EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS AND
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
Three Months Ended
March 31,
----------------------
2000 1999
---- ----
(Dollars in Millions)
Revenues
Direct broadcast, leasing and other services $1,432.0 $755.8
Product sales 271.1 162.6
-------- -----
Total Revenues 1,703.1 918.4
------- -----
Operating Costs and Expenses
Broadcast programming and other costs 667.8 313.9
Cost of products sold 198.3 136.2
Selling, general and administrative expenses 694.8 377.8
Depreciation and amortization 204.7 110.9
-------- -----
Total Operating Costs and Expenses 1,765.6 938.8
------- -----
Operating Loss (62.5) (20.4)
Interest income 3.9 13.6
Interest expense (44.9) (6.9)
Other, net (234.2) (17.3)
-------- ------
Loss From Continuing Operations Before Income
Taxes and Minority Interests (337.7) (31.0)
Income tax benefit (221.8) (13.4)
Minority interests in net losses of subsidiaries 7.6 6.5
------- -----
Loss from continuing operations (108.3) (11.1)
Income from discontinued operations, net of taxes 26.4 84.1
----- ----
Net Income (Loss) $(81.9) $73.0
Adjustments to exclude the effect of GM purchase accounting
adjustments 5.3 5.3
------- -----
Earnings (Loss) excluding the effect of GM purchase
accounting adjustments (76.6) 78.3
Preferred stock dividends (24.7) -
------ -------
Earnings (Loss) Used for Computation of Available
Separate Consolidated Net Income (Loss) $(101.3) $78.3
====== ====
Available Separate Consolidated Net Income (Loss)
Average number of shares of General Motors Class H
Common Stock outstanding (in millions) (Numerator) 137.8 106.3
Average Class H dividend base (in millions) (Denominator) 431.5 400.2
Available Separate Consolidated Net Income (Loss) $(32.4) $20.8
===== ====
Reference should be made to the Notes to Financial Statements.
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HUGHES ELECTRONICS CORPORATION
BALANCE SHEETS
March 31,
2000 December 31,
ASSETS (Unaudited) 1999
----------- ----
(Dollars in Millions)
Current Assets
Cash and cash equivalents $232.5 $238.2
Accounts and notes receivable (less allowances) 987.0 960.9
Contracts in process 163.3 155.8
Inventories 319.7 236.1
Net assets of discontinued operations 1,322.4 1,224.6
Deferred income taxes 545.9 254.3
Prepaid expenses and other 969.5 788.1
-------- --------
Total Current Assets 4,540.3 3,858.0
Satellites, net 4,037.3 3,907.3
Property, net 1,314.6 1,223.0
Net Investment in Sales-type Leases 178.3 146.1
Intangible Assets, net 7,341.8 7,406.0
Investments and Other Assets 2,556.0 2,056.6
--------- ---------
Total Assets $19,968.3 $18,597.0
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $1,147.6 $1,062.2
Deferred revenues 132.5 130.5
Short-term borrowings and current
portion of long-term debt 732.6 555.4
Accrued liabilities and other 1,281.5 894.0
------- --------
Total Current Liabilities 3,294.2 2,642.1
Long-Term Debt 1,857.2 1,586.0
Other Liabilities and Deferred Credits 1,399.8 1,454.2
Deferred Income Taxes 1,042.7 689.1
Commitments and Contingencies
Minority Interests 564.2 544.3
Stockholder's Equity
Capital stock and additional paid-in capital 9,898.1 9,809.5
Preferred stock 1,488.7 1,487.5
Retained deficit (191.0) (84.4)
-------- --------
Subtotal Stockholder's Equity 11,195.8 11,212.6
-------- --------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment (7.3) (7.3)
Accumulated unrealized gains on securities 637.0 466.0
Accumulated foreign currency translation
adjustments (15.3) 10.0
------- -------
Accumulated other comprehensive income 614.4 468.7
-------- --------
Total Stockholder's Equity 11,810.2 11,681.3
-------- --------
Total Liabilities and Stockholder's Equity $19,968.3 $18,597.0
======== ========
Reference should be made to the Notes to Financial Statements.
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HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------
2000 1999
---- ----
(Dollars in Millions)
Cash Flows from Operating Activities
Net Cash Provided by Operating Activities $7.9 $85.4
--- ----
Cash Flows from Investing Activities
Investment in companies, net of cash acquired (74.2) (242.1)
Expenditures for property (182.3) (34.8)
Increase in satellites (232.0) (211.3)
Early buy-out of satellite under sale and leaseback - (141.3)
Proceeds from disposal of property 12.0 -
Proceeds from sale of investments 36.6 -
Proceeds from insurance claims 33.8 -
------ ------
Net Cash Used in Investing Activities (406.1) (629.5)
------ ------
Cash Flows from Financing Activities
Net increase in short-term borrowings and current
portion of long-term debt 177.2 14.2
Long-term debt borrowings 1,258.4 405.0
Repayment of long-term debt (987.2) (327.1)
Stock options exercised 38.9 -
Preferred stock dividends paid to General Motors (23.4) -
------ ------
Net Cash Provided by Financing Activities 463.9 92.1
----- ----
Net cash provided by (used in) continuing operations 65.7 (452.0)
Net cash used in discontinued operations (71.4) (110.5)
----- ------
Net decrease in cash and cash equivalents (5.7) (562.5)
Cash and cash equivalents at beginning of the period 238.2 1,342.0
----- -------
Cash and cash equivalents at end of the period $232.5 $779.5
===== =====
Reference should be made to the Notes to Financial Statements.
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting. In the opinion of management, all adjustments (consisting only of
normal recurring items) which are necessary for a fair presentation have been
included. The results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for the full year.
For further information, refer to the financial statements and footnotes thereto
included in the Hughes Electronics Corporation Annual Report on Form 10-K for
the year ended December 31, 1999, filed with the Securities and Exchange
Commission on March 10, 2000 and the Hughes Electronics Corporation Current
Reports on Form 8-K filed with the Securities and Exchange Commission through
the date of this report.
Certain prior period amounts have been reclassified to conform to the March
31, 2000 presentation.
Revenues, operating costs and expenses, and other non-operating results for
the discontinued operations of the satellite systems manufacturing businesses
are excluded from Hughes' results from continuing operations for all periods
presented herein. As a result, the financial results of the satellite systems
manufacturing businesses are presented in Hughes' Statements of Operations and
Available Separate Consolidated Net Income (Loss) in a single line item entitled
"income from discontinued operations, net of taxes," the related assets and
liabilities are presented in the balance sheets in a single line item entitled
"net assets of discontinued operations" and the net cash flows as "net cash used
in discontinued operations." See further discussion in Note 8.
The accompanying financial statements include the applicable portion of
intangible assets, including goodwill, and related amortization resulting from
purchase accounting adjustments associated with General Motors Corporation's
("GM") purchase of Hughes in 1985, with certain amounts allocated to the
satellite systems manufacturing businesses.
Note 2. Inventories
Major Classes of Inventories
March 31, December 31,
2000 1999
---- ----
(Dollars in Millions)
Productive material and supplies $64.9 $59.1
Work in process 126.4 67.0
Finished goods 128.4 110.0
----- -----
Total $319.7 $236.1
===== =====
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
Three Months Ended
March 31,
-------------------
2000 1999
---- ----
(Dollars in Millions)
Net income (loss) $(81.9) $73.0
Other comprehensive income (loss):
Foreign currency translation adjustments (25.3) (3.5)
Unrealized gains on securities 171.0 9.3
----- -----
Other comprehensive income 145.7 5.8
----- -----
Total comprehensive income $63.8 $78.8
==== ====
- 36 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 4. Available Separate Consolidated Net Income (Loss)
GM Class H common stock is a "tracking stock" of GM designed to provide
holders with financial returns based on the financial performance of Hughes.
Holders of GM Class H common stock have no direct rights in the equity or assets
of Hughes, but rather have rights in the equity and assets of GM (which includes
100% of the stock of Hughes).
Amounts available for the payment of dividends on GM Class H common stock are
based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the separate
consolidated net income (loss) of Hughes, excluding the effects of GM purchase
accounting adjustments arising from GM's acquisition of Hughes and including the
effects of preferred dividends paid and/or payable to GM (earnings (loss) used
for computation of ASCNI), multiplied by a fraction, the numerator of which is
equal to the weighted-average number of shares of GM Class H common stock
outstanding during the period (137.8 million and 106.3 million during the first
quarters of 2000 and 1999, respectively) and the denominator of which is a
number equal to the weighted-average number of shares of GM Class H common stock
which, if issued and outstanding, would represent 100% of the tracking stock
interest in the earnings of Hughes (Average Class H dividend base). The Average
Class H dividend base was 431.5 million and 400.2 million during the first
quarters of 2000 and 1999, respectively.
Under the GM Restated Certificate of Incorporation, the GM Board of Directors
("GM Board") may adjust the denominator of the Class H fraction that determines
the net income of Hughes attributable to the GM Class H common stock - that is,
the Class H dividend base, from time to time as the GM Board deems appropriate
to reflect the following: (a) subdivisions and combinations of the GM Class H
common stock and stock dividends payable in shares of GM Class H common stock to
holders of GM Class H common stock; (b) the fair market value of contributions
of cash or property by GM to Hughes, or of cash or property of GM to or for the
benefit of employees of Hughes for employee benefit plans or arrangements of GM,
Hughes or other GM subsidiaries; (c) the contribution of shares of capital stock
of GM to or for the benefit of employees of Hughes or its subsidiaries for
benefit plans or arrangements of GM, Hughes or other GM subsidiaries; (d)
payments made by Hughes to GM of amounts applied to the repurchase by GM of
shares of GM Class H common stock, so long as the GM Board has approved the
repurchase and GM applied the payment to the repurchase; and (e) the repurchase
by Hughes of shares of GM Class H common stock that are no longer outstanding,
so long as the GM Board approved the repurchase. Additionally, upon conversion
of the General Motors Series H 6.25% Automatically Convertible Preference Stock
("GM Series H preference stock") into GM Class H common stock, both the
numerator and the denominator used in the computation of ASCNI will increase by
the number of shares of the GM Class H common stock issued (see further
discussion in Note 5).
Note 5. Hughes Series A Preferred Stock
On June 24, 1999, as part of a strategic alliance with Hughes, America
Online ("AOL") invested $1.5 billion in shares of GM Series H preference stock.
The GM Series H preference stock will automatically convert on June 24, 2002
into GM Class H common stock based upon a variable conversion factor linked to
the GM Class H common stock price at the time of conversion, and accrues
quarterly dividends at a rate of 6.25% per year. It may be converted earlier in
certain limited circumstances. GM immediately invested the $1.5 billion received
from AOL in shares of Hughes Series A Preferred Stock designed to correspond to
the financial terms of the GM Series H preference stock. Dividends on the Hughes
Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%.
These preferred stock dividends payable to GM will reduce Hughes' earnings used
for computation of the ASCNI of Hughes, which will have an equivalent effect to
the payment of dividends on the GM Series H preference stock as if those
dividends were paid by Hughes. Upon conversion of the GM Series H preference
stock into GM Class H common stock, Hughes will redeem the Hughes Series A
Preferred Stock through a cash payment to GM equal to the fair market value of
the GM Class H common stock issuable upon the conversion. Simultaneous with GM's
receipt of the cash redemption proceeds, GM will make a capital contribution to
Hughes of the same amount. In connection with this capital contribution, the
denominator of the fraction used in the computation of the ASCNI of Hughes will
be increased by the corresponding number of shares of GM Class H common stock
issued. Accordingly, upon conversion of the GM Series H preference stock into GM
Class H common stock, both the numerator and denominator used in the computation
of ASCNI will increase by the amount of the GM Class H common stock issued.
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 6. Other Postretirement Benefits
Hughes has accrued in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions.
Notwithstanding the recording of such amounts, Hughes does not admit or
otherwise acknowledge that such amounts or existing postretirement benefit plans
of Hughes (other than pensions) represent legally enforceable liabilities of
Hughes.
Note 7. Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings and Current Portion of Long-Term Debt
Interest Rates at March 31, December 31,
March 31, 2000 2000 1999
-------------- ---- ----
(Dollars in Millions)
Floating rate notes, net of unamortized
discount 7.29% $499.3 $498.9
364-day revolving credit facility 6.88% - 7.13% 200.0 -
Current portion of long-term debt 6.19% 33.3 56.5
------ ------
Total short-term borrowings and current
portion of long-term debt $732.6 $555.4
===== =====
Long-Term Debt
Interest Rates at March 31, December 31,
March 31, 2000 2000 1999
-------------- ---- ----
(Dollars in Millions)
Notes payable 6.00% - 6.88% $829.9 $874.1
Revolving credit facilities 6.83% - 6.94% 1,023.5 727.9
Other debt 9.61% - 11.7% 37.1 40.5
------- -------
Total debt 1,890.5 1,642.5
Less current portion 33.3 56.5
------- -------
Total long-term debt $1,857.2 $1,586.0
======= =======
Note 8. Acquisitions, Investments and Divestitures
Acquisitions and Investments
On May 20, 1999, Hughes acquired by merger all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"), a provider
of premium subscription television programming via the digital broadcasting
system that it shares with DIRECTV. The total consideration of approximately
$1.6 billion, paid in July 1999, consisted of approximately $0.4 billion in cash
and 22.6 million shares of GM Class H common stock.
On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3
million subscriber medium-power direct-to-home satellite business. The purchase
price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H
common stock, for a total purchase price of $1.3 billion. As part of the
agreement to acquire PRIMESTAR, Hughes agreed to purchase the high-power
satellite assets, which consisted of an in-orbit satellite and a satellite which
has not yet been launched, and related orbital frequencies of Tempo Satellite
Inc., a wholly owned subsidiary of TCI Satellite Entertainment Inc. The purchase
price for the Tempo Satellite assets consisted of $500 million in cash, $150
million paid on March 10, 1999 and the remaining $350 million paid on June 4,
1999.
Hughes agreed, in connection with its acquisition of PRIMESTAR, to exit the
medium-power business prior to May 1, 2001. Hughes formulated a detailed exit
plan during the second quarter of 1999 and immediately began to migrate the
medium-power customers to DIRECTV's high-power platform. Accordingly, Hughes
accrued exit costs of $150 million in determining the purchase price allocated
to the net assets acquired. The principal components of such exit costs include
penalties to terminate assumed contracts and costs to remove medium-power
equipment from customer premises. The timing of subscriber migration and exit of
the medium-power business is currently estimated to occur by the end of 2000.
The amount of accrued exit costs remaining at March 31, 2000 was $112 million.
- 38 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 8. Acquisitions, Investments and Divestitures - Concluded
The following selected unaudited pro forma information is being provided to
present a summary of the combined results of Hughes and USSB and PRIMESTAR for
the three months ended March 31, 1999 as if the acquisitions had occurred as of
the beginning of the period, giving effect to purchase accounting adjustments.
The pro forma data presents only these significant transactions, is presented
for informational purposes only and may not necessarily reflect the results of
operations of Hughes had these companies operated as part of Hughes for the
period presented, nor are they necessarily indicative of the results of future
operations. The pro forma information excludes the effect of non-recurring
charges.
Three Months Ended
March 31, 1999
--------------
(Dollars in Millions)
Total revenues $1,472.4
Net income 78.8
Pro forma available separate consolidated net
income 26.3
Divestitures
On March 1, 2000, Hughes announced that the operations of DIRECTV Japan,
Hughes' affiliate that provides DIRECTV services in Japan, would be discontinued
and that its subscribers would have the opportunity to migrate during 2000 to
SkyPerfecTV!, a company in Japan that provides direct-to-home satellite
broadcast services that is expected to complete an initial public offering
during the third quarter of 2000. In connection with the agreement, Hughes
acquired an approximate 6.6% interest in SkyPerfecTV!. As a result of the
transaction, in the first quarter of 2000 Hughes wrote off its investment and
accrued for the estimated costs to exit the DIRECTV Japan business. The
principal components of the accrued exit costs include estimated subscriber
migration and termination costs and costs to terminate certain leases,
programming agreements and other long-term contractual commitments. These
one-time charges were offset by the estimated fair value of the SkyPerfecTV!
interest acquired. The fair value of the SkyPerfecTV! interest recorded was
estimated based upon a preliminary independent appraisal, which is expected to
be completed within three to six months. Accordingly, the final amount of the
fair value of the SkyPerfecTV! investment recorded may be different from the
amount reflected herein. The total loss related to DIRECTV Japan for the first
quarter of 2000, including Hughes' share of DIRECTV Japan's operating losses,
was about $230 million and was recorded in "other, net." The after-tax impact
was about $49 million. Hughes will continue to record its share of DIRECTV
Japan's operating losses during the remainder of 2000.
On January 13, 2000, Hughes announced that it had reached an agreement to
sell its satellite systems manufacturing businesses to The Boeing Company
("Boeing") for $3.75 billion in cash. The transaction, which is subject to
regulatory approval, is expected to close in the third quarter of 2000 and
result in an after-tax gain in excess of $1 billion. The financial results for
the satellite systems manufacturing businesses are treated as discontinued
operations for all periods presented herein.
Note 9. Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, and Network Systems.
Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or
distributing digital entertainment programming via satellite to residential and
commercial customers. Satellite Services is engaged in the selling, leasing and
operating of satellite transponders and providing services for cable television
systems, news companies, Internet service providers and private business
networks. Network Systems is engaged in manufacturing equipment used in
satellite-based private business networks, manufacturing DIRECTV(TM), DirecPC(R)
and DirecDuo(TM) receiver equipment and providing business communications
services. Other includes the corporate office and other entities.
- 39 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Segment Reporting - Concluded
Selected information for Hughes' operating segments follows:
Direct-To-
Home Satellite Network Elimi-
Broadcast Services Systems Other nations Total
--------- --------- ------- ----- ------- -----
(Dollars in Millions)
For the Three Months Ended:
March 31, 2000
External Revenues $1,166.7 $264.4 $269.0 $3.0 - $1,703.1
Intersegment Revenues 7.1 34.7 95.5 0.6 $(137.9) -
------- ----- ----- --- ------ -------
Total Revenues $1,173.8 $299.1 $364.5 $3.6 $(137.9) $1,703.1
------- ----- ----- --- ------ -------
Operating Profit
(Loss) $(126.0) $127.3 $0.6 $(35.2) $(29.2) $(62.5)
March 31, 1999
External Revenues $556.0 $159.7 $200.5 $2.2 - $918.4
Intersegment Revenues 0.6 33.8 30.4 0.5 $(65.3) -
----- ----- ----- --- ----- -----
Total Revenues $556.6 $193.5 $230.9 $2.7 $(65.3) $918.4
----- ----- ----- --- ----- -----
Operating Profit
(Loss) $(23.4) $78.3 $(17.8) $(26.8) $(30.7) $(20.4)
Note 10. Contingencies
In connection with the 1997 spin-off of the defense electronics business of
Hughes' predecessor as part of the Hughes restructuring transactions and the
subsequent merger of that business with Raytheon Company ("Raytheon"), the terms
of the merger agreement provided processes for resolving disputes that might
arise in connection with post-closing financial adjustments that were also
called for by the terms of the merger agreement. These financial adjustments
might require a cash payment from Raytheon to Hughes or vice versa.
A dispute currently exists regarding the post-closing adjustments which
Hughes and Raytheon have proposed to one another and related issues regarding
the adequacy of disclosures made by Hughes to Raytheon in the period prior to
consummation of the merger. Hughes and Raytheon are proceeding with the dispute
resolution process. It is possible that the ultimate resolution of the
post-closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the dispute through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that
Hughes has proposed.
On June 3, 1999, the National Rural Telecommunications Cooperative ("NRTC")
filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc.,
which Hughes refers to together in this description as "DIRECTV", in the U.S.
District Court for the Central District of California, alleging that DIRECTV has
breached the DBS Distribution Agreement with the NRTC. The DBS Distribution
Agreement provides the NRTC with certain rights, in certain specified portions
of the United States, with respect to DIRECTV programming delivered over 27 of
the 32 frequencies at the 101(degree) west longitude orbital location. The NRTC
claims that DIRECTV has wrongfully deprived it of the exclusive right to
distribute programming formerly provided by USSB over the other five frequencies
at 101(degree). DIRECTV denies that the NRTC is entitled to exclusive
distribution rights to the former USSB programming because, among other things,
the NRTC's exclusive distribution rights are limited to programming distributed
over 27 of the 32 frequencies at 101(degree). The NRTC's complaint seeks, in the
alternative, the right to distribute former USSB programming on a non-exclusive
basis and the recovery of related revenues from the date USSB was acquired by
Hughes. DIRECTV maintains that the NRTC's right under the DBS Distribution
Agreement is to market and sell the former USSB programming as its agent and the
NRTC is not entitled to the claimed revenues. DIRECTV intends to vigorously
defend against the NRTC claims. DIRECTV has also filed a counterclaim against
the NRTC seeking a declaration of the parties' rights under the DBS Distribution
Agreement.
- 40 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 10. Contingencies - Continued
On August 26, 1999, the NRTC filed a second lawsuit against DIRECTV alleging
that DIRECTV has breached the DBS Distribution Agreement. In this lawsuit, the
NRTC is asking the court to require DIRECTV to pay the NRTC a proportionate
share of unspecified financial benefits that DIRECTV derives from programming
providers and other third parties. DIRECTV denies that it owes any sums to the
NRTC on account of the allegations in these matters and plans to vigorously
defend itself against these claims.
A purported class action suit was filed against DIRECTV on behalf of the
NRTC's participating members on February 29, 2000. The members assert claims
identical to the claims that were asserted by Pegasus Satellite Television, Inc.
and Golden Sky Systems, Inc. in their lawsuit against DIRECTV described in the
following paragraph.
Pegasus Satellite Television, Inc. and Golden Sky Systems, Inc., the two
largest NRTC affiliates, filed an action on January 11, 2000 against DIRECTV in
the U.S. District Court in Los Angeles. The plaintiffs allege, among other
things, that DIRECTV has interfered with their contractual relationship with the
NRTC. The plaintiffs plead that their rights and damages are derivative of the
rights and claims asserted by the NRTC in its two cases against DIRECTV. The
plaintiffs also allege that DIRECTV has interfered with their contractual
relationships with manufacturers and distributors by preventing those parties
from selling receiving equipment to the plaintiffs' dealers. DIRECTV denies that
it has wrongfully interfered with any of the plaintiffs' business relationships
and will vigorously defend the lawsuit. Although an amount of loss, if any,
cannot be estimated at this time, an unfavorable outcome could be reached in the
NRTC and Pegasus litigation that could be material to Hughes' results of
operations or financial position.
General Electric Capital Corporation ("GECC") and DIRECTV, Inc. entered into
a contract on July 31, 1995, in which GECC agreed to establish and manage a
private label consumer credit program for consumer purchases of hardware and
related DIRECTV programming. Under the contract, GECC also agreed to provide
certain related services to DIRECTV, including credit risk scoring, billing and
collections services. DIRECTV agreed to act as a surety for loans complying with
the terms of the contract. Hughes guaranteed DIRECTV's performance under the
contract. A complaint and counterclaim have been filed by the parties in the
U.S. District Court for the District of Connecticut concerning GECC's
performance and DIRECTV's obligation to act as a surety. GECC claims damages
from DIRECTV in excess of $140 million. DIRECTV is seeking damages from GECC in
excess of $45 million. Hughes intends to vigorously contest GECC's allegations
and pursue Hughes' own contractual rights and remedies. Hughes does not believe
that the litigation will have a material adverse impact on Hughes' results of
operations or financial position. The court has set a trial date of June 12,
2000.
There is a pending grand jury investigation into whether Hughes should be
accused of criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the failure of a Long March rocket in
China in 1996. Hughes is also subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participating in government
contracts. If Hughes were to enter into a settlement of this matter prior to the
closing of the Boeing transaction that involves a debarment from sales to the
U.S. government or a material suspension of Hughes' export licenses or other
material limitation on projected business activities of the satellite systems
manufacturing businesses, Boeing would not be obligated to complete the purchase
of Hughes' satellite systems manufacturing businesses. Hughes does not expect
the grand jury investigation or State Department review to result in a material
adverse effect upon its business.
- 41 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Concluded
(Unaudited)
Note 10. Contingencies - Concluded
Hughes Space and Communications International ("HSCI"), a wholly owned
subsidiary of Hughes Space and Communications Company, has certain contracts
with ICO Global Communications Operations ("ICO") to build the satellites and
related components for a global wireless communications system. On August 27,
1999, the ICO parent company filed for bankruptcy protection under Chapter 11 in
U.S. Bankruptcy Court in Wilmington, Delaware. On May 3, 2000 the U.S.
Bankruptcy Court approved a plan of reorganization and ICO's assumption of
contracts with HSCI. In connection with the contract assumption, ICO is expected
to pay, in the second quarter of 2000, all pre-petition amounts due to Hughes
related to the ICO contracts.
EchoStar Communications Corporation and others commenced an action in the
U.S. District Court in Colorado on February 1, 2000 against DIRECTV, Hughes
Network Systems and Thomson Consumer Electronics, Inc. seeking, among other
things, injunctive relief and unspecified damages, including treble damages, in
connection with allegations that the defendants have entered into agreements
with retailers and program providers and engaged in other conduct that violates
the antitrust laws and constitutes unfair competition. DIRECTV believes that the
complaint is without merit and intends to vigorously defend against the
allegations raised. Although an amount of loss, if any, cannot be estimated at
this time, an unfavorable outcome could be reached that could be material to
Hughes' results of operations or financial position.
Hughes and DIRECTV filed counterclaims against EchoStar on March 13, 2000,
alleging that EchoStar tortiously interfered with DIRECTV's relationship with
Kelly Broadcasting System, a provider of foreign-language programming; engaged
in unfair business practices in connection with improper sales of network
programming, misleading advertisements for National Football League games and
EchoStar's "PRIMESTAR bounty program"; and infringed on PRIMESTAR trademarks.
Hughes is subject to various claims and legal actions which are pending or
may be asserted against it. The aggregate ultimate liability of Hughes under
these claims and actions was not determinable at March 31, 2000. In the opinion
of Hughes management, such liability is not expected to have a material adverse
effect on Hughes' results of operations or financial position.
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HUGHES ELECTRONICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY DATA
Three Months Ended
March 31,
----------------------
2000 1999
--------- ---------
(Dollars in Millions)
Statement of Operations Data: (Unaudited)
Total revenues $1,703.1 $918.4
Total operating costs and expenses 1,765.6 938.8
------- -----
Operating loss (62.5) (20.4)
Interest, net (41.0) 6.7
Other, net (234.2) (17.3)
Income tax benefit (221.8) (13.4)
Minority interests in net losses of subsidiaries 7.6 6.5
-------- ------
Loss from continuing operations (108.3) (11.1)
Income from discontinued operations, net of taxes 26.4 84.1
----- ----
Net income (loss) $(81.9) $73.0
===== ====
Other Data:
EBITDA $142.2 $90.5
EBITDA Margin 8.3% 9.9%
Depreciation and amortization 204.7 110.9
Capital expenditures 414.3 387.4
March 31,
2000 December 31,
(Unaudited) 1999
--------- ----
Balance Sheet Data: (Dollars in Millions)
Cash and cash equivalents $232.5 $238.2
Total current assets 4,540.3 3,858.0
Total assets 19,968.3 18,597.0
Total current liabilities 3,294.2 2,642.1
Long-term debt 1,857.2 1,586.0
Minority interests 564.2 544.3
Total stockholder's equity 11,810.2 11,681.3
EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with generally
accepted accounting principles. Hughes management believes it is a meaningful
measure of performance and is commonly used by other large communications,
entertainment and media service providers. EBITDA does not give effect to cash
used for debt service requirements and thus does not reflect funds available for
investment in the business of Hughes, dividends or other discretionary uses.
EBITDA margin is calculated by dividing EBITDA by total revenues. In addition,
EBITDA and EBITDA margin as presented herein may not be comparable to similarly
titled measures reported by other companies.
- 43 -
HUGHES ELECTRONICS CORPORATION
SUMMARY DATA - Concluded
(Unaudited)
Selected Segment Data
Direct-To- Elimi-
Home Satellite Network nations
Broadcast Services Systems and Other Total
--------- -------- ------- --------- -----
(Dollars in Millions)
For the Three Months Ended:
March 31, 2000
Total Revenues $1,173.8 $299.1 $364.5 $(134.3) $1,703.1
- --------------------------------------------------------------------------
Operating Profit
(Loss) $(126.0) $127.3 $0.6 $(64.4) $(62.5)
Operating Profit Margin N/A 42.6% 0.2% N/A N/A
EBITDA $(9.2) $201.0 $11.8 $(61.4) $142.2
EBITDA Margin N/A 67.2% 3.2% N/A 8.3%
- --------------------------------------------------------------------------
Depreciation and
Amortization $116.8 $73.7 $11.2 $3.0 $204.7
Capital Expenditures 168.0 (1) 158.0 (2) 67.6 (3) 20.7 414.3
- --------------------------------------------------------------------------
March 31, 1999
Total Revenues $556.6 $193.5 $230.9 $(62.6) $918.4
- --------------------------------------------------------------------------
Operating Profit
(Loss) $(23.4) $78.3 $(17.8) $(57.5) $(20.4)
Operating Profit Margin N/A 40.5% N/A N/A N/A
EBITDA $3.9 $146.0 $(5.9) $(53.5) $90.5
EBITDA Margin 0.7% 75.5% N/A N/A 9.9%
- --------------------------------------------------------------------------
Depreciation and
Amortization $27.3 $67.7 $11.9 $4.0 $110.9
Capital Expenditures 77.6 (1) 339.8 (2) 2.2 (32.2) 387.4
- --------------------------------------------------------------------------
(1)Includes expenditures related to satellites amounting to $11.6 million and
$53.0 million in the first quarter of 2000 and 1999, respectively.
(2)Includes expenditures related to satellites amounting to $146.0 million
and $189.7 million in the first quarter of 2000 and 1999, respectively.
Also included in the first quarter of 1999 is $141.3 million related to
the early buy-out of a satellite sale-leaseback.
(3)Includes expenditures related to satellites amounting to $53.7 million in
the first quarter of 2000.
- 44 -
HUGHES ELECTRONICS CORPORATION
The following management's discussion and analysis should be read in
conjunction with the Hughes management's discussion and analysis included in the
General Motors ("GM") 1999 Annual Report on Form 10-K for the year ended
December 31, 1999, filed with the Securities and Exchange Commission on March
10, 2000 and the Hughes Electronics Corporation Current Reports on Form 8-K,
filed with the Securities and Exchange Commission through the date of this
report. In addition, the following discussion excludes purchase accounting
adjustments related to GM's acquisition of Hughes.
This Quarterly Report may contain certain statements that Hughes believes
are, or may be considered to be, "forward-looking statements," within the
meaning of various provisions of the Securities Act of 1933 and of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. All of these forward-looking statements are
subject to certain risks and uncertainties that could cause Hughes' actual
results to differ materially from those contemplated by the relevant
forward-looking statement. The principal important risk factors which could
cause actual performance and future actions to differ materially from
forward-looking statements made herein include economic conditions, product
demand and market acceptance, government action, local political or economic
developments in or affecting countries where Hughes has operations, ability to
obtain export licenses, competition, ability to achieve cost reductions,
technological risk, limitations on access to distribution channels, the success
and timeliness of satellite launches, in-orbit performance of satellites,
ability of customers to obtain financing and Hughes' ability to access capital
to maintain its financial flexibility.
Additionally, the in-orbit satellites of Hughes and its 81% owned subsidiary,
PanAmSat Corporation ("PanAmSat"), are subject to the risk of failing
prematurely due to, among other things, mechanical failure, collision with
objects in space or an inability to maintain proper orbit. Satellites are
subject to the risk of launch delay and failure, destruction and damage while on
the ground or during launch and failure to become fully operational once
launched. Delays in the production or launch of a satellite or the complete or
partial loss of a satellite, in-orbit or during launch, could have a material
adverse impact on the operation of Hughes' businesses. With respect to both
in-orbit and launch problems, insurance carried by Hughes and PanAmSat does not
compensate for business interruption or loss of future revenues or customers.
Hughes has, in the past, experienced technical anomalies on some of its
satellites. Service interruptions caused by these anomalies, depending on their
severity, could result in claims by affected customers for termination of their
transponder agreements, cancellation of other service contracts or the loss of
other customers. Readers are urged to consider these factors carefully in
evaluating the forward-looking statements. The forward-looking statements
included in this Quarterly Report are made only as of the date of this Quarterly
Report and Hughes undertakes no obligation to publicly update these
forward-looking statements to reflect subsequent events or circumstances.
General
Business Overview
The continuing operations of Hughes are comprised of the following segments:
Direct-To-Home Broadcast, Satellite Services and Network Systems. The
discontinued operations of Hughes consist of its satellite systems manufacturing
businesses, which on January 13, 2000, Hughes agreed to sell to The Boeing
Company ("Boeing"). This transaction is discussed more fully below in "Liquidity
and Capital Resources - Acquisitions, Investments and Divestitures."
The Direct-To-Home Broadcast segment consists primarily of the United States
and Latin America DIRECTV businesses, which provide digital multi-channel
entertainment. The DIRECTV U.S. operations were significantly affected during
1999 with Hughes' acquisition of the direct broadcast satellite medium-power
business of PRIMESTAR in April 1999 and Hughes' acquisition of United States
Satellite Broadcasting Company, Inc. ("USSB"), a provider of premium
subscription programming services, in May 1999. Currently, DIRECTV is continuing
to offer the medium-power PRIMESTAR subscribers the opportunity to transition to
the high-power DIRECTV(R) service and plans to cease operating the medium-power
PRIMESTAR business, PRIMESTAR By DIRECTV, by the end of 2000. The USSB
acquisition provided DIRECTV with 25 channels of video programming, including
premium networks such as HBO(R), Showtime(R), Cinemax(R) and The Movie
Channel(R), which are now being offered to DIRECTV's subscribers. The results of
operations for PRIMESTAR and USSB have been included in Hughes' financial
information since their dates of acquisition. See Note 8 to the financial
statements and "Liquidity and Capital Resources - Acquisitions, Investments and
Divestitures," below, for further discussion of these transactions.
In the fourth quarter of 1999, DIRECTV U.S. began providing local broadcast
network services and is currently providing those services to 23 U.S. markets.
On May 2, 2000, DIRECTV U.S. announced that it will add 12 additional local
channel markets throughout the second and third quarters, and by late September
2000, expects to offer local channels in 35 markets across the country.
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HUGHES ELECTRONICS CORPORATION
The Latin America DIRECTV businesses are comprised of Galaxy Latin America,
LLC ("GLA"), Hughes' 78% owned subsidiary that provides DIRECTV services to 27
countries in Latin America and the Caribbean Basin; SurFin Ltd. ("SurFin"), a
company 75% owned by Hughes, that provides financing of subscriber receiver
equipment to certain GLA operating companies; Grupo Galaxy Mexicana, S.R.L. de
C.V. ("GGM"), the exclusive distributor of DIRECTV in Mexico which was acquired
in February 1999; and Galaxy Brasil, Ltda. ("GLB"), the exclusive distributor of
DIRECTV in Brazil, which was acquired in July 1999. The results of operations
for SurFin, GGM, and GLB have been included in Hughes' financial information
since their dates of acquisition. See "Liquidity and Capital Resources -
Acquisitions, Investments and Divestitures," below, for further discussion of
these transactions.
Also included as part of the non-operating results of the Direct-To-Home
Broadcast segment is DIRECTV Japan, Hughes' affiliate that provides DIRECTV
services in Japan. On March 1, 2000, Hughes announced that DIRECTV Japan's
operations would be discontinued and that its subscribers would have the
opportunity to migrate during 2000 to SkyPerfecTV!, a company in Japan that
provides direct-to-home satellite broadcast services that is expected to
complete an initial public offering during the third quarter of 2000. In
connection with the agreement, Hughes acquired an ownership interest in
SkyPerfecTV!. See Note 8 to the financial statements and "Liquidity and Capital
Resources - Acquisitions, Investments and Divestitures," below, for further
discussion.
The Satellite Services segment consists of PanAmSat, Hughes' 81% owned
subsidiary. PanAmSat provides satellite services to its customers primarily
through long-term operating lease contracts for the full or partial use of
satellite transponder capacity. During the first quarter of 2000, PanAmSat
announced the introduction of NET/36(TM), a high-speed, bandwidth-intensive
network that will deliver popular video, audio and data content with high
clarity to thousands of digital subscriber line providers, cable headends,
Internet service providers and broadband wireless providers worldwide. PanAmSat
plans to introduce the Net/36 service in the United States by the end of 2000.
The Network Systems segment consists of Hughes Network Systems ("HNS"), who
is engaged in manufacturing equipment used in satellite-based private business
networks, manufacturing DIRECTV(TM), DirecPC(R) and DirecDuo(TM) receiver
equipment and providing business communications services. In April of 2000, HNS
announced plans to market a two-way broadband satellite service to consumers.
HNS will add two-way capabilities to its nationwide high-speed satellite
Internet service, DirecPC, early in the fourth quarter of 2000. Offering
always-on capability, the new two-way high-speed satellite service will allow
consumers to completely bypass the dial-up telephone network when accessing the
Internet. Two-way DirecPC will also be offered with a DirecDuo antenna system,
allowing consumers to receive both DirecPC and DIRECTV using the same antenna.
The Network Systems segment was affected in February 1999 by a notification
received by Hughes from the Department of Commerce that it intended to deny a
U.S. government export license that Hughes was required to obtain in connection
with its contract with Asia-Pacific Mobile Telecommunications Satellite Pte.
Ltd. ("APMT") for the provision of a satellite-based mobile telecommunications
system. As a result, APMT and Hughes terminated the contract on April 9, 1999,
resulting in a pre-tax charge to Hughes' earnings of $92.0 million in the first
quarter of 1999. Of the $92.0 million charge, $11.0 million was attributable to
the Network Systems segment and the remainder to Hughes Space and Communications
which is included in discontinued operations. The charge represented the
write-off of receivables and inventory, with no alternative use, related to the
contract.
Satellite Fleet
During the first quarter of 2000, PanAmSat successfully launched and
commenced service of the Galaxy XR satellite for Alaska's General
Communications, Inc., Disney and other customers. PanAmSat also commenced
service of the Galaxy-XI satellite in April of 2000, which provides expansion
and backup services for PanAmSat's Galaxy(R) cable neighborhood customers. Also,
in April of 2000, PanAmSat successfully launched Galaxy IVR, a replacement
satellite for Galaxy IV, which brought Hughes' total fleet of satellites to 26,
five owned by DIRECTV and 21 owned and operated by PanAmSat. Both PanAmSat and
DIRECTV expect to launch additional satellites during 2000.
- 45 -
HUGHES ELECTRONICS CORPORATION
Results of Operations
Revenues. Revenues for the first quarter of 2000 increased 85.4% to $1,703.1
million, compared with $918.4 million in the first quarter of 1999. The
Direct-To-Home Broadcast segment contributed to the overall change with an
increase in revenues of $617.2 million over the first quarter of 1999 that
resulted from an increased number of subscribers, including the addition of
510,000 new subscribers in the United States and Latin America since December
31, 1999, added revenues from the PRIMESTAR By DIRECTV and premium channel
services and subscribers converted from PRIMESTAR By DIRECTV to the high-power
DIRECTV service. Also contributing to the overall increase in revenues was the
Network Systems segment, which shipped nearly 1.0 million DIRECTV receiver
systems during the first quarter of 2000 compared to about 0.2 million shipped
in the first quarter of 1999 leading to an increase in revenues of $133.6
million. The Satellite Services segment also reported an increase in revenues of
$105.6 million due primarily to outright sales and sales-type leases of
satellite transponders during the first quarter of 2000.
Operating Costs and Expenses. Operating costs and expenses grew to $1,765.6
million in 2000 from $938.8 million in 1999. Broadcast programming and other
costs increased by $353.9 million in the first quarter of 2000 from the same
period of 1999 due to increased costs for the new high-power DIRECTV subscribers
and costs associated with the PRIMESTAR By DIRECTV and premium channel services.
Costs of products sold increased by $62.1 million in the first quarter of 2000
from the first quarter of 1999 due to the increased sales of DIRECTV receiver
systems. Selling, general and administrative expenses increased by $317.0
million during the first quarter of 2000 compared to the same period of 1999 due
primarily to increased subscriber acquisition costs at the Direct-To-Home
Broadcast segment to support the increase in subscribers, costs associated with
the PRIMESTAR By DIRECTV business and increased customer service costs that
resulted primarily from an increase in the number of customer service
representatives. Depreciation and amortization increased by $93.8 million during
the first quarter of 2000 compared to the first quarter of 1999 due primarily to
acquisitions in 1999, discussed more fully in "Liquidity and Capital Resources -
Acquisitions, Investments and Divestitures."
EBITDA increased 57.1% for the first quarter of 2000 to $142.2 million and
EBITDA margin was 8.3%, compared to EBITDA of $90.5 million and EBITDA margin of
9.9% in the first quarter of 1999. The increase in EBITDA resulted primarily
from the increased revenues at the Satellite Services segment. The lower EBITDA
margin was due primarily to the lower margins associated with the outright sales
and sales-type leases at the Satellite Services segment.
Operating Loss. The operating loss for the first quarter of 2000 was $62.5
million compared to an operating loss of $20.4 million in 1999. The increased
operating loss resulted from the higher depreciation and amortization, which
more than offset the improvement in EBITDA.
Interest Income and Expense. Interest income declined to $3.9 million for the
first quarter of 2000 compared to interest income of $13.6 million for the same
period of 1999 due to a decrease in cash and cash equivalents. Interest expense
increased to $44.9 million for the first quarter of 2000 from $6.9 million for
the first quarter of 1999. The increase in interest expense resulted from an
increase in debt and interest expense associated with liabilities for
above-market programming contracts assumed in the acquisitions of PRIMESTAR and
USSB. The changes in cash and cash equivalents and debt are discussed in more
detail below under "Liquidity and Capital Resources."
Other, Net. Other, net increased to an expense of $234.2 million for the
first quarter of 2000 from an expense of $17.3 million in the same period of
1999. The increased expense in 2000 resulted from the SkyPerfecTV! transaction,
discussed more fully in Note 8 to the financial statements and below in
"Liquidity and Capital Resources - Acquisitions, Investments and Divestitures,"
and higher equity losses recorded for DIRECTV Japan that resulted from Hughes'
increased investment during the third quarter of 1999. The total loss related to
DIRECTV Japan for the first quarter of 2000, which includes the effects of the
SkyPerfecTV! transaction and Hughes' share of DIRECTV Japan's operating losses,
was about $230 million.
Income Taxes. Hughes recognized a tax benefit of $221.8 million for the 2000
first quarter, compared to $13.4 million in the 1999 first quarter. The 2000 tax
benefit reflects the tax benefit associated with the write-off of Hughes'
historical investments in DIRECTV Japan and the higher pre-tax losses compared
to 1999.
Loss From Continuing Operations. Hughes reported a loss from continuing
operations of $108.3 million for the 2000 first quarter, compared to $11.1
million for the same period of 1999.
Discontinued Operations. Revenues for the satellite systems manufacturing
businesses decreased to $515.0 million for the first quarter of 2000 from
revenues of $627.8 million for the same period of 1999. Revenues, excluding
intercompany transactions, were $389.1 million for 2000 and $533.4 million for
1999. The decrease in revenues was principally due to decreased activity
associated with a contract with ICO Global Communications.
The satellite systems manufacturing businesses reported operating income of
$42.9 million for the first quarter of 2000 compared to an operating loss of
$0.1 million for the first quarter of 1999. Operating income, excluding
intercompany transactions, amounted to $41.7 million for 2000, compared to an
operating loss of $21.6 million for 1999. The 1999 results included a one-time
pre-tax charge of $81.0 million that resulted from the termination of the
satellite system contract with APMT.
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HUGHES ELECTRONICS CORPORATION
Income from discontinued operations, net of taxes was $26.4 million for the
first quarter of 2000 compared to $84.1 million in the same period of 1999. The
1999 results included a one-time after-tax gain of $94.0 million from the
settlement of a patent infringement case that was offset by the one-time
after-tax charge of $49.0 million associated with the termination of the APMT
contract.
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment first quarter 2000 revenues more than
doubled to $1,173.8 million from $556.6 million in the first quarter of 1999, an
increase of 110.9%. EBITDA in the first quarter of 2000 decreased to negative
$9.2 million compared to positive EBITDA of $3.9 million in the first quarter of
1999. The operating loss for the segment increased to $126.0 million in the
first quarter of 2000 from an operating loss of $23.4 million in the first
quarter of 1999.
United States. The DIRECTV U.S. businesses were the biggest contributor to
the segment's revenue growth with revenues of $1,059 million for the first
quarter of 2000, a 123.4% increase over last year's first quarter revenues of
$474 million. The large increase in revenues resulted primarily from an
increased number of subscribers, including the addition of 405,000 new
subscribers in the United States since December 31, 1999, added revenues from
the PRIMESTAR By DIRECTV and premium channel services and subscribers converted
from PRIMESTAR By DIRECTV to the high-power DIRECTV service. As of March 31,
2000 the DIRECTV U.S. businesses had more than 8.3 million subscribers compared
to about 4.8 million at March 31, 1999. Average monthly revenue per subscriber
for the high-power business increased to $58 for the first quarter of 2000 from
$47 for the same period in the prior year. This increase resulted from the
addition of the premium channel services in May of 1999.
In the first quarter of 2000, the DIRECTV U.S. businesses reported EBITDA of
$31 million compared to EBITDA of $25 million in the first quarter of 1999. The
first quarter 2000 operating loss for DIRECTV U.S. was $65 million compared with
an operating profit of $5 million in the first quarter of 1999. The change in
EBITDA resulted from the increased revenues that were partially offset by
increased subscriber acquisition costs, added operating costs from the PRIMESTAR
By DIRECTV and premium channel services and increased customer service costs
that resulted primarily from an increase in the number of customer service
representatives. The decrease in operating profit was principally due to
increased amortization expense related to the PRIMESTAR and USSB acquisitions.
Latin America. Revenues for the Latin America DIRECTV businesses increased
86.9% to $114 million in the first quarter of 2000 from $61 million in the first
quarter of 1999. The increase in revenues reflects an increase in subscribers
and the consolidation of the GGM and GLB businesses. Subscribers grew to 909,000
at the end of the first quarter of 2000 compared to 554,000 at the end of the
first quarter of 1999. Average monthly revenue per subscriber decreased to $34
in the first quarter of 2000 from $35 in the first quarter of 1999.
EBITDA was negative $38 million for the first quarter of 2000 compared to
negative EBITDA of $20 million in the first quarter of 1999. The change in
EBITDA resulted primarily from additional losses from the consolidation of GGM
and GLB and higher marketing costs associated with the record subscriber growth.
The Latin America DIRECTV businesses incurred an operating loss of $58 million
in the first quarter of 2000 compared to $28 million in the first quarter of
1999. The increased operating loss resulted from the decline in EBITDA and
higher depreciation and amortization expense that resulted from the GGM and GLB
transactions.
Satellite Services Segment
Revenues for the Satellite Services segment in the first quarter of 2000
increased 54.6% to $299.1 million from $193.5 million in the same period in the
prior year. This increase was primarily due to revenues from outright sales and
sales-type lease transactions executed during the first quarter of 2000. Total
sales and sales-type lease revenues were $99.1 million for the first quarter of
2000 as compared to $6.1 million of sales-type lease revenues for the same
period in the prior year. Revenues from operating leases of transponders,
satellite services and other were 66.9% of total revenues for the first quarter
of 2000 and increased by 6.7% to $200.0 million from $187.4 million for the same
period in the prior year. This increase was due primarily to increased available
transponder capacity on new international satellites that were placed into
service since the first quarter of 1999.
EBITDA was $201.0 million for the first quarter of 2000, a 37.7% increase
over the first quarter 1999 EBITDA of $146.0 million. The increase in EBITDA was
due to the increase in revenues. EBITDA margin in the first quarter of 2000 was
67.2% compared to 75.5% in the same period in 1999. This decline was due to
lower margins associated with the outright sales and sales-type lease
transactions in the first quarter of 2000. Excluding these sales and sales-type
lease transactions, EBITDA for the first quarter of 2000 was $153 million or 75%
of corresponding revenues. Operating profit was $127.3 million for the first
quarter of 2000, an increase of $49.0 million over the first quarter of 1999.
The increase in operating profit resulted from the increase in EBITDA partially
offset by higher depreciation expense resulting from increased capital
expenditures related to the satellite fleet.
- 47 -
HUGHES ELECTRONICS CORPORATION
Network Systems Segment
The Network Systems segment grew first quarter 2000 revenues by 57.9% to
$364.5 million, versus $230.9 million in the first quarter of 1999. The higher
revenues resulted from greater shipments of DIRECTV receiver equipment.
Shipments of DIRECTV receiver equipment totaled 980,000 in the first quarter of
2000, compared to 190,000 units in the same period last year.
The Network Systems segment reported EBITDA of $11.8 million for the first
quarter of 2000, compared to negative EBITDA of $5.9 million in the first
quarter of 1999. The Network Systems segment had an operating profit of $0.6
million in the first quarter of 2000, compared to an operating loss of $17.8
million in the first quarter of 1999. The increase in EBITDA and operating
profit resulted primarily from increased sales of DIRECTV receiver equipment.
Also affecting the change was a one-time first quarter 1999 pre-tax charge of
$11.0 million resulting from the termination of the APMT contract.
Eliminations and Other
The elimination of revenues increased to $134.3 million in the first quarter
of 2000 from $62.6 million in the first quarter of 1999 due primarily to
increased purchases of receiver equipment from the Network Systems segment by
DIRECTV for the conversion of the PRIMESTAR By DIRECTV medium-power subscribers
to the high-power service. Also contributing to the change was increased
manufacturing subsidies received by the Network Systems segment from the DIRECTV
business that resulted from the increased DIRECTV receiver equipment shipments.
Operating losses for "eliminations and other" increased to $64.4 million in
the first quarter of 2000 from $57.5 million for the first quarter of 1999. The
increase was primarily due to increased corporate expenditures related to
employee benefits and administrative costs.
Liquidity and Capital Resources
Cash and cash equivalents were $232.5 million at March 31, 2000 compared to
$238.2 million at December 31, 1999.
Cash provided by operating activities was $7.9 million for the first quarter
of 2000, compared to $85.4 million for the first quarter of 1999. The decrease
in 2000 resulted primarily from changes in working capital items.
Cash used in investing activities was $406.1 million in the three months
ended March 31, 2000, and $629.5 million for the same period in 1999. The higher
1999 investing activities included the acquisition of the Tempo Satellite assets
and the early buy-out of a satellite sale-leaseback at PanAmSat.
Cash provided by financing activities was $463.9 million in the first
quarter of 2000, compared to $92.1 million in the first quarter of 1999. The
increase is primarily due to additional borrowings used to finance capital
expenditures for satellites and property and equipment.
Cash used in discontinued operations was $71.4 million in the first quarter
of 2000, compared to $110.5 million in the first quarter of 1999.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at March 31, 2000 and December 31, 1999
was 1.38 and 1.46, respectively. Working capital increased by $30.2 million to
$1,246.1 million at March 31, 2000 from $1,215.9 million at December 31, 1999.
Common Stock Dividend Policy and Use of Cash. Since the completion of the
recapitalization of Hughes in late 1997, the GM Board has not paid, and does not
currently intend to pay in the foreseeable future, cash dividends on its GM
Class H common stock. Similarly, since such time, Hughes has not paid dividends
on its common stock to GM and does not currently intend to do so in the
foreseeable future. Future Hughes earnings, if any, are expected to be retained
for the development of the businesses of Hughes. Hughes expects to have
significant cash requirements in the remainder of 2000 primarily due to capital
expenditures of approximately $1.6 billion for satellites and property. In
addition, Hughes expects to increase its investment in affiliated companies,
primarily related to its international DIRECTV businesses. These cash
requirements are expected to be funded from a combination of cash provided from
operations, cash to be received upon completion of the Boeing transaction,
amounts available under credit facilities and debt and equity offerings, as
needed.
Debt and Credit Facilities. Short-Term Borrowings. In October 1999, Hughes
issued $500.0 million ($499.3 million net of unamortized discount) of floating
rate notes to a group of institutional investors in a private placement. The
notes bear interest at a variable rate which was 7.29% at March 31, 2000.
Interest is payable quarterly and the notes are due and payable on October 23,
2000.
Notes Payable. PanAmSat issued five, seven, ten and thirty-year notes
totaling $750.0 million in January 1998. The outstanding principal balances and
interest rates for the five-, seven-, ten- and thirty-year notes as of March 31,
2000 were $200 million at 6.0%, $275 million at 6.125%, $150 million at 6.375%
and $125 million at $6.875%, respectively. Principal on the notes is payable at
maturity, while interest is payable semi-annually.
- 48 -
HUGHES ELECTRONICS CORPORATION
In July 1999, in connection with the early buy-out of satellite
sale-leasebacks, PanAmSat assumed $124.1 million of variable rate notes, of
which $79.9 million was outstanding at March 31, 2000. The interest rate on the
notes was 6.19% at March 31, 2000. The notes mature on various dates through
January 2, 2002.
Revolving Credit Facilities. Hughes has three unsecured revolving credit
facilities totaling $1.6 billion, consisting of a $750.0 million multi-year
facility, a $350.0 million 364-day facility, and a $500.0 million bridge
facility. Borrowings under the facilities bear interest at various rates, based
on a spread to the then-prevailing London Interbank Offered Rate. The multi-year
credit facility provides for a commitment of $750.0 million through December 5,
2002. The 364-day facility provides for a commitment of $350.0 million through
November 22, 2000. These facilities also provide backup capacity for Hughes'
commercial paper program. The bridge facility provides for a commitment of
$500.0 million through the earlier of November 22, 2000 or the receipt of
proceeds from the issuance of any debt securities of Hughes in a public
offering. The multi-year facility was fully drawn as of March 31, 2000, with
borrowings bearing interest rates ranging from 6.92% to 6.94%. $200 million was
outstanding under the 364-day facility as of March 31, 2000, bearing interest at
rates ranging from 6.88% to 7.13%. No amounts were outstanding under the
commercial paper program and bridge facilities at March 31, 2000.
PanAmSat maintains a $500.0 million multi-year revolving credit facility that
provides for short-term and long-term borrowings and a $500.0 million commercial
paper program that provides for short-term borrowings. The multi-year revolving
credit facility provides for a commitment through December 24, 2002. Borrowings
under the credit facility and commercial paper program are limited to $500.0
million in the aggregate. No amounts were outstanding under either the
multi-year revolving credit facility or the commercial paper program at March
31, 2000.
At March 31, 2000, Hughes' 75% owned subsidiary, SurFin, had a total of
$273.5 million outstanding under a $400.0 million unsecured revolving credit
facility expiring in June 2002. The weighted average interest rate on these
borrowings was 6.83% at March 31, 2000.
Other. At March 31, 2000, GLB had a total of $21.1 million outstanding under
variable rate notes bearing interest at various rates. The weighted average
interest rate of the notes was 11.7% at March 31, 2000. Principal is payable in
varying amounts at maturity in April and May 2002, and interest is payable
monthly.
Other long-term debt totaling $16.0 million at March 31, 2000, consisted
primarily of notes bearing fixed rates of interest of 9.61% to 11.11%. Principal
is payable at maturity in April 2007, while interest is payable semi-annually.
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance of up to $2.0 billion of debt
securities from time to time. No amounts have been issued as of March 31, 2000.
Acquisitions, Investments and Divestitures. Acquisitions and Investments. On
July 28, 1999, GLA acquired GLB, the exclusive distributor of DIRECTV services
in Brazil, from Tevecap S.A. for approximately $114.0 million plus the
assumption of debt. In connection with the transaction, Tevecap also sold its
10% equity interest in GLA to Hughes and The Cisneros Group of Companies, the
remaining GLA partners, which increased Hughes' ownership interest in GLA to
77.8%. As part of the transaction, Hughes also increased its ownership interest
in SurFin from 59.1% to 75.0%. The total consideration paid in the transactions
amounted to approximately $101.1 million.
On May 20, 1999, Hughes acquired by merger all of the outstanding capital
stock of USSB, a provider of premium subscription television programming via the
digital broadcasting system that it shared with DIRECTV. The total consideration
of approximately $1.6 billion paid in July 1999, consisted of approximately $0.4
billion in cash and 22.6 million shares of GM Class H common stock.
On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3
million subscriber medium-power direct-to-home satellite business. The purchase
price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H
common stock, for a total purchase price of $1.3 billion. As part of the
agreement to acquire PRIMESTAR, Hughes agreed to purchase the high-power
satellite assets, which consisted of an in-orbit satellite and a satellite which
has not yet been launched, and related orbital frequencies of Tempo Satellite
Inc., a wholly owned subsidiary of TCI Satellite Entertainment Inc. The purchase
price for the Tempo Satellite assets consisted of $500 million in cash, $150
million paid on March 10, 1999 and the remaining $350 million paid on June 4,
1999.
In February 1999, Hughes acquired an additional ownership interest in GGM, a
Latin America local operating company which is the exclusive distributor of
DIRECTV in Mexico, from Grupo MVS, S.R.L. de C.V. Hughes' equity ownership
represents 49.0% of the voting equity and all of the non-voting equity of GGM.
In October 1998, Hughes acquired from Grupo MVS an additional 10.0% interest in
GLA, increasing Hughes' ownership interest to 70.0%. Hughes also acquired an
additional 19.8% interest in SurFin, a company providing financing of subscriber
receiver equipment for certain local operating companies located in Latin
America and Mexico, increasing Hughes' ownership percentage from 39.3% to 59.1%.
The aggregate purchase price for these transactions was $197.0 million in cash.
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HUGHES ELECTRONICS CORPORATION
The financial information included herein reflects the acquisitions discussed
above from their respective dates of acquisition. The acquisitions were
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based on the estimated fair values at the date of acquisition. The
excess of the purchase price over the estimated fair values of the net assets
acquired has been recorded as goodwill.
Divestitures. On March 1, 2000, Hughes announced that the operations of
DIRECTV Japan would be discontinued and that its subscribers would have the
opportunity to migrate during 2000 to SkyPerfecTV!. In connection with the
agreement, Hughes acquired an approximate 6.6% interest in SkyPerfecTV!. As a
result of the transaction, in the first quarter of 2000 Hughes wrote off its
investment and accrued for the estimated costs to exit the DIRECTV Japan
business. The principal components of the accrued exit costs include estimated
subscriber migration and termination costs and costs to terminate certain
leases, programming agreements and other long-term contractual commitments.
These one-time charges were offset by the estimated fair value of the
SkyPerfecTV! interest acquired. The fair value of the SkyPerfecTV! interest
recorded was estimated based upon a preliminary independent appraisal, which is
expected to be completed within three to six months. Accordingly, the final
amount of the fair value of the SkyPerfecTV! investment recorded may be
different from the amount reflected herein. The total loss related to DIRECTV
Japan for the first quarter of 2000, including Hughes' share of DIRECTV Japan's
operating losses, was about $230 million and was recorded in "other, net." The
after-tax impact was about $49 million. Hughes will continue to record its share
of DIRECTV Japan's operating losses during the remainder of 2000.
On January 13, 2000, Hughes announced that it had reached an agreement to
sell its satellite systems manufacturing businesses to Boeing for $3.75 billion
in cash. The transaction, which is subject to regulatory approval, is expected
to close in the third quarter of 2000 and result in an after-tax gain in excess
of $1 billion. The financial results for the satellite systems manufacturing
businesses are treated as discontinued operations for all periods presented
herein.
Security Ratings
On January 14, 2000, subsequent to the announced sale of Hughes' satellite
systems manufacturing businesses to Boeing, Standard and Poor's Rating Services
("S&P") and Moody's Investors Service ("Moody's") each affirmed its respective
debt ratings for Hughes. S&P maintained its BBB - minus credit rating, which
indicates the issuer has adequate capacity to pay interest and repay principal.
S&P maintained the short-term corporate credit and commercial paper ratings at
A-3. S&P revised its outlook to positive from negative.
Moody's confirmed Hughes' Baa2 long-term credit and P-2 commercial paper
ratings. While the outlook remains negative, Moody's ended its review for
possible downgrade. The Baa2 rating for senior debt indicates adequate
likelihood of interest and principal payment and principal security. The P-2
commercial paper rating is the second highest rating available and indicates
that the issuer has a strong ability for repayment relative to other issuers.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations as they come due. Lower ratings
generally result in higher borrowing costs. A security rating is not a
recommendation to buy, sell, or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating organization. Each rating
should be evaluated independently of any other rating.
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