Hughes Faces Lawsuit Claiming Misrepresentation

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Hughes Faces Lawsuit Claiming Misrepresentation

By AMANDA BRONSTAD

Staff Reporter

Rockwell Collins Inc. soon will go to trial against Hughes Electronics Corp. over breach of contract, claiming that the El Segundo-based electronics giant misrepresented the value of the in-flight entertainment business it purchased in 1997.

Hughes sold the business for $120 million to Rockwell Collins, which now claims at least $28 million in added costs, according to its suit. The case awaits a summary judgment hearing March 13 before Superior Court Judge William Highberger, after which a trial may commence April 9.

It’s not the first time allegations of misleading pricing have dogged Hughes, which has been shedding business units for the past several years. Last October, Hughes paid $635 million to settle a claim by Raytheon Co., which said it overpaid when it purchased Hughes’ defense business in 1997. Hughes is also in discussions with Boeing Co. over the price of the satellite business it sold to the airplane manufacturer in 2000.

“I think Hughes has had more than its fair share of these lawsuits and filings when it sells different assets it owns,” said Sean Badding, vice president of the Carmel Group in Carmel-by-the-Sea. “Hughes seems to be a bigger target. Other companies have had similar sales, but they haven’t had as much legal activity from the sales.”

The dispute with Rockwell Collins is the first of its sort to land in the courts. Raytheon’s settlement arose from lengthy mandatory arbitration hearings, and Hughes is still in arbitration with Boeing, said Hughes spokesman Richard Dore.

Disputes are commonplace

Dore said Hughes, like many other companies, frequently adjusts the price of a business unit after it’s sold. With large sales, especially in the defense business, the parties often tweak the price after the buyer has had some time to re-evaluate its purchase.

In addition, he said, Hughes has sold more businesses than most companies in the past few years, so the disputes over price appear much greater than normal.

But disputes, while commonplace, are usually not for amounts as large as the claims against Hughes, even for large-scale sales, said Paul Nisbet, aerospace analyst at JSA Research Inc. in Newport, R.I.

“There is usually in the sales agreement some means for adjusting the price, based on perhaps performance or subsequent due diligence audits or whatever,” Nisbet said. “And there are usually relatively minor adjustments in cases like that. But the ones involving Hughes seem to be considerably larger than those normally would be.”

Rockwell Collins purchased from Hughes in-flight entertainment products, including CD players, flat panel screens and video recorders. The balance of Rockwell Collins’ business is electronics and communications equipment, particularly satellite-based products for air traffic management, to military and commercial buyers.

Rockwell Collins claims that Hughes “grossly understaffed” part of the software development, resulting in late delivery and cost overruns and did not properly document or comply with standards required by the contractor, Boeing’s commercial airplane group.

Rockwell Collins’ in-flight entertainment products have had several demand problems, said Jon Kutler, chairman and chief executive of Quarterdeck Investments in L.A. Customers would rather have lower-priced plane tickets and bring their own laptops than pay extra for in-flight entertainment, he said.

Rockwell Collins reported $73 million in sales for its in-flight entertainment products for the first quarter ended Dec. 31, 2001, down from $81 million in the like year-earlier period.

Rockwell Collins didn’t just limit its legal action to Hughes. It sued consulting firm Towers Perrin over false representations of pension plans that came with the Hughes sale. U.S. District Court Judge Manuel Real, in the Central District of California, dismissed the suit in late January.

Numbers draw attention

The Raytheon settlement, $635.5 million, represented only 6 percent of the $9.5 billion sale, but it contributed to Hughes’ $368 million net loss during the third quarter of 2001. Hughes paid $500 million up front to Raytheon, with the remaining $135.5 million to be paid during the first half of this year, said Raytheon spokesman David Polk.

Boeing spokeswoman Anne Eisele declined to say how much Boeing is negotiating in price adjustments. But GM, in its report for the third quarter ended Sept. 30, said it anticipates the “ultimate resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes’ consolidated financial statements.”

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