EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS AND
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME (LOSS) AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions Except Per Share Amounts)
Revenues
Direct broadcast, leasing and other services $1,294.4 $ 640.5 $3,095.2 $1,845.8
Product sales 696.1 872.8 2,123.1 2,327.5
-------- -------- -------- --------
Total Revenues 1,990.5 1,513.3 5,218.3 4,173.3
-------- -------- -------- --------
Operating Costs and Expenses
Cost of products sold 606.7 659.5 1,961.6 1,782.4
Broadcast programming and other costs 573.9 284.6 1,344.1 800.2
Selling, general and administrative expenses 598.3 390.4 1,551.6 1,052.2
Depreciation and amortization 216.5 111.3 499.3 309.2
Amortization of GM purchase accounting
adjustments 5.3 5.3 15.9 15.9
-------- -------- -------- --------
Total Operating Costs and Expenses 2,000.7 1,451.1 5,372.5 3,959.9
-------- -------- -------- --------
Operating Profit (Loss) (10.2) 62.2 (154.2) 213.4
Interest income 2.4 20.5 20.9 88.6
Interest expense (51.7) (3.6) (71.0) (9.5)
Other, net (22.4) (33.4) 77.8 (102.8)
-------- -------- -------- --------
Income (Loss) Before Income Taxes, Minority
Interests and Cumulative Effect of
Accounting Change (81.9) 45.7 (126.5) 189.7
Income tax provision (benefit) (38.2) 17.4 (44.9) 72.1
Minority interests in net losses of subsidiaries 8.8 9.3 22.1 19.2
-------- -------- -------- --------
Income (Loss) before cumulative effect
of accounting change (34.9) 37.6 (59.5) 136.8
Cumulative effect of accounting change, net
of taxes - - - (9.2)
-------- -------- -------- --------
Net Income (Loss) (34.9) 37.6 (59.5) 127.6
Adjustments to exclude the effect of
GM purchase accounting adjustments 5.3 5.3 15.9 15.9
-------- -------- -------- --------
Earnings (Loss) excluding the effect of
GM purchase accounting adjustments (29.6) 42.9 (43.6) 143.5
Preferred stock dividends (24.7) - (26.3) -
-------- -------- -------- --------
Earnings (Loss) Used for Computation of
Available Separate Consolidated Net
Income (Loss) $ (54.3) $ 42.9 $ (69.9) $ 143.5
======== ======== ======== ========
Available Separate Consolidated Net Income (Loss)
Average number of shares of General Motors
Class H Common Stock outstanding
(in millions) (Numerator) 135.1 105.7 120.8 105.0
Average Class H dividend base (in millions)
(Denominator) 428.9 399.9 414.7 399.9
Available Separate Consolidated Net Income (Loss) $ (17.1) $ 11.4 $ (20.4) $ 37.6
======== ======== ======== ========
Earnings (Loss) Attributable to General Motors
Class H Common Stock on a Per Share
Basis - Basic and Diluted $ (0.13) $ 0.11 $ (0.17) $ 0.36
======== ======== ======== ========
- ---------
Reference should be made to the Notes to Financial Statements.
- 39 -
HUGHES ELECTRONICS CORPORATION
BALANCE SHEETS
September 30,
1999 December 31,
ASSETS (Unaudited) 1998
------------- ------------
(Dollars in Millions)
Current Assets
Cash and cash equivalents $ 158.3 $ 1,342.1
Accounts and notes receivable (less allowances) 1,289.8 922.4
Contracts in process, less advances and progress
payments of $24.7 and $27.0 846.1 783.5
Inventories 639.1 471.5
Prepaid expenses and other, including deferred income
taxes of $97.5 and $33.6 705.9 326.9
--------- ---------
Total Current Assets 3,639.2 3,846.4
Satellites, net 3,690.6 3,197.5
Property, net 1,303.0 1,059.2
Net Investment in Sales-type Leases 155.9 173.4
Intangible Assets, net of accumulated amortization
of $562.0 and $413.2 7,781.5 3,552.2
Investments and Other Assets 2,236.1 1,606.3
--------- ---------
Total Assets $18,806.3 $13,435.0
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 1,005.7 $ 764.1
Advances on contracts 164.5 291.8
Deferred revenues 194.9 43.8
Current portion of long-term debt 298.1 156.1
Accrued liabilities 933.1 753.7
--------- ---------
Total Current Liabilities 2,596.3 2,009.5
Long-Term Debt 1,929.2 778.7
Postretirement Benefits Other Than Pensions 155.5 150.7
Other Liabilities and Deferred Credits 1,686.1 988.6
Deferred Income Taxes 425.0 643.9
Commitments and Contingencies
Minority Interests 530.0 481.7
Stockholder's Equity
Capital stock and additional paid-in capital 9,710.7 8,146.1
Preferred stock 1,486.3 -
Net income retained for use in the business 172.0 257.8
--------- ---------
Subtotal Stockholder's Equity 11,369.0 8,403.9
--------- ---------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment (37.1) (37.1)
Accumulated unrealized gains on securities 140.1 16.1
Accumulated foreign currency translation adjustments 12.2 (1.0)
--------- ---------
Accumulated other comprehensive income (loss) 115.2 (22.0)
--------- ---------
Total Stockholder's Equity 11,484.2 8,381.9
--------- ---------
Total Liabilities and Stockholder's Equity $18,806.3 $13,435.0
========= =========
- ------
Reference should be made to the Notes to Financial Statements.
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HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------
1999 1998
---- ----
(Dollars in Millions)
Cash Flows from Operating Activities
Net Cash (Used in) Provided by Operating Activities $ (187.6) $ 313.7
--------- ---------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired (2,324.5) (960.5)
Investment in convertible bonds (238.1) -
Expenditures for property (310.2) (202.7)
Increase in satellites (551.9) (526.7)
Early buy-out of satellite under sale and leaseback (245.4) (155.5)
Proceeds from disposals of property 5.1 17.6
Proceeds from disposal of investments - 12.4
Proceeds from insurance claims 10.7 231.2
--------- ---------
Net Cash Used in Investing Activities (3,654.3) (1,584.2)
--------- ---------
Cash Flows from Financing Activities
Net increase in notes and loans payable 85.7 60.0
Long-term debt borrowings 5,221.6 875.3
Repayment of long-term debt (4,171.0) (734.2)
Net proceeds from issuance of preferred stock 1,485.0 -
Stock options exercised 47.3 -
Purchase and retirement of GM Class H common stock (8.9) -
Preferred stock dividends paid to General Motors (1.6) -
Payment to General Motors for Delco post-closing
price adjustment - (204.7)
--------- ---------
Net Cash Provided by (Used in) Financing Activities 2,658.1 (3.6)
--------- ---------
Net decrease in cash and cash equivalents (1,183.8) (1,274.1)
Cash and cash equivalents at beginning of the period 1,342.1 2,783.8
--------- ---------
Cash and cash equivalents at end of the period $ 158.3 $ 1,509.7
========= =========
- -----
Reference should be made to the Notes to Financial Statements.
- 41 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting. In the opinion of management, all adjustments (consisting only of
normal recurring items) which are necessary for a fair presentation have been
included. The results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for the full year.
For further information, refer to the financial statements and notes thereto
included in the General Motors ("GM") 1998 Annual Report on Form 10-K filed with
the Securities and Exchange Commission ("SEC"); the unaudited information
relating to Hughes filed as Exhibit 99 in GM's Quarterly Reports on Form 10-Q
dated March 31, 1999 and June 30, 1999 and related Hughes' Quarterly Report on
Form 10-Q for the period ended June 30, 1999, filed with the SEC; and Current
Reports on Form 8-K filed with the SEC subsequent to the filing date for the GM
1998 Annual Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to the
September 1999 presentation.
The 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.
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 was $9.2 million after-tax, or $0.02
per share of GM Class H common stock in the first quarter of 1998.
Note 2. Inventories
Major Classes of Inventories
September 30, December 31,
(Dollars in Millions) 1999 1998
---- ----
Productive material and supplies $ 75.8 $ 73.4
Work in process 457.9 285.1
Finished goods 105.4 113.0
------ ------
Total $639.1 $471.5
====== ======
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
(Dollars in Millions) 1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $(34.9) $ 37.6 $(59.5) $127.6
Other comprehensive income (loss):
Foreign currency translation
adjustments 17.8 2.2 13.2 (0.3)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) 148.1 (3.4) 124.0 (2.4)
Less: reclassification
adjustment for unrealized
gains (losses) included in net
income - 0.2 - (7.1)
------ ------ ------ ------
Unrealized gains (losses) on securities 148.1 (3.2) 124.0 (9.5)
------ ------ ------ ------
Other comprehensive income (loss) 165.9 (1.0) 137.2 (9.8)
------ ------ ------ ------
Total comprehensive income $131.0 $ 36.6 $ 77.7 $117.8
====== ====== ====== ======
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 4. Earnings (Loss) Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income (Loss)
Earnings (Loss) attributable to GM Class H common stock on a per share basis
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 (Loss) ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the
separate consolidated net income (loss) of Hughes, excluding the effects of GM
purchase accounting adjustments arising from GM's acquisition of Hughes and
including the effects of preferred dividends paid and/or payable to GM (earnings
(loss) used for computation of ASCNI), multiplied by a fraction, the numerator
of which is equal to the weighted-average number of shares of GM Class H common
stock outstanding during the period (135.1 million and 105.7 million during the
third quarters of 1999 and 1998, respectively) and the denominator of which is a
number equal to the weighted-average number of shares of GM Class H common
stock which, if issued and outstanding, would represent 100% of the tracking
stock interest in the earnings of Hughes (Average Class H dividend base). The
Average Class H dividend base was 428.9 million and 399.9 million during the
third quarters of 1999 and 1998, respectively. Upon conversion of the General
Motors Series H preference stock into General Motors Class H common stock, both
the numerator and the denominator used in the computation of ASCNI will increase
by the number of shares of the General Motors Class H common stock issued (see
further discussion in Note 5). In addition, 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 ("GM Board") to reflect subdivisions or combinations
of the GM Class H common stock, certain transfers of capital to or from Hughes,
the contribution of shares of capital stock of GM to or for the benefit of
Hughes employees and the retirement of GM Class H common stock purchased by
Hughes. The GM Board's discretion to make such adjustments is limited by
criteria set forth in GM's Restated Certificate of Incorporation.
In connection with the PRIMESTAR and USSB transactions (see further discussion
in Note 7), GM contributed to Hughes an amount of cash sufficient to enable
Hughes to purchase from GM, for fair value as determined by the GM Board, the
number of shares of GM Class H common stock delivered by Hughes. In accordance
with the GM certificate of incorporation, the Class H dividend base was
increased to reflect that number of shares. The number of shares issued as part
of the PRIMESTAR acquisition and the USSB merger have been included in the
calculation of both the numerator and denominator of the fraction described
above since the consummation dates of the transactions.
Effective January 1, 1999, shares of Class H common stock delivered by GM in
connection with the award of such shares to and the exercise of stock options by
employees of Hughes increases the numerator and denominator of the fraction
referred to above. Prior to January 1, 1999, there was no dilutive effect
resulting from the assumed exercise of stock options, because the exercise of
stock options did not affect the GM Class H dividend base (denominator). From
time to time, in anticipation of exercises of stock options, Hughes purchases
Class H common stock from the open market. Upon purchase, these shares are
retired and therefore decrease the numerator and denominator of the fraction
referred to above.
For the three and nine months ended September 30, 1999, diluted loss per share
has not been presented as the assumed exercise of stock options and the assumed
conversion of the preferred shares in the computation of diluted loss per share
would have been anti-dilutive.
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 5. Hughes Series A Preferred Stock
On June 24, 1999, as part of a strategic alliance with Hughes, America
Online ("AOL") invested $1.5 billion in shares of General Motors Series H 6.25%
Automatically Convertible Preference Stock. The General Motors Series H
preference stock will automatically convert into Class H common stock in three
years based upon a variable conversion factor linked to the Class H common stock
price at the time of conversion, and accrues quarterly dividends at a rate of
6.25% per year. It may be converted earlier in certain limited circumstances.
General Motors immediately invested the $1.5 billion received from AOL in shares
of Hughes Series A Preferred Stock designed to correspond to the financial terms
of the General Motors Series H preference stock. Dividends on the Hughes Series
A Preferred Stock are payable to General Motors quarterly at an annual rate of
6.25%. These preferred stock dividends payable to General Motors will reduce
Hughes' earnings used for computation of the ASCNI of Hughes, which will have an
effect equivalent to the payment of dividends on the Series H preference stock
as if those dividends were paid by Hughes. Upon conversion of the General Motors
Series H preference stock into General Motors Class H common stock, Hughes will
redeem the Series A Preferred Stock through a cash payment to General Motors
equal to the fair market value of the Class H common stock issuable upon the
conversion. Simultaneous with General Motors' receipt of the cash redemption
proceeds, General Motors will make a capital contribution to Hughes of the same
amount. In connection with this capital contribution, the denominator of the
fraction used in the computation of the ASCNI of Hughes will be increased by the
corresponding number of shares of General Motors Class H common stock issued.
Accordingly, upon conversion of the General Motors Series H preference stock
into General Motors Class H common stock, both the numerator and denominator
used in the computation of ASCNI will increase by the amount of the General
Motors Class H common stock issued.
Note 6. Other Postretirement Benefits
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities" or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, Hughes does not admit or otherwise acknowledge that
such amounts or existing postretirement benefit plans of Hughes (other than
pensions) represent legally enforceable liabilities of Hughes.
Note 7. Investments and Acquisitions
On September 24, 1999, DIRECTV Japan, Hughes' 42.2% owned affiliate, raised
approximately $275 million through the issuance of bonds, convertible into
common stock, to five of its major shareholders, including $238.1 million issued
to Hughes. If Hughes elects to convert these bonds, Hughes would have a
controlling interest in DIRECTV Japan.
On July 28, 1999, Galaxy Latin America ("GLA") acquired Galaxy Brasil,
Ltda., the exclusive distributor of DIRECTV services in Brazil, from Tevecap
S.A. for approximately $114.0 million plus the assumption of debt. In connection
with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and
the Cisneros Group, the remaining GLA partners. Hughes' share of the GLA
purchase amounted to approximately $101.1 million and increased Hughes'
ownership of GLA to 77.8%.
- 44 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 7. Investments and Acquisitions - concluded
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of Class H common stock at
the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March 10,
1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provided direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. The USSB acquisition was closed on May 20,
1999. On July 6, 1999, based upon elections made by the former USSB
shareholders, Hughes paid approximately $0.4 billion in cash and issued
approximately 22.6 million shares of Class H common stock, for a total purchase
price of approximately $1.6 billion.
The financial information presented as of and for the periods ended
September 30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and
USSB transactions, discussed above, from their respective dates of acquisition.
These transactions have been accounted for using the purchase method of
accounting; however, the adjustments made in the September 30, 1999 financial
statements reflect a preliminary allocation of the purchase price for the
transactions based upon information currently available. Adjustments relating to
the tangible assets (i.e., satellites, equipment located on customer premises,
etc.), intangible assets (i.e., licenses granted by the Federal Communications
Commission, customer lists, dealer network, etc.), and accrued liabilities for
programming contracts and leases with above-market rates are estimates pending
the completion of independent appraisals currently in process. Additionally, the
adjustment to recognize the benefit of net operating loss carryforwards of USSB
represents a preliminary estimate pending further review and analysis by the
management of Hughes. These appraisals, valuations and studies are expected to
be completed by December 31, 1999. Accordingly, the final purchase price
allocations may be different from the amounts reflected herein.
As the Hughes 1999 financial statements include only USSB's and PRIMESTAR's
results of operations since their dates of acquisition, the following selected
unaudited pro forma information is provided to present a summary of the combined
results of Hughes, USSB and PRIMESTAR as if the acquisitions 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 USSB and
PRIMESTAR operated as part of Hughes for the nine months ended September 30,
1999 and September 30, 1998, nor are they necessarily indicative of the results
of future operations. The pro forma information excludes the effect of non-
recurring charges.
Nine Months Ended Nine Months Ended
(Dollars in Millions Except Per Share Amounts) September 30, 1999 September 30, 1998
- -------------------------------------------------------------------------------------------------------------
Total revenues $6,008.1 $5,484.4
Income (Loss) before cumulative effect of accounting
change (41.7) 79.3
Net income (loss) (41.7) 70.1
Pro forma available separate consolidated net income (loss) (1) (30.1) 4.9
Pro forma earnings (loss) per share attributable to GM Class H
common stock on a per share basis (1) $ (0.22) $ 0.04
(1) Both periods include the pro forma effect of dividends amounting to $70.3
million related to the Hughes Series A Preferred Stock as if the preferred stock
had been outstanding as of the beginning of the respective periods.
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 8. 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 telephony
systems, mobile cellular digital packet data systems and DIRECTVtm receiver
equipment. Other includes the corporate office and other entities.
Selected information for Hughes' operating segments for the three and nine
months ended September 30, 1999 and 1998, are reported as follows:
Operating Segments:
Direct-To-
Home Satellite Satellite Network
(Dollars in Millions) Broadcast Services Systems Systems Other Eliminations Total
- --------------------------------------------------------------------------------------------------------------------
For the Three Months Ended:
September 30, 1999
External Revenues $1,143.8 $176.3 $ 364.6 $305.8 - - $1,990.5
Intersegment
Revenues 0.8 34.4 146.2 120.4 $ 0.1 $(301.9) -
- --------------------------------------------------------------------------------------------------------------------
Total Revenues $1,144.6 $210.7 $ 510.8 $426.2 $ 0.1 $(301.9) $1,990.5
- --------------------------------------------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $ (67.6) $ 98.2 $ 41.3 $ 32.2 $(27.1) $ (87.2) $ (10.2)
- --------------------------------------------------------------------------------------------------------------------
For the Three Months Ended:
September 30, 1998
External Revenues $ 458.0 $152.0 $ 659.5 $240.4 $ 3.4 - $1,513.3
Intersegment
Revenues 1.1 34.5 29.4 27.3 - $ (92.3) -
- --------------------------------------------------------------------------------------------------------------------
Total Revenues $ 459.1 $186.5 $ 688.9 $267.7 $ 3.4 $ (92.3) $1,513.3
- --------------------------------------------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $ (61.8) $ 78.2 $ 63.8 $ 16.9 $(14.8) $ (20.1) $ 62.2
- --------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1999
External Revenues $2,569.1 $503.3 $1,362.6 $783.3 - - $5,218.3
Intersegment
Revenues 2.3 101.3 332.3 214.9 $ 0.4 $(651.2) -
- --------------------------------------------------------------------------------------------------------------------
Total Revenues $2,571.4 $604.6 $1,694.9 $998.2 $ 0.4 $(651.2) $5,218.3
- --------------------------------------------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $ (159.4) $258.9 $ (106.1) $ 25.7 $(67.0) $(106.3) $ (154.2)
- --------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1998
External Revenues $1,247.4 $480.7 $1,806.2 $626.5 $ 12.5 - $4,173.3
Intersegment
Revenues 1.1 89.9 181.8 47.6 0.9 $(321.3) -
- --------------------------------------------------------------------------------------------------------------------
Total Revenues $1,248.5 $570.6 $1,988.0 $674.1 $ 13.4 $(321.3) $4,173.3
- --------------------------------------------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $ (133.6) $236.7 $ 178.9 $(20.2) $(26.2) $ (22.2) $ 213.4
- --------------------------------------------------------------------------------------------------------------------
(1) Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes amounting to $0.9 million in each of the
three-month periods and $2.5 million in each of the nine-month periods for
the Satellite Services segment and $4.4 million in each of the three-month
periods and $13.4 million in each of the nine-month periods for Other.
- 46 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Commitments and Contingencies
In connection with the 1997 spin-off of the defense electronics business of
Hughes' predecessor and the subsequent merger of that business with Raytheon
Company, the terms of the merger agreement provided processes for resolving
disputes that might arise in connection with post-closing financial adjustments
that were also called for by the terms of the merger agreement. Such financial
adjustments might require a cash payment from Raytheon to Hughes or vice versa.
Disputes currently exist regarding the post-closing adjustments which Hughes
and Raytheon have proposed to one another and related issues regarding the
adequacy of disclosures made by Hughes to Raytheon in the period prior to
consummation of the merger. Hughes and Raytheon are proceeding with the dispute
resolution process. It is possible that the ultimate resolution of the post-
closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the disputes through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that it
has proposed.
General Electric Capital Corporation ("GECC") and DIRECTV, Inc. entered
into a contract on July 31, 1995, in wich GECC agreed to provide financing for
consumer purchases of DIRECTV hardware and related programming. Under the
contract, GECC also agreed to provide certain related services to DIRECTV,
including credit risk scoring, billing and collections services. DIRECTV agreed
to act as a surety for loans complying with the terms of the contract. Hughes
guaranteed DIRECTV's performance under the contract. A complaint and
counterclaim have been filed by the parties in the U.S. District Court for the
District of Connecticut concerning GECC's performance and DIRECTV's obligation
to act as a surety. GECC claims damages from DIRECTV in excess of $140 million.
DIRECTV is seeking damages from GECC in excess of $70 million. Hughes intends to
vigorously contest GECC's allegations and pursue Hughes' own contractual rights
and remedies. Hughes does not believe that the litigation will have a material
adverse impact on Hughes' results of operations or financial position. Pretrial
discovery is not yet completed in the case and no trial date has been set.
Hughes Space and Communications International ("HSCI") has a contract with
ICO Global Communications Operations ("ICO Global") to build the satellites and
related components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in the parent company, ICO Global
Communications (Holdings) ("ICO"). On August 27, 1999, ICO filed for bankruptcy
protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On
November 9, 1999, the bankruptcy court approved an interim financing arrangement
that will allow ICO to continue its operations while it negotiates a plan of
reorganization. ICO has indicated that under its proposed plan, which is subject
to bankruptcy court approval, ICO would continue its contract with HSCI, pay
amounts owed to HSCI and have adequate financing to complete the contract. There
can be no assurance that ICO will be successful in confirming a plan of
reorganization, and if unable to do so the most likely outcome would be a
liquidation proceeding. In the event that a liquidation becomes probable, Hughes
would expect to record a pre-tax charge to earnings of up to approximately $500
million.
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HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Commitments and Contingencies - concluded
On June 3, 1999, the National Rural Telecommunications Cooperative ("NRTC")
filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc.
(together, "DIRECTV") in United States District Court for the Central District
of California, alleging that DIRECTV has breached the DBS Distribution Agreement
(the "Agreement") with the NRTC. The Agreement provides the NRTC with exclusive
distribution rights, in certain specified portions of the United States, to
DIRECTV programming delivered over 27 of the 32 frequencies at the 101 degrees
west longitude orbital location. The NRTC claims that DIRECTV has wrongfully
deprived it of the exclusive right to distribute programming formerly provided
by USSB over the other 5 frequencies at 101 degrees. DIRECTV denies that the
NRTC is entitled to exclusive distribution rights to the former USSB programming
because the NRTC's exclusive distribution rights are limited to programming
distributed over 27 of the 32 frequencies at 101 degrees. The NRTC's complaint
seeks, in the alternative, the right to distribute former USSB programming on a
non-exclusive basis and the recovery of related revenues from the date USSB was
acquired by Hughes. DIRECTV maintains that the NRTC's right under the Agreement
is to market and sell the former USSB programming as its agent and is not
entitled to the claimed revenues. On August 26, 1999, the NRTC filed a second
lawsuit against DIRECTV, for damages in excess of $75 million, in which it
alleges that DIRECTV has breached the agreement it has with NRTC. In this suit,
NRTC is asking the court to require DIRECTV to pay to NRTC a proportionate share
of the financial benefits DIRECTV derives from programming providers and certain
other third parties. DIRECTV denies that it owes any sums to the NRTC on account
of the allegations in these matters and plans to vigorously defend itself
against these claims. Although the amounts of the combined claims are material
to Hughes, Hughes does not believe that the outcome of these lawsuits will
result in a material adverse impact on Hughes' results of operations or
financial position. However, there can be no assurance as to those conclusions.
Note 10. Subsequent Event
In October 1999, Hughes issued $500.0 million of floating rate notes in a
private placement with a group of institutional investors. The notes mature on
October 23, 2000.
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HUGHES ELECTRONICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis should be read in
conjunction with the Hughes management's discussion and analysis included in the
General Motors ("GM") 1998 Annual Report to the Securities and Exchange
Commission ("SEC") on Form 10-K; the management's discussion and analysis
relating to Hughes included in Exhibit 99 to GM's Quarterly Reports on Form 10-Q
dated March 31, 1999 and June 30, 1999 and related Hughes' Quarterly Report on
Form 10-Q filed with the SEC; and Current Reports on Form 8-K filed with the SEC
subsequent to the filing date for GM's 1998 Form 10-K. In addition, the
following discussion excludes purchase accounting adjustments related to GM's
acquisition of Hughes (see Supplemental Data beginning on page 60).
This Quarterly Report may contain certain statements that Hughes believes
are, or may be considered to be, "forward-looking statements", within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. All of these forward-looking statements are
subject to certain risks and uncertainties that could cause our actual results
to differ materially from those contemplated by the relevant forward-looking
statement. The principal important risk factors which could cause actual
performance and future actions to differ materially from forward-looking
statements made herein include economic conditions, product demand and market
acceptance, government action, local political or economic developments in or
affecting countries where Hughes has operations, ability to obtain export
licenses, competition, ability to achieve cost reductions, technological risk,
ability to address the year 2000 issue, interruptions to production attributable
to causes outside of Hughes' control, limitations on access to distribution
channels, the success and timeliness of satellite launches, in-orbit performance
of satellites, ability of customers to obtain financing and Hughes' ability to
access capital to maintain its financial flexibility. Additionally, Hughes and
its 81.0% owned subsidiary, PanAmSat Corporation ("PanAmSat"), have experienced
satellite anomalies in the past and may experience satellite anomalies in the
future that could lead to the loss or reduced capacity of such satellites that
could materially affect Hughes' operations. Readers are urged to consider these
factors carefully in evaluating the forward-looking statements. The forward-
looking statements included in this Quarterly Report are made only as of the
date of this Quarterly Report and we undertake no obligation to publicly update
these forward-looking statements to reflect subsequent events or circumstances.
The financial information presented as of and for the period ended
September 30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and
United States Satellite Broadcasting Company, Inc. ("USSB") transactions,
discussed below, from their respective dates of acquisition. These transactions
have been accounted for using the purchase method of accounting; however, the
adjustments made in the September 30, 1999 financial statements reflect a
preliminary allocation of the purchase price for the transactions based upon
information currently available. Adjustments relating to the tangible assets
(i.e., satellites, equipment located on customer premises, etc.), intangible
assets (i.e., licenses granted by the Federal Communications Commission,
customer lists, dealer network, etc.), and accrued liabilities for programming
contracts and leases with above-market rates are estimates pending the
completion of independent appraisals currently in process. Additionally, the
adjustment to recognize the benefit of net operating loss carryforwards of USSB
represents a preliminary estimate pending further review and analysis by the
management of Hughes. These appraisals, valuations and studies are expected to
be completed by December 31, 1999. Accordingly, the final purchase price
allocations may be different from the amounts reflected herein.
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HUGHES ELECTRONICS CORPORATION
General
On February 24, 1999, the Department of Commerce notified Hughes that it
intended to deny a U.S. government export license Hughes was required to obtain
in connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile
telecommunications system. As a result, APMT and Hughes terminated the contract
on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92
million in the first quarter of 1999. This charge represents the write-off of
receivables and inventory, with no alternative use, related to the contract.
Hughes had maintained a lawsuit against the U.S. government since September
1973 regarding the U.S. government's infringement and use of a Hughes patent
covering "Velocity Control and Orientation of a Spin Stabilized Body,"
principally satellites (the "Williams Patent"). On April 7, 1998, the U.S. Court
of Appeals for the Federal Circuit reaffirmed earlier decisions in the Williams
Patent case, including an award of $114.0 million in damages, plus interest. In
March 1999, Hughes received and recognized as income a $154.6 million payment
from the U.S. government as a final settlement of the suit.
In April 1999, Hughes acquired the direct-broadcast satellite medium-power
business of PRIMESTAR and the related high-power satellite assets of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, in related
transactions. PRIMESTAR operated a 160-channel medium-power direct broadcast
service using leased satellite capacity at 85 (degrees) west longitude. As of
March 31, 1999, PRIMESTAR had 2.3 million subscribers in the United States.
DIRECTV intends to operate the medium-power PRIMESTAR business, PRIMESTAR By
DIRECTV, for a period of approximately two years, during which time PRIMESTAR
subscribers will be offered the opportunity to transition to the high-power
DIRECTV service. During this period, the PRIMESTAR distribution network will
continue servicing PRIMESTAR By DIRECTV subscribers and begin offering the high-
power DIRECTV service to new subscribers. The PRIMESTAR acquisition provided
DIRECTV with an immediate increase in revenues from the existing PRIMESTAR
subscribers, and ongoing revenues from those subscribers that transition to the
DIRECTV service. The Tempo Satellite in-orbit satellite and related frequencies
acquisition provides DIRECTV with 11 high-power DBS frequencies at 119(degrees)
west longitude, from which it can begin delivering programming to the contiguous
United States at any time.
In May 1999, Hughes acquired by merger all of the outstanding capital stock
of U.S. Satellite Broadcasting Company ("USSB"). USSB provided subscription
television programming to households throughout the continental United States
via the digital satellite broadcasting system that it shared with DIRECTV. The
USSB acquisition has provided DIRECTV with 25 channels of video programming,
including premium networks such as HBO(R), Showtime(R), Cinemax(R) and The Movie
Channel(R) which it is now offering to its subscribers resulting in an increase
in average revenue per subscriber.
In May 1999, it was announced that Hughes will collaborate with America
Online ("AOL") on a new service that will combine digital satellite television
programming from DIRECTV with AOL's new interactive television Internet service.
Hughes Network Systems ("HNS") will design and build the initial dual purpose
DIRECTV/AOL receiver equipment. The new service will be suited for both frequent
Internet users and the mass market consumer who wants to connect to the
Internet. In June 1999, Hughes announced a more extensive strategic alliance
with AOL to develop and market digital entertainment and Internet services
nationwide. The new alliance is expected to accelerate subscriber growth and
revenue-per-subscriber for the DIRECTV and DirecPC services, as well as expand
the subscriber base for AOL's developing AOL TV and AOL-Plus broadband services.
As part of the alliance, Hughes and AOL plan to jointly develop new content and
interactive services for U.S. and international markets. Additionally, an
extensive cross-marketing initiative will be instituted to market each company's
products through their respective retail outlets and to their respective
subscribers. As part of its marketing initiative with AOL, Hughes committed to
increase its sales and marketing expenditures over the next three years by
approximately $1.5 billion relating to its DirecPC/AOL-Plus, DlRECTV,
DlRECTV/AOL TV and DirecDuo products and services.
As part of the alliance, AOL invested $1.5 billion in shares of General
Motors Series H 6.25% Automatically Convertible Preference Stock. General Motors
immediately invested the $1.5 billion received from AOL in shares of Hughes
Series A Preferred Stock designed to correspond to the financial terms of the
General Motors Series H preference stock. Dividends on the Hughes Series A
Preferred Stock are payable to General Motors quarterly at an annual rate of
6.25%. See further discussion in Notes 4 and 5 to the financial statements.
Hughes Space and Communications International ("HSCI") has a contract with
ICO Global Communications Operations ("ICO Global") to build the satellites and
related components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in the parent company, ICO Global
Communications (Holdings) ("ICO"). On August 27, 1999, ICO filed for bankruptcy
protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On
November 9, 1999, the bankruptcy court approved an interim financing arrangement
that will allow ICO to continue its operations while it negotiates a plan of
reorganization. ICO has indicated that under its proposed plan, which is subject
to bankruptcy court approval, ICO would continue its contract with HSCI, pay
amounts owed to HSCI and have adequate financing to complete the contract. There
can be no assurance that ICO will be successful in confirming a plan of
reorganization, and if unable to do so the most likely outcome would be a
liquidation proceeding. In the event that a liquidation becomes probable, Hughes
would expect to record a pre-tax charge to earnings of up to approximately $500
million.
On October 9, 1999, DIRECTV successfully launched the DIRECTV 1-R satellite
which will be used in the 101 degree West Longitude ("WL") orbital slot. With
the addition of DIRECTV 1-R and technology upgrades at its two broadcast
centers, DIRECTV will have the additional capacity needed to deliver local
broadcast network channels to DIRECTV's top 20 markets using their existing 18-
inch satellite dish and receiving equipment. This announcement updates earlier
plans to deliver local channels from 101 degrees WL only to its customers in New
York and Los Angeles. In total, DIRECTV's initial plans call for the delivery of
local channels by satellite to approximately 50 million homes, or about half of
the nation's television households. DIRECTV remains, however, prohibited from
providing local television channels into local markets, until currently pending
legislation authorizes such delivery.
There is a pending grand jury investigation into whether Hughes should be
accused of criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the failure of a Long March rocket in
China in 1996. Hughes is also subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participation in government
contracts. Hughes does not expect the grand jury investigation or State
Department review to result in a material adverse effect upon its business.
However, there can be no assurance as to those conclusions. In addition, a
congressional committee chaired by Representative Cox released a report in May
1999 containing negative commentary about the compliance of U.S. satellite
manufacturers, including Hughes, with export control laws. Many of Hughes'
satellite launches, including those of PanAmSat, are scheduled for non-U.S.
launch providers. There can be no assurance that future satellite launches by
non-U.S. launch providers will not be adversely affected by this investigation
and report, including the possibility of significant launch delays.
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HUGHES ELECTRONICS CORPORATION
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues. Third quarter 1999 revenues increased 31.5% to $1,990.5 million
compared with $1,513.3 million for the third quarter of 1998. The increase
reflects revenue growth at the Direct-To-Home, Satellite Services and Network
Systems segments offset in part by a decline in revenues at the Satellite
Systems segment.
The Direct-To-Home Broadcast segment's third quarter 1999 revenues more
than doubled to $1,144.6 million from $459.1 million in the third quarter of
1998. The increase was primarily attributable to continued strong subscriber
growth for the DIRECTV(R) businesses, as well as additional revenues from the
PRIMESTAR By DIRECTV and USSB businesses acquired in the second quarter of 1999.
Domestic DIRECTV contributed significantly to this growth with quarterly
revenues of $1,052 million compared to last year's third quarter revenues of
$408 million. Domestic DIRECTV added 423,000 net new subscribers to its
high-power DIRECTV service in the third quarter of 1999 compared to 303,000 net
new subscribers for the third quarter of 1998, a 40% increase. In addition,
204,000 customers were transitioned from the PRIMESTAR By DIRECTV medium-power
service to the DIRECTV high-power service in the third quarter of 1999. As of
September 30, 1999, total domestic DIRECTV subscribers grew to more than 7.7
million, which includes approximately 1.8 million customers subscribing to
PRIMESTAR By DIRECTV. Hughes' DIRECTV Latin American businesses, which includes
Hughes' subsidiary, Galaxy Latin America ("GLA"), more than doubled revenues to
$76 million for the third quarter of 1999 from $37 million for the third quarter
of 1998. This increase in revenues was due to continued subscriber growth and
additional revenues resulting from the consolidation of SurFin Ltd. ("SurFin"),
beginning in November 1998, Grupo Galaxy Mexicana, S.A. de C.V. ("GGM"),
beginning in February 1999 and Galaxy Brazil, Ltda. ("GLB"), beginning in August
1999. GLA added 67,000 net new subscribers for the third quarter, compared to
36,000 net new subscribers acquired for the same period last year, bringing the
total cumulative DIRECTV Latin America subscribers to 668,000 as of September
30, 1999.
The Satellite Services segment's third quarter 1999 revenues increased to
$210.7 million compared with $186.5 million for the prior year. The 13.0%
increase in revenues resulted primarily from the commencement of new service
agreements on additional satellites placed into service and a one-time customer
payment associated with the termination of a direct-to-home video services
agreement in India.
For the third quarter of 1999, revenues for the Satellite Systems segment
decreased to $510.8 million from revenues of $688.9 million for the same period
in 1998. This decrease in revenues was principally due to reduced activity
associated with the ICO program.
Third quarter 1999 revenues for the Network Systems segment were $426.2
million compared with $267.7 million for the same period last year, an increase
of 59.2%. This increase in revenues was primarily due to higher sales of
DIRECTV receiving equipment, satellite-based mobile telephone systems and U.S.
private business network systems.
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HUGHES ELECTRONICS CORPORATION
Costs and Expenses. Selling, general and administrative expenses increased to
$598.3 million in the third quarter of 1999 from $390.4 million for the same
period of 1998. The increase resulted primarily from increased subscriber
acquisition costs due to the record DIRECTV subscriber growth, added costs from
the PRIMESTAR By DIRECTV and USSB businesses, and the consolidation of GGM,
SurFin and GLB. The increase in depreciation and amortization expense to $216.5
million in the third quarter of 1999 from $111.3 million in the same period of
1998 resulted primarily from higher depreciation due to increased capital
expenditures for property and equipment, additions to PanAmSat's satellite fleet
in late 1998 and early 1999, added depreciation expense related to leased
medium-power receiving equipment for the PRIMESTAR By DIRECTV business and
additional goodwill amortization of $45.1 million that resulted from the
PRIMESTAR, USSB, GGM and GLB transactions.
Operating Profit (Loss). Hughes incurred an operating loss of $4.9 million
for the third quarter of 1999 compared with operating profit, on the same basis,
of $67.5 million for the third quarter of 1998. The operating loss for the
third quarter of 1999 compared to the operating profit in the same quarter of
1998 principally resulted from increased losses from the DIRECTV Latin American
businesses and reduced operating profit in the Satellite Systems segment from
the lower revenues discussed above.
The operating loss in the Direct-To-Home Broadcast segment for the third
quarter of 1999 was $67.6 million compared with an operating loss of $61.8
million for the third quarter of 1998. The increased operating loss for the
third quarter of 1999 resulted primarily from increased losses at the DIRECTV
international businesses consisting primarily of DIRECTV Latin America. DIRECTV
Latin America's operating loss for the third quarter of 1999 was $53 million
compared with an operating loss of $30 million for the same period of 1998. The
increased loss at DIRECTV Latin America was primarily due to the consolidation
of GLB and GGM and higher marketing expenses. Domestic DIRECTV reported an
operating loss for the third quarter of $6 million compared with an operating
loss of $31 million for the third quarter of 1998. The decreased operating loss
at domestic DIRECTV for the quarter was due to the increased subscriber revenues
discussed above which were partially offset by increased subscriber acquisition
costs due to record subscriber growth, added goodwill and intangible
amortization that resulted from the PRIMESTAR and USSB acquisitions and added
depreciation expense related to leased medium-power receiving equipment for the
PRIMESTAR By DIRECTV business.
Domestic DIRECTV's cost of acquiring new subscribers has increased due to,
among other things, incentives granted by USSB to manufacturers of DIRECTV
receiving equipment which were assumed by DIRECTV as part of the USSB
acquisition in May 1999 and increased incentives paid to DIRECTV dealers. In
connection with the AOL alliance, DIRECTV's subscriber acquisition costs will
increase with respect to the new DIRECTV/AOL TV service. In the future,
subscriber acquisition costs will continue to be largely determined by the
competitive environment.
The Satellite Services segment's operating profit for the third quarter of
1999 increased 25.3% to $99.1 million from $79.1 million for the same period of
1998. The increase in operating profit was primarily due to the increase in
revenues discussed above, partially offset by increased depreciation from the
additions to the satellite fleet noted above.
The Satellite Systems segment reported operating profit and operating profit
margin of $41.3 million and 8.1%, respectively, for the third quarter of 1999
compared with operating profit and operating profit margin of $63.8 million and
9.3%, respectively, for the third quarter of 1998. The decrease in operating
profit and operating profit margin for the third quarter of 1999 resulted
primarily from the decrease in revenues discussed above.
The Network Systems segment's operating profit and operating profit margin for
the third quarter of 1999 was $32.2 million and 7.6%, respectively, compared
with operating profit and operating profit margin of $16.9 million and 6.3%,
respectively, for the third quarter of 1998. The increase in operating income
and operating profit margin for the third quarter of 1999 was primarily due to
higher sales of DIRECTV receiving equipment, satellite-based mobile telephone
systems and U.S. private business network systems.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").
EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with generally
accepted accounting principles. However, Hughes believes EBITDA is a meaningful
measure of the company's performance and that of its business units. EBITDA is
a performance measurement commonly used by other communications, entertainment
and media service providers and therefore can be used to analyze and compare
Hughes' financial performance to that of its competitors. EBITDA is also a
measurement used for certain of Hughes' debt covenants and is used by rating
agencies in determining credit ratings. EBITDA does not give effect to cash
used for debt service requirements and thus does not reflect funds available for
investment in the business of Hughes, dividends or other discretionary uses.
EBITDA margin is calculated by dividing EBITDA by total revenues.
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HUGHES ELECTRONICS CORPORATION
For the third quarter of 1999, EBITDA grew to $211.6 million from $178.8
million for the same period in 1998 primarily as a result of the EBITDA growth
in the Direct-To-Home Broadcast Segment. EBITDA margin on the same basis was
10.6% for the third quarter of 1999 compared to 11.8% for the third quarter of
1998.
The Direct-To-Home Broadcast segment had EBITDA of $47.7 million for the third
quarter of 1999 compared with negative EBITDA of $30.6 million for the third
quarter of 1998. Domestic DIRECTV's EBITDA was $86 million for the third
quarter of 1999 compared to a negative EBITDA of $5 million for the third
quarter of 1998. The increase in domestic DIRECTV's EBITDA was due to EBITDA
contributions from the PRIMESTAR By DIRECTV and USSB businesses, as well as
increased revenues resulting from the larger high-power subscriber base which
more than offset increased subscriber acquisition costs. DIRECTV Latin America
reported negative EBITDA for the third quarter of 1999 of $30 million compared
to negative EBITDA of $24 million for the same period of 1998. This change was
primarily due to the acquisition of GLB during the 1999 third quarter and higher
marketing expenses.
For the Satellite Services segment, EBITDA for the third quarter of 1999 was
$169.0 million compared with $135.7 million for the same period of last year.
EBITDA margin increased to 80.2% versus 72.8% for last year's third quarter.
The increases in EBITDA and EBITDA margin were principally due to the higher
revenues discussed above and lower satellite leaseback expenses resulting from
the early buy-out of certain satellites under sale-leaseback agreements during
the first and third quarters of 1999.
The Satellite Systems segment had EBITDA and EBITDA margin of $56.3 million
and 11.0% for the third quarter of 1999 compared with EBITDA and EBITDA margin
of $76.7 million and 11.1% for the third quarter of 1998. The decrease in
EBITDA for the third quarter of 1999 was due to reduced activity associated with
the ICO program.
Network Systems segment EBITDA grew to $44.3 million for the third quarter of
1999 compared to EBITDA of $28.3 million for the third quarter of 1998 primarily
due to the increased revenues discussed above. EBITDA margin for the third
quarter of 1999 was 10.4% compared to 10.6% for the third quarter of 1998.
Interest Income and Expense. Interest income decreased to $2.4 million for
the third quarter of 1999 compared with $20.5 million for the third quarter of
1998 due to lower cash balances in the third quarter of 1999 compared to 1998.
Interest expense increased $48.1 million for the third quarter of 1999 from the
same period in 1998 due to the increased borrowings and interest expense
associated with certain liabilities that arose from the PRIMESTAR and USSB
acquisitions.
Other, net. Other, net for the third quarter of 1999 reflects losses from
unconsolidated subsidiaries of $31.6 million that are primarily attributable to
equity investment in DIRECTV Japan. The third quarter 1998 amount reflects
losses from unconsolidated subsidiaries of $28.1 million, primarily related to
DIRECTV Japan and AMSC.
Income taxes for the third quarter of 1999 reflect the recognition of tax
benefits for the pre-tax losses incurred in the period and higher expected tax
benefits, compared to the third quarter of 1998, from the expected favorable
resolution of certain tax contingencies.
Accounting Change. 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 was $9.2 million
after-tax, or $0.02 per share of GM Class H common stock in the first quarter of
1998.
Earnings (Loss). Third quarter 1999 loss and loss per share, including the
effect of preferred stock dividends, were $29.6 million and $0.13, respectively,
compared to third quarter 1998 earnings and earnings per share of $42.9 million
and $0.11, respectively.
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HUGHES ELECTRONICS CORPORATION
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. For the first nine months of 1999, revenues increased 25.0% to
$5,218.3 million compared to $4,173.3 million for the first nine months of 1998.
The increase reflects revenue growth at the Direct-To-Home, Satellite Services
and Network Systems segments offset in part by a decline in revenues at the
Satellite Systems segment.
Direct-To-Home Broadcast segment revenues for the first nine months of 1999
increased 106.0% to $2,571.4 million from $1,248.5 million for the same period
of 1998. The increase resulted from continued record subscriber growth, as well
as additional revenues from the PRIMESTAR By DIRECTV and USSB businesses.
For the first nine months of 1999, the Satellite Services segment's revenues
increased to $604.6 million compared with $570.6 million for the prior year, a
6.0% increase. The increase in revenues resulted primarily from the
commencement of new service agreements on additional satellites placed into
service and a one-time customer payment associated with the termination of a
direct-to-home video services agreement in India.
Revenues for the first nine months of 1999 for the Satellite Systems segment
decreased to $1,694.9 million from revenues of $1,988.0 million for the same
period in 1998. This decrease in revenues was principally due to contract
revenue adjustments and delayed revenue recognition that resulted from increased
development costs and schedule delays on several new product lines and decreased
activity associated with the ICO program.
Network Systems segment revenues for the first nine months of 1999 were $998.2
million compared with $674.1 million for the same period last year, an increase
of 48.1%. This increase in revenues was primarily due to higher sales of
DIRECTV receiving equipment, satellite-based mobile telephone systems and U.S.
private business network systems.
Costs and Expenses. Selling, general and administrative expenses increased to
$1,551.6 million for the first nine months of 1999 from $1,052.2 million for the
same period of 1998. The increase resulted primarily from increased subscriber
acquisition costs, added costs for the PRIMESTAR By DIRECTV and USSB businesses,
and the consolidation of GGM, SurFin and GLB. The increase in depreciation and
amortization expense to $499.3 million for the first nine months of 1999 from
$309.2 million for the same period of 1998 resulted primarily from higher
depreciation due to increased capital expenditures for property and equipment,
additions to PanAmSat's satellite fleet, added depreciation expense related to
leased medium-power receiving equipment for the PRIMESTAR By DIRECTV business,
increased goodwill amortization related to the May 1998 purchase of an
additional 9.5% interest in PanAmSat and added depreciation expense and goodwill
and intangible amortization that resulted from the PRIMESTAR, USSB, GGM and GLB
acquisitions.
Operating Profit (Loss). Hughes incurred an operating loss of $138.3 million
for the first nine months of 1999 compared with operating profit, on the same
basis, of $229.3 million for the first nine months of 1998. The operating loss
for the first nine months of 1999 was principally a result of the $125.0 million
pre-tax charge at the Satellite Systems segment resulting from increased
development costs and schedule delays, $190.1 million of higher depreciation and
amortization expense discussed above and a one-time pre-tax charge of $92.0
million resulting from the termination of the Asia-Pacific Mobile
Telecommunications Satellite Pte. Ltd. ("APMT") contract due to export licenses
not being issued.
The operating loss in the Direct-To-Home Broadcast segment for the first nine
months of 1999 was $159.4 million compared with an operating loss of $133.6
million for the first nine months of 1998. The increase in operating loss for
the first nine months of 1999 was due primarily to increased losses at the
DIRECTV Latin America businesses that resulted from the consolidation of GLB and
GGM and higher marketing expenses. These losses were partially offset by a
decrease in operating losses at the domestic DIRECTV businesses.
The Satellite Services segment operating profit for the first nine months of
1999 was $261.4 million compared to $239.2 million for the same period of 1998.
The increase in operating profit was primarily due to the increase in revenues
discussed above offset by higher depreciation expense due to additions to the
satellite fleet. Also affecting the comparison was a second quarter 1998
provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV
satellite.
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HUGHES ELECTRONICS CORPORATION
The Satellite Systems segment reported an operating loss for the first nine
months of 1999 of $106.1 million compared to operating profit of $178.9 million
for the first nine months of 1998. The operating loss for the first nine months
of 1999 resulted from a pre-tax charge, before intercompany eliminations, of
$178.0 million that resulted from increased development costs and schedule
delays on several new product lines, a one-time pre-tax charge of $81.0 million
resulting from the termination of the APMT contract and decreased activity
associated with the ICO program.
The Network Systems segment's operating profit for the first nine months of
1999 was $25.7 million compared with an operating loss of $20.2 million for the
first nine months of 1998. The increase for the first nine months of 1999
compared to 1998 was primarily due to the higher sales noted above partially
offset by a one-time pre-tax charge of $11.0 million in the first quarter of
1999 resulting from the termination of the APMT contract. Also affecting the
comparison was a 1998 provision of $26.0 million associated with the bankruptcy
filing by a customer.
EBITDA. For the first nine months of 1999, EBITDA was $361.0 million versus
$538.5 million for the same period in 1998. EBITDA margin on the same basis was
6.9% for the first nine months of 1999 compared to 12.9% for the first nine
months of 1998. The decrease in EBITDA and EBITDA margin were primarily due to
decreased EBITDA at the Satellite Systems segment offset in part by increased
EBITDA at the Direct-To-Home Segment.
The Direct-To-Home Broadcast segment had EBITDA for the first nine months of
1999 of $44.8 million compared with negative EBITDA of $56.4 million for the
first nine months of 1998. This improvement in EBITDA for the first nine months
of 1999 was primarily due to continued strong subscriber growth in the domestic
DIRECTV business, the contributions from PRIMESTAR By DIRECTV and USSB
businesses from their dates of acquisition and the consolidation of SurFin.
The Satellite Services segment's EBITDA for the first nine months of 1999 was
$465.9 million compared with $409.0 million for the same period of last year.
EBITDA margin increased to 77.1% versus 71.7% for last year's first nine months.
The increases in EBITDA and EBITDA margin were principally due to the higher
revenues discussed above, and lower satellite leaseback expenses resulting from
the 1999 early buy-out of certain satellites under sale-leaseback agreements.
Also affecting the comparison was a second quarter 1998 provision for losses
related to the May 1998 failure of PanAmSat's Galaxy IV satellite.
The Satellite Systems segment had a negative EBITDA of $64.7 million for the
first nine months of 1999, compared with EBITDA of $214.0 million for the first
nine months of 1998. The decrease in EBITDA for the first nine months of 1999
was due to the first quarter 1999 pre-tax charge of $81.0 million that resulted
from the termination of the APMT contract, the second quarter 1999 $178.0
million pre-tax charge, before intercompany eliminations, discussed above and
decreased activity associated with the ICO program.
Network Systems segment EBITDA increased to $63.4 million for the first nine
months of 1999, compared to EBITDA of $9.6 million for the first nine months of
1998. EBITDA margin for the first nine months of 1999 was 6.4% compared to
EBITDA margin of 1.4% for the first nine months of 1998. The increase in EBITDA
and EBITDA margin for the first nine months of 1999 was primarily due to the
higher sales discussed above, partially offset by the first quarter 1999 pre-tax
charge of $11.0 million related to the termination of the APMT contract. Also,
the second quarter of 1998 included a $26.0 million provision associated with
the bankruptcy filing by a customer.
Interest Income and Expense. Interest income decreased to $20.9 million for
the first nine months of 1999 compared with $88.6 million for the first nine
months of 1998 due to lower cash balances for the first nine months of 1999
compared to 1998. Interest expense increased $61.5 million for the first nine
months of 1999 from the same period in 1998 due to increased borrowings and
interest expense associated with certain liabilities that arose from the
PRIMESTAR and USSB acquisitions.
Other, net. Other, net for the first nine months of 1999 reflects a $154.6
million pre-tax gain that resulted from the settlement of the Williams Patent
infringement case offset by losses from unconsolidated subsidiaries of $96.3
million attributable principally to equity investments in DIRECTV Japan and
AMSC. The first nine months of 1998 includes losses from unconsolidated
subsidiaries of $79.0 million, primarily related to DIRECTV Japan and AMSC and
$17.5 million of losses associated with bankruptcy filings by two unaffiliated
customers.
Income Taxes. For the first nine months of 1999, Hughes recorded an income
tax benefit at an effective income tax rate of 40.6%, while Hughes recorded an
income tax provision at an effective income tax rate of 35.1% for the first nine
months of 1998. Income taxes for the first nine months of 1999 reflect the
recognition of tax benefits for the pre-tax losses incurred in the period and
higher expected tax benefits, compared to the first nine months of 1998, from
the expected favorable resolution of certain tax contingencies.
Earnings (Loss). Loss and loss per share, including the effect of preferred
stock dividends in 1999 of $26.3 million, for the nine months ended September
30, 1999 were $43.6 million and $0.17, respectively, compared to earnings and
earnings per share of $143.5 million and $0.36, respectively, for the comparable
period in 1998.
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HUGHES ELECTRONICS CORPORATION
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $158.3 million at
September 30, 1999 compared to $1,342.1 million at December 31, 1998. The
$1,183.8 million decrease was due to increased investments in companies, which
included the acquisitions of PRIMESTAR, USSB, Tempo Satellite assets and GLB
(see "Acquisitions"), additional equity investments in DIRECTV Japan, the early
buy-out of satellite sale-leasebacks by PanAmSat, additional capital
expenditures for satellites and property and equipment and general working
capital requirements. These uses of cash were partially funded by GM's $1.5
billion investment in Hughes as part of the alliance with AOL and the $154.6
million received in connection with the settlement of the Williams Patent
infringement case.
Cash used in operating activities for the first nine months of 1999 was $187.6
million, compared to cash provided by operating activities of $313.7 million in
the same period of 1998. The decrease was due primarily to the decrease in net
income for the first nine months of 1999 and an increase in prepaid dealer
commissions and prepaid marketing expenses at the DIRECTV businesses.
Net cash used in investing activities was $3,654.3 million for the nine months
ended September 30, 1999 and $1,584.2 million for the same period in 1998. The
substantial increase in 1999 compared to 1998 resulted from increased
investments in companies, which included the acquisitions of PRIMESTAR, USSB,
Tempo Satellite assets, GLB (See "Acquisitions") and additional investments in
DIRECTV Japan, and an increase in capital expenditures for satellite and
property and equipment, partially offset by a decrease in proceeds from
insurance claims related to the loss of satellites in the prior year.
Net cash provided by financing activities for the first nine months of 1999
was $2,658.1 million, compared to cash used in financing activities of $3.6
million for the same period in 1998. The substantial increase was primarily due
to an increase in net borrowings compared to 1998 and proceeds received in 1999
from the issuance of preferred stock to GM related to the AOL transaction.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at September 30, 1999 and December 31,
1998 was 1.40 and 1.91, respectively. Working capital decreased by $794.0
million to $1,042.9 million at September 30, 1999 from $1,836.9 million at
December 31, 1998.
Common Stock Dividend Policy and Use of Cash. Since the completion of the
recapitalization of Hughes in late 1997, the GM Board has not paid, and does not
currently intend to pay in the foreseeable future, cash dividends on its GM
Class H common stock. Similarly, since such time, Hughes has not paid dividends
on its common stock to GM and does not currently intend to do so in the
foreseeable future. Future Hughes earnings, if any, are expected to be retained
for the development of the businesses of Hughes. Hughes expects to have
significant cash requirements in 2000 primarily due to capital expenditures of
approximately $1.5 to $2.0 billion for property and equipment as well as
expenditures for new satellites. In addition, Hughes expects to increase its
investment in affiliated companies, primarily related to its international
DIRECTV businesses. 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. These cash
requirements are expected to be funded from a combination of cash provided from
operations, amounts available under credit facilities and debt and equity
offerings, as needed.
Debt and Credit Facilities. At September 30, 1999, Hughes' 75% owned
subsidiary, SurFin, had a total of $197.6 million outstanding under a $400.0
million unsecured revolving credit facility expiring in June 2002.
At September 30, 1999, GLA's 100% owned subsidiary, GLB, had a total of $26.7
million outstanding under a variable rate note.
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
$600.0 million of outstanding borrowings.
PanAmSat maintains a $500.0 million multi-year revolving credit facility and a
$500.0 million commercial paper program. The multi-year revolving credit
facility provides for a commitment through December 24, 2002. Borrowings under
the credit facility and commercial paper program are limited to $500.0 million
in the aggregate and are expected to be used to fund PanAmSat's satellite
expansion program. No amounts were outstanding under the credit facility at
September 30, 1999. $185.0 million was outstanding under the commercial paper
program at September 30, 1999.
In July 1999, in connection with the early buy-out of satellite sale-
leasebacks, PanAmSat assumed variable rate notes. The notes bear interest at
London Interbank Offered Rate plus 0.25%, and mature on various dates through
January 2, 2002. At September 30, 1999, $124.1 million was outstanding.
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HUGHES ELECTRONICS CORPORATION
Hughes has two unsecured revolving credit facilities totaling $1.0 billion,
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 and the 364-day credit facility provides for a
commitment of $250.0 million through December 1, 1999. $665.0 million was
outstanding under the multi-year facility at September 30, 1999. No amount was
outstanding under the 364-day credit facility at September 30, 1999. These
facilities provide backup capacity for Hughes' $1.0 billion commercial paper
program. $196.6 million was outstanding under the commercial paper program at
September 30, 1999.
At September 30, 1999, other short-term and long-term debt of $82.3 million
was outstanding.
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance of up to $2.0 billion of debt
securities from time to time. Currently, no amounts have been issued at
September 30, 1999.
In October 1999, Hughes issued $500.0 million of floating rate notes in a
private placement with a group of institutional investors. The notes mature on
October 23, 2000.
Acquisitions and Investments. On September 24, 1999, DIRECTV Japan, Hughes'
42.2% owned affiliate, raised approximately $275 million through the issuance of
bonds, convertible into common stock, to five of its major shareholders,
including $238.1 million issued to Hughes. If Hughes elects to convert these
bonds, Hughes would have a controlling interest in DIRECTV Japan.
On July 28, 1999, Galaxy Latin America ("GLA") acquired Galaxy Brasil, Ltda.,
the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for
approximately $114.0 million plus the assumption of debt. In connection with
the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and the
Cisneros Group, the remaining GLA partners. Hughes' share of the GLA purchase
amounted to approximately $101.1 million and increased Hughes' ownership of GLA
to 77.8%.
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of Class H common stock at
the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March
10, 1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provided direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. The USSB acquisition was closed on May 20,
1999. On July 6, 1999, based upon elections made by the former USSB
shareholders, Hughes paid approximately $0.4 billion in cash and issued
approximately 22.6 million shares of Class H common stock, for a total purchase
price of approximately $1.6 billion.
New Accounting Standards. In September 1999, the Financial Accounting
Standards Board ("FASB") issued Emerging Issues Task Force Issue 99-10 ("EITF
99-10"), Percentage Used to Determine the Amount of Equity Method losses. EITF
99-10 addresses the issue of which percentage of ownership should be used to
compute equity method losses when the investment account has been reduced to
zero and the investor holds other securities of the investee. EITF 99-10
requires that equity method losses should not be recognized solely on the
percentage of common stock owned; rather, an entity-wide approach should be
adopted. Under such an approach, equity method losses may be recognized based on
the ownership level that includes other equity securities (e.g., preferred
stock) and loans/advances to the investee or based on the change in the
investor's claim on the investor's book value. Hughes adopted EITF 99-10 during
the third quarter of 1999, as required. The impact of adopting EITF 99-10 was
not material to the third quarter 1999 results.
In June 1998, the 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,
2001, as required. Management is currently assessing the impact of this
statement on Hughes' results of operations and financial position.
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HUGHES ELECTRONICS CORPORATION
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 includes 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 has been completed. All
critical systems were identified in this phase and were the primary focus
of the project teams. Critical systems identified requiring remediation
included satellite control and communication software, broadcast systems
and 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
tasks have been completed on all critical systems.
(5) Testing - test remediated systems to assure normal function when placed in
their original operating environment and further test for Year 2000
compliance. Testing has been successfully completed on all critical
systems.
(6) Implementation - once a remediated system and its interfaces have been
successfully tested, the system will be put into its operating
environment. The majority of the remediated systems have been placed into
their operating environment.
(7) Contingency Planning - development and execution of plans that narrow the
focus on specific areas of significant concern and concentrate resources
to address them. Hughes has developed contingency plans to address the
risk of any critical system not being Year 2000 compliant. These
contingency plans are frequently reviewed and updated as necessary. Hughes
currently believes that the most reasonably likely worst case scenario is
a temporary loss of functionality in satellite control and communication
software for the HSC built satellites. The loss of real-time satellite
control software functionality for these satellites would be addressed
through the use of back-dated processors or through manual procedures.
These alternative procedures would restore any loss in functionality but
could result in slightly higher operating costs until the Year 2000
problems are corrected.
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HUGHES ELECTRONICS CORPORATION
Hughes is utilizing both internal and external resources for the remediation
and testing of its systems that are undergoing Year 2000 modification. Hughes
has incurred and expensed approximately $15.0 million during the first nine
months of 1999 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 remaining system remediation and testing is currently
estimated to be from $7.0 million to $9.0 million. Each Hughes operating company
is funding its respective Year 2000 efforts with current and future operating
cash flows.
Hughes has received certification of Year 2000 compliance from a majority of
its critical third parties. For those third party systems that are not yet Year
2000 compliant, Hughes has identified 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 September 1999, Standard and Poor's Rating Services ("S&P") lowered Hughes'
long-term debt rating from BBB to BBB - minus. The S&P BBB - minus credit
rating indicates the issuer has adequate capacity to pay interest and repay
principal. Additionally, S&P lowered the short-term corporate credit and
commercial paper ratings to A-3 from A-2. S&P has assigned a negative outlook
to Hughes' ratings.
In September 1999, Moody's Investors Service ("Moody's") placed Hughes' Baa2
long-term credit and P-2 commercial paper ratings on review for possible
downgrade. The Baa2 rating for senior debt indicates adequate likelihood of
interest and principal payment and principal security. The P-2 commercial paper
rating is the second highest rating available and indicates that the issuer has
a strong ability for repayment relative to other issuers.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations as they come due. The lowered
rating and review for possible downgrade, as well as the negative outlook,
reflects increased financial leverage at Hughes resulting from a significant
acceleration of its growth initiatives, including the PRIMESTAR, Tempo Satellite
and USSB transactions, PanAmSat's satellite deployment and restoration plan, the
previously announced increased development costs and schedule delays experienced
by HSC and the investment in Spaceway.
Lower ratings generally result in higher borrowing costs. A security rating
is not a recommendation to buy, sell, or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating organization. Each
rating should be evaluated independently of any other rating.
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HUGHES ELECTRONICS CORPORATION
Supplemental Data
The financial statements reflect the application of purchase accounting
adjustments related to GM's purchase of Hughes in 1985. However, as provided in
GM's Restated Certificate of Incorporation, the earnings attributable to GM
Class H common stock for purposes of determining the amount available for the
payment of dividends on GM Class H common stock specifically excludes such
adjustments. More specifically, amortization of the intangible assets
associated with GM's purchase of Hughes amounted to $5.3 million for the third
quarters of 1999 and 1998 and $15.9 million for the nine months ended September
30, 1999 and 1998. 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 $410.7 million at September 30, 1999 and $426.6 million
at December 31, 1998.
In order to provide additional analytical data to the users of Hughes'
financial information, supplemental data in the form of unaudited summary pro
forma financial data are provided. Consistent with the basis on which earnings
of Hughes available for the payment of dividends on the GM Class H common stock
is determined, the pro forma data exclude purchase accounting adjustments
related to GM's acquisition of Hughes. Included in the supplemental data are
certain financial ratios which provide measures of financial returns excluding
the impact of purchase accounting adjustments. The pro forma data are not
presented as a measure of GM's total return on its investment in Hughes.
- 60 -
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data*
Pro Forma Condensed Statement of Income (Loss)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- ---------
(Dollars in Millions Except Per Share Amounts)
Total revenues $1,990.5 $1,513.3 $5,218.3 $4,173.3
Total operating costs and expenses 1,995.4 1,445.8 5,356.6 3,944.0
-------- -------- -------- --------
Operating profit (loss) (4.9) 67.5 (138.3) 229.3
Non-operating income (loss) (71.7) (16.5) 27.7 (23.7)
Income tax provision (benefit) (38.2) 17.4 (44.9) 72.1
Minority interests in net losses of subsidiaries 8.8 9.3 22.1 19.2
Cumulative effect of accounting change, net
of taxes - - - (9.2)
Preferred stock dividends (24.7) - (26.3) -
-------- -------- -------- --------
Earnings (Loss) Used for Computation of
Available Separate Consolidated Net
Income (Loss) (1) $ (54.3) $ 42.9 $ (69.9) $ 143.5
======== ======== ======== ========
Earnings (Loss) Attributable to General Motors
Class H Common Stock on a Per Share Basis-
Basic and Diluted $ (0.13) $ 0.11 $ (0.17) $ 0.36
======== ======== ======== ========
Pro Forma Condensed Balance Sheet
September 30, December 31,
Assets 1999 1998
------------- ------------
(Dollars in Millions)
Total Current Assets $ 3,639.2 $ 3,846.4
Satellites, net 3,690.6 3,197.5
Property, net 1,303.0 1,059.2
Net Investment in Sales-type Leases 155.9 173.4
Intangible Assets, Investments and Other Assets, 9,606.9 4,731.9
--------- ---------
Total Assets $18,395.6 $13,008.4
========= =========
Liabilities and Stockholder's Equity
Total Current Liabilities $ 2,596.3 $ 2,009.5
Long-Term Debt 1,929.2 778.7
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 2,266.6 1,783.2
Minority Interests 530.0 481.7
Total Stockholder's Equity (2) 11,073.5 7,955.3
--------- ---------
Total Liabilities and Stockholder's Equity (2) $18,395.6 $13,008.4
========= =========
- --------------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) Includes accrued and/or paid preferred stock dividends of $24.7 million and
$26.3 million in the third quarter and first nine months of 1999,
respectively.
(2) 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).
- 61 -
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Continued
Pro Forma Selected Segment Data
Direct-To-
Home Satellite Satellite Network Eliminations
(Dollars in Millions) Broadcast Services Systems Systems and Other Total
- ------------------------------------------------------------------------------------------------------------
For the Three Months Ended:
September 30, 1999
Total Revenues $1,144.6 $ 210.7 $ 510.8 $426.2 $(301.8) $1,990.5
- ------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ (67.6) $ 99.1 $ 41.3 $ 32.2 $(109.9) $ (4.9)
Operating Profit Margin - 47.0% 8.1% 7.6% - -
EBITDA (1) $ 47.7 $ 169.0 $ 56.3 $ 44.3 $(105.7) $ 211.6
EBITDA Margin(1) 4.2% 80.2% 11.0% 10.4% - 10.6%
- ------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization $ 115.3 $ 69.9 $ 15.0 $ 12.1 $ 4.2 $ 216.5
Capital Expenditures $ 97.6(2) $ 347.8(3) $ 17.0 $ 5.4 $ 41.4 $ 509.2
- ------------------------------------------------------------------------------------------------------------
September 30, 1998
Total Revenues $ 459.1 $ 186.5 $ 688.9 $267.7 $ (88.9) $1,513.3
- ------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ (61.8) $ 79.1 $ 63.8 $ 16.9 $ (30.5) $ 67.5
Operating Profit Margin - 42.4% 9.3% 6.3% - 4.5%
EBITDA(1) $ (30.6) $ 135.7 $ 76.7 $ 28.3 $ (31.3) $ 178.8
EBITDA Margin(1) - 72.8% 11.1% 10.6% - 11.8%
- ------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization $ 31.2 $ 56.6 $ 12.9 $ 11.4 $ (0.8) $ 111.3
Capital Expenditures $ 82.0(2) $ 190.7(3) $ 18.2 $ 10.7 $ (21.4) $ 280.2
- ------------------------------------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1999
Total Revenues $2,571.4 $ 604.6 $1,694.9 $998.2 $(650.8) $5,218.3
- ------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ (159.4) $ 261.4 $ (106.1) $ 25.7 $(159.9) $ (138.3)
Operating Profit Margin - 43.2% - 2.6% - -
EBITDA(1) $ 44.8 $ 465.9 $ (64.7) $ 63.4 $(148.4) $ 361.0
EBITDA Margin(1) 1.7% 77.1% - 6.4% - 6.9%
- ------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization $ 204.2 $ 204.5 $ 41.4 $ 37.7 $ 11.5 $ 499.3
Capital Expenditures $ 253.4(2) $ 823.0(3) $ 52.1 $ 23.1 $ 45.9 $1,197.5
- ------------------------------------------------------------------------------------------------------------
September 30, 1998
Total Revenues $1,248.5 $ 570.6 $1,988.0 $674.1 $(307.9) $4,173.3
- ------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ (133.6) $ 239.2 $ 178.9 $(20.2) $ (35.0) $ 229.3
Operating Profit Margin - 41.9% 9.0% - - 5.5%
EBITDA(1) $ (56.4) $ 409.0 $ 214.0 $ 9.6 $ (37.7) $ 538.5
EBITDA Margin(1) - 71.7% 10.8% 1.4% - 12.9%
- ------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization $ 77.2 $ 169.8 $ 35.1 $ 29.8 $ (2.7) $ 309.2
Capital Expenditures $ 130.1(2) $ 605.0(3) $ 50.5 $ 26.4 $ 114.5 $ 926.5
- ------------------------------------------------------------------------------------------------------------
* The Financial Statements reflect the application of purchase accounting
adjustments related to GM's acquisition of Hughes. However, as provided in
the General Motors' Restated Certificate of Incorporation, the earnings
attributable to GM Class H common stock for purposes of determining the
amount available for the payment of dividends on GM Class H common stock
specifically excludes such adjustments. In order to provide additional
analytical data, the above unaudited pro forma selected segment data, which
exclude the purchase accounting adjustments related to GM's acquisition of
Hughes, are presented.
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
generally accepted accounting principles. EBITDA margin is calculated by
dividing EBITDA by total revenues. See discussion in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
(2) Includes satellite expenditures amounting to $13.6 million, $38.0 million,
$89.1 and $38.0 million, respectively.
(3) Includes satellite expenditures amounting to $93.2 million, $182.2 million,
$408.8 million and $422.2 million, respectively. Also included are
expenditures related to the early buy-out of satellite sale-leasebacks
totaling $228.2 million for the third quarter of 1999 and $369.5 million and
$155.5 million for the first nine months of 1999 and 1998, respectively.
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HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Concluded
Pro Forma Selected Financial Data
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
1999 1998 1999 1998
-------- --------- -------- -------
(Dollars in Millions Except Per Share Amounts)
Operating profit (loss) $ (5) $ 68 $ (138) $ 229
EBITDA (1) $ 212 $ 179 $ 361 $ 539
EBITDA margin (2) 10.6% 11.8% 6.9% 12.9%
Income (Loss) before income taxes, minority
interests and cumulative effect of accounting
change $ (77) $ 51 $ (111) $ 206
Earnings (Loss) used for computation of
available separate consolidated net income
(loss) (3) $ (54) $ 43 $ (70) $ 144
Average number of GM Class H dividend base
shares (4) 428.9 399.9 414.7 399.9
Stockholder's equity $11,074 $7,827 $11,074 $7,827
Working capital $ 1,043 $2,418 $ 1,043 $2,418
Operating profit as a percent of revenues N/A 4.5% N/A 5.5%
Income before income taxes, minority interests
and cumulative effect of accounting change
as a percent of revenues N/A 3.4% N/A 4.9%
Net income as a percent of revenues N/A 2.8% N/A 3.4%
- ----------------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in accordance
with generally accepted accounting principles. See discussion in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(2) EBITDA margin is calculated by dividing EBITDA by total revenues.
(3) Includes accrued and/or paid preferred stock dividends of $24.7 million and
$26.3 million in the third quarter and first nine months of 1999,
respectively.
(4) Average 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
135.1 million and 105.7 million for the third quarters of 1999 and 1998,
respectively, and 120.8 million and 105.0 million for the nine months ended
September 30, 1999 and 1998, respectively.
* * * * *
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