Raytheon 2006 Annual Report Download - page 109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1997, we provided a first loss guarantee of $133 million on $1.3 billion of U.S. Export-Import Bank loans (maturing in 2015)
to the Brazilian government related to the System for the Vigilance of the Amazon (SIVAM) program being performed by
Network Centric Systems. Loan repayments by the Brazilian government were current at December 31, 2006.
Defense contractors are subject to many levels of audit and investigation. Agencies that oversee contract performance
include: the Defense Contract Audit Agency, the Department of Defense Inspector General, the Government
Accountability Office, the Department of Justice and Congressional Committees. The Department of Justice, from time
to time, has convened grand juries to investigate possible irregularities by us. Individually and in the aggregate, these
audits and investigations are not expected to have a material adverse effect on our financial position, results of operations
or liquidity.
In 2006, Technical Services recorded a profit adjustment related to certain program costs which may be deemed
unrecoverable. Although not expected to be material, we may incur additional charges as we continue to assess and
engage in discussions regarding the matter.
In June 2006, the Securities and Exchange Commission (the “SEC”) authorized the final settlement of a previously
disclosed formal investigation into our 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. The final
settlement was consistent with the terms of our previously announced offer of settlement to the staff of the SEC made in
April 2005. Under the final settlement, we, without admitting or denying any wrongdoing, paid a civil penalty of $12
million in September 2006 which was accrued in 2005, and consented 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. This settlement concluded the SEC’s investigation of this matter
with respect to Raytheon.
In May 2006, international arbitration hearings commenced against us, as the successor to the Hughes Electronics defense
business, in connection with certain claims brought in 2004 relating to an alleged 1995 Workshare Agreement. The
asserted claims include breach of contract, intellectual property infringement and other related claims. The arbitrator’s
liability decision on certain of the claims has been stayed while the parties engage in settlement discussions. The ultimate
resolution of this matter, however, remains uncertain and difficult to predict. We believe that we have meritorious
defenses to these claims and intend to continue to contest the claims vigorously. An adverse resolution of this matter
could have a material effect on our results of operations.
In May 2004, without admitting any liability or wrongdoing, we reached an agreement to settle a securities class action
lawsuit originally filed in 1999 on behalf of us and all individual defendants. The terms of the settlement included a cash
payment of $210 million and the issuance of warrants for our common stock with a stipulated value of $200 million. In
December 2004, the court approved the settlement, resolving all claims asserted against us and the individual defendants.
In connection with the settlement, we 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. In 2004, we paid $210 million into escrow in connection with the settlement. In 2005, the insurance
receivable balance was paid in full. In June 2006, we issued 12,025,662 warrants to purchase our common stock at an
exercise price of $37.50 per share, which expire on June 16, 2011. Upon issuance of the warrants, the charge for the
settlement was reduced by $34 million and reflected in other (income) expense in 2006 to reflect the difference between
the stipulated value of the warrants and the actual fair value of the warrants based on trading on the New York Stock
Exchange on the date of issuance. The warrants are listed for trading on the NYSE under the symbol “RTN WS.”
In May 2003, two purported class action lawsuits were filed on behalf of participants in our savings and investment plans
who invested in our common stock between August 19, 1999 and May 27, 2003. The two class action complaints are
brought pursuant to the Employee Retirement Income Security Act of 1974 (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 our savings
and investment plans who invested in our common stock since October 7, 1998. The Second Consolidated Amended
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