Raytheon 2005 Annual Report Download - page 99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As previously reported, the Company has been cooperating with the staff of the Securities and Exchange Commission
(the “SEC”) in a formal investigation into the Company’s disclosure and accounting practices, primarily related to the
commuter aircraft business and the timing of revenue recognition at Raytheon Aircraft during the period from 1997 to
2001. On April 15, 2005, the Company announced that it had submitted an offer of settlement to the staff of the SEC,
which the staff agreed to recommend to the SEC. The Company, without admitting or denying any wrongdoing, offered
to pay a civil penalty of $12 million and consent to the entry of a cease and desist order with respect to violations of
Sections 17(a)(2)-(3) of the Securities Act of 1933 and Sections 13(a) and 13(b)(2)(A)-(B) of the Securities Exchange Act
of 1934, and related SEC rules. The proposed settlement is subject to approval by the SEC.
In addition, the SEC’s investigation of two of the Company’s employees in connection with this matter, one of whom
served as the Company’s Chief Financial Officer from December 2002 until April 15, 2005 remains unresolved. Both
individuals remain on administrative leave.
In May 2004, without admitting any liability or wrongdoing, the Company reached an agreement to settle a securities
class action lawsuit originally filed in 1999 on behalf of the Company and all individual defendants. The terms of the
settlement include a cash payment of $210 million and the issuance of warrants for the Company’s stock with a stipulated
value of $200 million. The warrants will have a five-year term with a strike price of $37.50 and will be issued when the
settlement proceeds are distributed to the claimants which is expected to occur in the second quarter of 2006. In
December 2004, the court approved the settlement, resolving all claims asserted against the Company and the individual
defendants. In connection with the settlement, the Company recorded a charge of $329 million in 2004, of which $325
million was included in other expense, a $410 million accrued expense, and an $85 million receivable for insurance
proceeds primarily related to this settlement. The charge for the settlement will be revised to reflect the actual fair value of
the warrants upon issuance. In 2004, the Company paid $210 million into escrow in connection with the settlement. In
2005, the insurance receivable balance was paid in full. In July 2004, without admitting any liability or wrongdoing, the
Company and the individual defendants reached an agreement to settle a derivative action related to this class action
lawsuit for $4 million. The settlement, which was approved by the court in July 2005, resolves all claims in the case.
In May 2005, without admitting any liability or wrongdoing, the Company and individual defendants reached an
agreement to settle a class action lawsuit originally filed in 2001. The settlement includes a cash payment by the Company
of $39 million, which was paid into escrow in May 2005. In July 2005, the court approved the settlement which resolves
all claims in the case. In November 2005, the Company received approximately $28 million from its insurance carriers
towards the settlement and related expenses. In November 2004, without admitting any liability or wrongdoing, the
individual defendants and the Company reached a tentative agreement to settle a derivative action related to this class
action lawsuit for $2 million. The settlement, which was approved by the court in September 2005, resolves all claims in
the case.
In May 2003, two purported class action lawsuits were filed on behalf of participants in the Company’s savings and
investment plans who invested in the Company’s stock between August 19, 1999 and May 27, 2003. The two class action
complaints are brought pursuant to the Employee Retirement Income Security Act (ERISA). Both lawsuits are
substantially similar and have been consolidated into a single action. In April 2004, a second consolidated amended
complaint (the “Second Consolidated Amended ERISA Complaint”) was filed on behalf of participants and beneficiaries
in the Company’s savings and investment plans who invested in the Company’s stock since October 7, 1998. The Second
Consolidated Amended ERISA Complaint alleges that the Company, its Pension and Investment Group, and its
Investment Committee breached ERISA fiduciary duties by failing to: (1) prudently and loyally manage plan assets,
(2) monitor the Pension and Investment Group and the Investment Committee and provide them with accurate
information, (3) provide complete and accurate information to plan participants and beneficiaries, and (4) avoid
conflicts of interest. In October 2004, the defendants filed a motion to dismiss the Second Consolidated Amended ERISA
Complaint. In September 2005, the court heard the motion to dismiss but declined to decide the motion subject to a trial
on a statute of limitations issue, which is scheduled for June 2006. Although the Company believes that it and the other
defendants have meritorious defenses and intends to contest this lawsuit vigorously, an adverse resolution of this lawsuit
could have a material adverse effect on the Company’s financial position, results of operations, and liquidity. The
Company is not presently able to reasonably estimate potential losses, if any, related to this lawsuit.
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