items combined was a net gain of $7 million after-tax, or $0.02 per share. (2) - Includes a charge of $180 million after-tax and restructuring and special charges of $104 million after-tax and net gain on sales of operating units of $3 milion after-tax. The impact of these items combined was a net charge of $281 million after-tax, or $0.82 per share. (3) - Includes a net gain on sales of operating units of $3 million after-tax, or $0.01 per share. (4) - Includes a net gain on sales of operating units of $8 million after-tax, or $0.03 per share. (5) - Includes restructuring and special charges of $322 milion after-tax and a net gain on sales of operating units of $38 million after-tax. The impact of these items combined was a net charge of $284 million after-tax, or $1.14 per share. Note: Earnings per share are computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal the total computed for the year. Note Q: Financial Instruments The carrying value of certain financial instruments, including cash, cash equivalents, and short-term debt approximates estimated fair value due to their short maturities and varying interest rates of the debt. The carrying value of notes receivable approximates estimated fair value based principally on the underlying interest rates and terms, maturities, collateral, and credit status of the receivables. The carrying values of investments are based on quoted market prices or the present value of future cash flows and earnings which approximate estimated fair value. The value of guarantees and letters of credit approximates estimated fair value. The estimated fair value of long-term debt was based on current rates offered to the Company for similar debt with the same remaining maturities and approximates the carrying value. 48 At December 31, 1998 and 1997, the Company had outstanding interest rate swap agreements and foreign currency forward exchange contracts which minimized or eliminated risk associated with interest rate changes or foreign currency exchange rate fluctuations. All of these financial instruments were related to specific transactions and particular assets or liabilities for which a firm commitment existed. These instruments were executed with credit-worthy institutions and the majority of the foreign currencies were denominated in currencies of major industrial countries. The following table summarizes major currencies and the approximate contract amounts associated with foreign exchange contracts at December 31: (In millions) 1998 1997 - ------------------------------------------------------------------------------- Buy Sell Buy Sell British Pounds $138 $100 $ 70 $ 27 Netherlands Guilders 41 89 45 -- German Marks 40 27 71 19 Canadian Dollars 20 50 13 66 Swiss Francs 12 85 -- 8 Norwegian Kroner 100 -- -- -- All other 49 25 57 49 - ------------------------------------------------------------------------------- Total $400 $376 $256 $169 =============================================================================== "Buy" amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies and "sell" amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. Foreign exchange contracts that do not involve U.S. dollars have been converted to U.S. dollars for disclosure purposes. Swap contracts were $383 million and $386 million at December 31, 1998 and 1997, respectively. Swap contracts outstanding at December 31, 1998 mature during 2000 and essentially fix the interest rates on a portion of variable rate debt. Under these agreements, the Company will pay the counterparties interest at a weighted average fixed rate of 6.5%, and the counterparties will pay the Company at a variable rate primarily equal to three-month LIBOR. The weighted average variable rate applicable to these agreements was 5.2% at December 31, 1998. Foreign exchange forward contracts, used primarily to minimize fluctuations in the values of foreign currency payments and receipts, have maturities at various dates through June 2003 as follows: $678 million in 1999 $ 70 million in 2000 $ 4 million in 2001 $ 11 million in 2002 $ 13 million in 2003 Estimated fair values for the swap contracts and foreign exchange contracts total $13 million. 49 Note R: Stockholders' Equity The Company has two classes of common stock-Class A and Class B. For all matters other than the election and removal of directors, Class A and Class B stockholders have equal voting rights. For the election or removal of directors only, the Class A stockholders have 80.1 percent of the total voting power and the Class B stockholders have the remaining 19.9 percent. Class A and Class B stockholders are entitled to receive the same amount per share of any dividends declared. Immediately following any dividend, split, subdivision, or other distribution of shares of Class A or Class B common stock, the number of shares must bear the same relationship to each other as immediately prior to such distribution. Except as indicated above, the rights of Class A and Class B stockholders are identical. In December 1997, the Company issued 102.6 million shares of Class A common stock and converted each share of Raytheon common stock into one share of Class B common stock in connection with its merger with Hughes Defense. The Company has agreed with the former parent of Hughes Defense that it will not propose a plan of recapitalization or certain other equity transactions that would adversely affect the tax free status of the merger. In December 1997, the Company retired 71.1 million shares of Class B common stock previously held in treasury. Prior to this retirement, the excess of cost over par value of treasury stock was charged proportionally to additional paid-in capital and retained earnings. In February 1995, the Board of Directors authorized the repurchase of up to 12 million shares of the Company's common stock and in January 1998, the Board of Directors ratified and reauthorized the repurchase of the remaining 2.5 million shares originally authorized. There have been 11 million shares purchased under these authorizations through December 31, 1998. There were 1.7 million shares repurchased under this program during 1998. In January 1998, the Board of Directors authorized the purchase of up to 5 million shares of the Company's common stock per year to counter the dilution due to the exercise of stock options. There were 2.9 million shares repurchased under this program during 1998 to offset 2.9 million shares issued due to the exercise of stock options. In November 1992, the Board of Directors authorized the purchase of up to 4 million shares of the Company's common stock per year over the next five years to counter the dilution due to the exercise of stock options. During 1997, outstanding shares were reduced by the repurchase of 1.7 million shares on the open market to offset 1.7 million shares issued due to the exercise of stock options. Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Class A and B common stock have been aggregated in the basic and diluted EPS calculation which follows: 50 1998 1997 1996 (Restated) (Restated) (Restated) - ------------------------------------------------------------------------------- Net income for basic and diluted EPS $ 844 $ 511 $ 757 Share information (in thousands) Average common shares outstanding for basic EPS 337,882 238,915 236,600 Dilutive effect of stock options and restricted stock 3,979 2,971 3,565 - ------------------------------------------------------------------------------- Shares for diluted EPS 341,861 241,886 240,165 Basic EPS $ 2.50 $ 2.14 $ 3.20 Diluted EPS $ 2.47 $ 2.11 $ 3.15 - ------------------------------------------------------------------------------- Stock options to purchase 6.7 million, 8.2 million, and 3.7 million shares of common stock outstanding at December 31, 1998, 1997, and 1996, respectively, were not included in the computation of diluted EPS because the stock options' exercise price was greater than the average market price of the Company's common stock during the year. Note S: Subsequent Events In the fourth quarter of 1997, the Company took a charge for $220 million for a series of restructuring actions. In the fourth quarter of 1999, the Company determined that the cost of these initiatives would be $65 million lower than originally planned. The reduction in the estimated costs related to lower than anticipated costs for severance and facilities. The primary reasons for the reduction in severance costs include a shift in the composition of severed employees, higher attrition resulting in the need for fewer severed employees, and more employees transferring to other locations within the Company. The estimated costs related to facilities were lower than anticipated due to the identification of alternative uses for assets originally identified for disposition, lower de-installation costs, and more rapid exit from facilities. Company Responsibility for Financial Statements The financial statements and related information contained in this Annual Report have been prepared by and are the responsibility of Raytheon's management. The Company's financial statements have been prepared in conformity with generally accepted accounting principles and reflect judgments and estimates as to the expected effects of transactions and events currently being reported. Raytheon's management is responsible for the integrity and objectivity of the financial statements and other financial information included in this report. To meet this responsibility, the Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are properly executed and recorded. The system includes policies and procedures, internal audits, and Company officers' reviews. /s/ Franklyn A. Caine Senior Vice President and Chief Financial Officer /s/ Daniel P. Burnham Chairman and Chief Executive Officer 51 The Audit Committee of the Board of Directors is composed solely of outside directors. The Committee meets periodically and, when appropriate, separately with representatives of the independent accountants, Company officers, and the internal auditors to monitor the activities of each. Upon recommendation of the Audit Committee, PricewaterhouseCoopers LLP, independent accountants, were selected by the Board of Directors to audit the Company's financial statements and their report follows. /s/ Daniel P. Burnham Chairman of the Board of Directors Report of Independent Accountants To the Board of Directors and Stockholders of Raytheon Company In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Raytheon Company at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The consolidated financial statements for each of the three years in the period ended December 31, 1998 have been restated as described in Note B. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts January 26, 1999, except for the information in Notes B, C and S as to which the date is January 17, 2000