EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The following financial statements of Hughes Electronics Corporation (as more
fully described in Note 1 to the financial statements) were prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and, as such, include amounts based on judgments of management.
Management is further responsible for maintaining internal control designed
to provide reasonable assurance that the books and records reflect the
transactions of the companies and that established policies and procedures are
carefully followed. Perhaps the most important feature in internal control is
that it is continually reviewed for effectiveness and is augmented by written
policies and guidelines, the careful selection and training of qualified
personnel and a strong program of internal audit.
Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the
financial statements of Hughes Electronics Corporation and issue reports
thereon. The audit is conducted in accordance with generally accepted auditing
standards that comprehend the consideration of internal control and tests of
transactions to the extent necessary to form an independent opinion on the
financial statements prepared by management. The Independent Auditors' Report
appears on the next page.
The Board of Directors, through its Audit Committee, is responsible for
assuring that management fulfills its responsibilities in the preparation of the
financial statements and engaging the independent auditors. The Audit Committee
reviews the scope of the audits and the accounting principles being applied in
financial reporting. The independent auditors, representatives of management,
and the internal auditors meet regularly (separately and jointly) with the Audit
Committee to review the activities of each, to ensure that each is properly
discharging its responsibilities and to assess the effectiveness of internal
control. It is management's conclusion that internal control at December 31,
1998 provides reasonable assurance that the books and records reflect the
transactions of the company and that established policies and procedures are
complied with. To ensure complete independence, Deloitte & Touche LLP has full
and free access to meet with the Audit Committee, without management
representatives present, to discuss the results of the audit, the adequacy of
internal control, and the quality of financial reporting.
/s/MICHAEL T. SMITH /s/CHARLES H. NOSKI /s/ROXANNE S. AUSTIN
- ------------------- ------------------- --------------------
Michael T. Smith Charles H. Noski Roxanne S. Austin
Chairman of the Board and President and Chief Senior Vice
President and
Chief Executive Officer Operating Officer Chief Financial
Officer
IV-15
HUGHES ELECTRONICS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Hughes Electronics Corporation:
We have audited the accompanying Balance Sheet of Hughes Electronics
Corporation (as more fully described in Note 1 to the financial statements) as
of December 31, 1998 and 1997 and the related Statement of Income and Available
Separate Consolidated Net Income, Statement of Changes in Owner's Equity and
Statement of Cash Flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of Hughes
Electronics Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hughes Electronics Corporation at December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the accompanying financial statements, effective
January 1, 1998, Hughes Electronics Corporation changed its method of accounting
for costs of start-up activities by adopting American Institute of Certified
Public Accountants Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities.
/s/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
Los Angeles, California
January 20, 1999
(March 1, 1999 as to Note 19)
IV-16
HUGHES ELECTRONICS CORPORATION
STATEMENT OF INCOME AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME
Years Ended December 31,
------------------------
1998 1997 1996
-------- ------- -------
(Dollars in Millions
Except
Per Share Amounts)
Revenues
Product sales $3,360.3 $3,143.6 $3,009.0
Direct broadcast, leasing and other services 2,603.6 1,984.7 999.7
------- ------- --------
Total Revenues 5,963.9 5,128.3 4,008.7
------- ------- -------
Operating Costs and Expenses
Cost of products sold 2,627.3 2,493.3 2,183.7
Broadcast programming and other costs 1,175.7 912.3 631.8
Selling, general and administrative expenses 1,457.0 1,119.9 788.5
Depreciation and amortization 433.8 296.4 194.6
Amortization of GM purchase accounting
adjustments 21.0 21.0 21.0
---- ---- ----
Total Operating Costs and Expenses 5,714.8 4,842.9 3,819.6
------- ------- -------
Operating Profit 249.1 285.4 189.1
Interest income 112.3 33.1 6.8
Interest expense (17.5) (91.0) (42.9)
Other, net (153.1) 390.7 69.1
----- ----- -----
Income From Continuing Operations Before Income
Taxes, Minority Interests, Extraordinary Item
and Cumulative Effect of Accounting Change 190.8 618.2 222.1
Income taxes (44.7) 236.7 104.8
Minority interests in net losses of subsidiaries 24.4 24.8 52.6
------ ------ ------
Income from continuing operations before
extraordinary item and cumulative effect
of accounting change 259.9 406.3 169.9
Income (Loss) from discontinued operations,
net of taxes - 1.2 (7.4)
Gain on sale of discontinued operations,
net of taxes - 62.8 -
------ ------ ------
Income before extraordinary item and
cumulative effect of accounting change 259.9 470.3 162.5
Extraordinary item, net of taxes - (20.6) -
Cumulative effect of accounting change,
net of taxes (9.2) - -
------ ------ ------
Net Income 250.7 449.7 162.5
Adjustments to exclude the effect of GM purchase
accounting adjustments 21.0 21.0 21.0
------ ------ ------
Earnings Used for Computation of Available
Separate Consolidated Net Income $271.7 $470.7 $183.5
===== ===== =====
Available Separate Consolidated Net Income
Average number of shares of General Motors
Class H Common Stock outstanding
(in millions) (Numerator) 105.3 101.5 98.4
Class H dividend base (in millions) (Denominator) 399.9 399.9 399.9
Available Separate Consolidated Net Income $71.5 $119.4 $ 45.2
==== ===== =====
Earnings Attributable to General Motors
Class H Common Stock on a Per Share Basis
Income from continuing operations before
extraordinary item and cumulative effec
of accounting change $0.70 $1.07 $0.48
Discontinued operations - 0.16 (0.02)
Extraordinary item - (0.05) -
Cumulative effect of accounting change (0.02) - -
---- ------ ------
Earnings Attributable to General Motors
Class H Common Stock $0.68 $1.18 $0.46
==== ==== ====
- ---------------------
Reference should be made to the Notes to Financial Statements.
IV-17
HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
December 31,
------------
ASSETS 1998 1997
---- ----
(Dollars in Millions)
Current Assets
Cash and cash equivalents $1,342.1 $2,783.8
Accounts and notes receivable, net of
allowances of $23.9 and $15.2 922.4 630.0
Contracts in process, less advances and progress
payments of $27.0 and $50.2 783.5 575.6
Inventories 471.5 486.4
Prepaid expenses and other, including deferred
income taxes of $33.6 and $93.2 326.9 297.3
-------- --------
Total Current Assets 3,846.4 4,773.1
Satellites, net 3,197.5 2,643.4
Property, net 1,059.2 889.7
Net Investment in Sales-type Leases 173.4 337.6
Intangible Assets, net of accumulated amortization
of $413.2 and $318.3 3,552.2 2,954.8
Investments and Other Assets 1,606.3 1,132.4
--------- ---------
Total Assets $13,435.0 $12,731.0
======== ========
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
Accounts payable $764.1 $472.8
Advances on contracts 291.8 209.8
Deferred revenues 43.8 77.8
Current portion of long-term debt 156.1 -
Accrued liabilities 753.7 689.4
------- -------
Total Current Liabilities 2,009.5 1,449.8
------- -------
Long-Term Debt 778.7 637.6
Deferred Gains on Sales and Leasebacks 121.5 191.9
Accrued Operating Leaseback Expense 56.0 100.2
Postretirement Benefits Other Than Pensions 150.7 154.8
Other Liabilities and Deferred Credits 811.1 706.4
Deferred Income Taxes 643.9 570.8
Commitments and Contingencies
Minority Interests 481.7 607.8
Owner's Equity
Capital stock and additional paid-in capital 8,146.1 8,322.8
Net income retained for use in the business 257.8 7.1
------- -------
Subtotal Owner's Equity 8,403.9 8,329.9
------- -------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment (37.1) (34.8)
Accumulated unrealized gains on securities 16.1 21.4
Accumulated foreign currency translatio
adjustments (1.0) (4.8)
---- ----
Accumulated other comprehensive loss (22.0) (18.2)
--------- ---------
Total Owner's Equity 8,381.9 8,311.7
--------- ---------
Total Liabilities and Owner's Equity $13,435.0 $12,731.0
======== ========
- ------------------------
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Reference should be made to the Notes to Financial Statements.
IV-18
HUGHES ELECTRONICS CORPORATION
STATEMENT OF CHANGES IN OWNER'S EQUITY
(Dollars in Millions)
Capital Stock Net Income Accumulated
Parent and Retained Other
Company's Additional for Use in Compre- Total Compre-
Net Paid-In the hensive Owner's hensive
Investment Capital Business Income (Loss) Equity Income
---------- ------- -------- ------------- ------ ------
Balance at January 1, 1996 $2,615.1 $(6.2) $2,608.9
Net distribution to
Parent Company (280.6) (280.6)
Net income 162.5 162.5 $162.5
Foreign currency translation
adjustments 0.8 0.8 0.8
-----
Comprehensive income $163.3
------- ---- ------ =====
Balance at December 31, 1996 2,497.0 (5.4) 2,491.6
Net contribution from
Parent Company 1,124.2 1,124.2
Transfer of capital from
Parent Company's
net investment (4,063.8) $4,063.8 -
Capital contribution resulting
from the Hughes
Transactions 4,259.0 4,259.0
Minimum pension liability
adjustment resulting from
the Hughes Transactions (34.8) (34.8)
Unrealized gains on securities
resulting from the Hughes
Transactions 21.4 21.4
Net income 442.6 $7.1 449.7 $449.7
Foreign currency translation
adjustments 0.6 0.6 0.6
-----
Comprehensive income $450.3
------ ------- ---- ---- ------ =====
Balance at December 31, 1997 - 8,322.8 7.1 (18.2) 8,311.7
Net Income 250.7 250.7 $250.7
Delco post-closing price
adjustment (199.7) (199.7)
Tax benefit from exercise of
GM Class H common
stock options 23.0 23.0
Minimum pension liability
adjustment (2.3) (2.3) (2.3)
Foreign currency translation
adjustments 3.8 3.8 3.8
Unrealized gains on securities:
Unrealized holding gains 1.8 1.8 1.8
Less: reclassification
adjustment for gains
included in net income (7.1) (7.1) (7.1)
-----
Comprehensive income $246.9
------ ------- ---- ---- ---- =====
Balance at December 31, 1998 $ - $8,146.1 $257.8 $(22.0) $8,381.9
====== ======= ===== ==== =======
- --------------------------------
Reference should be made to the Notes to Financial Statements.
* * * * * * * * * * *
IV-19
HUGHES ELECTRONICS CORPORATION
STATEMENT OF CASH FLOWS
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(Dollars in Millions)
Cash Flows from Operating Activities
Net Income $250.7 $449.7 $162.5
Adjustments to reconcile net income
to net cash provided by continuing
operations
(Income) Loss from discontinued
operations, net of taxes - (1.2) 7.4
Gain on sale of discontinued operations,
net of taxes - (62.8) -
Extraordinary item, net of taxes - 20.6 -
Cumulative effect of accounting change,
net of taxes 9.2 - -
Depreciation and amortization 433.8 296.4 194.6
Amortization of GM purchase
accounting adjustments 21.0 21.0 21.0
Net gain on sale of investments and
businesses sold (13.7) (489.7) (120.3)
Gross profit on sales-type leases - (33.6) (51.8)
Deferred income taxes and other 153.2 285.5 91.9
Change in other operating assets
and liabilities
Accounts and notes receivable (97.5) (239.0) (87.0)
Contracts in process (230.9) (174.2) 54.1
Inventories 20.2 (60.7) (121.5)
Collections of principal on net
investment in sales-type leases 40.6 22.0 31.2
Accounts payable 277.3 (184.1) 116.8
Advances on contracts 82.0 (95.6) 97.6
Deferred revenues (34.0) (21.2) 80.6
Accrued liabilities 66.8 217.8 22.4
Deferred gains on sales and leasebacks (36.2) (42.9) (41.6)
Other (67.3) 102.5 (90.5)
------ ----- ------
Net Cash Provided by Continuing Operations 875.2 10.5 367.4
Net cash used by discontinued operations - (15.9) (8.0)
------ ------ ------
Net Cash Provided by (Used in)
Operating Activities 875.2 (5.4) 359.4
------ ------ ------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired (1,240.3) (1,798.8) (32.2)
Expenditures for property (343.6) (251.3) (261.5)
Increase in satellites (945.2) (633.5) (191.6)
Proceeds from sale of investments 12.4 242.0 -
Proceeds from the sale and leaseback of
satellite transponders with
General Motors Acceptance Corporation - - 252.0
Proceeds from the sale of minority
interest in subsidiary - - 137.5
Early buy-out of satellite under sale
and leaseback (155.5) - -
Proceeds from sale of discontinued operations - 155.0 -
Proceeds from disposal of property 20.0 55.1 15.3
Proceeds from insurance claims 398.9 - -
------- ------- -----
Net Cash Used in Investing Activities (2,253.3) (2,231.5) (80.5)
------- ------- -----
Cash Flows from Financing Activities
Long-term debt borrowings 1,165.2 2,383.3 -
Repayment of long-term debt (1,024.1) (2,851.9) -
Premium paid to retire debt - (34.4) -
Contributions from (distributions to)
Parent Company - 1,124.2 (279.8)
Payment to General Motors for Delco
post-closing price adjustment (204.7) - -
Capital infusion resulting from
Hughes Transactions - 4,392.8 -
------- ------- -------
Net Cash (Used in) Provided by
Financing Activities (63.6) 5,014.0 (279.8)
------ ------- -------
Net (decrease) increase in cash and
cash equivalents (1,441.7) 2,777.1 (0.9)
Cash and cash equivalents at
beginning of the year 2,783.8 6.7 7.6
------- ------- ----
Cash and cash equivalents at end of the year $1,342.1 $2,783.8 $6.7
======= ======= ====
- --------------------
Certain 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation.
Reference should be made to the Notes to Financial Statements.
IV-20
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1: Basis of Presentation and Description of Business
On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics")
and General Motors Corporation ("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 tracking stock, GM Class H common stock, that is linked to the
remaining telecommunications and space business. 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 or Parent Company.
In connection with the recapitalization of Hughes Electronics on December 17,
1997, the telecommunications and space business of former Hughes, consisting
principally of its direct-to-home broadcast, satellite services, satellite
systems and network systems businesses, was contributed to the recapitalized
Hughes Electronics. Such telecommunications and space business, both before and
after the recapitalization, is 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. For the period prior to December 18,
1997, these 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, prior to December 18, 1997, interest expense in the
Statement of Income and Available Separate Consolidated Net Income included an
allocated share of total former Hughes' interest expense.
The Hughes Transactions had a significant impact on the Hughes balance sheet.
Prior to the consummation of the Hughes Transactions, Hughes participated in the
centralized cash management system of former Hughes, wherein cash receipts were
transferred to and cash disbursements were funded by former Hughes on a daily
basis. Accordingly, Hughes' balance sheet included only cash and cash
equivalents held directly by the telecommunications and space business. In
conjunction with the completion of the Hughes Transactions, certain assets and
liabilities were contributed by former Hughes to Hughes. The contributed assets
and liabilities consisted principally of cash, pension assets and liabilities,
liabilities for other postretirement benefits, deferred taxes, property and
equipment, and other miscellaneous items. In addition, Hughes received $4.0
billion of cash proceeds from the borrowings incurred by Hughes Defense prior to
its spin-off to GM.
The accompanying financial statements include the applicable portion of
intangible assets, including goodwill, and related amortization resulting from
purchase accounting adjustments associated with GM's purchase of Hughes in 1985.
Hughes is a leading manufacturer of communications satellites and provider of
satellite-based services. It owns and operates one of the world's largest
private fleets of geostationary communications satellites and is the world's
leading supplier of satellite-based private business networks. Hughes is also a
leader in the direct broadcast satellite market with its programming
distribution service known as DIRECTV(R), which was introduced in the U.S. in
1994 and was the first high-powered, all digital, Direct-To-Home ("DTH")
television distribution service in North America. DIRECTV began service in Latin
America in 1996 and Japan in 1997. Hughes also provides communications equipment
and services in the mobile communications and packet switching markets. Its
equipment and services are applied in, among other things, data, video and audio
transmission, cable and network television distribution, private business
networks, digital cellular communications and DTH satellite broadcast
distribution of television programming.
IV-21
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 2: Summary of Significant Accounting Policies
Principles of Combination and Consolidation
Prior to December 18, 1997, the financial statements present the financial
position, results of operations and cash flows of the telecommunications and
space business owned and operated by former Hughes on a combined basis.
Subsequent to the Hughes Transactions, the accompanying financial statements are
presented on a consolidated basis. The financial statements include the accounts
of Hughes and its domestic and foreign subsidiaries that are more than 50% owned
or controlled by Hughes, with investments in associated companies in which
Hughes owns at least 20% of the voting securities or has significant influence
accounted for under the equity method of accounting.
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may be based upon amounts which differ from those estimates.
Revenue Recognition
Revenues are generated from sales of satellites and telecommunications
equipment, DTH broadcast subscriptions, and the sale of transponder capacity and
related services through outright sales, sales-type leases and operating lease
contracts.
Sales under long-term contracts are recognized primarily using the
percentage-of-completion (cost-to-cost) method of accounting. Under this method,
sales are recorded equivalent to costs incurred plus a portion of the profit
expected to be realized, determined based on the ratio of costs incurred to
estimated total costs at completion. Profits expected to be realized on
long-term contracts are based on estimates of total sales value and costs at
completion. These estimates are reviewed and revised periodically throughout the
lives of the contracts, and adjustments to profits resulting from such revisions
are recorded in the accounting period in which the revisions are made. Estimated
losses on contracts are recorded in the period in which they are identified.
Certain contracts contain cost or performance incentives which provide for
increases in profits for surpassing stated objectives and decreases in profits
for failure to achieve such objectives. Amounts associated with incentives are
included in estimates of total sales values when there is sufficient information
to relate actual performance to the objectives.
Sales which are not pursuant to long-term contracts are generally recognized
as products are shipped or services are rendered. DTH subscription revenues are
recognized when programming is viewed by subscribers. Programming payments
received from subscribers in advance of viewing are recorded as deferred revenue
until earned.
Satellite transponder lease contracts qualifying for capital lease treatment
(typically based on the term of the lease) are accounted for as sales-type
leases, with revenues recognized equal to the net present value of the future
minimum lease payments. Upon entering into a sales-type lease, the cost basis of
the transponder is removed and charged to cost of products sold. The portion of
each periodic lease payment deemed to be attributable to interest income is
recognized in each respective period. Contracts for sales of transponders
typically include telemetry, tracking and control ("TT&C") service agreements.
Revenues related to TT&C service agreements are recognized as the services are
performed.
Transponder and other lease contracts that do not qualify as sales-type
leases are accounted for as operating leases. Operating lease revenues are
recognized on a straight-line basis over the respective lease term. Differences
between operating lease payments received and revenues recognized are deferred
and included in accounts and notes receivable or investments and other assets.
Hughes has entered into agreements for the sale and leaseback of certain of
its satellite transponders. The leaseback transactions have been classified as
operating leases and, therefore, the capitalized cost and associated
depreciation related to satellite transponders sold are not included in the
accompanying financial statements. Gains resulting from such transactions are
deferred and amortized over the leaseback period. Leaseback expense is recorded
using the straight-line method over the term of the lease, net of amortization
of the deferred gains. Differences between operating leaseback payments made and
expense recognized are deferred and included in accrued operating leaseback
expense.
IV-22
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 2: Summary of Significant Accounting Policies - Continued
Cash Flows
Cash equivalents consist of highly liquid investments purchased with original
maturities of 90 days or less.
Net cash from operating activities includes cash payments made for interest
of $53.2 million, $156.8 million and $55.8 million in 1998, 1997 and 1996,
respectively. Net cash refunds received by Hughes for prior year income taxes
amounted to $59.9 million in 1998. Cash payments for income taxes amounted to
$24.0 million and $36.5 million in 1997 and 1996, respectively.
Certain non-cash transactions occurred in connection with the consummation of
the Hughes Transactions on December 17, 1997, resulting in a contribution of a
net liability of $133.8 million.
In 1997, in a separate non-cash transaction, Hughes' subsidiary, PanAmSat
Corporation ("PanAmSat"), converted its outstanding preferred stock into debt
amounting to $438.5 million.
Contracts in Process
Contracts in process are stated at costs incurred plus estimated profit, less
amounts billed to customers and advances and progress payments applied.
Engineering, tooling, manufacturing, and applicable overhead costs, including
administrative, research and development and selling expenses, are charged to
costs and expenses when incurred. Contracts in process include amounts relating
to contracts with long production cycles, with $151.0 million of the 1998 amount
expected to be billed after one year. Amounts billed under retainage provisions
of contracts are not significant, and substantially all amounts are collectible
within one year. Under certain contracts with the U.S. Government, progress
payments are received based on costs incurred on the respective contracts. Title
to the inventories related to such contracts (included in contracts in process)
vests with the U.S. Government.
Inventories
Inventories are stated at the lower of cost or market principally using the
average cost method.
Major Classes of Inventories
(Dollars in Millions) 1998 1997
------ -----
Productive material and supplies $73.4 $57.5
Work in process 285.1 328.5
Finished goods 113.0 100.4
----- -----
Total $471.5 $486.4
===== =====
Property, Satellites and Depreciation
Property and satellites are carried at cost. Satellite costs include
construction costs, launch costs, launch insurance and capitalized interest.
Capitalized satellite costs represent the costs of successful satellite
launches. Satellite costs related to unsuccessful launches, net of insurance
proceeds, are recognized in the period of failure. Depreciation is computed
generally using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lesser of the life of the
asset or term of the lease.
Intangible Assets
Intangible assets, a majority of which is goodwill, are amortized using the
straight-line method over periods not exceeding 40 years.
Software Development Costs
Other assets include certain software development costs capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. Capitalized software development costs at December 31, 1998 and 1997,
net of accumulated amortization of $70.6 million and $107.7 million,
respectively, totaled $104.1 million and $99.0 million. The software is
amortized using the greater of the units of revenue method or the straight-line
method over its useful life, not in excess of five years. Software program
reviews are conducted to ensure that capitalized software development costs are
properly treated and costs associated with programs that are not generating
revenues are appropriately written-off.
IV-23
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 2: Summary of Significant Accounting Policies - Continued
Valuation of Long-Lived Assets
Hughes periodically evaluates the carrying value of long-lived assets to be
held and used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair market values are reduced for
the cost of disposal.
Research and Development
Expenditures for research and development are charged to costs and expenses
as incurred and amounted to $121.4 million in 1998, $120.4 million in 1997 and
$94.6 million in 1996.
Foreign Currency
Substantially all of Hughes' foreign operations have determined the local
currency to be their functional currency. Accordingly, these foreign entities
translate assets and liabilities from their local currencies to U.S. dollars
using year-end exchange rates while income and expense accounts are translated
at the average rates in effect during the year. The resulting translation
adjustment is recorded as part of accumulated other comprehensive income (loss),
a separate component of owner's equity. Gains and losses resulting from
remeasurement into the functional currency of transactions denominated in
non-functional currencies are recognized in earnings. Net foreign currency
transaction gains and losses included in the operating results were not material
for all years presented.
Financial Instruments and Investments
Hughes maintains investments in equity securities of unaffiliated companies.
These investments are considered available-for-sale and carried at current fair
value with unrealized gains or losses, net of tax, reported as part of
accumulated other comprehensive income (loss), a separate component of owner's
equity. Fair value is determined by market quotes, when available, or by
management estimate.
Market values of financial instruments, other than debt and derivative
instruments, are based upon management estimates. Market values of debt and
derivative instruments are determined by quotes from financial institutions.
The carrying value of cash and cash equivalents, accounts and notes
receivable, investments and other assets, accounts payable, amounts included in
accrued liabilities meeting the definition of a financial instrument and debt
approximated fair value at December 31, 1998.
Hughes' derivative contracts primarily consist of foreign exchange-forward
contracts. Hughes enters into these contracts to reduce its exposure to
fluctuations in foreign exchange rates. Foreign exchange-forward contracts are
accounted for as hedges to the extent they are designated as, and are effective
as, hedges of firm foreign currency commitments. Gains and losses on foreign
exchange-forward contracts designated as hedges of firm foreign currency
commitments are recognized in income in the same period as gains and losses on
the underlying transactions are recognized.
IV-24
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 2: Summary of Significant Accounting Policies - Concluded
Stock Compensation
Hughes issues stock options to employees with grant prices equal to the fair
value of the underlying security at the date of grant. No compensation cost has
been recognized for options in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. See Note 10 for information regarding the pro forma effect on
earnings of recognizing compensation cost based on the estimated fair value of
the stock options granted, as required by SFAS No. 123, Accounting for
Stock-Based Compensation.
Compensation related to stock awards is recognized ratably over the vesting
period and, where required, periodically adjusted to reflect changes in the
stock price of the underlying security.
Market Concentrations and Credit Risk
Sales under U.S. Government contracts were 12.4%, 15.3% and 22.5% of total
revenues in 1998, 1997 and 1996, respectively. Hughes provides services and
extends credit to a large number of customers in the commercial satellite
communications market and to a large number of residential consumers. Management
monitors its exposure to credit losses and maintains allowances for anticipated
losses.
Accounting Change
In 1998, Hughes adopted American Institute of Certified Pubic Accountants
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs previously capitalized be
written off and recognized as a cumulative effect of accounting change, net of
taxes, as of the beginning of the year of adoption. On a prospective basis,
these types of costs are required to be expensed as incurred. The unfavorable
cumulative effect of this accounting change at January 1, 1998 was $9.2 million
after-tax, or $0.02 per share of GM Class H common stock.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 requires all derivatives to be recorded as either assets or liabilities and
the instruments to be measured at fair value. Gains or losses resulting from
changes in the values of those derivatives are to be recognized immediately or
deferred depending on the use of the derivative and whether or not it qualifies
as a hedge. Hughes plans to adopt SFAS No. 133 by January 1, 2000, as required.
Management is currently assessing the impact of this statement on Hughes'
results of operations and financial position.
Note 3: Property and Satellites, Net
Estimated
Useful Lives
(Dollars in Millions) (years) 1998 1997
---------------- ----- -----
Land and improvements 5 - 25 $51.7 $51.2
Buildings and unamortized leasehold
improvements 2 - 45 321.8 305.8
Machinery and equipment 3 - 12 1,163.1 1,015.4
Furniture, fixtures and office
machines 3 - 10 80.2 83.2
Construction in progress - 285.3 169.9
-------- -------
Total 1,902.1 1,625.5
Less accumulated depreciation 842.9 735.8
-------- -------
Property, net $1,059.2 $889.7
======= =====
Satellites 9 - 16 $3,783.2 $3,051.9
Less accumulated depreciation 585.7 408.5
-------- --------
Satellites, net $3,197.5 $2,643.4
======= =======
Hughes capitalized interest of $55.3 million, $64.5 million and $12.9 million
for 1998, 1997 and 1996, respectively, as part of the cost of its satellites
under construction.
IV-25
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 4: Leasing Activities
Future minimum lease payments due from customers under noncancelable
satellite transponder operating leases, exclusive of amounts due from subleases
reported below, are $550.5 million in 1999, $498.9 million in 2000, $477.6
million in 2001, $462.5 million in 2002, $440.7 million in 2003 and $2,031.7
million thereafter.
The components of the net investment in sales-type leases are as follows:
(Dollars in Millions) 1998 1997
--------------------- ---- ----
Total minimum lease payments $301.9 $662.5
Less unearned interest income and
allowance for doubtful accounts 106.0 297.1
----- -----
Total net investment in sales-type leases 195.9 365.4
Less current portion 22.5 27.8
---- ----
Total $173.4 $337.6
====== ======
Future minimum payments due from customers under sales-type leases and
related service agreements as of December 31, 1998 are as follows:
Minimum Service
Lease Agreement
(Dollars in Millions) Payments Payments
- --------------------- -------- --------
1999 $46.1 $4.5
2000 44.7 5.7
2001 45.8 5.7
2002 44.9 5.7
2003 43.4 5.7
Thereafter 77.0 10.4
---- ----
Total $301.9 $37.7
===== ====
In February 1996, Hughes entered into a sale-leaseback agreement for certain
satellite transponders on Galaxy III-R with General Motors Acceptance
Corporation ("GMAC"), a subsidiary of GM. Proceeds from the sale were $252.0
million, and the sale resulted in a deferred gain of $108.8 million. In 1992 and
1991, Hughes entered into sale-leaseback agreements for certain transponders on
Galaxy VII and SBS-6, respectively, resulting in deferred gains of $180.0
million in 1992 and $96.1 million in 1991. Deferred gains from sale-leaseback
agreements are amortized over the expected term of leaseback period. In 1998,
PanAmSat exercised certain early buy-out options on the SBS-6 transaction and
repurchased the transponders for a total payment of $155.5 million. In January
1999, PanAmSat exercised early buy-out options for $141.3 million related to
certain transponders on Galaxy VII, and has remaining early buy-out options of
approximately $227.0 million on Galaxy III-R and Galaxy VII that can be
exercised later in 1999.
As of December 31, 1998, the future minimum leaseback amounts payable to
lessors under the operating leasebacks and the future minimum sublease amounts
due from subleases under noncancelable subleases are as follows:
Minimum
Leaseback Sublease
(Dollars in Millions) Payments Amounts
- --------------------- -------- -------
1999 $90.9 $57.5
2000 120.3 58.2
2001 71.9 53.2
2002 110.9 49.5
2003 26.6 34.2
------ ------
Total $420.6 $252.6
===== =====
IV-26
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 5: Accrued Liabilities
(Dollars in Millions) 1998 1997
---- ----
Payroll and other compensation $196.5 $200.2
Contract-related provisions 138.0 76.0
Reserve for consumer finance and
rebate programs 93.0 86.9
Other 326.2 326.3
----- -----
Total $753.7 $689.4
====== ======
Note 6: Long-Term Debt
(Dollars in Millions) 1998 1997
------ -----
Notes payable $750.0 $ -
Revolving credit facilities 155.9 500.0
Bridge loan - 100.0
Other 28.9 37.6
------ ------
Total debt 934.8 637.6
Less current portion 156.1 -
----- ------
Total long-term debt $778.7 $637.6
===== =====
Notes payable consisted of five, seven, ten and thirty-year notes totaling
$750.0 million issued by PanAmSat in January 1998. The proceeds received were
used by PanAmSat to repay the revolving credit facility of $500.0 million and
bridge loan of $100.0 million outstanding at December 31, 1997. The outstanding
principal balances and interest rates for the five, seven, ten and thirty-year
notes as of December 31, 1998 were $200.0 million at 6.00%, $275.0 million at
6.13%, $150.0 million at 6.38% and $125.0 million at 6.88%, respectively.
Principal on the notes is payable at maturity, while interest is payable
semi-annually.
At December 31, 1998, Hughes' 59.1% owned subsidiary, SurFin Ltd. ("SurFin"),
had a total of $155.9 million outstanding under two separate $150.0 million
unsecured revolving credit facilities. The first matures on April 30, 1999 and
the second matures on July 31, 1999. Both credit facilities, which are expected
to be renewed, are subject to a facility fee of 0.10% per annum. Borrowings
under these credit facilities bear interest at the Eurodollar Rate plus 0.15%
and were included in current portion of long-term debt.
Other long-term debt at December 31, 1998 and 1997 consisted primarily of
notes bearing fixed rates of interest of 9.61% to 11.11%. Principal is payable
at maturity in April 2007 while interest is payable semi-annually. Also included
in other long-term debt at December 31, 1997 was $9.1 million of PanAmSat Senior
Notes which were repaid in 1998.
As part of a debt refinancing program undertaken by PanAmSat in 1997, an
extraordinary charge of $20.6 million ($34.4 million before taxes) was recorded,
related to the excess of the price paid for the debt over its carrying value,
net of deferred financing costs.
The aggregate maturities of long-term debt for the five years subsequent to
December 31, 1998 are $156.1 million in 1999, $200.0 million in 2003 and $578.7
million thereafter.
Hughes has $1.0 billion of unused credit available under two unsecured
revolving credit facilities, consisting of a $750.0 million multi-year facility
and a $250.0 million 364-day facility. The multi-year credit facility provides
for a commitment of $750.0 million through December 5, 2002, subject to a
facility fee of 0.07% per annum. Borrowings bear interest at a rate which
approximates the London Interbank Offered Rate ("LIBOR") plus 0.155%. The
364-day credit facility provides for a commitment of $250.0 million through
December 1, 1999, subject to a facility fee of 0.05% per annum. Borrowings bear
interest at a rate which approximates LIBOR plus 0.25%, with an additional
0.125% utilization fee when borrowings exceed 50% of the commitment. No amounts
were outstanding under either facility at December 31, 1998. These facilities
provide backup capacity for Hughes' $1.0 billion commercial paper program. No
amounts were outstanding under the commercial paper program at December 31,
1998.
PanAmSat maintains a $500.0 million multi-year revolving credit facility that
provides for short-term and long-term borrowings and a $500.0 million commercial
paper program that provides for short-term borrowings. The multi-year revolving
credit facility provides for a commitment through December 24, 2002, subject to
a facility fee of 0.10% per annum. Borrowings bear interest at a rate which
approximates LIBOR plus 0.30%. Borrowings under the credit facility and
commercial paper program are limited to $500.0 million in the aggregate. No
amounts were outstanding under either agreement at December 31, 1998.
IV-27
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 7: Income Taxes
The provision for income taxes is based on reported income from continuing
operations before income taxes, minority interests, extraordinary item and
cumulative effect of accounting change. Deferred income tax assets and
liabilities reflect the impact of temporary differences between the amounts of
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes, as measured by applying currently enacted
tax laws.
Hughes and former Hughes (prior to December 18, 1997), and their domestic
subsidiaries join with General Motors in filing a consolidated U.S. Federal
income tax return. The portion of the consolidated income tax liability recorded
by Hughes is generally equivalent to the liability it would have incurred on a
separate return basis.
Prior to December 18, 1997, certain income tax assets and liabilities were
maintained by former Hughes. Income tax expense was allocated to Hughes as if
Hughes filed a separate income tax return. In connection with the Hughes
Transactions, certain income tax assets and liabilities were contributed to and
assumed by Hughes on December 17, 1997 and are included in the accompanying
balance sheet.
The income tax provision consisted of the following:
(Dollars in Millions) 1998 1997 1996
------ ------ -----
U.S. Federal, state and foreign taxes currently
(refundable) payable $(177.3) $24.0 $36.5
U.S. Federal, state and foreign deferred tax
liabilities, net 132.6 212.7 68.3
----- ----- -----
Total income tax (benefit) provision $(44.7) $236.7 $104.8
==== ===== =====
Income from continuing operations before income taxes, minority interests,
extraordinary item and cumulative effect of accounting change included the
following components:
(Dollars in Millions) 1998 1997 1996
------ ------ -----
U.S. income $283.8 $659.4 $218.4
Foreign (loss) income (93.0) (41.2) 3.7
------ ------ -------
Total $190.8 $618.2 $222.1
===== ===== =====
The combined income tax provision was different than the amount computed
using the U.S. Federal statutory income tax rate for the reasons set forth in
the following table:
(Dollars in Millions) 1998 1997 1996
------ ------ -----
Expected tax at U.S. Federal statutory
income tax rate $66.8 $216.4 $77.7
Research and experimentation tax benefits (183.6) (39.3) -
Foreign sales corporation tax benefit (30.1) (25.5) (24.0)
U.S. state and local income taxes 13.7 24.8 9.4
Purchase accounting adjustments 7.3 7.3 7.3
Losses of equity method investees 36.7 18.7 14.8
Minority interests in losses of partnership 19.3 17.5 17.7
Non-deductible goodwill amortization 20.1 9.7 -
Other 5.1 7.1 1.9
----- ------ ------
Total income tax (benefit) provision $(44.7) $236.7 $104.8
==== ===== =====
IV-28
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 7: Income Taxes - Concluded
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities at December 31 were as follows:
1998 1997
---- ----
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
(Dollars in Millions) Assets Liabilities Assets Liabilities
- --------------------- ------ ----------- ------ -----------
Profits on long-term contracts $145.5 $155.5 $156.0 $142.8
Sales and leasebacks 65.4 - 85.8 -
Employee benefit programs 68.3 101.3 64.3 114.0
Postretirement benefits other
than pensions 72.3 - 72.9 -
Customer deposits and rebates 52.9 - 61.9 -
State taxes 38.8 - 50.0 -
Gain on PanAmSat merger - 191.1 - 195.0
Satellite launch insurance costs - 103.1 - 43.7
Depreciation - 470.9 - 438.6
Net operating loss and tax credit
carryforwards 77.8 - - -
Sale of equity interest in DIRECTV - 47.5 - 48.7
Other 32.8 30.5 63.9 35.4
------ ------- ------- -------
Subtotal 553.8 1,099.9 554.8 1,018.2
Valuation allowance (64.2) - (14.2) -
------ ------- ------- -------
Total deferred taxes $489.6 $1,099.9 $540.6 $1,018.2
===== ======= ===== =======
No income tax provision has been made for the portion of undistributed
earnings of foreign subsidiaries deemed permanently reinvested that amounted to
approximately $18.5 million and $18.2 million at December 31, 1998 and 1997,
respectively. Repatriation of all accumulated earnings would have resulted in
tax liabilities of $6.4 million in 1998 and $5.4 million in 1997.
At December 31, 1998, Hughes has $63.9 million of foreign operating loss
carryforwards expiring in varying amounts between 1999 and 2003. A valuation
allowance was provided for all of the foreign operating loss carryforwards.
Hughes has an agreement with Raytheon which governs Hughes' rights and
obligations with respect to U.S. Federal and state income taxes for all periods
prior to the merger of Hughes Defense with Raytheon. Hughes is responsible for
any income taxes pertaining to those periods prior to the merger, including any
additional income taxes resulting from U.S. Federal and state tax audits. Hughes
is also entitled to any U.S. Federal and state income tax refunds relating to
those years.
The U.S. Federal income tax returns of former Hughes have been examined
through 1990. All years prior to 1983 are closed. Issues relating to the years
1983 through 1990 are being contested through various stages of administrative
appeal. The Internal Revenue Service ("IRS") is currently examining former
Hughes' U.S. Federal tax returns for years 1991 through 1994. Management
believes that adequate provision has been made for any adjustment which might be
assessed for open years.
Hughes reached an agreement with the IRS regarding a claim for refund of U.S.
Federal income taxes related to the treatment of research and experimentation
costs for the years 1983 through 1995. Hughes recorded a total of $183.6 million
of research and experimentation tax benefits during 1998, a substantial portion
of which related to the above noted agreement with the IRS and covered prior
years.
Note 8: Retirement Programs and Other Postretirement Benefits
Hughes adopted SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits. SFAS No. 132 required changes in disclosure
of certain information about pensions and other postretirement benefits.
Substantially all of Hughes' employees participate in Hughes' contributory
and non-contributory defined benefit retirement plans. Benefits are based on
years of service and compensation earned during a specified period of time
before retirement. Additionally, an unfunded, nonqualified pension plan covers
certain employees. Hughes also maintains a program for eligible retirees to
participate in health care and life insurance benefits generally until they
reach age 65. Qualified employees who elected to participate in the Hughes
contributory defined benefit pension plans may become eligible for these health
care and life insurance benefits if they retire from Hughes between the ages of
55 and 65.
IV-29
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 8: Retirement Programs and Other Postretirement Benefits - Continued
Prior to December 18, 1997, the pension-related assets and liabilities and
the postretirement benefit plans were maintained by former Hughes for its
non-automotive businesses and were not included in the Hughes balance sheet. A
portion of former Hughes' net pension expense or income and postretirement
benefit cost was allocated to Hughes and is included in the Statement of Income
and Available Separate Consolidated Net Income. The net pension expense
allocation was $12.3 million and $12.2 million for 1997 and 1996, respectively.
For 1997 and 1996, the pension expense components including benefits earned
during the year, interest accrued on benefits earned in prior years, actual
return on assets and net amortization and deferral, were not determined
separately for the Hughes participants. The postretirement benefit cost
allocated to Hughes was $11.2 million and $10.4 million for 1997 and 1996,
respectively. For 1997 and 1996, the postretirement benefit cost components,
including benefits earned during the year, interest accrued on benefits earned
in prior years and net amortization, were not determined separately for the
Hughes employees. The 1997 information presented below is based on pro rata
allocations from former Hughes for each pension and postretirement benefit
component.
The components of the pension benefit obligation and the other postretirement
benefit obligation, as well as the net benefit obligation recognized in the
balance sheet, are shown below:
Other
Postretirement
Pension Benefits Benefits
---------------- --------
(Dollars in Millions) 1998 1997 1998 1997
---- ---- ---- ----
Change in Benefit Obligation
Net benefit obligation at beginning
of year $1,556.4 $1,490.5 $135.6 $132.3
Service cost 57.5 47.9 3.6 3.6
Interest cost 110.8 110.3 9.3 9.1
Plan participants' contributions 14.1 13.7 - -
Actuarial loss 66.6 32.4 35.1 4.1
Acquisitions/divestitures - (17.6) - -
Benefits paid (151.3) (120.8) (12.0) (13.5)
------- ------- ----- -----
Net benefit obligation at end of year 1,654.1 1,556.4 171.6 135.6
------- ------- ----- -----
Change in Plan Assets
Fair value of plan assets at
beginning of year 1,906.1 1,716.4 - -
Actual return on plan assets 165.0 302.4 - -
Employer contributions 20.3 12.0 12.0 13.5
Plan participants' contributions 14.1 13.7 - -
Acquisitions/divestitures - (17.6) - -
Benefits paid (151.3) (120.8) (12.0) (13.5)
Transfers 4.7 - - -
------- ------- ---- -----
Fair value of plan assets at end of year 1,958.9 1,906.1 - -
------- ------- ---- -----
Funded status at end of year 304.8 349.7 (171.6) (135.6)
Unamortized asset at date of adoption - (12.8) - -
Unamortized amount resulting from
changes in plan provision 4.4 5.1 - -
Unamortized net amount resulting
from changes in plan experience
and actuarial assumptions (80.8) (122.3) 4.9 (31.0)
----- ------ --- -----
Net amount recognized at end of year $228.4 $219.7 $(166.7) $(166.6)
===== ===== ===== =====
Amounts recognized in the balance
sheet consist of:
Prepaid benefit cost $248.1 $227.0 - -
Accrued benefit cost (89.3) (83.8) $(166.7) $(166.6)
Intangible asset 7.4 18.0 N/A N/A
Deferred tax assets 25.1 23.7 N/A N/A
Accumulated other comprehensive loss 37.1 34.8 N/A N/A
----- ----- ----- ------
Net amount recognized at end of year $228.4 $219.7 $(166.7) $(166.6)
===== ===== ===== =====
IV-30
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 8: Retirement Programs and Other Postretirement Benefits - Concluded
Included in the pension plan assets at December 31, 1998 are GM Class H
common stock of $2.3 million, GM $1-2/3 common stock of $7.1 million and GMAC
bonds of $3.3 million.
Other
Postretirement
Weighted-average assumptions as of Pension Benefit Benefits
--------------- --------
December 31 1998 1997 1998 1997
---- ---- ---- ----
Discount rate 6.75% 7.25% 6.50% 6.75%
Expected return on plan assets 9.50% 9.50% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
For measurement purposes, a 9.5% annual rate of increase per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually 0.5% per year to 6.0% in 2006.
Other
Postretirement
Pension Benefits Benefit
---------------- -------
(Dollars in Millions) 1998 1997 1998 1997
---- ---- ---- ----
Components of net periodic benefit cost
Benefits earned during the year $57.5 $47.9 $3.6 $3.6
Interest accrued on benefits earned
in prior years 110.8 110.3 9.3 9.1
Expected return on assets (144.5) (135.7) - -
Amortization components
Unamortized asset at date of adoption (12.8) (14.2) - -
Unamortized amount resulting
from changes in plan provisions 0.7 0.7 - -
Unamortized net amount resulting
from changes in plan experience
and actuarial assumptions 4.6 3.3 (0.8) (1.5)
--- --- ---- ----
Net periodic benefit cost $16.3 $12.3 $12.1 $11.2
==== ==== ==== ====
The projected benefit obligation and accumulated benefit obligation for the
pension plans with accumulated benefit obligations in excess of plan assets were
$114.3 and $89.3, respectively, as of December 31, 1998, and $93.5 and $83.8,
respectively, as of December 31, 1997. The pension plans with accumulated
benefit obligations in excess of plan assets do not have any underlying assets.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
(Dollars in Millions) Point Increase Point Decrease
-------------- --------------
Effect on total of service and
interest cost components $1.5 $(1.2)
Effect on postretirement
benefit obligation 14.0 (12.2)
Hughes maintains 401(k) plans for qualified employees. A portion of employee
contributions are matched by Hughes and amounted to $30.6 million, $26.3 million
and $16.7 million in 1998, 1997 and 1996, respectively.
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "other postretirement benefit obligation."
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.
IV-31
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 9: Owner's Equity
In connection with the Hughes Transactions, Hughes was recapitalized on
December 17, 1997 at which time 1,000 shares of $1.00 par value common stock,
representing all of the authorized and outstanding common stock of Hughes, were
issued to GM. Prior to December 17, 1997, the equity of Hughes was comprised of
Parent Company's net investment in its telecommunications and space business.
The following represents changes in the components of accumulated other
comprehensive income (loss), net of income taxes, as of December 31:
1998 1997 1996
------------------------ ---------------------- -------------------------
Tax
Pre-tax (Credit) Net Pre-tax Tax Net Pre-tax Tax Net
(Dollars in Millions) Amount Expense Amount Amount Expense Amount Amount Credit Amount
------ ------- ------ ------ ------- ------ ------ ------ ------
Minimum pension
liability adjustments $(3.9) $(1.6) $(2.3) - - - - - -
Foreign currency
translation
adjustments $6.4 $2.6 $3.8 $1.0 $0.4 $0.6 $1.3 $0.5 $0.8
Unrealized holding
losses $3.0 $1.2 $1.8 - - - - - -
Reclassification
adjustment for gains
included in net income $(11.8) $(4.7) $(7.1) - - - - - -
Note 10: Incentive Plans
Under the Hughes Electronics Corporation Incentive Plan ("the Plan"), as
approved by the GM Board of Directors in 1998, shares, rights or options to
acquire up to 35.6 million shares of GM Class H common stock on a cumulative
basis were available for grant through December 31, 1998.
The GM Executive Compensation Committee may grant options and other rights to
acquire shares of GM Class H common stock under the provisions of the Plan. The
option price is equal to 100% of the fair market value of GM Class H common
stock on the date the options are granted. These nonqualified options generally
vest over two to four years, expire ten years from date of grant and are subject
to earlier termination under certain conditions.
As part of the Hughes Transactions, the outstanding options of former Hughes
employees who continued as Hughes employees were converted on December 18, 1997
into options to purchase recapitalized GM Class H common stock. Recognition of
compensation expense was not required in connection with the conversion.
Changes in the status of outstanding options were as follows:
Shares Under Weighted-Average
GM Class H Common Stock Option Exercise Price
-------------- --------------
Outstanding at December 31, 1997 13,961,615 $29.08
Granted 4,180,525 51.02
Exercised (1,506,241) 23.22
Terminated (937,179) 31.79
---------- -----
Outstanding at December 31, 1998 15,698,720 $35.32
========== =====
IV-32
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 10: Incentive Plans - Concluded
The following table summarizes information about the Plan stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
------------------ ----------- ----------- -------------- ----------- --------------
$9.86 to $20.00 833,203 3.7 $14.70 833,203 $14.70
20.01 to 30.00 1,056,354 5.9 22.18 1,056,354 22.18
30.01 to 40.00 9,800,388 8.2 32.08 3,344,007 32.64
40.01 to 50.00 1,372,700 9.6 43.71 - -
50.01 to 54.79 2,636,075 9.3 54.79 - -
--------------- ---------- --- ----- --------- ------
$9.86 to $54.79 15,698,720 8.1 $35.32 5,233,564 $27.67
============== ========== === ===== ========= =====
At December 31, 1998, 5,373,522 shares were available for grant under the
Plan subject to GM Executive Compensation Committee approval.
On May 5, 1997, PanAmSat adopted a stock option incentive plan with terms
similar to the Plan. As of December 31, 1998, PanAmSat had issued 1,493,319
options to purchase its common stock with exercise prices ranging from $29.00
per share to $59.75 per share. The options vest ratably over three years and
have a remaining life of approximately nine years on the 1998 options and eight
and one-half years on the 1997 options. At December 31, 1998, 113,590 options
were exercisable. The PanAmSat options have been considered in the following pro
forma analysis.
The following table presents pro forma information as if Hughes recorded
compensation cost using the fair value of issued options on their grant date:
(Dollars in Millions Except Per Share Amounts) 1998 1997 1996
----- ----- -----
Reported earnings used for computation of
available separate consolidated net income $271.7 $470.7 $183.5
Assumed stock compensation cost, net of tax 85.0 43.5 8.8
------ ------ ------
Adjusted earnings used for computation of
available separate consolidated net income $186.7 $427.2 $174.7
===== ===== =====
Reported earnings per share attributable to GM
Class H common stock $0.68 $1.18 $0.46
Adjusted earnings per share attributable to GM
Class H common stock $0.47 $1.07 $0.44
==== ==== ====
For stock options granted prior to the Hughes Transactions, the estimated
compensation cost was based upon an allocation from former Hughes which was
calculated using the Black-Scholes valuation model for estimation of the fair
value of its options. The following table presents the estimated
weighted-average fair value of options granted and the assumptions used for the
1998 and 1997 calculations (stock volatility has been estimated based upon a
three-year average derived from a study of a Hughes determined peer group and
may not be indicative of actual volatility for future periods):
1998 1997
Estimated fair value per option granted $22.78 $26.90
Average exercise price per option granted 51.02 31.71
Stock volatility 32.8% 32.5%
Average risk-free interest rate 5.63% 5.87%
Average option life in years 6.2 7.0
Note 11: Other Income and Expenses
(Dollars in Millions) 1998 1997 1996
----- ----- -----
Gain on PanAmSat merger $489.7
Gain on sale of DIRECTV interest to AT&T - $120.3
Equity losses from unconsolidated affiliates $(128.3) (72.2) (42.2)
Other (24.8) (26.8) (9.0)
----- ---- -----
Total Other, net $(153.1) $390.7 $69.1
===== ===== ====
IV-33
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 11: Other Income and Expenses - Concluded
Equity losses from unconsolidated affiliates at December 31, 1998, are
primarily comprised of losses at DIRECTV Japan, of which Hughes owns 31.6%, and
American Mobile Satellite Corporation, of which Hughes owns 20.7%.
Note 12: Related-Party Transactions
In the ordinary course of its operations, Hughes provides telecommunications
services and sells electronic components to, and purchases sub-components from,
related parties. In addition, prior to December 18, 1997, Hughes received
allocations of corporate expenses and interest costs from former Hughes and GM.
The following table summarizes significant related party transactions:
(Dollars in Millions) 1998 1997 1996
------ ------ -----
Revenues $40.5 $45.2 $50.8
Costs and expenses
Purchases 29.0 275.4 241.5
Allocation of corporate expenses - 77.5 75.6
Allocated interest - 55.6 53.2
Note 13: 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 ("ASCNI") of Hughes. The
ASCNI 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 ASCNI), 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 and the denominator of which was 399.9 million
during 1998, 1997 and 1996. The denominator used in determining the ASCNI of
Hughes may be adjusted from time-to-time as deemed appropriate by the GM Board
of Directors to reflect subdivisions or combinations of the GM Class H common
stock and to reflect certain transfers of capital to or from Hughes. The GM
Board's discretion to make such adjustments is limited by criteria set forth in
GM's Restated Certificate of Incorporation.
For 1997 and 1996, ASCNI and earnings attributable to GM 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 and 1996 financial statements relate only to the
telecommunications and space business of former Hughes prior to the consummation
of the Hughes Transactions, 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 and 1996 relative to the GM Class H common stock had they been
calculated based on the performance of the telecommunication and space business
of former Hughes.
Earnings per share represent basic earnings per share. The assumed exercise
of stock options does not have a dilutive effect since such exercises do not
currently result in a change to 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 are not
presented.
IV-34
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 13: Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income - Concluded
Dividends may be paid on the GM Class H common stock only when, as, and if
declared by GM's Board of Directors in its sole discretion. Dividends may be
paid on GM Class H common stock to the extent of the amount initially determined
to be available for the payment of dividends on Class H common stock, plus the
portion of earnings of GM after the closing of the Hughes Transactions
attributed to GM Class H common stock. The GM Board determined that the amount
initially available for payment of dividends on shares of the recapitalized GM
Class H common stock was the cumulative amount available for the payment of
dividends on GM Class H common stock immediately prior to the closing of the
Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's
total stockholders' equity resulting from the Hughes Transactions. As of
December 31, 1998, the amount available for the payment of dividends on GM Class
H common stock was $3.8 billion. The GM Board does not currently intend to pay
cash dividends on the recapitalized GM Class H common stock.
Note 14: Acquisitions
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provides DTH premium satellite programming in conjunction with DIRECTV's basic
programming service. USSB launched its service in June 1994 and, as of December
31, 1998, had more than two million subscribers nationwide. The acquisition will
be accounted for using the purchase method of accounting. The purchase price,
consisting of cash and GM Class H common stock, will be determined at closing
based upon an agreed-upon formula and will not exceed $1.6 billion in the
aggregate. Subject to certain limitations in the merger agreement, USSB
shareholders will be entitled to elect to receive cash or shares of GM Class H
common stock. The amount of cash to be paid in the merger cannot be less than
30% or greater than 50% of the aggregate purchase price with the remaining
consideration consisting of GM Class H common stock. The merger, which is
subject to USSB shareholder approval and the receipt of appropriate regulatory
approval, is expected to close in early to mid-1999.
In October 1998, Hughes agreed to acquire, pending regulatory approval in
Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V.
("GGM"), a Galaxy Latin America, LLC ("GLA") local operating company located in
Mexico, from Grupo MVS, S.A. de C.V. ("MVS"). Hughes' equity ownership will
represent 49.0% of the voting equity and all of the non-voting equity of GGM.
The GGM transaction will be accounted for using the purchase method of
accounting. As part of the GGM transaction, in October 1998 Hughes acquired from
MVS an additional 10.0% interest in GLA, increasing its ownership interest to
70.0%, as well as an additional 19.8% interest in SurFin, a company providing
financing of subscriber receiver equipment for certain GLA local operating
companies located in Latin America and Mexico, increasing its ownership
percentage from 39.3% to 59.1%. The GLA and SurFin transactions were accounted
for using the purchase method of accounting. The increased ownership in SurFin
resulted in its consolidation since the date of acquisition. The aggregate
purchase price for the transactions was $197.0 million in cash.
In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for
$851.4 million in cash, increasing Hughes' ownership interest in PanAmSat from
71.5% to 81.0%.
IV-35
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 14: Acquisitions - Concluded
In December 1997, Hughes repurchased from AT&T, a 2.5% equity interest in
DIRECTV, ending AT&T's marketing agreement to distribute the DIRECTV direct
broadcast satellite television service and DIRECTV(TM) receiver equipment. The
$161.8 million repurchase resulted in goodwill of approximately $156.1 million.
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 Corporation. 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. Such cash consideration and other
funds required to consummate the merger were funded by new debt financing
totaling $1,725.0 million provided by Hughes, which borrowed such funds from GM.
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).
As the Hughes 1997 financial statements include only PanAmSat's results of
operations since the date of acquisition, the following selected unaudited pro
forma information is being provided to present a summary of the combined results
of Hughes and PanAmSat as if the acquisition had occurred as of the beginning of
the respective periods, giving effect to purchase accounting adjustments. The
pro forma data is presented for informational purposes only and may not
necessarily reflect the results of operations of Hughes had PanAmSat operated as
part of Hughes for the years ended December 31, 1997 and 1996, nor are they
necessarily indicative of the results of future operations. The pro forma
information excludes the effect of non-recurring charges.
(Dollars in Millions Except Per Share Amounts) 1997 1996
------ -------
Total Revenues $5,247.9 $4,189.8
Income before extraordinary item 164.1 42.1
Net income 143.5 42.1
Pro forma available separate
consolidated net income 41.8 15.5
Pro forma earnings per share attributable
to GM Class H common stock $0.41 $0.16
Note 15: Derivative Financial Instruments and Risk Management
In the normal course of business, Hughes enters into transactions that expose
it to risks associated with foreign exchange rates. Hughes utilizes derivative
instruments in an effort to mitigate these risks. Hughes' policy does not allow
speculation in derivative instruments for profit or execution of derivative
instrument contracts for which there are no underlying exposures. Instruments
used as hedges must be effective at reducing the risk associated with the
exposure being hedged and designated as a hedge at the inception of the
contract. Accordingly, changes in market values of hedge instruments are highly
correlated with changes in market values of the underlying transactions, both at
the inception of the hedge and over the life of the hedge contract.
Hughes primarily uses foreign exchange-forward contracts to hedge firm
commitments denominated in foreign currencies. Foreign exchange-forward
contracts are legal agreements between two parties to purchase and sell a
foreign currency, for a price specified at the contract date, with delivery and
settlement in the future. The total notional amounts of contracts afforded hedge
accounting treatment at December 31, 1998 and 1997 were not significant.
Hughes is exposed to credit risk in the event of non-performance by the
counterparties to its foreign exchange-forward contracts. While Hughes believes
this risk is remote, credit risk is managed through the periodic monitoring and
approval of financially sound counterparties.
In connection with debt refinancing activities by PanAmSat in 1997, PanAmSat
entered into certain U.S. Treasury rate lock contracts to reduce its exposure to
fluctuations in interest rates. The aggregate notional value of these contracts
was $375.0 million and these contracts were accounted for as hedges. The cost to
settle these instruments in 1998 was $9.1 million and is being amortized to
interest expense over the term of the related debt securities.
IV-36
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 16: Discontinued Operations
On December 15, 1997, Hughes sold substantially all of the assets and
liabilities of Hughes Avicom International, Inc. ("Hughes Avicom") to Rockwell
Collins, Inc. for cash. Hughes Avicom is a supplier of products and services to
the commercial airline market. Hughes recorded an after-tax gain of $62.8
million on the sale. The net operating results of Hughes Avicom have been
reported, net of applicable income taxes, as "Income (Loss) from discontinued
operations, net of taxes" and the net cash flows as "Net cash used by
discontinued operations."
Summarized financial information for Hughes Avicom follows:
(Dollars in Millions) 1997* 1996
------ -----
Revenues $102.5 $89.9
Net income (loss) 1.2 (7.4)
*Includes the results of Hughes Avicom through December 15, 1997.
Note 17: Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, Satellite Systems and
Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting,
selling and/or distributing digital programming via satellite to residential and
commercial customers. Satellite Services is engaged in the selling, leasing and
operating of satellite transponders and providing services for cable television
systems, news companies, Internet service providers and private business
networks. Satellite Systems designs, manufactures and markets satellites and
satellite components. Network Systems products include satellite-based business
networks and Internet access service, cellular-based fixed wireless telephone
systems and mobile cellular digital packet data systems. Other includes the
corporate office and other entities.
Direct-To-
Home Satellite Satellite Network
(Dollars in Millions) Broadcast Services Systems Systems Other Eliminations Total
--------- -------- ------- ------- ----- ------------ -----
1998
External Revenues $1,813.7 $643.8 $2,493.4 $1,000.6 $12.4 $5,963.9
Intersegment Revenues 2.4 123.5 337.7 76.1 0.8 $(540.5) -
------- ----- ------- ------- ---- ----- -------
Total Revenues $1,816.1 $767.3 $2,831.1 $1,076.7 $13.2 $(540.5) $5,963.9
------- ----- ------- ------- ---- ----- -------
Operating Profit (1) $(228.1) $318.3 $246.3 $10.9 $(68.2) $(30.1) $249.1
Depreciation and
Amortization (1) 102.3 235.0 49.2 41.7 31.6 (5.0) 454.8
Intangibles, net - 2,433.5 - 53.6 1,065.1 - 3,552.2
Segment Assets (2) 2,190.4 5,890.5 1,491.2 1,299.0 2,856.8 (292.9 13,435.0
Capital Expenditures (3) 230.8 921.7 99.7 40.0 3.3 133.0 1,428.5
------- ------- ------- ------- ------- ----- -------
1997
External Revenues $1,276.9 $537.3 $2,290.0 $998.3 $25.8 $5,128.3
Intersegment Revenues - 92.6 201.9 13.0 2.7 $(310.2) -
------- ------- ------- ------- ------- ----- -------
Total Revenues $1,276.9 $629.9 $2,491.9 $1,011.3 $28.5 $(310.2) $5,128.3
------- ------- ------- ------- ------- ----- -------
Operating Profit (1 $(254.6) $292.9 $226.3 $74.1 $(47.9) $(5.4) $285.4
Depreciation and
Amortization (1) 86.1 145.2 39.4 32.0 14.7 - 317.4
Intangibles, net - 2,498.5 - - 456.3 - 2,954.8
Segment Assets (2) 1,408.7 5,682.4 1,312.6 1,215.6 3,298.1 (186.4) 12,731.0
Capital Expenditures (3) 105.6 625.7 113.9 43.1 0.4 (62.1) 826.6
------- ------- ------- ------- ------- ----- -------
1996
External Revenues $621.0 $381.7 $1,950.4 $1,049.6 $6.0 $4,008.7
Intersegment Revenues - 101.1 106.0 20.4 1.7 $(229.2) -
------- ------- ------- ------- ------- ----- -------
Total Revenues $621.0 $482.8 $2,056.4 $1,070.0 $7.7 $(229.2) $4,008.7
------- ------- ------- ------- ------- ----- -------
Operating Profit (1) $(319.8) $239.1 $183.3 $107.7 $(13.5) $(7.7) $189.1
Depreciation and
Amortization (1 67.3 58.5 34.4 28.3 27.1 - 215.6
Intangibles, net - 72.9 - - 395.1 - 468.0
Segment Assets (2) 1,023.4 1,275.5 757.8 964.0 457.1 (105.2) 4,372.6
Capital Expenditures (3) 63.5 308.7 87.8 45.3 - (55.9) 449.4
------- ------- ------- ------- ------- ----- -------
- -------------------
See Notes on next page.
IV-37
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 17: Segment Reporting - Concluded
Certain 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation.
(1)Includes amortization arising from purchase accounting adjustments
related to GM's acquisition of Hughes amounting to $3.3 million in each of
the years for the Satellite Services segment and $17.7 million in each of the
years in Other.
(2)Assets of the Satellite Services segment and Other include the unamortized
purchase accounting adjustments associated with GM's acquisition of Hughes.
Satellite Services includes unamortized purchase accounting adjustments of
$66.3 million in 1998, $69.6 million in 1997 and $72.9 million in 1996. Other
includes unamortized purchase accounting adjustments of $360.3 million in
1998, $378.0 million in 1997 and $395.7 million in 1996.
(3)Includes expenditures related to satellites in segments as follows: $70.2
million in 1998 for Direct-To-Home Broadcast segment and $726.3 million,
$606.1 million and $259.2 million in 1998, 1997 and 1996, respectively, for
Satellite Services segment. Satellite Services segment also includes $155.5
million in 1998 related to the early buy-out of satellite sale-leasebacks.
A reconciliation of operating profit to income from continuing operations
before income taxes, minority interests, extraordinary item and cumulative
effect of accounting change, as shown in the Statement of Income and Available
Separate Consolidated Net Income, follows:
(Dollars in Millions) 1998 1997 1996
----- ------ -----
Operating profit $249.1 $285.4 $189.1
Interest income 112.3 33.1 6.8
Interest expense (17.5) (91.0) (42.9)
Other, net (153.1) 390.7 69.1
----- ----- ------
Income from continuing operations before
income taxes, minority interests,
extraordinary item and cumulative
effect of accounting change $190.8 $618.2 $222.1
====== ====== ======
The following table presents revenues earned from customers located in
different geographic areas. Property and satellites are grouped by their
physical location. All satellites are reported as United States assets.
1998 1997 1996
-------------------- -------------------- --------------------
Net Net Net
Total Property & Total Property & Total Property &
(Dollars in Millions) Revenues Satellites Revenues Satellites Revenues Satellites
-------- ---------- -------- ---------- -------- ----------
North America
United States $3,534.3 $4,206.3 $2,851.1 $3,507.1 $2,613.1 $1,725.1
Canada and Mexico 136.7 2.0 101.3 - 27.4 -
------- ------- ------- ------- ------- --------
Total North America 3,671.0 4,208.3 2,952.4 3,507.1 2,640.5 1,725.1
======= ======= ======= ======= ======= =======
Europe
United Kingdom 842.4 14.1 583.3 10.4 336.2 8.0
Other 275.5 0.6 419.0 0.4 290.0 0.3
------- ------- ------- ------- ------- --------
Total Europe 1,117.9 14.7 1,002.3 10.8 626.2 8.3
======= ======= ======= ======= ======= =======
Latin America
Brazil 184.9 4.6 131.2 - 48.6 -
Other 104.2 11.2 90.4 - 23.1 -
------- ------- ------- ------- ------- --------
Total Latin America 289.1 15.8 221.6 - 71.7 -
======= ======= ======= ======= ======= =======
Asia
Japan 185.9 0.6 147.9 0.5 119.7 0.4
India 83.4 14.7 46.5 12.7 8.0 11.7
China 63.4 1.7 154.5 1.5 125.2 1.4
Other 214.7 0.6 477.8 0.5 387.3 0.5
------- ------- ------- ------- ------- --------
Total Asia 547.4 17.6 826.7 15.2 640.2 14.0
======= ======= ======= ======= ======= =======
Total Middle East 284.3 - 77.7 - 1.2 -
Total Africa 54.2 0.3 47.6 - 28.9 -
------- ------- ------- ------- ------- --------
Total $5,963.9 $4,256.7 $5,128.3 $3,533.1 $4,008.7 $1,747.4
======= ======= ======= ======= ======= =======
IV-38
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 18: Commitments and Contingencies
In connection with the 1997 spin-off of Hughes Defense and its subsequent
merger with Raytheon, a process was agreed to among GM, 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. In an attempt to resolve the dispute, Hughes gave notice to Raytheon to
commence the arbitration process. Raytheon responded by filing an action in
Delaware Chancery Court which seeks to enjoin the arbitration as premature. It
is possible that the ultimate resolution of the post-closing financial
adjustment provision of the merger agreement may result in Hughes making a
payment to Raytheon that could be material to Hughes. However, the amount of any
payment that either party might be required to make to the other is not
determinable at this time. Hughes intends to vigorously pursue resolution of the
dispute through the arbitration process, opposing the adjustments Raytheon seeks
and seeking the payment from Raytheon that it has proposed.
Hughes has entered into agreements to procure commercial satellite launches,
a significant number of which are expected to be used in connection with
satellites ordered by outside customers. The agreements provide for launches
beginning in 1999 and also contain options for additional launch vehicles. The
total amount of the commitments, which is dependent upon the number of options
exercised, market conditions and other factors, could exceed $2.0 billion.
Hughes has a long-term agreement for multiple launch services aboard
expendable launch vehicles using the Sea Launch ocean-based commercial launch
system. Hughes plans to use options under this agreement to deliver
communications satellites in-orbit. Sea Launch is scheduled to demonstrate the
capabilities of its ocean-based commercial launch system with its first launch
in March 1999. The first launch will carry a demonstration payload having the
same mission and physical characteristics (weight, size, etc.) as an HS 702
commercial communications satellite. If the first launch is not successful or
delayed, Hughes could be required by customers to procure other launch vehicles
to satisfy its contractual obligations, which may lead to higher operating
costs.
DIRECTV has an agreement with General Electric Capital Corporation ("GECC")
under which GECC agreed to provide an open-end revolving credit program for
consumer purchases of DIRECTV receiver equipment, installations and ancillary
items at selected retail establishments. Funding under this program was
discontinued effective September 10, 1996. The aggregate outstanding balance
under this agreement at December 31, 1998 was approximately $190.0 million.
Hughes has certain rights regarding the administration of the program, and the
losses from qualifying accounts under this program accrue to Hughes, subject to
certain indemnity obligations of GECC. Hughes has established allowances to
provide for expected losses under the program. The allowances are subject to
periodic review based on information regarding the status of the program. A
complaint and counterclaim have been filed by the parties in the U.S. District
Court for the District of Connecticut concerning GECC's performance and
DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in
excess of $140.0 million. DIRECTV seeks damages from GECC in excess of $70.0
million. Hughes intends to vigorously contest GECC's allegations and pursue its
own contractual rights and remedies. Hughes does not believe that the litigation
will have a material adverse impact on Hughes' results of operations or
financial position. Discovery is not yet completed in the case and no trial date
has been set.
In December 1994, former Hughes entered into an agreement with Computer
Sciences Corporation ("CSC") whereby CSC provides a significant amount of data
processing services required by the non-automotive businesses of former Hughes.
Baseline service payments to CSC are expected to aggregate approximately $1.5
billion over the term of the eight-year agreement for former Hughes. Based on
historical usage, approximately 17% of the costs incurred under the agreement
are attributable to Hughes. The contract is cancelable by Hughes with early
termination penalties.
At December 31, 1998, minimum future commitments under noncancelable
operating leases having lease terms in excess of one year, exclusive of
satellite transponders leaseback payments disclosed in Note 4, are primarily for
real property and aggregated $323.8 million, payable as follows: $56.6 million
in 1999, $53.3 million in 2000, $52.3 million in 2001, $50.3 million in 2002,
$29.4 million in 2003 and $81.9 million thereafter. Certain of these leases
contain escalation clauses and renewal or purchase options. Rental expenses
under operating leases were $62.0 million in 1998, $72.2 million in 1997 and
$52.7 million in 1996.
IV-39
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 18: Commitments and Contingencies - Concluded
In conjunction with its performance on long-term contracts, Hughes is
contingently liable under standby letters of credit and bonds in the amount of
$294.3 million at December 31, 1998. In Hughes' past experience, no material
claims have been made against these financial instruments. In addition, Hughes
has guaranteed up to $204.6 million of bank debt, including $150.0 million
related to American Mobile Satellite Corporation, and up to $22.1 million of
capital lease obligations. $150.0 million of bank debt matures in March 2003;
the remaining $54.6 million of bank debt matures in September 2007. The capital
lease obligations are due in variable amounts over the next five years.
In connection with the DTH broadcast businesses, Hughes has commitments
related to certain programming agreements which are variable based upon the
number of underlying subscribers and market penetration rates. Minimum payments
over the terms of applicable contracts are anticipated to be approximately
$700.0 million to $800.0 million.
Hughes is subject to potential liability under government regulations and
various claims and legal actions which are pending or may be asserted against
it. The aggregate ultimate liability of Hughes under these claims and actions
was not determinable at December 31, 1998. In the opinion of Hughes management,
such liability is not expected to have a material adverse effect on Hughes'
results of operations or financial position.
Note 19: Subsequent Events
Hughes entered into a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") effective May 15, 1998, whereby Hughes was to
provide to APMT a satellite-based mobile telecommunications system consisting of
two satellites, a ground segment, user terminals and associated equipment and
software. As part of the contract, Hughes was required to obtain all necessary
U.S. Government export licenses for the APMT system by February 15, 1999. On
February 24, 1999, the Department of Commerce notified Hughes that it intends to
deny the export licenses required by Hughes to fulfill its contractual
obligation to APMT. Hughes has until March 16, 1999 to request reconsideration
of the decision. As a result of Hughes failing to obtain the export licenses,
APMT has the right to terminate the contract. At this time, there are ongoing
discussions between Hughes and APMT regarding the contract, and between Hughes
and the U.S. Government regarding the export licenses. If the U.S. Government
ultimately denies the required export licenses or APMT terminates the contract,
Hughes could be required to refund $45.0 million to APMT and record a pre-tax
charge to earnings of approximately $100 million in 1999.
On January 22, 1999, Hughes agreed to acquire Primestar, Inc.'s
("Primestar") 2.3 million-subscriber medium-power DTH business. In a related
transaction, Hughes also agreed to acquire the high-power satellite assets and
direct broadcast satellite ("DBS") orbital frequencies of Tempo, a wholly-owned
subsidiary of TCI Satellite Entertainment, Inc. The acquisitions will be
accounted for using the purchase method of accounting. The purchase price for
the DTH business will be comprised of $1.1 billion in cash and 4,871,448 shares
of GM Class H common stock, for a total purchase price of $1,325.0 million. The
DTH transaction, pending regulatory and Primestar lender approval, is expected
to close in early to mid-1999. The purchase price for the Tempo assets consists
of $500.0 million in cash, $150.0 million of which is expected to be paid in
early to mid-1999 and $350.0 million which is payable upon Federal
Communications Commission approval of the transfer of the DBS orbital
frequencies, which is expected in mid to late-1999.
IV-40
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 19: Subsequent Events - Concluded
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 U.S. Court of
Appeals for the Federal Circuit ("CAFC") reaffirmed earlier decisions in the
Williams case including 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, was denied the request, and
thereafter applied for certiorari to the U.S. Supreme Court.
On March 1, 1999, the U.S. Supreme Court denied the U.S. Government's
petition for certiorari. The case will be remanded back to the trial court
(Court of Claims) for entry of the final judgment. While no amount has been
recorded in the financial statements of Hughes to reflect the $114.0 million
award or the interest accumulating thereon as of December 31, 1998, it is
expected that resolution of this matter will result in the recognition of a
pre-tax gain of approximately $150 million during 1999.
The GGM transaction (discussed in Note 14) received regulatory approval and
closed in February 1999.
* * *
IV-41
HUGHES ELECTRONICS CORPORATION
SUPPLEMENTAL INFORMATION
Selected Quarterly Data (Unaudited)
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
(Dollars in Millions
Except Per Share Amounts)
1998 Quarters
Revenues $1,291.0 $1,369.0 $1,513.3 $1,790.6
------- ------- ------- -------
Income from continuing operations
before income taxes, minority
interests, and cumulative effect
of accounting change $78.5 $65.5 $45.7 $1.1
Income taxes 31.4 23.3 17.4 (116.8)
Minority interests 1.3 8.6 9.3 5.2
Cumulative effect of accounting
change (1) (9.2) - - -
---- ---- ---- -----
Net income 39.2 50.8 37.6 123.1
Earnings used for computation
of available separate
consolidated net income $44.5 $56.1 $42.9 $128.2
==== ==== ==== =====
Average number of shares of
General Motors Class H common stock
outstanding (in millions) 104.1 105.2 105.7 105.9
Class H dividend base (in millions) 399.9 399.9 399.9 399.9
Available separate consolidated
net income $11.5 $14.7 $11.4 $33.9
Earnings attributable to General
Motors Class H common stock on
a per share basis:
Income from continuing operations
before cumulative effect of
accounting change $0.13 $0.14 $0.11 $0.32
Cumulative effect of accounting
change (1) (0.02) - - -
---- ---- ---- ----
Earnings attributable to General
Motors Class H common stock $0.11 $0.14 $0.11 $0.32
==== ==== ==== ====
Stock price range of General Motors
Class H common stock
High $48.00 $57.88 $50.81 $42.38
Low $31.50 $42.75 $35.00 $30.38
- ---------------
See Notes on next page.
IV-42
HUGHES ELECTRONICS CORPORATION
SUPPLEMENTAL INFORMATION
Selected Quarterly Data (Unaudited) - Continued
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
(Dollars in Millions
Except Per Share Amounts)
1997 Quarters
Revenues $1,024.0 $1,151.4 $1,258.3 $1,694.6
------- ------- ------- -------
Income from continuing operations
before income taxes, minority
interests and extraordinary item $5.6 $518.6 $87.1 $6.9
Income taxes 2.2 207.5 34.8 (7.8)
Minority interests 14.2 7.7 (5.1) 8.0
Income (loss) from discontinued
operations 1.0 0.3 (0.1) 62.8
Extraordinary item - - - (20.6)
----- ------ ----- ------
Net income 18.6 319.1 47.1 64.9
Earnings used for pro forma
computation of available separate
consolidated net income $23.9 $324.4 $52.4 $70.0
==== ===== ==== ====
Average number of shares of
General Motors Class H common stock
outstanding (in millions) 100.4 101.0 102.0 102.5
Class H dividend base (in millions) 399.9 399.9 399.9 399.9
Pro forma available separate
consolidated net income $6.0 $82.0 $13.4 $18.0
Pro forma earnings attributable to
General Motors Class H common stock
on a per share basis:
Pro forma income from
continuing operations
before extraordinary item $0.06 $0.81 $0.13 $0.07
Discontinued operations - - - 0.16
Extraordinary item - - - (0.05)
----- ----- ----- ----
Pro forma earnings attributable
to General Motors
Class H common stock $0.06 $0.81 $0.13 $0.18
==== ==== ==== ====
Stock price range of General Motors Class
H common stock
High N/A N/A N/A (2)
Low N/A N/A N/A (2)
(1)Hughes adopted SOP 98-5, Reporting on the Costs of Start-Up Activities,
effective January 1, 1998. The unfavorable cumulative effect of adopting SOP
98-5 was $9.2 million, or $0.02 million attributable to GM Class H common
stock on a per share basis. The impact on the second, third and fourth
quarters of 1998 was not significant.
(2)The stock price range for GM Class H common stock, for the period December
18, 1997 through December 31, 1997, was a high of $40.00 and a low of $35.75.
The GM Class H common stock was recapitalized as part of the Hughes
Transactions on December 17, 1997.
IV-43
HUGHES ELECTRONICS CORPORATION
SUPPLEMENTAL INFORMATION - Concluded
Selected Financial Data
(Unaudited) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Millions Except Per Share
Amounts)
Revenues $5,963.9 $5,128.3 $4,008.7 $3,152.8 $2,697.0
Earnings used for
computation of
available separate
consolidated net income $271.7 $470.7 $183.5 $27.2 $62.2
Average number of shares
of General Motors
Class H common stock
outstanding (in millions) 105.3 101.5 98.4 95.5 92.1
Class H dividend base
(in millions) 399.9 399.9 399.9 399.9 399.9
Available separate
consolidated net income $71.5 $119.4 $45.2 $6.5 $14.3
Earnings attributable
to General Motors
Class H common stock
on a per share basis $0.68 $1.18 $0.46 $0.07 $0.16
Capital expenditures(1) $1,428.5 $826.6 $449.4 $442.3 $399.0
Cash and cash equivalents $1,342.1 $2,783.8 $6.7 $7.6 $5.8
Working capital $1,836.9 $3,323.3 $277.5 $311.9 $273.5
Total assets $13,435.0 $12,731.0 $4,372.6 $3,941.9 $3,609.3
Long-term debt $778.7 $637.6 $ - $ - $ -
Minority interests $481.7 $607.8 $21.6 $40.2 $ -
Return on equity (2) 3.1% 7.5% 6.7% 2.9% 4.6%
Income before interest
expense and income
taxes as a percent of
capitalization (3) 2.6% 12.8% 12.5% 6.6% 9.6%
Pre-tax return on total
assets (4) 1.6% 7.5% 6.6% 2.7% 4.5%
- -------------------------
Certain amounts have been reclassified to conform with the 1998 presentation.
(1)Includes expenditures related to satellites amounting to $929.5 million,
$575.3 million, $187.9 million, $274.6 million and $255.8 million in 1998,
1997, 1996, 1995 and 1994, respectively. Also includes $155.5 million in 1998
related to the early buy-out of sale-leasebacks.
(2)Income from continuing operations before extraordinary item and cumulative
effect of accounting change divided by average owner's equity (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).
(3)Income from continuing operations before interest expense, income taxes,
extraordinary item and cumulative effect of accounting change divided by
average owner's equity plus average debt.
(4)Income from continuing operations before income taxes, extraordinary item
and cumulative effect of accounting change divided by average total assets.
IV-44
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion excludes purchase accounting adjustments related to
General Motors' acquisition of Hughes (see Supplemental Data beginning on page
IV-55).
Forward-looking statements made, including those concerning expected
financial performance, ongoing financial performance strategies, and possible
future actions, constitute forward-looking information. Actual results may
differ materially from anticipated results due to numerous conditions,
uncertainties and risk factors. The principal important risk factors include,
but are not limited to, economic conditions, product demand and market
acceptance, government action, competition, ability to achieve cost reductions
and successfully integrate acquired businesses, technological risk, ability to
address 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 General Motors Corporation ("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 tracking stock, GM Class H common stock, that is linked to the
remaining telecommunications and space business. 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 or Parent Company.
In connection with the recapitalization of Hughes Electronics on December 17,
1997, the telecommunications and space business 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 business, 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. For
additional information on the basis of presentation, see Note 1 to the financial
statements.
As a result of the May 1997 PanAmSat Corporation ("PanAmSat") merger (see
further discussion in Note 14 to the financial statements), Hughes' 1997
financial information includes PanAmSat's results of operations from the date of
merger.
During 1998, four Hughes-built satellites experienced the failure of a
primary spacecraft control processor ("SCP"). Three of these satellites were
owned and operated by PanAmSat and the fourth was owned by DIRECTV. With the
exception of the Galaxy(R) 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,
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. 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 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.
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 or the displacement of
other customers. PanAmSat is developing solutions for its customers that may
include transition of certain services to other PanAmSat satellites or the
launch of replacement satellites.
IV-45
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
Hughes entered into a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") effective May 15, 1998, whereby Hughes was to
provide to APMT a satellite-based mobile telecommunications system consisting of
two satellites, a ground segment, user terminals and associated equipment and
software. As part of the contract, Hughes was required to obtain all necessary
U.S. Government export licenses for the APMT system by February 15, 1999. On
February 24, 1999, the Department of Commerce notified Hughes that it intends to
deny the export licenses required by Hughes to fulfill its contractual
obligation to APMT. Hughes has until March 16, 1999 to request reconsideration
of the decision. As a result of Hughes failing to obtain the export licenses,
APMT has the right to terminate the contract. At this time, there are ongoing
discussions between Hughes and APMT regarding the contract, and between Hughes
and the U.S. Government regarding the export licenses. If the U.S. Government
ultimately denies the required export licenses or APMT terminates the contract,
Hughes could be required to refund $45.0 million to APMT and record a pre-tax
charge to earnings of approximately $100 million in 1999.
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 U.S. Court of
Appeals for the Federal Circuit ("CAFC") reaffirmed earlier decisions in the
Williams case including 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, was denied the request, and
thereafter applied for certiorari to the U.S. Supreme Court.
On March 1, 1999, the U.S. Supreme Court denied the U.S. Government's
petition for certiorari. The case will be remanded back to the trial court
(Court of Claims) for entry of the final judgment. While no amount has been
recorded in the financial statements of Hughes to reflect the $114.0 million
award or the interest accumulating thereon as of December 31, 1998, it is
expected that resolution of this matter will result in the recognition of a
pre-tax gain of approximately $150 million during 1999.
Results of Operations
1998 compared to 1997
Revenues. Hughes reported that 1998 revenues increased 16.3% to $5,963.9
million compared with $5,128.3 million in 1997. Each of Hughes' four primary
business segments contributed to the growth in revenue, including continued
strong subscriber growth in the Direct-To-Home Broadcast segment, the effect of
the PanAmSat merger and increased operating lease revenues for video, data and
Internet-related services in the Satellite Services segment, increased sales of
DIRECTV(TM) receiver equipment in the Network Systems segment and increased
sales of commercial satellites in the Satellite Systems segment.
Direct-To-Home Broadcast segment revenues for 1998 increased 42.2% to
$1,816.1 million from $1,276.9 million in 1997. The large increase in revenues
resulted from record U.S. subscriber growth, increased average monthly revenue
per subscriber and low subscriber churn rates. Domestic DIRECTV was the biggest
contributor to this growth with revenues of $1,604.1 million for 1998, a 45.4%
increase over prior year's revenues of $1,103.3 million. Hughes' Latin American
DIRECTV subsidiary, Galaxy Latin America, LLC ("GLA"), had revenues of $141.3
million compared with $70.0 million in 1997. Total DIRECTV subscribers as of
December 31, 1998 were 4,458,000 in the United States and 484,000 in Latin
America. In addition, Hughes' unconsolidated affiliate, DIRECTV Japan, which
initiated its service in December 1997, had a total of 231,000 subscribers as of
December 31, 1998.
Revenues for the Satellite Services segment in 1998 increased 21.8% to $767.3
million from $629.9 million in 1997. The increase in revenues was due to the May
1997 PanAmSat merger and increased operating lease revenues from the
commencement of service agreements for full-time video distribution, as well as
short-term special events and an increase in data and Internet-related service
agreements. The increase was partially offset by a decrease in sales and
sales-type lease revenues.
Satellite Systems segment revenues increased 13.6% in 1998 to $2,831.1
million from $2,491.9 million in 1997 primarily due to higher commercial
satellite sales to customers such as Thuraya Satellite Telecommunications
Company, PanAmSat, ICO Global Communications and Orion Asia Pacific
Corporation.
Revenues in 1998 for the Network Systems segment were $1,076.7 million
compared with $1,011.3 million in 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 of wireless telephone systems and private business
networks, primarily in the Asia Pacific region.
IV-46
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Operating Profit. Operating profit, excluding amortization of purchase
accounting adjustments related to GM's acquisition of Hughes, was $270.1 million
in 1998 compared with $306.4 million in 1997. Full-year 1998 operating profit
margin on the same basis was 4.5% compared with 6.0% in 1997. The lower 1998
operating profit and operating profit margin resulted principally from lower
sales of wireless telephone systems and private business networks in the Asia
Pacific region, as well as provisions for estimated losses at Hughes Network
Systems ("HNS") associated with uncollectible amounts due from certain wireless
customers. Also contributing to the decline was goodwill amortization associated
with the May 1997 PanAmSat merger and the additional May 1998 investment in
PanAmSat.
The operating loss in the Direct-To-Home Broadcast segment in 1998 was $228.1
million compared with an operating loss of $254.6 million in 1997. The full-year
1998 operating loss for domestic DIRECTV was $100.0 million compared with $137.0
million in 1997. GLA's operating loss was $125.8 million in 1998 versus $116.0
million in 1997. The lower operating loss for domestic DIRECTV in 1998 was
principally due to increased subscriber revenues which more than offset
increased sales and marketing expenditures.
As a result of the increased revenues described above, the Satellite Services
segment operating profit increased 8.6% to $321.6 million in 1998, compared with
prior year's operating profit of $296.2 million. Operating profit margin in 1998
declined to 41.9% from 47.0% in the prior year principally due to 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.
Operating profit for the Satellite Systems segment in 1998 was $246.3
million, an increase of 8.8% over $226.3 million in 1997. The increase was
primarily due to the higher commercial satellite sales noted above. The
operating profit margin for the year was 8.7% compared with the 9.1% margin
earned in the prior year.
The Network Systems segment operating profit in 1998 was $10.9 million versus
$74.1 million in 1997 and operating profit margin declined to 1.0% from 7.3%
last year. The decrease in operating profit and operating profit margin was
primarily due to a $26 million provision for estimated losses associated with
the bankruptcy filing by a customer, provision for uncollectible amounts due
from certain wireless customers and lower international sales of wireless
telephone systems and private business networks, primarily in the Asia Pacific
region.
Costs and Expenses. Selling, general and administrative expenses increased to
$1,457.0 million in 1998 from $1,119.9 million in 1997. The increase in these
expenses resulted primarily from increased marketing and subscriber acquisition
costs in the Direct-To-Home Broadcast segment and increased expenditures to
support the growth in the remaining business segments. The increase in
depreciation and amortization expense to $433.8 million in 1998 from $296.4
million in 1997 resulted from increased goodwill amortization related to the May
1997 PanAmSat merger and the purchase of an additional 9.5% interest in PanAmSat
in May 1998, and increased capital expenditures in the Direct-To-Home Broadcast
and Satellite Services segments.
Interest Income and Expense. Interest income increased to $112.3 million in
1998 compared to $33.1 million in 1997 due primarily to higher cash balances
resulting from the Hughes Transactions. Interest expense decreased $73.5 million
to $17.5 million in 1998 versus $91.0 million in 1997 resulting from the
repayment of debt at the end of 1997, which originally resulted from the
PanAmSat merger.
Other, net. Other, net for 1998 relates primarily to losses from
unconsolidated subsidiaries of $128.3 million, attributable principally to
equity investments, including American Mobile Satellite Corporation and DIRECTV
Japan, and a provision for estimated losses associated with bankruptcy filings
by two customers. The amount for 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 $72.2 million.
Income Taxes. The effective income tax rate was (21.1)% in 1998 and 37.0% in
1997. The effective income tax rate in 1998 benefited from the favorable
adjustment relating to an agreement with the Internal Revenue Service regarding
the treatment of research and experimentation costs for the years 1983 through
1995.
Discontinued Operations and Extraordinary Item. On December 15, 1997, Hughes
Avicom International, Inc. ("Hughes Avicom") was sold to Rockwell Collins, Inc.,
resulting in an after-tax gain of $62.8 million. Hughes recorded an
extraordinary after-tax charge of $20.6 million in 1997 related to the
refinancing of PanAmSat's debt (for additional information see Note 6 to the
financial statements).
IV-47
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Accounting Changes. In 1998, Hughes adopted American Institute of Certified
Public Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs previously
capitalized be written off and recognized as a cumulative effect of accounting
change, net of taxes, as of the beginning of the year of adoption. On a
prospective basis, these types of costs are required to be expensed as incurred.
The unfavorable cumulative effect of this accounting change at January 1, 1998
was $9.2 million after-tax, or $0.02 per share of GM Class H common stock.
Earnings. 1998 earnings were $271.7 million, or $0.68 per share of GM Class H
common stock, compared with 1997 earnings of $470.7 million, $1.18 per share of
GM Class H common stock on a pro forma basis. 1997 earnings per share are
presented on a pro forma basis assuming the recapitalized GM Class H common
stock was outstanding for all of 1997 (see further discussion in Note 13 to the
financial statements).
Backlog. The 1998 year-end backlog of $10,064.9 million decreased from
the $10,337.6 million reported at the end of 1997, primarily due to a
decrease in the Satellite Services segment.
1997 compared to 1996
Revenues. Hughes reported that 1997 revenues increased 27.9% to $5,128.3
million compared with $4,008.7 million in 1996. The increase reflects strong
subscriber growth in the Direct-To-Home Broadcast segment, increased revenues in
the Satellite Services segment resulting primarily from the PanAmSat merger and
increased sales on commercial satellite programs in the Satellite Systems
segment.
Direct-To-Home Broadcast segment revenues more than doubled to $1,276.9
million from $621.0 million in 1996. This increase resulted from strong
subscriber growth and continued low subscriber churn rates. Domestic DIRECTV
fueled this growth with revenues of $1,103.3 million, a 78.5% increase over
prior year's revenues of $618.2 million. GLA had revenues of $70.0 million
compared with $2.7 million in 1996. Total DIRECTV subscribers as of December 31,
1997 were 3,301,000 in the United States and 300,000 in Latin America. DIRECTV
Japan initiated its service in December 1997.
Revenues for the Satellite Services segment in 1997 increased 30.5% to $629.9
million from $482.8 million in 1996. The increased revenues were due to the
PanAmSat merger and increased operating lease revenues for both video
distribution and business communications services. PanAmSat's services were
expanded in 1997 with the successful launch of two dedicated direct-to-home
("DTH") satellites and a new cable TV distribution satellite in Latin America
leading to an increase in total transmission capability since the May merger.
Satellite Systems segment revenues increased 21.2% in 1997 to $2,491.9
million from $2,056.4 million in 1996 primarily due to higher commercial
satellite sales within the High Powered product line of satellites and on the
ICO Global Communications satellite contracts.
Revenues in 1997 for the Network Systems segment were $1,011.3 million
compared with $1,070.0 million in 1996. The decline was primarily due to lower
domestic mobile cellular telephone equipment sales, which were partially offset
by higher satellite-based mobile telephony equipment sales.
Operating Profit. Operating profit for Hughes increased to $306.4 million in
1997 from $210.1 million in 1996. The 45.8% increase reflects reduced losses in
the Direct-To-Home Broadcast segment, higher commercial satellite sales and the
completion of the PanAmSat merger.
The operating loss in the Direct-To-Home Broadcast segment in 1997 was $254.6
million compared with an operating loss of $319.8 million in 1996. The full-year
1997 operating loss for domestic DIRECTV was $137.0 million compared with $192.0
million in 1996. GLA's operating loss was $116.0 million in 1997 versus $131.0
million in 1996. The lower operating losses in 1997 were principally due to
increased subscriber revenues which more than offset higher marketing and
subscriber related expenditures.
The Satellite Services segment operating profit was $296.2 million in 1997,
an increase of 22.2% over the prior year's operating profit of $242.4 million.
The increase resulted primarily from the PanAmSat merger and increased operating
lease revenues for both video distribution and business communications services.
Operating profit margin in 1997 declined to 47.0% from 50.2% in the prior year
principally due to goodwill amortization associated with the PanAmSat merger.
Operating profit for the Satellite Systems segment in 1997 was $226.3
million, an increase of 23.5% over $183.3 million in 1996. The increase was
primarily due to the higher commercial program sales noted above. The operating
profit margin for the year was 9.1% compared with 8.9% in the prior year.
The Network Systems segment operating profit in 1997 was $74.1 million versus
$107.7 million in 1996 and operating profit margin declined to 7.3% from 10.1%
last year. These decreases were primarily the result of lower domestic mobile
cellular telephone equipment sales, increased research and development
expenditures and higher marketing expenditures associated with the launch of the
DirecPC(R)/DirecDuo(TM) products.
IV-48
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Costs and Expenses. Selling, general and administrative expenses increased to
$1,119.9 million in 1997 from $788.5 million in 1996. The increase resulted
principally from the PanAmSat merger, increased programming and subscriber
acquisition costs in the Direct-To-Home Broadcast segment and increased research
and development and marketing expenditures in the Network Systems segment. The
increase in depreciation and amortization expense to $296.4 million in 1997 from
$194.6 million in 1996, resulted from increased goodwill amortization related to
the PanAmSat merger and additional satellite depreciation in 1997.
Interest Income and Expense. Interest income increased $26.3 million in 1997
compared to 1996 due primarily to higher cash balances resulting from the
PanAmSat merger as well as increased cash resulting from the Hughes
Transactions. Interest expense increased $48.1 million in 1997 versus 1996 due
to the increased borrowings resulting from the PanAmSat merger.
Other, net. The 1997 amount included a $489.7 million pre-tax gain related to
the PanAmSat merger, partially offset by losses from unconsolidated subsidiaries
of $72.2 million attributable principally to equity investments in American
Mobile Satellite Corporation, DIRECTV Japan and SurFin Ltd. ("SurFin"). The 1996
amount included a $120.3 million pre-tax gain recognized from the sale of 2.5%
of DIRECTV to AT&T, partially offset by losses from unconsolidated subsidiaries
of $42.2 million, primarily related to American Mobile Satellite Corporation.
Income Taxes. The effective income tax rate was 37.0% in 1997 and 43.1% in
1996. The decrease in the effective income tax rate in 1997 was due primarily to
an increase in research and development credits and favorable resolution of
certain tax contingencies in 1997.
Discontinued Operations and Extraordinary Item. On December 15, 1997, Hughes
Avicom was sold to Rockwell Collins, Inc., resulting in an after-tax gain of
$62.8 million. Hughes recorded an extraordinary after-tax charge of $20.6
million in 1997 related to premiums paid for the refinancing of PanAmSat's debt
(for additional information see Note 6 to the financial statements).
Earnings. 1997 earnings were $470.7 million, or $1.18 per share of GM Class H
common stock on a pro forma basis, compared with 1996 earnings of $183.5
million, $0.46 per share of GM Class H common stock on a pro forma basis.
Earnings per share are presented on a pro forma basis assuming the recapitalized
GM Class H common stock was outstanding during all periods presented (see
further discussion in Note 13 to the financial statements).
Backlog. The 1997 year-end backlog of $10,337.6 million increased from
the $6,780.5 million reported at the end of 1996, primarily due to the
PanAmSat merger.
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $1,342.1 million at
December 31, 1998 compared to $2,783.8 million at December 31, 1997. The
decrease in cash resulted primarily from the purchase of an additional 9.5%
interest in PanAmSat, expenditures for PanAmSat and DIRECTV satellites, other
equity investments and cash paid to General Motors for the Delco post-closing
price adjustment, offset in part by proceeds from insurance claims related to
the loss of the Galaxy IV and Galaxy X satellites.
Cash provided by continuing operations was $875.2 million in 1998, compared
to $10.5 million in 1997 and $367.4 million in 1996. The change in 1998 from
1997 resulted primarily from increased revenues and a decrease in working
capital, while the change in 1997 from 1996 resulted primarily from an increase
in working capital.
Net cash used in investing activities was $2,253.3 million in 1998, $2,231.5
million in 1997 and $80.5 million in 1996. The increase in 1998 investing
activities reflects the purchase of an additional 9.5% interest in PanAmSat, the
early buy-out of satellite sale-leasebacks at PanAmSat and an increase in
expenditures for satellites compared to 1997, offset in part by proceeds from
insurance claims related to the loss of the Galaxy IV and Galaxy X satellites.
The increase in 1997 investing activities reflects the repurchase of AT&T's 2.5%
equity interest in DIRECTV, the PanAmSat merger, and an increase in satellites
and equity investments compared to 1996, offset by proceeds received from the
sale of Hughes Avicom and the sale of investments.
Net cash used in financing activities was $63.6 million in 1998, compared
with net cash provided by financing activities of $5,014.0 million in 1997 and
net cash used in financing activities of $279.8 million in 1996. 1998 financing
activities include the payment to General Motors for the Delco post-closing
price adjustment stemming from the Hughes Transactions, offset in part by net
long-term borrowings. 1997 financing activities reflect the impact of the
PanAmSat merger, the Hughes Transactions and cash contributions from Parent
Company, while the 1996 amount consisted of cash distributions to Parent
Company.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at December 31, 1998 and 1997 was 1.91
and 3.29, respectively. Working capital decreased by $1,486.4 million to
$1,836.9 million at December 31, 1998 from $3,323.3 million at December 31,
1997. The change in working capital resulted principally from the decrease in
cash discussed above.
IV-49
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Property and Satellites. Property, net of accumulated depreciation, increased
$169.5 million to $1,059.2 million in 1998 from the $889.7 million reported in
1997. Satellites, net of accumulated depreciation, increased $554.1 million to
$3,197.5 million in 1998 from the $2,643.4 million reported in 1997. The
increase in property and satellites resulted primarily from the construction of
an additional broadcast center and increased capital expenditures for
satellites. Capital expenditures, including expenditures related to satellites,
increased to $1,428.5 million in 1998 from $826.6 million in 1997. The increase
reflects additions to property and equipment to support revenue growth at
various Hughes businesses, as well as additional satellites to support future
operations, the replacement of certain satellites, including Galaxy X, and to
provide spare satellites as part of Hughes' satellite sparing strategy.
Dividend Policy and Use of Cash. As discussed in Note 13 to the financial
statements, since the completion of the Hughes Transactions in late 1997, the GM
Board has not paid, and does not currently intend to pay in the foreseeable
future, cash dividends on GM Class H common stock. Future Hughes earnings, if
any, are expected to be retained for the development of the businesses of
Hughes. Expected cash requirements in 1999 relate to capital expenditures for
property and equipment and expenditures for additional satellites of
approximately $1.9 billion, the early buy-out of satellite sale-leasebacks, the
funding of business acquisitions, including the acquisitions discussed below,
and additional equity investments. These cash requirements are expected to be
funded from a combination of existing cash balances, amounts available under
existing credit facilities, additional borrowings and equity offerings, as
needed. Also, although Hughes may be required to make a cash payment to or
receive a cash payment from Raytheon, the amount of a cash payment to or from
Raytheon, if any, is not determinable at this time. See further discussion in
Note 18 to the financial statements.
Debt and Credit Facilities. In January 1998, PanAmSat issued five, seven, ten
and thirty-year notes totaling $750.0 million. The proceeds received were used
by PanAmSat to repay the revolving credit facility of $500.0 million and bridge
loan of $100.0 million outstanding at December 31, 1997. The outstanding
principal balances and interest rates for the five, seven, ten and thirty-year
notes as of December 31, 1998 were $200.0 million at 6.00%, $275.0 million at
6.13%, $150.0 million at 6.38% and $125.0 million at 6.88%, respectively.
Principal on the notes is payable at maturity, while interest is payable
semi-annually.
At December 31, 1998, Hughes' 59.1% owned subsidiary, SurFin, had a total of
$155.9 million outstanding under two separate $150.0 million unsecured revolving
credit facilities. The first matures on April 30, 1999 and the second matures on
July 31, 1999. Both credit facilities, which are expected to be renewed, are
subject to a facility fee of 0.10% per annum. Borrowings under these credit
facilities bear interest at the Eurodollar Rate plus 0.15%.
At December 31, 1998, other long-term debt of $28.9 million, which consisted
of notes bearing fixed rates of interest of 9.61% to 11.11%, was outstanding.
Principal is payable at maturity in April 2007 while interest is payable
semi-annually.
Hughes has $1.0 billion of unused credit available under two unsecured
revolving credit facilities, consisting of a $750.0 million multi-year facility
and a $250.0 million 364-day facility. The multi-year credit facility provides
for a commitment of $750.0 million through December 5, 2002, subject to a
facility fee of 0.07% per annum. Borrowings bear interest at a rate which
approximates the London Interbank Offered Rate ("LIBOR") plus 0.155%. The
364-day credit facility provides for a commitment of $250.0 million through
December 1, 1999, subject to a facility fee of 0.05% per annum. Borrowings bear
interest at a rate which approximates LIBOR plus 0.25%, with an additional
0.125% utilization fee when borrowings exceed 50% of the commitment. No amounts
were outstanding under either facility at December 31, 1998. These facilities
provide back-up capacity for Hughes' $1.0 billion commercial paper program. No
amounts were outstanding under the commercial paper program at December 31,
1998.
PanAmSat maintains a $500.0 million multi-year revolving credit facility that
provides for short-term and long-term borrowings and a $500.0 million commercial
paper program that provides for short-term borrowings. The multi-year revolving
credit facility provides for a commitment through December 24, 2002, subject to
a facility fee of 0.10% per annum. Borrowings bear interest at a rate which
approximates LIBOR plus 0.30%. Borrowings under the credit facility and
commercial paper program are limited to $500.0 million in the aggregate. No
amounts were outstanding under either agreement at December 31, 1998.
IV-50
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Acquisitions and Divestitures. On January 22, 1999, Hughes agreed to acquire
Primestar, Inc.'s ("Primestar") 2.3 million-subscriber medium-power DTH
business. In a related transaction, Hughes also agreed to acquire the high-power
satellite assets and direct broadcast satellite ("DBS") orbital frequencies of
Tempo, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The
acquisitions will be accounted for using the purchase method of accounting. The
purchase price for the DTH business will be comprised of $1.1 billion in cash
and 4,871,448 shares of GM Class H common stock, for a total purchase price of
$1,325.0 million. The DTH transaction, pending regulatory and Primestar lender
approval, is expected to close in early to mid-1999. The purchase price for the
Tempo assets consists of $500.0 million in cash, $150.0 million of which is
expected to be paid in early to mid-1999, and $350.0 million which is payable
upon Federal Communications Commission approval of the transfer of the DBS
orbital frequencies, which is expected in mid to late-1999.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provides DTH premium satellite programming in conjunction with DIRECTV's basic
programming service. USSB launched its service in June 1994 and, as of December
31, 1998, had more than two million subscribers nationwide. The acquisition will
be accounted for using the purchase method of accounting. The purchase price,
consisting of cash and GM Class H common stock, will be determined at closing
based upon an agreed-upon formula and will not exceed $1.6 billion in the
aggregate. Subject to certain limitations in the merger agreement, USSB
shareholders will be entitled to elect to receive cash or shares of GM Class H
common stock. The amount of cash to be paid in the merger cannot be less than
30% or greater than 50% of the aggregate purchase price with the remaining
consideration consisting of GM Class H common stock. The merger, which is
subject to USSB shareholder approval and the receipt of appropriate regulatory
approval, is expected to close in early to mid-1999.
In October 1998, Hughes agreed to acquire, pending regulatory approval in
Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V.
("GGM"), a GLA local operating company located in Mexico, from Grupo MVS, S.A.
de C.V. ("MVS"). Hughes' equity ownership will represent 49.0% of the voting
equity and all of the non-voting equity of GGM. The GGM transaction will be
accounted for using the purchase method of accounting. As part of the GGM
transaction, in October 1998 Hughes acquired from MVS an additional 10.0%
interest in GLA, increasing its ownership interest to 70.0%, as well as an
additional 19.8% interest in SurFin, a company providing financing of subscriber
receiver equipment for certain local operating companies located in Latin
America and Mexico, increasing its ownership percentage from 39.3% to 59.1%. The
GLA and SurFin transactions were accounted for using the purchase method of
accounting. The increased ownership in SurFin resulted in its consolidation
since the date of acquisition. The aggregate purchase price for the transactions
was $197.0 million in cash. The GGM transaction received regulatory approval and
closed in February 1999. In May 1998, Hughes purchased an additional 9.5%
interest in PanAmSat for $851.4 million in cash, increasing Hughes' ownership
interest in PanAmSat from 71.5% to 81.0%.
In May 1997, Hughes and PanAmSat completed the merger of their respective
satellite service operations into a new publicly-held company, which retained
the name PanAmSat Corporation. Hughes contributed its Galaxy(R) satellite
services business in exchange for a 71.5% interest in the new company. Existing
PanAmSat stockholders received a 28.5% interest in the new company and $1.5
billion in cash. Such cash consideration and other funds required to consummate
the merger were funded by new debt financing totaling $1,725.0 million borrowed
from GM, which was subsequently repaid in December 1997.
On December 15, 1997, Hughes sold substantially all of the assets and
liabilities of the Hughes Avicom business to Rockwell Collins, Inc. for cash,
which resulted in an after-tax gain of $62.8 million. Hughes Avicom is treated
as a discontinued operation for all periods presented.
In March 1996, Hughes Electronics sold a 2.5% equity interest in DIRECTV to
AT&T for $137.5 million, with options to increase their ownership interest under
certain conditions. The sale resulted in a $120.3 million pre-tax gain, which
was included in other income. In December 1997, Hughes repurchased from AT&T the
2.5% equity interest in DIRECTV for $161.8 million, ending AT&T's marketing
agreement to distribute the DIRECTV(R) direct broadcast satellite television
service and DIRECTV receiver equipment.
IV-51
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
New Accounting Standards. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires all derivatives to be recorded as either
assets or liabilities and the instruments to be measured at fair value.
Gains or losses resulting from changes in the values of those derivatives are
to be recognized immediately or deferred depending on the use of the
derivative and whether or not it qualifies as a hedge. Hughes plans to adopt
SFAS No. 133 by January 1, 2000, as required. Management is currently
assessing the impact of this statement on Hughes' results of operations and
financial position.
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'
business operations 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, some of which
are being conducted concurrently:
(1)Awareness - establish project teams made up of project leaders from each
Hughes operating company, assign responsibilities and establish awareness
of 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 has been completed. 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 identified requiring
remediation include satellite control and communication software,
broadcast systems, systems utilized in customer service/billing,
engineering and manufacturing operations. Hughes has also identified the
need to upgrade network control software for customers who have
maintenance agreements with Hughes. Hughes' in-orbit satellites do not
have date dependent processing.
(4)Remediation - modify, repair or replace categorized systems. Remediation
has begun on many systems and is targeted for completion by the end of the
second quarter of 1999, with the exception of satellite control software
which is expected to be completed early in the fourth 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 remaining remediated systems will be put into
operations during 1999.
(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 by the end of 1999. However, Hughes is in the process of
developing contingency plans to address the risk of any system not being
Year 2000 compliant and expects to complete such plans in the third
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. The loss of real-time satellite
control software functionality would be addressed through the use of
back-dated processors or through manual procedures but could result in
slightly higher operating costs until the Year 2000 problems are
corrected.
IV-52
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
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 on schedule. Hughes has incurred and expensed approximately
$2.0 million through 1997 and approximately $7.0 million during 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 $15 million to $19 million, with the majority of the
expense expected to be incurred during the first half of 1999. Each Hughes
operating company is funding its respective Year 2000 efforts with current and
future operating cash flows.
Hughes has mailed Year 2000 verification request letters to its suppliers and
other third parties and is coordinating efforts 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 high percentage of
the third parties have replied and a large number of Hughes' third parties'
systems are Year 2000 compliant or are expected to be Year 2000 compliant in a
timely manner. For those third party systems that 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.
Security Ratings
In March 1999, Standard and Poor's Rating Services ("S&P") lowered the
long-term debt rating of Hughes from A- to BBB. The S&P BBB credit rating
indicates the issuer has adequate capacity to pay interest and repay principal.
Additionally, S&P affirmed its A-2 rating on Hughes' commercial paper. The A-2
commercial paper rating is the third highest category available and indicates a
strong degree of safety regarding timely payment. S&P's ratings outlook for
Hughes remains developing.
In January 1999, Moody's Investors Service ("Moody's") lowered the long-term
credit rating of Hughes from A-3 to Baa1. The Baa1 rating for senior debt is
sixth highest within the 10 investment grade ratings available from Moody's for
long-term debt. Moody's ratings for Hughes' commercial paper remained unchanged
at P-2. The rating is the second highest rating available and indicates that the
issuer has a strong ability for repayment relative to other issuers. Currently,
the Moody's ratings are under review.
Debt ratings by the various rating agencies reflect each agency's opinion
of the ability of issuers to repay debt obligations punctually. The lowered
ratings reflect increased financial leverage at Hughes resulting from a
significant acceleration of its growth initiatives, including the recently
announced USSB, Primestar and Tempo transactions. Lower ratings generally result
in higher borrowing costs. A security rating is not a recommendation to buy,
sell, or hold securities and may be subject to revision or withdrawal at any
time by the assigning rating organization. Each rating should be evaluated
independently of any other rating.
Market Risk Disclosure
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially from
such assumptions because the amounts noted below are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should not be considered projections
by Hughes of future events or losses.
General
Hughes' cash flows and earnings are subject to fluctuations resulting from
changes in foreign currency exchange rates, interest rates and changes in the
market value of its equity investments. Hughes manages its exposure to these
market risks through internally established policies and procedures and, when
deemed appropriate, through the use of derivative financial instruments. Hughes'
policy does not allow speculation in derivative instruments for profit or
execution of derivative instrument contracts for which there are no underlying
exposures. Hughes does not use financial instruments for trading purposes and is
not a party to any leveraged derivatives.
IV-53
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Foreign Currency Risk
Hughes generally conducts its business in U.S. dollars with a small amount of
business conducted in a variety of foreign currencies and therefore is exposed
to fluctuations in foreign currency exchange rates. Hughes' objective in
managing the exposure to foreign currency changes is to reduce earnings and cash
flow volatility associated with foreign exchange rate fluctuations to allow
management to focus its attention on its core business issues and challenges.
Accordingly, Hughes primarily enters into foreign exchange-forward contracts to
protect the value of its existing assets, liabilities and firm commitments.
Foreign exchange-forward contracts are legal agreements between two parties to
purchase and sell a foreign currency, for a price specified at the contract
date, with delivery and settlement in the future. At December 31, 1998, the
impact of a hypothetical 10% adverse change in exchange rates on the fair values
of foreign exchange-forward contracts and foreign currency denominated assets
and liabilities would not be significant.
Investments
Hughes maintains investments in publicly-traded common stock of unaffiliated
companies and is therefore subject to equity price risk. These investments are
classified as available-for-sale and, consequently, are reflected in the balance
sheet at fair value with unrealized gains or losses, net of tax, recorded as
part of accumulated other comprehensive income (loss), a separate component of
owner's equity. At December 31, 1998, the fair value of the investments in such
common stock was $8.0 million. The investments were valued at the market closing
price at December 31, 1998. No actions have been taken by Hughes to hedge this
market risk exposure. A 20% decline in the market price of both investments
would cause the fair value of the investments in common stock to decrease by
$1.6 million.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of USSB. The purchase price, consisting of cash and GM Class H common
stock, will be determined at closing based upon an agreed-upon formula and will
not exceed $1.6 billion in the aggregate. Subject to certain limitations in the
merger agreement, USSB shareholders will be entitled to elect to receive cash or
shares of GM Class H common stock. The amount of cash to be paid in the merger
cannot be less than 30% or greater than 50% of the aggregate purchase price with
the remaining consideration consisting of GM Class H common stock. The merger,
which is subject to USSB shareholder approval and the receipt of appropriate
regulatory approval, is expected to close in early to mid-1999. See further
discussion in Note 14 to the financial statements.
Interest Rate Risk
Hughes is subject to interest rate risk related to its $934.8 million of debt
outstanding at December 31, 1998. Debt, which is classified as held-to-maturity,
consisted of PanAmSat's fixed-rate borrowings of $750.0 million, SurFin's
variable rate borrowings of $155.9 million and Hughes' fixed-rate borrowings of
$28.9 million. Hughes is subject to fluctuating interest rates which may
adversely impact its results of operations and cash flows for its variable rate
bank borrowings. Fluctuations in interest rates may also adversely effect the
market value of Hughes' fixed-rate borrowings. At December 31, 1998, outstanding
borrowings bore interest at rates ranging from 5.55% to 11.11%. The potential
fair value loss resulting from a hypothetical 10% decrease in interest rates
related to Hughes' outstanding debt would be approximately $32.5 million.
In connection with debt refinancing activities by PanAmSat in 1997, PanAmSat
entered into certain U.S. Treasury rate lock contracts to reduce its exposure to
fluctuations in interest rates. The aggregate notional value of these contracts
was $375.0 million and these contracts were accounted for as hedges. The cost to
settle these instruments in 1998 was $9.1 million and is being amortized to
interest expense over the term of the related debt securities.
Credit Risk
Hughes is exposed to credit risk in the event of non-performance by the
counterparties to its foreign exchange-forward contracts. While Hughes believes
this risk is remote, credit risk is managed through the periodic monitoring and
approval of financially sound counterparties.
IV-54
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Supplemental Data
The financial statements reflect the application of purchase accounting
adjustments as described in Note 1 to the financial statements. 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 $21.0 million in
1998, 1997 and 1996. 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 common
stock. Unamortized purchase accounting adjustments associated with GM's purchase
of Hughes were $426.6 million, $447.6 million and $468.6 million at December 31,
1998, 1997 and 1996, respectively.
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 General Motors' 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.
IV-55
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*
PRO FORMA CONDENSED STATEMENT OF INCOME
Years Ended December 31,
------------------------
1998 1997 1996
--------- --------- --------
(Dollars in Millions
Except Per Share Amounts)
Total revenues $5,963.9 $5,128.3 $4,008.7
Total costs and expenses 5,693.8 4,821.9 3,798.6
------- ------- -------
Operating profit 270.1 306.4 210.1
Non-operating (expense) income (58.3) 332.8 33.0
Income taxes (44.7) 236.7 104.8
Minority interests in net losses of subsidiaries 24.4 24.8 52.6
Income (loss) from discontinued operations - 64.0 (7.4)
Extraordinary item - (20.6) -
Cumulative effect of account change (9.2) - -
--- ----- -----
Earnings Used for Computation of Available
Separate Consolidated Net Income $271.7 $470.7 $183.5
===== ===== =====
Earnings Attributable to General Motors
Class H Common Stock on a Per Share Basis:
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change $0.70 $1.07 $0.48
Discontinued operations - 0.16 (0.02)
Extraordinary item - (0.05) -
Cumulative effect of accounting change (0.02) - -
---- ---- ----
Earnings Attributable to General Motors
Class H Common Stock $0.68 $1.18 $0.46
==== ==== ====
PRO FORMA CONDENSED BALANCE SHEET
December 31,
------------
ASSETS 1998 1997
-------- --------
(Dollars in Millions)
Total Current Assets $3,846.4 $4,773.1
Satellites, net 3,197.5 2,643.4
Property, net 1,059.2 889.7
Net Investment in Sales-type Leases 173.4 337.6
Intangible Assets, Investments and Other Assets, net 4,731.9 3,639.6
------- -------
Total Assets $13,008.4 $12,283.4
======== ========
LIABILITIES AND OWNER'S EQUITY
Total Current Liabilities $2,009.5 $1,449.8
Long-Term Debt 778.7 637.6
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 1,783.2 1,724.1
Minority Interests 481.7 607.8
Total Owner's Equity (1) 7,955.3 7,864.1
------- -------
Total Liabilities and Owner's Equity (1) $13,008.4 $12,283.4
======== ========
- -------------------
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(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).
IV-56
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA* - Continued
PRO FORMA SELECTED SEGMENT DATA
Years Ended December 31,
1998 1997 1996
---- ---- ----
(Dollars in Millions)
Direct-To-Home Broadcast
Total Revenues $1,816.1 $1,276.9 $621.0
Operating Loss (228.1) (254.6) (319.8)
Depreciation and Amortization 102.3 86.1 67.3
Segment Assets 2,190.4 1,408.7 1,023.4
Capital Expenditures (1) 230.8 105.6 63.5
Satellite Services
Total Revenues $767.3 $629.9 $482.8
Operating Profit 321.6 296.2 242.4
Operating Profit Margin 41.9% 47.0% 50.2%
Depreciation and Amortization $231.7 $141.9 $55.2
Segment Assets 5,824.2 5,612.8 1,202.6
Capital Expenditures (2) 921.7 625.7 308.7
Satellite Systems
Total Revenues $2,831.1 $2,491.9 $2,056.4
Operating Profit 246.3 226.3 183.3
Operating Profit Margin 8.7% 9.1% 8.9%
Depreciation and Amortization $49.2 $39.4 $34.4
Segment Assets 1,491.2 1,312.6 757.8
Capital Expenditures 99.7 113.9 87.8
Network Systems
Total Revenues $1,076.7 $1,011.3 $1,070.0
Operating Profit 10.9 74.1 107.7
Operating Profit Margin 1.0% 7.3% 10.1%
Depreciation and Amortization $41.7 $32.0 $28.3
Segment Assets 1,299.0 1,215.6 964.0
Capital Expenditures 40.0 43.1 45.3
Eliminations and Other
Total Revenues $(527.3) $(281.7) $(221.5)
Operating (Loss) (80.6) (35.6) (3.5)
Depreciation and Amortization 8.9 (3.0) 9.4
Segment Assets 2,203.6 2,733.7 (43.8)
Capital Expenditures 136.3 (61.7) (55.9)
Consolidated Total
Total Revenues $5,963.9 $5,128.3 $4,008.7
Operating Profit 270.1 306.4 210.1
Operating Profit Margin 4.5% 6.0% 5.2%
Depreciation and Amortization $433.8 $296.4 $194.6
Segment Assets 13,008.4 12,283.4 3,904.0
Capital Expenditures 1,428.5 826.6 449.4
Certain 1997 and 1996 amounts have been reclassified to conform with 1998
classifications.
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1)Includes expenditures related to satellites amounting to $70.2 million in
1998.
(2)Includes expenditures related to satellites amounting to $726.3 million,
$606.1 million and $259.2 million, respectively. Also included in the 1998
amount is $155.5 million related to the early buy-out of satellite
sale-leasebacks.
IV-57
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA* - Concluded
PRO FORMA SELECTED FINANCIAL DATA
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
--------------------------------------
(Dollars in Millions)
Operating profit $270 $306 $210 $172 $235
Income from continuing operations
before income taxes, minority
interests, extraordinary
item and cumulative effect
of accounting change $212 $639 $243 $119 $174
Earnings used for computation
of available separate
consolidated net income $272 $471 $184 $27 $62
Average number of GM
Class H dividend base
shares (in millions) (1) 399.9 399.9 399.9 399.9 399.9
Owner's equity $7,955 $7,864 $2,023 $2,119 $1,790
Working capital $1,837 $3,323 $278 $312 $274
Operating profit as a percen
of revenues 4.5% 6.0% 5.2% 5.4% 8.7%
Income from continuing operations
before income taxes, minority
interests, extraordinary item
and cumulative effect of
accounting change
as a percent of revenues 3.6% 12.5% 6.1% 3.8% 6.5%
Net income as a percent of revenues 4.6% 9.2% 4.6% 0.9% 2.3%
Return on equity (2) 3.4% 9.5% 8.9% 1.4% 3.8%
Income before interest expense
and income taxes as a percent
of capitalization (3) 3.2% 14.3% 16.3% 9.4% 14.0%
Pre-tax return on total assets (4) 1.9% 8.2% 8.0% 3.8% 6.0%
* 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 105.3 million in
1998.
(2)Earnings used for computation of available separate consolidated net income
divided by average owner's equity (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).
(3)Income from continuing operations before interest expense, income taxes,
extraordinary item and cumulative effect of accounting change divided by
average owner's equity plus average total debt.
(4)Income from continuing operations before income taxes, extraordinary item
and cumulative effect of accounting change divided by average total assets.
* * * * * * *
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