EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENT OF INCOME AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME
(Unaudited)
Three Months Ended
March 31,
1998 1997
---- ----
(Dollars in Millions
Except Per Share Amounts)
Revenues
Product sales $692.1 $683.2
Direct broadcast, leasing and other services 598.9 340.8
-------- --------
Total revenues 1,291.0 1,024.0
------- -------
Operating costs and expenses
Cost of products sold 542.3 554.8
Broadcast programming and other costs 264.8 163.8
Selling, general and administrative expenses 302.6 222.0
Depreciation and amortization 97.7 50.3
Amortization of GM purchase accounting adjustments 5.3 5.3
---------- -------
Total operating costs and expenses 1,212.7 996.2
------- -----
Operating profit 78.3 27.8
Interest income 37.5 2.0
Interest expense (3.0) (15.1)
Other, net (34.3) (9.1)
----- -----
Income from continuing operations before
income taxes and minority interests 78.5 5.6
Income taxes 31.4 2.2
Minority interests in net losses of subsidiaries 1.3 14.2
----- ----
Income from continuing operations 48.4 17.6
Income from discontinued operations, net of taxes - 1.0
------- -----
Net income 48.4 18.6
Adjustments to exclude the effect of
GM purchase accounting adjustments 5.3 5.3
----- -----
Earnings Used for Computation of Available
Separate Consolidated Net Income $53.7 $23.9
==== ====
Available Separate Consolidated Net Income
Average number of shares of General Motors Class H
Common Stock outstanding (in millions) (numerator) 104.1 100.4
Class H dividend base (in millions) (denominator) 399.9 399.9
Available Separate Consolidated Net Income $14.0 $6.0
==== ===
Earnings Attributable to General Motors
Class H Common Stock on a Per Share Basis $0.13 $0.06
==== ====
Reference should be made to the Notes to Financial Statements.
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HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
March 31,
1998 December 31,
ASSETS (Unaudited) 1997
(Dollars in Millions)
Current Assets
Cash and cash equivalents $2,499.5 $2,783.8
Accounts and notes receivable (less allowances) 740.9 662.8
Contracts in process, less advances and progress
payments of $39.0 and $50.2 623.1 575.6
Inventories 511.6 486.4
Prepaid expenses and other, including deferred income
taxes of $87.2 and $93.2 326.2 297.3
-------- --------
Total Current Assets 4,701.3 4,805.9
Satellites, net 2,921.3 2,643.4
Property, net 885.0 889.7
Net Investment in Sales-type Leases 302.4 337.6
Intangible Assets, net of accumulated amortization
of $340.2 and $318.3 2,932.9 2,954.8
Investments and Other Assets 1,160.7 1,132.4
--------- ---------
Total Assets $12,903.6 $12,763.8
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 510.4 $ 472.8
Advances on contracts 222.8 209.8
Deferred revenues 112.9 110.6
Accrued liabilities 597.4 689.4
-------- --------
Total Current Liabilities 1,443.5 1,482.6
Long-Term Debt 787.6 637.6
Deferred Gains on Sales and Leasebacks 161.2 191.9
Accrued Operating Leaseback Expense 54.5 100.2
Postretirement Benefits Other Than Pensions 155.2 154.8
Other Liabilities and Deferred Credits 722.3 706.4
Deferred Income Taxes 612.2 570.8
Commitments and Contingencies
Minority Interests 605.1 607.8
Stockholder's Equity
Capital stock and additional paid-in capital 8,325.6 8,322.8
Net income retained for use in the business 55.5 7.1
Subtotal 8,381.1 8,329.9
Minimum pension liability adjustment (34.8) (34.8)
Accumulated unrealized gains on securities 20.8 21.4
Accumulated foreign currency translation adjustments (5.1) (4.8)
---- -----
Accumulated other comprehensive loss (19.1) (18.2)
--------- ---------
Total Stockholder's Equity 8,362.0 8,311.7
--------- ---------
Total Liabilities and Stockholder's Equity $12,903.6 $12,763.8
======== ========
Reference should be made to the Notes to Financial Statements.
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HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1998 1997
---- ----
(Dollars in
Millions)
Cash Flows from Operating Activities
Net cash used in continuing operations $(38.7) $(226.0)
Net cash used by discontinued operations - (0.4)
------- -------
Net Cash Used in Operating Activities (38.7) (226.4)
---- -----
Cash Flows from Investing Activities
Investment in companies (8.4) (1.6)
Expenditures for property (38.1) (36.4)
Increase in satellites (270.1) (57.7)
Early buy-out of satellite under sale and leaseback (96.6) -
Proceeds from disposal of property 17.6 -
------ -------
Net Cash Used in Investing Activities (395.6) (95.7)
----- ----
Cash Flows from Financing Activities
Long-term debt borrowings 875.0 -
Repayment of long-term debt (725.0) -
Contributions from Parent Company - 326.4
--------- -----
Net Cash Provided by Financing Activities 150.0 326.4
----- -----
Net (decrease) increase in cash and cash equivalents (284.3) 4.3
Cash and cash equivalents at beginning of the year 2,783.8 6.7
------- -----
Cash and cash equivalents at end of the year $2,499.5 $11.0
======= ====
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 which may be expected for any other interim period or for the full year.
For further information, refer to the financial statements and notes thereto
included in the General Motors ("GM") 1997 Annual Report on Form 10-K, as
amended.
GM purchase accounting adjustments relate to GM's purchase of Hughes Aircraft
Company in 1985.
On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics")
and GM, the parent of Hughes Electronics, completed a series of transactions
(the "Hughes Transactions") designed to address strategic challenges facing the
three principal businesses of Hughes Electronics and unlock stockholder value in
GM. The Hughes Transactions included the tax-free spin-off of the defense
electronics business ("Hughes Defense") to holders of GM $1-2/3 par value and
Class H common stocks, followed immediately by the merger of Hughes Defense with
Raytheon Company ("Raytheon"). Concurrently, Delco Electronics Corporation
("Delco"), the automotive electronics business, was transferred to GM's Delphi
Automotive Systems unit. Finally, GM Class H common stock was recapitalized into
a GM tracking stock linked to the remaining telecommunications and space
businesses. For the periods prior to the consummation of the Hughes Transactions
on December 17, 1997, Hughes Electronics, consisting of its defense electronics,
automotive electronics and telecommunications and space businesses, is
hereinafter referred to as former Hughes.
In connection with the recapitalization of Hughes Electronics on December 17,
1997, the telecommunications and space businesses of former Hughes, consisting
principally of its direct-to-home broadcast, satellite services, satellite
manufacturing and network systems businesses, were contributed to the
recapitalized Hughes Electronics. Such telecommunications and space businesses,
both before and after the recapitalization, are hereinafter referred to as
Hughes. The accompanying financial statements and footnotes pertain only to
Hughes and do not include balances of former Hughes related to Hughes Defense or
Delco.
Prior to the Hughes Transactions, the Hughes businesses were effectively
operated as divisions of former Hughes. The March 31, 1997 financial statements
include allocations of corporate expenses from former Hughes, including research
and development, general management, human resources, financial, legal, tax,
quality, communications, marketing, international, employee benefits and other
miscellaneous services. These costs and expenses have been charged to Hughes
based either on usage or using allocation methodologies primarily based upon
total revenues, certain tangible assets and payroll expenses. Management
believes the allocations were made on a reasonable basis; however, they may not
necessarily reflect the financial position, results of operations or cash flows
of Hughes on a stand-alone basis in the future. Also, the interest expense in
the Statement of Income and Available Separate Consolidated Net Income
("Statement of Income") for March 31, 1997 included an allocated share of total
former Hughes' interest expense.
Note 2. Inventories
Major Classes of Inventories
March 31, December 31,
(Dollars in Millions) 1998 1997
---- ----
Productive material and supplies $77.2 $57.5
Work in process 312.7 328.5
Finished goods 121.7 100.4
----- -----
Total $511.6 $486.4
===== =====
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 3. Comprehensive Income
Hughes adopted Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, which established standards for reporting and
displaying comprehensive income and its components in an annual financial
statement that is displayed with the same prominence as other financial
statements. This statement also requires that an entity report a total for
comprehensive income in condensed financial statements of interim periods.
Hughes' total comprehensive income was as follows:
Three Months Ended
March 31,
(Dollars in Millions) 1998 1997
---- ----
Net income $48.4 $18.6
Other comprehensive (loss) income:
Foreign currency translation adjustments (0.3) 0.1
Unrealized loss on securities (0.6) -
----- -------
Other comprehensive (loss) income (0.9) 0.1
----- -----
Total comprehensive income $47.5 $18.7
==== ====
Note 4. Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income
Earnings per share attributable to GM Class H common stock is determined
based on the relative amounts available for the payment of dividends to holders
of GM Class H common stock. 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 of Hughes. The available
separate consolidated net income of Hughes is determined quarterly and is equal
to the separate consolidated net income of Hughes, excluding the effects of GM
purchase accounting adjustments arising from GM's acquisition of Hughes Aircraft
Company (earnings used for computation of available separate consolidated net
income), multiplied by a fraction, the numerator of which is a number equal to
the weighted-average number of shares of GM Class H common stock outstanding
during the period (104.1 million and 100.4 million during the first quarters of
1998 and 1997, respectively) and the denominator of which was 399.9 million
during the first quarters of 1998 and 1997.
For 1997, available separate consolidated net income and earnings
attributable to General Motors Class H common stock are presented on a pro forma
basis. Prior to the Hughes Transactions, such amounts were calculated based on
the financial performance of former Hughes. Since the financial statements for
the three months ended March 31, 1997 relate only to the telecommunications and
space businesses of former Hughes, they do not reflect the earnings attributable
to the GM Class H common stock on a historical basis. The pro forma presentation
is used, therefore, to present the financial results which would have been
achieved for 1997 relative to the GM Class H common stock had they been
calculated based on the performance of the telecommunications and space
businesses of former Hughes.
Earnings per share represent basic earnings per share. There is no dilutive
effect resulting from the assumed exercise of stock options, since the exercise
of stock options would not affect the GM Class H dividend base (denominator)
used in calculating earnings per share. As Hughes has no other common stock
equivalents that may impact the calculation, diluted earnings per share is not
presented.
Note 5. Other Postretirement Benefits
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities" or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, 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.
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 6. Acquisitions
In May 1997, Hughes and PanAmSat, a leading provider of international
satellite services, merged their respective satellite service operations into a
new publicly-held company, which retained the name PanAmSat. Hughes contributed
its Galaxy(R) satellite services business in exchange for a 71.5% interest in
the new company. PanAmSat stockholders received a 28.5% interest in the new
company and $1.5 billion in cash.
For accounting purposes, the merger was treated by Hughes as an acquisition
of 71.5% of PanAmSat and was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the net assets acquired,
including intangible assets, based on estimated fair values at the date of
acquisition. The purchase price exceeded the fair value of net assets acquired
by $2.4 billion. In addition, the merger was treated as a partial sale of the
Galaxy business by Hughes and resulted in a one-time pre-tax gain of $489.7
million ($318.3 million after-tax).
In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for
$851.4 million in cash, increasing Hughes' ownership interest from 71.5% to
81.0%.
Note 7. Discontinued Operations
On December 15, 1997, Hughes sold substantially all of the assets and
liabilities of the Hughes Avicom International, Inc. ("Hughes Avicom") business
to Rockwell Collins, Inc. for cash. Hughes Avicom is a supplier of products and
services to the commercial airline market. The net operating results of Hughes
Avicom through March 31, 1997 have been reported, net of applicable income
taxes, as "Income from discontinued operations" and the net cash flows as "Net
cash used by discontinued operations."
Note 8. Segment Reporting
Hughes adopted SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, which established standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders.
Operating Segments:
(Dollars in Millions)
Direct-To
-Home Satellite Satellite Network
Broadcast Services Manuf. Systems Other Elimin. Total
For the Three Months Ended:
March 31, 1998
External Revenues $387.9 $167.1 $553.7 $179.1 $3.2 - $1,291.0
Intersegment
Revenues - 25.9 70.6 5.6 0.3 $(102.4) -
- --------------------------------------------------------------------------------
Total Revenues $387.9 $193.0 $624.3 $184.7 $3.5 $(102.4)$1,291.0
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(31.6) $84.9 $55.1 $(11.9) $(10.8) $(7.4) $78.3
- --------------------------------------------------------------------------------
March 31, 1997
External Revenues $235.6 $103.9 $496.2 $182.4 $5.9 - $1,024.0
Intersegment
Revenues - 23.7 63.1 0.1 0.5 $(87.4) -
- -------------------------------------------------------------------------------
Total Revenues $235.6 $127.6 $559.3 $182.5 $6.4 $(87.4)$1,024.0
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(67.5) $67.5 $52.8 $(15.3) $2.7 $(12.4) $27.8
- --------------------------------------------------------------------------------
(1) Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes Aircraft Company amounting to $0.8 million in
each of the three month periods for the Satellite Services segment and $4.5
million in each of the three month periods for Other.
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Concluded
(Unaudited)
Note 8. Segment Reporting (Concluded)
A reconciliation of operating profit shown on the prior page to income from
continuing operations before income taxes and minority interests shown in the
Statement of Income follows:
Three Months Ended
March 31,
(Dollars in Millions) 1998 1997
---- ----
Operating profit $78.3 $27.8
Interest income 37.5 2.0
Interest expense (3.0) (15.1)
Other, net (34.3) (9.1)
------ ------
Income from continuing operations before
income taxes and minority interests $78.5 $5.6
==== ===
Note 9. Contingencies
As a result of the Hughes Transactions, Hughes is subject to certain
potential adjustments which could require amounts to be paid to or received from
GM or Raytheon.
In connection with the transfer of Delco to Delphi, a cash payment is to be
made to the extent that the closing balance sheet reflects a "net investment
amount" of Delco that deviates by more than $50 million from the targeted "net
investment amount." As a result of the adjustments, Hughes expects that a
payment will be made by Hughes to GM of approximately $300 million to $350
million.
Similarly, in connection with the Hughes Defense merger with Raytheon, a
payment will be made to the extent that the closing date balance sheet of Hughes
Defense reflects an "adjusted net worth amount" that deviates by more than $50
million from a target amount. The amount payable to or from Raytheon, if any, is
not determinable at this time.
Any amounts payable or receivable resulting from these adjustments will be
treated as equity transactions at the time the amounts are finalized.
Hughes has maintained a suit against the U.S. Government since September
1973 regarding the Government's infringement and use of a Hughes patent (the
"Williams Patent") covering "Velocity Control and Orientation of a Spin
Stabilized Body," principally satellites. On April 7, 1998, the Court of Appeals
for the Federal Circuit ("CAFC") affirmed its previous decision in the Williams
case and its award of $114.0 million in damages. The CAFC ruled that the
conclusions reached in the Williams case were consistent with the U.S. Supreme
Court's findings in the Warner-Jenkinson case. On or before May 24, 1998 the
U.S. Government may petition the CAFC for a rehearing. Hughes is unable to
estimate the duration of any appeal effort on behalf of the U.S. Government.
While no amount has been recorded in the financial statements of Hughes to
reflect the $114.0 million award or the interest accumulating thereon, a
resolution of this issue could result in a gain that would be material to the
earnings of GM attributable to Class H common stock.
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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") 1997 Annual Report to the Securities Exchange Commission
on Form 10-K, as amended. In addition, the following discussion excludes
purchase accounting adjustments related to GM's acquisition of Hughes Aircraft
Company (see Supplemental Data beginning on page 37).
Statements made concerning expected financial performance, ongoing financial
performance strategies, and possible future action which Hughes (as defined
below) intends to pursue to achieve strategic objectives for each of its four
principal business segments constitute forward-looking information. The
implementation of these strategies and of such future actions and the
achievement of such financial performance are each subject to numerous
conditions, uncertainties and risk factors, and, accordingly, no assurance can
be given that Hughes will be able to successfully accomplish its strategic
objectives or achieve such financial performance. 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,
competition, ability to achieve cost reductions, technological risk,
interruptions to production attributable to causes outside of Hughes' control,
the success of satellite launches, in-orbit performance of satellites and
Hughes' ability to access capital to maintain its financial flexibility.
General
On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics")
and GM, the parent of Hughes Electronics, completed a series of transactions
(the "Hughes Transactions") designed to address strategic challenges facing the
three principal businesses of Hughes Electronics and unlock stockholder value in
GM. The Hughes Transactions included the tax-free spin-off of the defense
electronics business ("Hughes Defense") to holders of GM $1-2/3 par value and
Class H common stocks, followed immediately by the merger of Hughes Defense with
Raytheon Company. Concurrently, Delco Electronics Corporation ("Delco"), the
automotive electronics business, was transferred to GM's Delphi Automotive
Systems unit. Finally, GM Class H common stock was recapitalized into a GM
tracking stock linked to the remaining telecommunications and space businesses.
For the periods prior to the consummation of the Hughes Transactions on December
17, 1997, Hughes Electronics, consisting of its defense electronics, automotive
electronics, and telecommunications and space businesses, is hereinafter
referred to as former Hughes.
In connection with the recapitalization of Hughes Electronics on December 17,
1997, the telecommunications and space businesses of former Hughes, consisting
principally of its direct-to-home broadcast, satellite services, satellite
manufacturing and network systems businesses, were contributed to the
recapitalized Hughes Electronics. Such telecommunications and space businesses,
both before and after the recapitalization, is hereinafter referred to as
Hughes. The following discussion and accompanying financial statements pertain
only to Hughes and do not pertain to balances of former Hughes related to Hughes
Defense or Delco.
Results of Operations
Revenues. First quarter 1998 revenues increased 26.1% to $1,291.0 million
compared with $1,024.0 million in the first quarter of 1997. The increase
reflects continued record subscriber growth in the Direct-To-Home Broadcast
segment, increased revenues in the Satellite Services segment resulting
primarily from the May 1997 PanAmSat merger and increased revenues in the
Satellite Manufacturing segment due to higher commercial satellite sales.
Direct-To-Home Broadcast segment first quarter 1998 revenues increased 64.6%
to $387.9 million from $235.6 million in the first quarter of 1997. The increase
resulted from continued record subscriber growth, strong average monthly revenue
per subscriber and low subscriber churn rates. Domestic DIRECTV propelled this
growth with quarterly revenues of $353 million, a 55% increase over last year's
first quarter revenues of $228 million. With its best-ever first quarter of
227,000 net new subscribers, total DIRECTV(R) subscribers grew to 3,528,000 in
the United States as of March 31, 1998. Hughes' Latin American DIRECTV
subsidiary, Galaxy Latin America ("GLA"), had first quarter revenues of $31
million compared with $8 million in 1997. With the addition of 38,000 net new
subscribers in the first quarter, cumulative DIRECTV subscribers in Latin
America were 338,000 as of March 31, 1998.
The Satellite Services segment's first quarter 1998 revenues were up 51.3% to
$193.0 million compared with $127.6 million in the prior year. The revenue
growth was primarily due to the May 1997 PanAmSat merger and increased operating
lease revenues for both video distribution and business communications services.
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HUGHES ELECTRONICS CORPORATION
For the first quarter of 1998, revenues for the Satellite Manufacturing
segment increased 11.6% to $624.3 million from revenues of $559.3 million for
the same period in 1997. The increase in revenue was principally due to higher
commercial satellite sales to customers such as ICO Global Communications,
Thuraya Satellite Telecommunications Company and PanAmSat
Corporation.
First quarter 1998 revenues for the Network Systems segment were $184.7
million compared with $182.5 million in the same period last year. Increased
sales of private business networks and satellite-based mobile telephony
equipment were mostly offset by lower sales of international wireless local loop
telephone systems.
Operating Profit. Operating profit rose sharply in the first quarter of 1998
to $83.6 million compared with $33.1 million in the first quarter of 1997. First
quarter operating profit margin increased to 6.5% in 1998 from 3.2% in 1997. The
increases were primarily due to continued increases in subscribers in the
Direct-To-Home Broadcast segment and the 1997 PanAmSat merger and increased
operating lease revenues in the Satellite Services segment.
The operating loss in the Direct-To-Home Broadcast segment for the first
quarter of 1998 was $31.6 million compared with an operating loss of $67.5
million in the first quarter of 1997. The lower operating loss in 1998 was
principally due to increased subscriber revenues that more than offset higher
sales and marketing expenditures. The first quarter 1998 operating loss in the
domestic DIRECTV business was $10 million compared with $38 million in the first
quarter of 1997, and GLA's first quarter operating loss for 1998 was $22 million
compared with $30 million in the same period of 1997.
With respect to the worldwide DIRECTV businesses, particularly in the United
States, Hughes has implemented a number of strategic initiatives designed to
expand its market share and enhance its competitive position. These include new
distribution channels, expanded services, broader programming and marketing and
other promotional strategies designed to address "barriers to entry" identified
by consumers. The implementation of such strategies is likely to increase
subscriber acquisition costs and, as a result, is likely to affect the timing
and amount of revenues and the overall profitability of the DIRECTV businesses.
However, Hughes believes that early capture of market share and the
establishment of market leadership are important to the maximization of the
long-term value of the DIRECTV businesses.
The Satellite Services segment operating profit in the first quarter of 1998
rose 25.5% to $85.7 million from $68.3 million in 1997. The operating profit
growth was due to the PanAmSat merger and increased operating lease revenues
noted above. Operating profit margin for the first quarter of 1998 declined to
44.4% from 53.6% in the same period last year primarily as a result of goodwill
amortization associated with the PanAmSat merger.
First quarter 1998 operating profit for the Satellite Manufacturing segment
increased 4.4% to $55.1 million from $52.8 million in the prior year. The
increased operating profit was principally due to the higher commercial
satellite sales noted above. Operating profit margin in the first quarter of
1998 declined to 8.8% from 9.4% in the prior year primarily due to increased
costs related to the completion of certain satellite component contracts.
The Network Systems segment operating loss in the first quarter of 1998 was
$11.9 million compared with an operating loss of $15.3 million in the first
quarter of 1997. The lower operating loss in the first quarter of 1998 was
primarily due to higher revenues and profits on satellite-based mobile telephony
equipment.
Costs and Expenses. Selling, general and administrative expenses increased to
$302.6 million in the first quarter of 1998 from $222.0 million in the same
period of 1997. The increase resulted primarily from the PanAmSat merger,
increased programming, marketing and subscriber acquisition costs in the
Direct-To-Home Broadcast segment and marketing expenditures in the Network
Systems segment. The increase in depreciation and amortization expense to $97.7
million in the first quarter of 1998 from $50.3 million in the same period of
1997, resulted from increased goodwill amortization related to the PanAmSat
merger and additional satellite depreciation.
Interest Income and Expense. Interest income increased to $37.5 million in
the first quarter of 1998 compared with $2.0 million in the first quarter of
1997. The increase was due to the higher level of cash and cash equivalents
resulting from the Hughes Transactions as well as the PanAmSat merger. Interest
expense decreased $12.1 million in the first quarter of 1998 from the same
period in 1997 due to the repayment of debt in conjunction with the Hughes
Transactions.
Other, net. The first quarter 1998 amount primarily relates to losses from
unconsolidated subsidiaries of $28.9 million attributable principally to equity
investments in American Mobile Satellite Corporation (AMSC), DIRECTV Japan and
Surfin, Ltd. The first quarter 1997 amount includes losses from unconsolidated
subsidiaries of $9.4 million, primarily related to AMSC.
Income Taxes. The effective income tax rate was 37.5% in the first quarter of
1998 and 20.2% in the first quarter of 1997. The first quarter 1998 effective
tax rate increase compared to the same period of 1997 reflects the nondeductible
goodwill amortization related to the PanAmSat merger. In addition, the lower
first quarter 1997 effective income tax rate reflects the effects of the foreign
sales corporation benefit and R&E credits.
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HUGHES ELECTRONICS CORPORATION
Discontinued Operations. On December 15, 1997, Hughes sold substantially all
of the assets and liabilities of the Hughes Avicom International, Inc.
("Hughes Avicom") business to Rockwell Collins, Inc. for cash. As a result,
Hughes Avicom is treated as a discontinued operation in 1997.
Net Earnings. 1998 first quarter earnings more than doubled to $53.7 million
from $23.9 million in the first quarter of 1997. Earnings per share for the
first quarter were $0.13 per share versus pro forma earnings per share of $0.06
in the first quarter of 1997. See Note 4 to the financial statements for further
discussion regarding pro forma presentation.
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $2,499.5 million at
March 31, 1998 compared to $2,783.8 million at December 31, 1997. The $284.3
million decline during the quarter was due to expenditures for PanAmSat
satellites and general working capital requirements.
Cash used in operating activities for the first quarter of 1998 was $38.7
million, compared to $226.4 million in the first quarter of 1997. First quarter
1998 continuing operations required less cash than the comparable period of 1997
primarily due to first quarter 1998 increases in net income and improved working
capital.
Net cash used in investing activities was $395.6 million for the three months
ended March 31, 1998 and $95.7 million for the same period in 1997. The
substantial increase in 1998 compared to 1997 resulted from a significant
increase in expenditures for satellites and PanAmSat's early buy-out of a
satellite sale-leaseback in January 1998.
Net cash provided by financing activities was $150.0 million for the first
quarter of 1998, compared with $326.4 million for first quarter 1997. The 1998
financing activities reflect PanAmSat's net borrowings for the quarter of $150.0
million. The 1997 financing activities resulted from former Hughes contributing
$326.4 million to Hughes.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at March 31, 1998 and December 31, 1997
was 3.26 and 3.24, respectively. Working capital decreased by $65.5 million to
$3,257.8 million at March 31, 1998 from $3,323.3 million at December 31, 1997.
Dividend Policy and Use of Cash. GM does not initially anticipate paying cash
dividends to holders of GM Class H common stock. Hughes anticipates using its
cash to fund 1998 capital expenditures for property and equipment, as well as
spacecraft, of approximately $1.2 billion, the early buy-out of satellite
sale-leasebacks and to fund additional equity investments. Additionally, Hughes
may be required to make cash payments for purchase price adjustments related to
the Hughes Transactions. Currently, a payment to GM is expected to be required
in the amount of approximately $300 million to $350 million, while the amount of
a payment to or from Raytheon, if any, is not determinable at this time.
In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for
$851.4 million in cash, increasing Hughes' ownership interest in PanAmSat to
81.0%.
Debt and Credit Facilities. Hughes maintains two unsecured revolving credit
facilities, consisting of a $750 million multi-year facility and a $250 million
364-day facility. There were no borrowings against the credit facilities at
March 31, 1998.
In January 1998, PanAmSat borrowed $125.0 million under a bank borrowing
agreement, principally for the purpose of exercising an early buy-out option on
a satellite sale-leaseback agreement. Also in January 1998, PanAmSat completed a
private placement debt offering for five, seven, ten and thirty year notes
aggregating $750.0 million, the proceeds of which were used to repay outstanding
bank borrowings of $725.0 million.
Hughes believes that existing cash balances and amounts available under its
credit facilities, will provide sufficient resources to meet currently
identified working capital requirements, debt service and other cash needs.
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HUGHES ELECTRONICS CORPORATION
Supplemental Data
The financial statements reflect the application of purchase accounting
adjustments as previously discussed. However, as provided in GM's Restated
Certificate of Incorporation, the earnings attributable to GM Class H common
stock for purposes of determining the amount available for the payment of
dividends on GM Class H common stock specifically excludes such adjustments.
More specifically, amortization of the intangible assets associated with GM's
purchase of Hughes Aircraft Company amounted to $5.3 million for the first
quarters of 1998 and 1997. Such amounts are excluded from the earnings available
for the payment of dividends on GM Class H common stock and are charged against
earnings available for the payment of dividends on GM's $1-2/3 par value stock.
Unamortized purchase accounting adjustments associated with GM's purchase of
Hughes Aircraft Company were $442.3 million at March 31, 1998 and $447.6 million
at December 31, 1997.
In order to provide additional analytical data to the users of Hughes'
financial information, supplemental data in the form of unaudited summary pro
forma financial data are provided. Consistent with the basis on which earnings
of Hughes available for the payment of dividends on the GM Class H common stock
is determined, the pro forma data exclude purchase accounting adjustments
related to GM's acquisition of Hughes Aircraft Company. Included in the
supplemental data are certain financial ratios which provide measures of
financial returns excluding the impact of purchase accounting adjustments. The
pro forma data are not presented as a measure of GM's total return on its
investment in Hughes.
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HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data*
Pro Forma Condensed Statement of Income
Three Months Ended
March 31,
1998 1997
(Dollars in Millions
Except per Share Amounts)
Total revenues $1,291.0 $1,024.0
Total operating costs and expenses 1,207.4 990.9
------- -------
Operating profit 83.6 33.1
Non-operating income (loss) 0.2 (22.2)
Income taxes 31.4 2.2
Minority interests in net losses of subsidiaries 1.3 14.2
Income from discontinued operations - 1.0
------ -----
Earnings Used for Computation of Available
Separate Consolidated Net Income $53.7 $23.9
==== ====
Earnings Attributable to General Motors Class H
Common Stock on a Per Share Basis $0.13 $0.06
==== ====
Pro Forma Condensed Balance Sheet
March 31, December 31,
Assets 1998 1997
(Dollars in Millions)
Total Current Assets $4,701.3 $4,805.9
Satellites, net 2,921.3 2,643.4
Property, net 885.0 889.7
Net Investment in Sales-type Leases 302.4 337.6
Intangible Assets, Investments and Other Assets, net 3,651.3 3,639.6
-------- --------
Total Assets $12,461.3 $12,316.2
======== ========
Liabilities and Stockholder's Equity
Total Current Liabilities $1,443.5 $1,482.6
Long-Term Debt 787.6 637.6
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 1,705.4 1,724.1
Minority Interests 605.1 607.8
Total Stockholder's Equity (1) 7,919.7 7,864.1
--------- ---------
Total Liabilities and Stockholder's Equity (1) $12,461.3 $12,316.2
======== ========
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes Aircraft Company. 1997 earnings attributable to General
Motors Class H common stock on a per share basis are presented on a pro forma
basis for comparative purposes. See Note 4 to the financial statements for
further discussion.
(1)General Motors' equity in its wholly-owned subsidiary, 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).
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HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Continued
Pro Forma Selected Segment Data
Three Months Ended
March 31,
1998 1997
(Dollars in Millions)
Direct-To-Home Broadcast
Total Revenues $387.9 $235.6
Operating Loss (31.6) (67.5)
Depreciation and Amortization 22.5 18.3
Capital Expenditures 13.7 11.4
Satellite Services
Total Revenues $193.0 $127.6
Operating Profit 85.7 68.3
Operation Profit Margin 44.4% 53.6%
Depreciation and Amortization $54.5 $13.8
Capital Expenditures (1) 249.6 334.6
Satellite Manufacturing
Total Revenues $624.3 $559.3
Operating Profit 55.1 52.8
Operation Profit Margin 8.8% 9.4%
Depreciation and Amortization $10.7 $8.7
Capital Expenditures 10.7 15.6
Network Systems
Total Revenues $184.7 $182.5
Operating Loss (11.9) (15.3)
Depreciation and Amortization 8.5 7.2
Capital Expenditures 4.8 6.9
Eliminations and Other
Total Revenues $(98.9) $(81.0)
Operating Loss (13.7) (5.2)
Depreciation and Amortization 1.5 2.3
Capital Expenditures 125.9 (274.5)
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes Aircraft Company.
(1)Includes expenditures related to satellites amounting to $145.6 million in
1998 and $332.1 million in 1997. Also included in 1998 is $96.6 million
related to the early buy-out of a satellite sale-leaseback.
* * * * * * *
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HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Concluded
Pro Forma Selected Financial Data
Three Months Ended
March 31,
1998 1997
(Dollars in Millions)
Operating profit $84 $33
Income from continuing operations before
income taxes and minority interests 84 11
Earnings used for computation of available
separate consolidated net income 54 24
Average number of GM Class H dividend base
shares (1) 399.9 399.9
Stockholder's equity $7,920 $2,411
Working capital 3,258 525
Operating profit as a percent of revenues 6.5% 3.2%
Income from continuing operations before
income taxes and minority interests
as a percent of revenues 6.5% 1.1%
Net income as a percent of revenues 4.2% 2.3%
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes Aircraft Company.
(1)Class H dividend base shares is used in calculating earnings attributable to
GM Class H common stock on a per share basis. This is not the same as the
average number of GM Class H shares outstanding, which was 104.1 million for
the first quarter of 1998 and 100.4 million for the first quarter of 1997.
* * * * * * *
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