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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
(Dollars in Millions Except Per
Share Amounts)
Revenues
Product sales $872.8 $703.3 $2,327.5 $2,125.9
Direct broadcast, leasing and
other services 640.5 555.0 1,845.8 1,307.8
------- ------- ------- -------
Total revenues 1,513.3 1,258.3 4,173.3 3,433.7
------- ------- ------- -------
Operating costs and expenses
Cost of products sold 659.5 550.3 1,782.4 1,711.4
Broadcast programming and
other costs 284.6 243.9 800.2 598.4
Selling, general and
administrative expenses 390.4 261.9 1,052.2 714.0
Depreciation and amortization 111.3 78.0 309.2 195.3
Amortization of GM purchase
accounting adjustments 5.3 5.3 15.9 15.9
------- ------- ------- -------
Total operating costs and expenses 1,451.1 1,139.4 3,959.9 3,235.0
------- ------- ------- -------
Operating profit 62.2 118.9 213.4 198.7
Interest income 20.5 10.4 88.6 18.1
Interest expense (3.6) (24.4) (9.5) (58.1)
Other, net (33.4) (17.8) (102.8) 452.6
------- --------- --------- --------
Income from continuing operations
before income taxes and
minority interests 45.7 87.1 189.7 611.3
Income taxes 17.4 34.8 72.1 244.5
Minority interests in net losses
(income) of subsidiaries 9.3 (5.1) 19.2 16.8
------- ------- ------- ---------
Income from continuing operations 37.6 47.2 136.8 383.6
(Loss) income from discontinued
operations, net of taxes - (0.1) - 1.2
------- ------- -------- ---------
Net income 37.6 47.1 136.8 384.8
Adjustments to exclude the effect of
GM purchase accounting adjustments 5.3 5.3 15.9 15.9
------- ------ -------- ---------
Earnings Used for Computation of
Available Separate
Consolidated Net Income $42.9 $52.4 $152.7 $400.7
==== ==== ===== =====
Available Separate Consolidated Net Income
Average number of shares of General Motors
Class H Common Stock outstanding
(in millions) (numerator) 105.7 102.0 105.0 101.2
Class H dividend base (in millions)
(denominator) 399.9 399.9 399.9 399.9
Available Separate Consolidated Net
Income $11.4 $13.4 $40.1 $101.4
==== ==== ==== =====
Earnings Attributable to General Motors
Class H Common Stock on a Per Share
Basis $0.11 $0.13 $0.38 $1.00
Reference should be made to the Notes to Financial Statements.
- 33 -
HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
September 30,
1998 December 31,
ASSETS (Unaudited) 1997
------------ ------------
(Dollars in Millions)
Current Assets
Cash and cash equivalents $1,509.7 $2,783.8
Accounts and notes receivable (less allowances) 1,067.2 662.8
Contracts in process, less advances and progress
payments of $2.2 and $50.2 611.8 575.6
Inventories 570.7 486.4
Prepaid expenses and other, including deferred income
taxes of $75.6 and $93.2 399.1 297.3
-------- --------
Total Current Assets 4,158.5 4,805.9
Satellites, net 2,843.1 2,643.4
Property, net 965.9 889.7
Net Investment in Sales-type Leases 181.9 337.6
Intangible Assets, net of accumulated amortization
of $388.2 and $318.3 3,587.8 2,954.8
Investments and Other Assets 1,155.9 1,132.4
--------- ---------
Total Assets $12,893.1 $12,763.8
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $720.0 $472.8
Advances on contracts 245.6 209.8
Deferred revenues 150.3 110.6
Notes payable 60.2 -
Accrued liabilities 564.1 689.4
------- -------
Total Current Liabilities 1,740.2 1,482.6
Long-Term Debt 778.7 637.6
Deferred Gains on Sales and Leasebacks 130.1 191.9
Accrued Operating Leaseback Expense 38.8 100.2
Postretirement Benefits Other Than Pensions 156.2 154.8
Other Liabilities and Deferred Credits 702.8 706.4
Deferred Income Taxes 618.7 570.8
Commitments and Contingencies
Minority Interests 469.0 607.8
Stockholder's Equity
Capital stock and additional paid-in capital 8,142.7 8,322.8
Net income retained for use in the business 143.9 7.1
Subtotal 8,286.6 8,329.9
Minimum pension liability adjustment (34.8) (34.8)
Accumulated unrealized gains on securities 11.9 21.4
Accumulated foreign currency translation adjustments (5.1) (4.8)
-------- ---------
Accumulated other comprehensive loss (28.0) (18.2)
-------- ---------
Total Stockholder's Equity 8,258.6 8,311.7
--------- ---------
Total Liabilities and Stockholder's Equity $12,893.1 $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)
Nine Months Ended
September 30,
------------------
1998 1997
------ ------
(Dollars in Millions)
Cash Flows from Operating Activities
Net cash provided by continuing operations $313.7 $315.3
Net cash used by discontinued operations - (0.3)
------ ------
Net Cash Provided by Operating Activities 313.7 315.0
------ ------
Cash Flows from Investing Activities
Investment in companies (960.5) (1,559.1)
Expenditures for property (202.7) (140.8)
Increase in satellites (526.7) (473.2)
Early buyout of satellite under sale and leaseback (155.5) -
Proceeds from disposal of property 17.6 -
Proceeds from disposal of investments 12.4 -
Proceeds from insurance claims 231.2 -
-------- ---------
Net Cash Used in Investing Activities (1,584.2) (2,173.1)
-------- --------
Cash Flows from Financing Activities
Net increase in notes and loans payable 60.0 -
Long-term debt borrowings 875.3 1,759.1
Repayment of long-term debt (734.2) -
Payment to General Motors for Delco post-closing
price adjustment (204.7) -
Contributions from Parent Company - 518.8
------- -------
Net Cash (Used In) Provided by
Financing Activities (3.6) 2,277.9
------- -------
Net (decrease) increase in cash and cash equivalents (1,274.1) 419.8
Cash and cash equivalents at beginning of the period 2,783.8 6.7
------- -----
Cash and cash equivalents at end of the period $1,509.7 $426.5
======= =====
Reference should be made to the Notes to Financial Statements.
- 35 -
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, the unaudited information relating to Hughes Electronics Corporation
("Hughes Electronics") filed as Exhibit 99 in GM's quarterly reports on Form
10-Q dated March 31, 1998 and June 30, 1998, and current reports on Form 8-K
filed subsequent to the filing date for the GM 1997 Annual Report on Form 10-K,
as amended.
GM purchase accounting adjustments relate to GM's purchase of Hughes
Electronics in 1985.
On December 17, 1997, 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,
the transfer of Delco Electronics Corporation ("Delco"), the automotive
electronics business, to GM's Delphi Automotive Systems unit, and the
recapitalization of GM Class H common stock into a new GM tracking stock, Class
H common stock, that is linked to the remaining telecommunications and space
businesses. The Hughes Transactions were followed immediately by the merger of
Hughes Defense with Raytheon Company ("Raytheon"). 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
systems 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 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 for
1997 in the Statement of Income and Available Separate Consolidated Net Income
("Statement of Income") included an allocated share of total former Hughes'
interest expense.
Note 2. Inventories
Major Classes of Inventories
September 30, December 31,
(Dollars in Millions) 1998 1997
---- ----
Productive material and supplies $104.1 $57.5
Work in process 343.1 328.5
Finished goods 123.5 100.4
----- -----
Total $570.7 $486.4
===== =====
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
(Dollars in Millions) 1998 1997 1998 1997
-------- ------- -------- -------
Net income $37.6 $47.1 $136.8 $384.8
Other comprehensive income (loss):
Foreign currency translation
adjustments 2.2 (0.8) (0.3) (1.6)
Unrealized gains (losses)
on securities:
Unrealized holding losses (3.4) - (2.4) -
Less: reclassification
adjustment for losses
(gains) included in
net income 0.2 - (7.1) -
----- ------- ------ -------
Unrealized losses
on securities (3.2) - (9.5) -
----- ------- ------ -------
Other comprehensive loss (1.0) (0.8) (9.8) (1.6)
----- ------ ------ -------
Total comprehensive
income $36.6 $46.3 $127.0 $383.2
==== ==== ===== =====
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
(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 (105.7 million and 102.0 million during the third quarters of 1998
and 1997, respectively) and the denominator of which was 399.9 million during
the third 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 1997 financial statements
relate only to the telecommunications and space businesses of former Hughes,
they do not reflect the earnings attributable to the former GM Class H common
stock on a historical basis. The pro forma presentation, therefore, presents the
financial results which would have been achieved for 1997 relative to the GM
Class H common stock based solely 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.
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
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.
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%.
In October 1998, Hughes purchased an additional 10% interest in Galaxy Latin
America from MVS Multivision, increasing its ownership to 70%. Hughes also
agreed to acquire an additional ownership interest in Grupo Galaxy Mexicana
("GGM"), pending regulatory approval in Mexico. GGM offers Direct-To-Home
Broadcast service in Mexico.
Note 7. Hughes Transactions
In connection with the Hughes Transactions and the resulting Delco
post-closing price adjustment, Hughes made a cash payment to GM in June of 1998
for $204.7 million. The payment was treated as an adjustment to additional
paid-in capital.
Note 8. 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 1997 net operating results of
Hughes Avicom have been reported, net of applicable income taxes, as "Income
from discontinued operations, net of taxes" and the net cash flows as "Net cash
used by discontinued operations."
- 38 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Segment Reporting
The following presents selected information regarding Hughes' operating
segments:
Operating Segments:
Direct-To-
Home Satellite Satellite Network
Broadcast Services Systems Systems Other Elims. Total
- -------------------------------------------------------------------------------
(Dollars in Millions)
For the Three Months Ended:
September 30, 1998
External Revenues $458.0 $152.0 $659.5 $240.4 $3.4 - $1,513.3
Intersegment
Revenues 1.1 34.5 29.4 27.3 - $(92.3) -
- -------------------------------------------------------------------------------
Total Revenues $459.1 $186.5 $688.9 $267.7 $3.4 $(92.3)$1,513.3
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(61.8) $78.2 $63.8 $16.9 $(14.8) $(20.1) $62.2
- --------------------------------------------------------------------------------
September 30, 1997
External Revenues $343.7 $146.5 $541.1 $215.6 $11.4 - $1,258.3
Intersegment
Revenues - 23.8 63.2 0.4 0.5 $(87.9) -
- -------------------------------------------------------------------------------
Total Revenues $343.7 $170.3 $604.3 $216.0 $11.9 $(87.9)$1,258.3
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(43.3) $70.8 $53.1 $22.4 $23.6 $ (7.7) $118.9
- --------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1998
External Revenues$1,247.4 $480.7 $1,806.2 $626.5 $12.5 - $4,173.3
Intersegment
Revenues 1.1 89.9 181.8 47.6 0.9 $(321.3) -
- -------------------------------------------------------------------------------
Total Revenues $1,248.5 $570.6 $1,988.0 $674.1 $13.4 $(321.3)$4,173.3
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(133.6) $236.7 $178.9 $(20.2) $(26.2) $(22.2) $213.4
- --------------------------------------------------------------------------------
September 30, 1997
External Revenues $861.0 $362.3 $1,605.7 $608.9 $(4.2) - $3,433.7
Intersegment
Revenues - 69.7 142.4 0.5 1.6 $(214.2) -
- -------------------------------------------------------------------------------
Total Revenues $861.0 $432.0 $1,748.1 $609.4 $(2.6) $(214.2)$3,433.7
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(158.7) $200.4 $159.7 $6.1 $(6.4) $(2.4) $198.7
- --------------------------------------------------------------------------------
(1) Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes amounting to $0.9 million in each of the three
month periods and $2.5 million in each of the nine months periods for the
Satellite Services segment and $4.4 million in each of the three month
periods and $13.4 million in each of the nine month periods for Other.
A reconciliation of operating profit to income from continuing operations
before income taxes and minority interests, as shown in the Statement of Income,
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Millions) 1998 1997 1998 1997
---- ---- ---- ----
Operating profit $62.2 $118.9 $213.4 $198.7
Interest income 20.5 10.4 88.6 18.1
Interest expense (3.6) (24.4) (9.5) (58.1)
Other, net (33.4) (17.8) (102.8) 452.6
------ ------ ------ -----
Income from continuing operations
before income taxes and
minority interests $45.7 $87.1 $189.7 $611.3
==== ==== ===== =====
- 39 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Concluded
(Unaudited)
Note 10. Contingencies
In connection with the 1997 spin-off of Hughes Defense and its subsequent
merger with Raytheon, a process was agreed to among General Motors, Hughes and
Raytheon for resolving disputes that might arise in connection with post-closing
adjustments called for by the terms of the merger agreement. Such adjustments
might call for a cash payment between Hughes and Raytheon. A dispute currently
exists regarding the post-closing adjustments which Hughes and Raytheon have
proposed to one another. If the dispute is not resolved by negotiation, the
parties will proceed to an agreed upon form of binding arbitration, under which
either party may be required by arbitration to make a payment to the other. It
is possible that Hughes may be required by arbitration to make a payment to
Raytheon that would be material to Hughes. However, the amount of payment that
might be required of either party is not determinable at this time. Hughes
intends to vigorously oppose the adjustments Raytheon seeks.
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") reaffirmed earlier decisions in the Williams
case and the award of $114.0 million in damages. The CAFC ruled that the
conclusions previously reached in the Williams case were consistent with the
U.S. Supreme Court's findings in the Warner-Jenkinson case. The U.S. Government
petitioned the CAFC for a rehearing and was denied and is presently considering
a further appeal to the U.S. Supreme Court. Hughes is unable to estimate the
duration of any further appeal effort by 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.
Hughes has reached an agreement with the Internal Revenue Service regarding a
claim for refund of Federal income taxes for the years 1983, 1984 and 1985. The
agreement requires approval by the Joint Committee on Taxation before the refund
claim becomes final. If the agreement is approved, a favorable adjustment to
Hughes' tax provision would occur which 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 Electronics Corporation management's discussion and
analysis included in the General Motors ("GM") 1997 Annual Report to the
Securities and Exchange Commission on Form 10-K, as amended, the management's
discussion and analysis relating to Hughes Electronics Corporation included in
Exhibit 99 to GM's quarterly reports on Form 10-Q dated March 31, 1998 and June
30, 1998, and current reports on Form 8-K filed subsequent to the filing date
for GM's 1997 Form 10-K, as amended. In addition, the following discussion
excludes purchase accounting adjustments related to GM's acquisition of Hughes
Electronics Corporation (see Supplemental Data beginning on page 47).
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, ability to
deal with the Year 2000 issue, 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, the transfer of Delco Electronics Corporation ("Delco"),
the automotive electronics business, to GM's Delphi Automotive Systems unit, and
the recapitalization of GM Class H common stock into a new GM tracking stock, GM
Class H common stock, that is linked to the remaining telecommunications and
space businesses. The Hughes Transactions were followed immediately by the
merger of Hughes Defense with Raytheon Company ("Raytheon"). 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
systems 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.
During 1998, four Hughes-built satellites have experienced the failure of a
primary spacecraft control processor (SCP). With the exception of the Galaxy IV
satellite, operated by PanAmSat, control of the satellites was automatically
switched to the spare SCP and the spacecraft are operating normally. The spare
SCP on the Galaxy IV satellite had also failed, however, resulting in the loss
of the satellite.
An extensive investigation by Hughes revealed that electrical shorts
involving tin-plated relay switches are the most likely cause of the primary SCP
failures. It appears the most probable cause of the electrical shorts is that
under certain conditions, a tiny, crystalline structure, less than the width of
a human hair, can grow and bridge a relay terminal to its case. Although there
exists the possibility of failure of other currently operating SCP's, Hughes
believes the probability of a primary and spare SCP failing in one in-orbit
HS-601 satellite is very low. Hughes is confident that the phenomenon will not
be repeated on satellites currently being built and those ready for launch. The
failure of the second SCP on Galaxy IV appears to be unrelated and is being
treated as an isolated anomaly.
- 41 -
HUGHES ELECTRONICS CORPORATION
Battery anomalies have occurred on two other Hughes-built PanAmSat
satellites. In both cases, battery cells have failed resulting in the need to
shut-off a number of transponders for a brief time during twice-yearly eclipse
periods. To date, the impact on customers has been minimal. There can be no
assurance, however, that service to all full-time customers will not be
interrupted for brief periods during future eclipse periods or that additional
battery cell failures will not occur in the future. Such future service
interruptions, depending on their extent, could result in a claim by affected
customers for termination of their transponder agreements. PanAmSat is
developing solutions for its customers that may include transition of
certain services to other PanAmSat satellites or the launch of replacement
satellites.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenues. Third quarter 1998 revenues increased 20.3% to $1,513.3 million
compared with $1,258.3 million in the third quarter of 1997. The increase
reflects continued record subscriber growth in the Direct-To-Home Broadcast
segment, increased sales of commercial satellites in the Satellite Systems
segment and increased sales of DIRECTV receiver equipment in the Network Systems
segment.
Direct-To-Home Broadcast segment third quarter 1998 revenues increased 33.6%
to $459.1 million from $343.7 million in the third quarter of 1997. The increase
resulted from continued strong subscriber growth, strong average monthly revenue
per subscriber and low subscriber churn rates. Domestic DIRECTV propelled this
growth with quarterly revenues of $408 million, a 37% increase over last year's
third quarter revenues of $298 million. With 303,000 net new subscribers in the
third quarter, total DIRECTV(R) subscribers grew to 4,058,000 in the United
States as of September 30, 1998. Hughes' Latin American DIRECTV subsidiary,
Galaxy Latin America ("GLA"), had third quarter revenues of $37 million compared
with $22 million in the third quarter of 1997. With the addition of 36,000 net
new subscribers in the third quarter, cumulative DIRECTV subscribers in Latin
America were 423,000 as of September 30, 1998. In addition, DIRECTV Japan had a
total of 181,900 subscribers by the end of the third quarter.
The Satellite Services segment third quarter 1998 revenues were up 9.5% to
$186.5 million compared with $170.3 million in the prior year. Overall revenue
from video services increased by 4% to $135.8 million, primarily due to
increased operating lease revenues from the commencement of service agreements
for full-time video distribution, as well as short-term special events.
Telecommunications services revenue increased by 16% to $40.7 million in the
third quarter, in large part due to the growth in data and Internet-related
service agreements.
For the third quarter of 1998, revenues for the Satellite Systems segment
increased 14.0% to $688.9 million from revenues of $604.3 million for the same
period in 1997. The increase in revenue was principally due to higher commercial
satellite sales to customers such as Thuraya Satellite Telecommunications
Company, ICO Global Communications and American Mobile
Radio Corporation.
Third quarter revenues for the Network Systems segment were $267.7 million
compared with $216.0 million in the same period last year, an increase of 23.9%.
The increase in revenues was primarily due to increased sales of DIRECTV
receiver equipment, which more than offset lower international sales of private
business networks.
Operating Profit. Operating profit in the quarter was $67.5 million compared
to $124.2 million in the third quarter of 1997. Third quarter operating profit
margin on the same basis decreased to 4.5% in 1998 from 9.9% in 1997. The
decrease in operating profit and operating profit margin resulted primarily from
an expected increase in operating losses in the Direct-To-Home Broadcast segment
and other increased expenses, including pension expense.
The Direct-To-Home Broadcast segment operating loss for the third quarter of
1998 was $61.8 million compared with an operating loss of $43.3 million in the
third quarter of 1997. The larger operating loss in 1998 was principally due to
expected higher sales and marketing expenditures that more than offset increased
subscriber revenues. The third quarter 1998 operating loss for the domestic
DIRECTV business was $31 million compared with $15 million for last year, and
GLA's third operating loss was $30 million compared with $26 million last year.
- 42 -
HUGHES ELECTRONICS CORPORATION
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 increased 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 third quarter rose
10.3% to $79.1 million from $71.7 million in 1997, resulting from the increased
video and telecommunications services revenue noted above. Operating profit
margin in the quarter increased slightly to 42.4% from 42.1% in the same period
of last year. In August 1998, Galaxy X, a PanAmSat satellite, was destroyed as a
result of the launch failure of a Boeing Delta III rocket. Galaxy X was fully
insured.
For the third quarter 1998, operating profit for the Satellite Systems
segment increased 20.2% to $63.8 million from $53.1 million in the prior year.
The increase in operating profit was principally due to the higher commercial
satellite sales noted above. Operating profit margin in the quarter increased to
9.3% from 8.8% last year, resulting from increased commercial satellite sales in
the current period.
The Network Systems segment operating profit in the third quarter of 1998 was
$16.9 million compared with an operating profit of $22.4 million in the third
quarter of 1997. Third quarter operating profit margin declined to 6.3% compared
with 10.4% in the same period last year. The decline in operating profit and
margin in the third quarter of 1998 was primarily due to lower international
sales of private business networks.
Costs and Expenses. Selling, general and administrative expenses increased to
$390.4 million in the third quarter of 1998 from $261.9 million in the same
period of 1997. The increase resulted primarily from increased programming,
marketing and subscriber acquisition costs in the Direct-To-Home Broadcast
segment and increased general and administrative expenditures in the Network
Systems segment. The increase in depreciation and amortization expenses to
$111.3 million in the third quarter of 1998 from $78.0 million in the same
period of 1997 resulted from increased capital expenditures in the
Direct-To-Home Broadcast and Satellite Services segments since September 1997,
and amortization of goodwill for the additional 9.5% interest in PanAmSat.
Interest Income and Expense. Interest income increased to $20.5 million in
the third quarter of 1998 compared with $10.4 million in the third quarter of
1997. The increase was due to the higher level of cash and cash equivalents
resulting from the Hughes Transactions. Interest expense decreased $20.8 million
in the third quarter of 1998 from the same period in 1997 due to the repayment
of debt in conjunction with the Hughes Transactions.
Other, net. The third quarter 1998 amount primarily relates to losses from
unconsolidated subsidiaries of $28.1 million compared with $11.2 million of
losses from unconsolidated subsidiaries in the third quarter of 1997.
Income Taxes. The effective income tax rate was 34.1% in the third quarter of
1998 and 37.7% in the third quarter of 1997. The decrease in the effective tax
rate resulted from Hughes increasing its ownership in PanAmSat in the second
quarter of 1998. As a result of Hughes' increased ownership in PanAmSat, Hughes
now benefits from the inclusion of PanAmSat in the Hughes consolidated tax
return.
Discontinued Operations. On December 15, 1997, Hughes sold substantially al
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 for 1997.
Net Earnings. 1998 third quarter earnings decreased to $42.9 million compared
with last year's $52.4 million. Earnings per share decreased to $0.11 per share
versus pro forma earnings per share of $0.13 in 1997. See Note 4 to the
financial statements for further discussion regarding pro forma presentation.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Revenues. For the first nine months of 1998, revenues increased 21.5 % to
$4,173.3 million compared with $3,433.7 million in the first nine months of
1997. This increase was primarily the result of record DIRECTV subscriber growth
in the Direct-To-Home Broadcast segment, the PanAmSat merger and increased
operating lease revenues for video, data and Internet-related services in the
Satellite Services segment, increased commercial satellite sales in the
Satellite Systems segment and higher DIRECTV equipment sales in the Network
Systems segment.
- 43 -
HUGHES ELECTRONICS CORPORATION
Direct-To-Home Broadcast segment revenues for the first nine months of 1998
increased 45.0% to $1,248.5 million from $861.0 million for the same period in
1997. The increase resulted from continued strong subscriber growth and average
monthly revenue per subscriber, as well as low subscriber churn rates.
For the first nine months of 1998, the Satellite Services segment revenues
increased 32.1% to $570.6 million from $432.0 million for the same period in
1997. The increase in revenues was primarily due to the May 1997 PanAmSat
merger, increased operating lease revenues from the commencement of service
agreements for full-time video distribution, as well as short-term special
events and increased growth in data and Internet-related service agreements.
Revenues for the first nine months of 1998 for the Satellite Systems segment
were $1,988.0 million compared to $1,748.1 million for the same period in 1997.
The 13.7% increase resulted principally from higher commercial satellite sales
to customers such as Thuraya Satellite Telecommunications Company, ICO Global
Communications and American Mobile
Radio Corporation.
Network Systems segment revenues for the first nine months of 1998 increased
10.6% to $674.1 million from $609.4 million for the first nine months of 1997.
The increase in revenues resulted from the growth in sales of DIRECTV receiver
equipment and the increased sales of private business networks and
satellite-based mobile telephony equipment offset by lower international sales.
Operating Profit. Driven by the above noted revenue growth, operating profit
for the first nine months of 1998 grew to $229.3 million versus $214.6 million
in 1997, an increase of 6.8%. The increase in operating profit for the first
nine months of 1998 resulted primarily from increased commercial satellite sales
in the Satellite Systems segment and continued strong performance in the
Satellite Services segment, primarily from the PanAmSat merger. These increases
were offset by higher sales and marketing expense in the Direct-To-Home
Broadcast segment, a provision for losses in the Network Systems segment and
higher other expenses. Operating profit margin on the same basis decreased to
5.5% compared with 6.2% in the first nine months of 1997. The decline in
operating profit margin for the first nine months of 1998 was principally due to
expected higher DIRECTV sales and marketing expenditures, a provision for
estimated losses related to the bankruptcy filing by a Network Systems segment
customer, goodwill amortization associated with the May 1997 PanAmSat merger and
a subsequent additional investment in PanAmSat by Hughes in May 1998 and other
increased expenses, including pension expense.
The Direct-To-Home Broadcast segment operating loss for the first nine months
of 1998 was $133.6 million compared with an operating loss of $158.7 million for
first nine months of 1997. The lower operating loss in 1998 was principally due
to increased subscriber revenues that more than offset higher sales and
marketing expenditures.
Resulting from the noted increased revenues, the Satellite Services segment
operating profit for the first nine months of 1998 increased 17.9% to $239.2
million from $202.9 million for the first nine months of 1997. Operating profit
margin in the period declined to 41.9% from 47.0% in the same period last year
primarily from increased goodwill amortization associated with the PanAmSat
merger, a provision for losses relating to the May 1998 failure of PanAmSat's
Galaxy IV satellite and increased depreciation expense resulting from increased
capital expenditures by PanAmSat.
For the first nine months of 1998, operating profit for the Satellite Systems
segment increased 12.0% to $178.9 million from $159.7 million. The increased
operating profit was principally due to the higher commercial satellite sales
noted above. Operating profit margin in the first nine months of 1998 declined
slightly to 9.0% from 9.1% in the prior year.
The Network Systems segment operating loss in the first nine months of 1998
was $20.2 million compared with an operating income of $6.1 million in the first
nine months of 1997. The operating loss was primarily due to a $26 million
provision for estimated losses associated with the bankruptcy filing by a
customer.
Cost and Expenses. Selling, general and administrative expenses increased to
$1,052.2 million from $714.0 million in the same period of 1997. The increase in
these expenses resulted primarily from increased programming, marketing and
subscriber acquisition costs in the Direct-To-Home Broadcast segment and
increased expenditures to support the growth in the remaining business segments.
Depreciation and amortization expenses increased to $309.2 million in the first
nine months of 1998 from $195.3 million for the same period in 1997. The
increase in depreciation and amortization expenses resulted from increased
capital expenditures in the Direct-To-Home Broadcast and Satellite Services
segments since September 1997, and amortization of goodwill related to the May
1997 PanAmSat merger as well as the purchase of an additional 9.5% interest in
PanAmSat in May 1998.
- 44 -
HUGHES ELECTRONICS CORPORATION
Interest Income and Expense. Interest income increased to $88.6 million in
the first nine months of 1998 from $18.1 million in the first nine months of
1997. The increase was due to the higher level of cash and cash equivalents
resulting from the Hughes Transactions. Interest expense decreased $ 48.6
million in the first nine months of 1998 from the same period in 1997 due to the
repayment of debt in conjunction with the Hughes Transactions.
Other, net. Other, net for the first nine months of 1998 relates primarily to
losses from unconsolidated subsidiaries of $79.0 million, attributable
principally to equity investments, and a provision for estimated losses
associated with bankruptcy filings by two customers. The amount for the first
nine months of 1997 includes the $489.7 million pre-tax gain recognized in
connection with the May 1997 PanAmSat merger offset by losses from
unconsolidated subsidiaries of $31.5 million.
Income Taxes. The effective income tax rate was 35.1% in the first nine
months of 1998 and 39.0% in the first nine months of 1997. The decrease in the
effective tax rate resulted from Hughes increasing its ownership of PanAmSat in
the second quarter of 1998. As a result of Hughes' increased ownership in
PanAmSat, Hughes now benefits from the inclusion of PanAmSat in the Hughes
consolidated tax return.
Net Earnings. Earnings for the first nine months of 1998 increased to $152.7
million compared with last year's $82.4 million, which excludes the $318.3
million after-tax gain ($0.80 per share) recognized in connection with the May
1997 PanAmSat merger. Earnings per share on the same basis increased to $0.38
per share versus pro forma earnings per share of $0.20 in 1997. Including the
gain associated with the PanAmSat merger, for the first nine months of 1997,
earnings and pro forma earnings per share were $400.7 million and $1.00,
respectively. 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 $1,509.7 million at
September 30, 1998 compared to $2,783.8 million at December 31, 1997. The
$1,274.1 million decrease was primarily due to the purchase of an additional
9.5% interest in PanAmSat, expenditures for PanAmSat satellites and cash paid to
General Motors for the Delco post-closing price adjustment, offset in part by
proceeds from insurance claims from the loss of the Galaxy IV and Galaxy X
satellites.
Cash provided by operating activities for the nine months ended September 30,
1998 was $313.7 million, compared to $315.0 million of cash provided by
operating activities for the same period in 1997.
Net cash used in investing activities was $1,584.2 million for the nine
months ended September 30, 1998 and $2,173.1 million for the same period in
1997. The 1998 investing activities reflect the purchase of an additional 9.5%
interest in PanAmSat, proceeds from insurance claims related to the loss of the
Galaxy IV and Galaxy X satellites, an increase in satellite expenditures and the
early buyout of satellite sale-leasebacks at PanAmSat. The 1997 investing
activities reflect the PanAmSat merger in May 1997.
Net cash used in financing activities was $3.6 million for the nine months
ended September 30, 1998 compared with net cash provided by financing activities
of $2,277.9 million for same period in 1997. The 1998 financing activities
reflect PanAmSat's net borrowings of $200.0 million, offset by the $204.7
million payment to GM for the Delco post-closing price adjustment. The 1997
financing activities resulted from former Hughes contributing $518.8 million to
Hughes and Hughes borrowing $1,725.0 million from GM for the PanAmSat merger.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at September 30, 1998 and December 31,
1997 was 2.39 and 3.24, respectively. Current assets decreased by $647.4 million
to $4,158.5 million at September 30, 1998 from $4,805.9 million at December 31,
1997, resulting primarily from the decrease in cash, noted above, offset by an
increase in accounts and notes receivable.
Dividend Policy and Use of Cash. The GM Board has decided that at this time
no cash dividends will be paid by Hughes to GM or by GM to holders of GM Class H
common stock to allow the earnings of Hughes to be retained for investment in
its business. Significant cash requirements in the next year related to capital
expenditures for property and equipment, including satellites, and equity
investments are expected to be funded from a combination of existing cash
balances, amounts available under existing credit facilities and additional
borrowings, if necessary. Also, although Hughes may be required to make a cash
payment to or receive a cash payment from Raytheon for a post-closing purchase
price adjustment in connection with the merger of Hughes Defense and Raytheon,
the amount of a cash payment to or from Raytheon, if any, is not determinable at
this time. (See further discussion in Note 10).
Debt and Credit Facilities. In January 1998, PanAmSat borrowed $125.0 million
under their five-year revolving credit facility, principally for the purpose of
exercising an early buyout 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, which
included the $125.0 million of borrowings noted above.
- 45 -
HUGHES ELECTRONICS CORPORATION
PanAmSat maintains a $500 million five-year revolving credit facility, which
provides for short-term and long-term borrowings, and a $500 million commercial
paper program, which provides for short-term borrowings. Borrowings under the
credit facility and commercial paper program are limited to $500 million in the
aggregate. There were $60.0 million of short-term borrowings against the
commercial paper program at September 30, 1998, principally for the purpose of
exercising an early buyout option on satellite sale-leaseback agreements.
In addition, 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 September
30, 1998.
Hughes believes that existing cash balances, amounts available under its
existing credit facilities and additional borrowings, if necessary, will provide
sufficient resources to meet currently identified working capital requirements,
satellite construction, debt service and other cash needs.
Year 2000
Many computer technologies made or used by Hughes throughout its business
have the potential for operational problems if they lack the ability to handle
the transition to the Year 2000. Computer technologies include both information
technology (IT) in the form of hardware and software, as well as non-information
technology (Non-IT) which include embedded technology such as microprocessors.
Because of the potential disruption that this issue could cause to Hughes and
its customers, a comprehensive, company wide, Year 2000 program was initiated in
1996 to identify and remediate potential Year 2000 problems. The Year 2000
program addresses both IT and Non-IT systems, related to internal systems and
Hughes' products and services.
Hughes' Year 2000 program is being implemented in seven phases:
1) Awareness - establish project teams made up of project leaders from
each Hughes operating company, assign responsibilities and establish
awareness of the Year 2000 issues. The awareness phase has been
completed.
2) Inventory - identify all systems within Hughes, determine if they are
critical and identify responsible personnel for compliance. The
inventory phase is substantially complete. Many of Hughes' systems are
already Year 2000 compliant, or had already been scheduled for
replacement as part of Hughes' ongoing systems plans.
3) Assessment - categorize all systems and determine activities that are
required to achieve compliance, including contacting and assessing the
Year 2000 readiness of material third party vendors and suppliers of
hardware and software. The assessment phase is substantially complete.
All critical systems have been identified in this phase and are the
primary focus of the project teams. Critical systems were identified
requiring remediation, including satellite control and communication
software, broadcast systems, and other systems utilized in customer
service/billing systems, engineering and manufacturing operations.
Hughes' in-orbit satellites do not have date dependent processing.
4) Remediation - modify, repair and replace categorized systems.
Remediation has begun on many systems and is targeted for completion by
the second quarter of 1999.
5) Testing - test remediated systems to assure normal function when placed
in their original operating environment and further test for Year 2000
compliance. Overall testing is completed at approximately the same time
as remediation due to the overlap of the remediation and testing
phases. Testing is currently underway and is expected to be a primary
focus of the project teams over the next several quarters. Hughes
expects to complete this phase shortly after the remediation phase,
with on-going review and follow-up.
6) Implementation - once a remediated system and its interfaces have been
successfully tested, the system will be put into its operating
environment. A number of remediated systems have already been put back
into operations. The majority of remediated systems will be put into
operations as testing is completed over the next several quarters.
7) Contingency Planning - development and execution of plans that narrow
the focus on specific areas of significant concern and concentrate
resources to address them. All Year 2000 critical systems are expected
to be Year 2000 compliant in a reasonably timely manner. However,
Hughes is planning to develop contingency plans to address the risk of
any system not being Year 2000 compliant and expects to complete such
plans by the end of the second quarter of 1999. Hughes currently
believes that the most reasonably likely worst case scenario is a
temporary loss of functionality in satellite control and communication
software. Contingency plans are being developed for this unlikely event
and would result in slightly higher operating costs until any remaining
Year 2000 problems are corrected.
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HUGHES ELECTRONICS CORPORATION
Hughes is utilizing both internal and external resources for the remediation
and testing of its systems that are undergoing Year 2000 modification. Hughes'
Year 2000 program is currently on schedule. Hughes has incurred and expensed
approximately $2.0 million through 1997 and approximately $4.5 million during
the first nine months of 1998, related to the assessment of, and on-going
efforts in connection with, its Year 2000 program. Future spending for system
remediation and testing are currently estimated to be from $12 million to $19
million, with the majority of the expense expected to be incurred during the
last quarter of 1998 and early 1999. Each Hughes operating company is funding
their respective Year 2000 efforts with existing IT budgets and current and
future operating cash flows. Hughes is currently substantially on target with
respect to its Year 2000 budget.
Hughes has initiated communications and is working with its suppliers and
other third parties in order to assess and reduce the risk that Hughes'
operations could be adversely affected by the failure of these third parties to
adequately address the Year 2000 issue. A large number of Hughes' third parties'
systems are currently expected to be Year 2000 compliant. For those third party
systems which are not yet Year 2000 compliant, Hughes will continue to identify
action plans or alternatives to meet Hughes' requirements.
In view of the foregoing, Hughes does not currently anticipate that it will
experience a significant disruption of its business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect Hughes and third parties that are critical to
Hughes' operations. For example, lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure could pose significant impediments to Hughes' ability to
carry on its normal operations. If the modifications and conversions required to
make Hughes Year 2000 ready are not made or are not completed on a timely basis
and in the event that Hughes is unable to implement adequate contingency plans
in the event that problems are encountered internally or externally by third
parties, the resulting problems could have a material adverse effect on Hughes'
results of operations and financial condition.
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 amounted to $5.3 million for the third quarters of 1998 and
1997 and $15.9 million for the nine months ended September 30, 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 were
$431.7 million at September 30, 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. 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.
- 47 -
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data*
Pro Forma Condensed Statement of Income
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ -------- ------- --------
(Dollars in Millions Except Per Share Amounts)
Total revenues $1,513.3 $1,258.3 $4,173.3 $3,433.7
Total operating costs and expenses 1,445.8 1,134.1 3,944.0 3,219.1
------- ------- ------- -------
Operating profit 67.5 124.2 229.3 214.6
Non-operating (loss) income (16.5) (31.8) (23.7) 412.6
Income taxes 17.4 34.8 72.1 244.5
Minority interests in net losses
(income)of subsidiaries 9.3 (5.1) 19.2 16.8
(Loss) income from discontinued
operations - (0.1) - 1.2
Earnings Used for Computation of
Available Separate
Consolidated Net Income $42.9 $52.4 $152.7 $400.7
==== ==== ===== =====
Earnings Attributable to
General Motors Class H
Common Stock on a Per Share Basis $0.11 $0.13 $0.38 $1.00
==== ==== ==== ====
Pro Forma Condensed Balance Sheet
September 30, December 31,
Assets 1998 1997
------------- ------------
(Dollars in Millions)
Total Current Assets $4,158.5 $4,805.9
Satellites, net 2,843.1 2,643.4
Property, net 965.9 889.7
Net Investment in Sales-type Leases 181.9 337.6
Intangible Assets, Investments and Other Assets, net 4,312.0 3,639.6
-------- --------
Total Assets $12,461.4 $12,316.2
======== ========
Liabilities and Stockholder's Equity
Total Current Liabilities $1,740.2 $1,482.6
Long-Term Debt 778.7 637.6
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 1,646.6 1,724.1
Minority Interests 469.0 607.8
Total Stockholder's Equity (1) 7,826.9 7,864.1
--------- ---------
Total Liabilities and Stockholder's Equity (1) $12,461.4 $12,316.2
======== ========
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes. 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).
- 48 -
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Continued
Pro Forma Selected Segment Data
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Millions)
Direct-To-Home Broadcast
Total Revenues $459.1 $343.7 $1,248.5 $861.0
Operating Loss $(61.8) $(43.3) $(133.6) $(158.7)
Depreciation and Amortization $31.2 $21.2 $77.2 $62.5
Capital Expenditures(1) $82.0 $24.0 $130.1 $54.2
Satellite Services
Total Revenues $186.5 $170.3 $570.6 $432.0
Operating Profit $79.1 $71.7 $239.2 $202.9
Operation Profit Margin 42.4% 42.1% 41.9% 47.0%
Depreciation and Amortization $56.6 $48.0 $169.8 $91.9
Capital Expenditures (2) $190.7 $191.0 $605.0 $543.7
Satellite Systems
Total Revenues $688.9 $604.3 $1,988.0 $1,748.1
Operating Profit $63.8 $53.1 $178.9 $159.7
Operation Profit Margin 9.3% 8.8% 9.0% 9.1%
Depreciation and Amortization $12.9 $9.9 $35.1 $27.7
Capital Expenditures $18.2 $28.1 $50.5 $68.2
Network Systems
Total Revenues $267.7 $216.0 $674.1 $609.4
Operating Income (Loss) $16.9 $22.4 $(20.2) $6.1
Operating Profit Margin 6.3% 10.4% - 1.0%
Depreciation and Amortization $11.4 $5.6 $29.8 $21.7
Capital Expenditures $10.7 $15.3 $26.4 $33.0
Eliminations and Other
Total Revenues $(88.9) $(76.0) $(307.9) $(216.8)
Operating Loss $(30.5) $20.3 $(35.0) $4.6
Depreciation and Amortization $(0.8) $(6.7) $(2.7) $(8.5)
Capital Expenditures $(21.4) $74.1 $114.5 $(147.6)
* The Financial Statements reflect the application of purchase accounting
adjustments related to GM's acquisition of Hughes. However, as provided
in the General Motor'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. In order to provide additional
analytical data, the above unaudited pro forma selected segment data, which
exclude the purchase accounting adjustments related to GM's acquisition of
Hughes, are presented.
(1)Includes expenditures related to satellites amounting to $38.0 million in
the third quarter and nine-month periods of 1998.
(2)Includes expenditures related to satellites amounting to $182.2 million,
$180.2 million, $422.2 million and $527.3 million, respectively. Also
included in the 1998 nine-month period is $155.5 million related to the early
buy-out of satellite sale-leasebacks.
- 49 -
HUGHES ELECTRONICS CORPORATION AND SUBSIDIARIES
Unaudited Summary Pro Forma Financial Data* - Concluded
Pro Forma Selected Financial Data
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Millions Except Per
Share Amounts)
Operating profit $68 $124 $229 $215
Income from continuing operations
before income taxes and
minority interests $51 $92 $206 $627
Earnings used for computation
of available separate
consolidated net income $43 $52 $153 $401
Average number of GM Class H
dividend base shares (1) 399.9 399.9 399.9 399.9
Stockholder's equity $7,827 $2,941 $7,827 $2,941
Working capital 2,418 791 2,418 791
Operating profit as a percent
of revenues 4.5% 9.9% 5.5% 6.2%
Income from continuing operations before
income taxes and minority interests
as a percent of revenues 3.4% 7.3% 4.9% 18.3%
Net income as a percent of revenues 2.8% 4.2% 3.7% 11.7%
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(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 105.7 million for
the third quarter of 1998 and 102.0 million for the third quarter of 1997.
* * * * * *
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