UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ------------ to -------------
Commission file number 1-143
GENERAL MOTORS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
STATE OF DELAWARE 38-0572515
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 Renaissance Center, Detroit, Michigan 48243-7301
3044 West Grand Boulevard, Detroit, Michigan 48202-3091
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (313) 556-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common, $1-2/3 par value (678,564,579 shares
outstanding as of February 28, 1998) New York Stock Exchange, Inc.
Class H Common, $0.10 par value (104,368,924
shares outstanding as of February 28, 1998) New York Stock Exchange, Inc.
Preference, $0.10 par value, Series B
9-1/8% Depositary Shares, stated value
$25 per share, dividends cumulative
(20,020,586 depositary shares outstanding
as of February 28, 1998) New York Stock Exchange, Inc.
Preference, $0.10 par value, Series D
7.92% Depositary Shares, stated value
$25 per share, dividends cumulative
(3,014,654 depositary shares outstanding
as of February 28, 1998) New York Stock Exchange, Inc.
Preference, $0.10 par value, Series G
9.12% Depositary Shares, stated value
$25 per share, dividends cumulative
(5,015,410 depositary shares outstanding
as of February 28, 1998) New York Stock Exchange, Inc.
General Motors Capital Trust D 8.67% Trust
Originated Preferred Securitiessm (TOPrSsm),
Series D (3,149,748 shares outstanding as of
February 28, 1998) New York Stock Exchange, Inc.
General Motors Capital Trust G 9.87% Trust
Originated Preferred Securitiessm (TOPrSsm),
Series G (5,221,123 shares outstanding as of
February 28, 1998) New York Stock Exchange, Inc.
Note: The $1-2/3 par value common stock of the Registrant is also listed for
trading on:
Chicago Stock Exchange, Inc. Chicago, Illinois
Pacific Exchange, Inc. San Francisco, California
Philadelphia Stock Exchange, Inc. Philadelphia, Pennsylvania
Montreal Stock Exchange Montreal, Quebec, Canada
Toronto Stock Exchange Toronto, Ontario, Canada
Borse Frankfurt am Main Frankfort on the Main, Germany
Borse Dusseldorf Dusseldorf, Germany
Bourse de Bruxelles Brussels, Belgium
Courtiers en Valeurs Mobilieres Paris, France
The London Stock Exchange London, England
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value (based upon the average of the highest and lowest
sales prices on the Composite Tape on February 27, 1998) of General Motors
Corporation $1-2/3 par value and Class H common stocks held by nonaffiliates on
February 27, 1998 was approximately $46.6 billion and $4.3 billion,
respectively.
Documents incorporated by reference are as follows:
Part and Item Number of Form
Document 10-K into Which Incorporated
General Motors Notice of Annual Meeting of
Stockholders and Proxy Statement for
the Annual Meeting of Stockholders
to be held June 1, 1998 Part III, Items 10
through 13
sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of
Merrill Lynch & Co.
COVER PAGE
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-K/A
AMENDMENT TO REPORT
FILED PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
GENERAL MOTORS CORPORATION
(Exact name of registrant as specified in charter)
AMENDMENT NO. 1
The undersigned registrant hereby amends Exhibit 99 to its 1997 Annual
Report on Form 10-K ("Form 10-K") to update the Independent Auditors' Report on
page IV-17 to include the typed signature of Deloitte & Touche LLP, independent
auditors, as part of such Form 10-K.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
General Motors Corporation
(Registrant)
By: /s/Peter R. Bible
(Peter R. Bible, Chief Accounting
Officer)
Date: March 26, 1998
-1-
EXHIBIT 23
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
General Motors Corporation:
We consent to the incorporation by reference of our reports dated
January 26, 1998 appearing in this Annual Report on Form 10-K of General
Motors Corporation for the year ended December 31, 1997, as amended, in the
following Registration Statements:
Registration
Form Statement No. Description
S-3 33-64229 General Motors Corporation Debt Securities
S-3 333-13797 General Motors Corporation Debt Securities
S-3 33-47343 General Motors Corporation $1-2/3 Par Value Common
Stock
(Post-Effective
Amendment No. 1)
S-3 33-49035 General Motors Corporation $1-2/3 Par Value Common
Stock
(Amendment No. 1)
S-3 33-56671 General Motors Corporation $1-2/3 Par Value Common
Stock
(Amendment No. 1)
S-3 33-49309 General Motors Corporation Dividend Reinvestment
Plan
S-8 333-17975 The General Motors Personal Savings Plan for
Hourly-Rate Employees in the United States
S-8 33-54841 General Motors Amended 1987 Stock Incentive Plan
S-8 333-45961 General Motors Savings-Stock Purchase Program for
Salaried Employees in the United States
S-8 33-32322 Hughes Aircraft Company Salaried Employees' Thrift
and Savings Plan
Hughes Aircraft Company Tucson Bargaining
Employees' Thrift and Savings Plan
Hughes Aircraft Company California Hourly
Employees' Thrift and Savings Plan
Hughes Thrift and Savings Plan
S-8 33-54835 The GMAC Mortgage Corporation Savings Incentive Plan
S-8 333-24697 Hughes Electronics Corporation Incentive Plan
S-8 333-21029 Saturn Individual Savings Plan for Represented
Members
S-8 333-17937 Saturn Personal Choices Savings Plan for
Non-Represented Members
S-8 333-44957 General Motors 1998 Stock Option Plan
/s/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Detroit, Michigan
March 26, 1998
IV-15
EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The following financial statements of Hughes Electronics Corporation and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts based on
judgments of management.
Management is further responsible for maintaining internal control designed
to provide reasonable assurance that the books and records reflect the
transactions of the companies and that established policies and procedures are
carefully followed. Perhaps the most important feature in internal control is
that it is continually reviewed for effectiveness and is augmented by written
policies and guidelines, the careful selection and training of qualified
personnel and a strong program of internal audit.
Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the
financial statements of Hughes Electronics Corporation and subsidiaries and
issue reports thereon. The audit is conducted in accordance with generally
accepted auditing standards that comprehend the consideration of internal
control and tests of transactions to the extent necessary to form an independent
opinion on the financial statements prepared by management. The Independent
Auditors' Report appears on the next page.
The Board of Directors, through its Audit Committee, is responsible for
assuring that management fulfills its responsibilities in the preparation of the
financial statements and engaging the independent auditors. The Audit Committee
reviews the scope of the audits and the accounting principles being applied in
financial reporting. The independent auditors, representatives of management,
and the internal auditors meet regularly (separately and jointly) with the Audit
Committee to review the activities of each, to ensure that each is properly
discharging its responsibilities and to assess the effectiveness of internal
control. It is management's conclusion that internal control at December 31,
1997 provides reasonable assurance that the books and records reflect the
transactions of the companies and that established policies and procedures are
complied with. To ensure complete independence, Deloitte & Touche LLP has full
and free access to meet with the Audit Committee, without management
representatives present, to discuss the results of the audit, the adequacy of
internal control, and the quality of financial reporting.
/s/MICHAEL T. SMITH /s/CHARLES H. NOSKI /s/ROXANNE S. AUSTIN
Michael T. Smith Charles H. Noski Roxanne S. Austin
Chairman of the Board and President Senior Vice President
Chief Executive Officer and Chief Financial
Officer
IV-16
<PAGE>
HUGHES ELECTRONICS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors of Hughes Electronics Corporation:
We have audited the Balance Sheet of Hughes Electronics Corporation (as
more fully described in Note 1 to the financial statements) as of December 31,
1997 and 1996 and the related Statement of Income and Pro Forma Available
Separate Consolidated Net Income, Statement of Changes in Owner's Equity and
Statement of Cash Flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of Hughes
Electronics Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such
financial statements present fairly, in all material respects, the financial
position of Hughes Electronics Corporation at December 31, 1997 and 1996 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Los Angeles, California
January 26, 1998
IV-17
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF INCOME AND PRO FORMA
AVAILABLE SEPARATE CONSOLIDATED NET INCOME
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
(Dollars in Millions Except
Per Share Amounts)
Revenues
Product sales $3,143.6 $3,009.0 $2,576.1
Direct broadcast, leasing and other services 1,984.7 999.7 576.7
------- -------- --------
Total Revenues 5,128.3 4,008.7 3,152.8
------- ------- -------
Operating Costs and Expenses
Cost of products sold 2,493.3 2,183.7 1,977.8
Broadcast programming and other costs 912.3 631.8 335.2
Selling, general and administrative expenses 1,119.9 788.5 488.4
Depreciation and amortization 296.4 194.6 179.9
Amortization of GM purchase accounting
adjustments related to Hughes
Aircraft Company 21.0 21.0 21.0
-------- -------- --------
Total Operating Costs and Expenses 4,842.9 3,819.6 3,002.3
------- ------- -------
Operating Profit 285.4 189.1 150.5
Interest income 33.1 6.8 5.2
Interest expense (91.0) (42.9) (61.1)
Other, net 390.7 69.1 3.0
----- ---- -----
Income From Continuing Operations Before Income
Taxes, Minority Interests and
Extraordinary Item 618.2 222.1 97.6
Income taxes 236.7 104.8 31.4
Minority interests in net losses of subsidiaries 24.8 52.6 4.6
------ ------ -----
Income from continuing operations before
extraordinary item 406.3 169.9 70.8
Income (Loss) from discontinued operations,
net of taxes 1.2 (7.4) (64.6)
Gain on sale of discontinued operations,
net of taxes 62.8 - -
------ ------ -----
Income before extraordinary item 470.3 162.5 6.2
Extraordinary item, net of taxes (20.6) - -
------ ------- -------
Net Income 449.7 162.5 6.2
Adjustments to exclude the effect of GM purchase
accounting adjustments related to Hughes
Aircraft Company 21.0 21.0 21.0
------ ------ ------
Earnings Used for Pro Forma Computation of
Available Separate Consolidated Net Income $470.7 $183.5 $27.2
===== ===== ====
Pro Forma Available Separate Consolidated Net Income
Average number of shares of General Motors Class H
Common Stock outstanding (in millions)
(Numerator) 101.5 98.4 95.5
Class H dividend base (in million) (Denominator) 399.9 399.9 399.9
Pro Forma Available Separate Consolidated
Net Income $119.4 $45.2 $6.5
===== ==== ===
Pro Forma Earnings Attributable to General Motors
Class H Common Stock on a Per Share Basis
Income from continuing operations before
extraordinary item $1.07 $0.48 $0.23
Discontinued operations 0.16 (0.02) (0.16)
Extraordinary item (0.05) - -
---- ------ ------
Pro Forma Earnings Attributable to General Motors
Class H Common Stock $1.18 $0.46 $0.07
==== ==== ====
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
Reference should be made to the Notes to Financial Statements.
</TABLE>
IV-18
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
<CAPTION>
December 31,
ASSETS 1997 1996
-------- --------
<S> <C> <C>
(Dollars in Millions)
ASSETS
Current Assets
Cash and cash equivalents $2,783.8 $6.7
Accounts and notes receivable (less allowances) 662.8 423.0
Contracts in process, less advances and progress
payments of $50.2 and $54.2 575.6 401.4
Inventories 486.4 423.1
Net assets of discontinued operations - 35.0
Deferred subscriber acquisition costs 26.4 97.5
Prepaid expenses and other, including deferred income
taxes of $93.2 and $26.7 270.9 110.4
------- -------
Total Current Assets 4,805.9 1,497.1
Satellites, net 2,643.4 1,056.6
Property, net 889.7 690.8
Net Investment in Sales-type Leases 337.6 320.6
Intangible Assets, net of accumulated amortization
of $318.3 and $260.4 2,954.8 468.0
Investments and Other Assets 1,132.4 383.3
--------- --------
Total Assets $12,763.8 $4,416.4
======== =======
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
Accounts payable $472.8 $359.0
Advances on contracts 209.8 287.8
Deferred revenues 110.6 142.8
Accrued liabilities 689.4 430.0
------- -------
Total Current Liabilities 1,482.6 1,219.6
------- -------
Long-Term Debt 637.6 -
Deferred Gains on Sales and Leasebacks 191.9 234.8
Accrued Operating Leaseback Expense 100.2 107.8
Postretirement Benefits Other Than Pensions 154.8 -
Other Liabilities and Deferred Credits 706.4 136.9
Deferred Income Taxes 570.8 204.1
Commitments and Contingencies
Minority Interests 607.8 21.6
Owner's Equity
Parent Company's net investment - 2,497.0
Capital stock and additional paid-in capital 8,322.8 -
Net income retained for use in the business 7.1 -
---------- -----------
Subtotal 8,329.9 2,497.0
Minimum pension liability adjustment (34.8) -
Accumulated unrealized gains on securities 21.4 -
Accumulated foreign currency translation adjustments (4.8) (5.4)
--------- ---------
Accumulated other comprehensive loss (18.2) (5.4)
-------- ---------
Total Owner's Equity 8,311.7 2,491.6
------- -------
Total Liabilities and Owner's Equity $12,763.8 $4,416.4
======== =======
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
Reference should be made to the Notes to Financial Statements.
</TABLE>
IV-19
<TABLE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF CHANGES IN OWNER'S EQUITY
(Dollars in Millions)
<CAPTION>
Capital Stock Accumulated
Parent and Other
Company's Additional Compre- Total Compre-
Net Paid-In Retained hensive Owner's hensive
Investment Capital Earnings Loss Equity Income
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995 $2,305.0 $ (4.0) $2,301.0
Net contribution from
Parent Company 303.9 303.9
Net income 6.2 6.2 $6.2
Foreign currency
translation
adjustments (2.2) (2.2) (2.2)
---
Comprehensive income $4.0
------- ---- ===
Balance at December 31,
1995 2,615.1 (6.2) 2,608.9
Net distribution to
Parent Company (280.6) (280.6)
Net income 162.5 162.5 $162.5
Foreign currency
translation
adjustments 0.8 0.8 0.8
---
Comprehensive income $163.3
------- ---- =====
Balance at December 31,
1996 2,497.0 (5.4) 2,491.6
Net contribution from
Parent Company 1,124.2 1,124.2
Transfer of capital from
Parent Company's
net investment (4,063.8) $4,063.8 -
Capital contribution
resulting from the
Hughes Transactions 4,259.0 4,259.0
Minimum pension liability
adjustment resulting
from the Hughes
Transactions (34.8) (34.8)
Unrealized gains on
securities resulting
from the Hughes
Transactions 21.4 21.4
Net income 442.6 $7.1 449.7 $449.7
Foreign currency
translation
adjustments 0.6 0.6 0.6
---
Comprehensive income $450.3
----- ------- --- ---- ------- =====
Balance at December 31,
1997 $ - $8,322.8 $7.1 $(18.2) $8,311.7
== ======= === ==== =======
</TABLE>
Reference should be made to the Notes to Financial Statements.
* * * * * * * * * * *
IV-20
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF CASH FLOWS
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
(Dollars in Millions)
Cash Flows from Operating Activities
Net Income $449.7 $162.5 $6.2
Adjustments to reconcile net income to net cash
provided by continuing operations
(Income) loss from discontinued operations (1.2) 7.4 64.6
Gain on sale of discontinued operations (62.8) - -
Extraordinary item, net of taxes 20.6 - -
Depreciation and amortization 296.4 194.6 179.9
Amortization of GM purchase accounting
adjustments related to Hughes Aircraft
Company 21.0 21.0 21.0
Net (gain) loss on sale of investments
and businesses sold (489.7) (120.3) 49.0
Gross profit on sales-type leases (33.6) (51.8) (62.9)
Deferred income taxes and other 285.5 91.9 (76.5)
Change in other operating assets and liabilities
Accounts and notes receivable (228.0) (120.1) (110.3)
Contracts in process (174.2) 54.1 174.1
Inventories (60.7) (121.5) (109.3)
Deferred subscriber acquisition costs 71.1 (97.5) -
Collections of principal on net investment
in sales-type leases 22.0 31.2 19.6
Accounts payable (184.1) 116.8 7.1
Advances on contracts (95.6) 97.6 8.6
Deferred revenues (32.2) 113.7 22.5
Accrued liabilities 217.8 22.4 86.4
Deferred gains on sales and leasebacks (42.9) (41.6) (27.1)
Other 31.4 7.0 (154.1)
---- ------ -----
Net Cash Provided by Continuing Operations 10.5 367.4 98.8
Net cash used by discontinued operations (15.9) (8.0) (25.2)
---- ------- ----
Net Cash (Used in) Provided by Operating
Activities (5.4) 359.4 73.6
--- ----- ----
Cash Flows from Investing Activities
Investment in companies, net of cash acquired (1,637.0) (32.2) (1.3)
Expenditures for property (251.3) (261.5) (167.7)
Increase in satellites (633.5) (191.6) (223.7)
Proceeds from sale of long-term investments 242.0 - -
Proceeds from sale and leaseback of satellite
transponders with General Motors Acceptance
Corporation - 252.0 -
Proceeds from sale of minority interest in
subsidiary - 137.5 -
Repurchase of minority interest in subsidiary (161.8) - -
Proceeds from sale of discontinued operations 155.0 - -
Proceeds from sales of investments and businesses - - 17.5
Proceeds from disposal of property 55.1 15.3 1.7
-------- ---- ------
Net Cash Used in Investing Activities (2,231.5) (80.5) (373.5)
------- ---- -----
Cash Flows from Financing Activities
Long-term debt borrowings 2,383.3 - -
Repayment of long-term debt (2,851.9) - -
Premium paid to retire debt (34.4) - -
Contributions from (distributions to)
Parent Company 1,124.2 (279.8) 301.7
Capital infusion resulting from Hughes
Transactions 4,392.8 - -
------- ------- -------
Net Cash Provided by (Used in)
Financing Activities 5,014.0 (279.8) 301.7
------- ------- ------
Net increase (decrease) in cash and
cash equivalents 2,777.1 (0.9) 1.8
Cash and cash equivalents at beginning
of the year 6.7 7.6 5.8
------- --- ---
Cash and cash equivalents at end of the year $2,783.8 $6.7 $7.6
======= === ===
</TABLE>
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
Reference should be made to the Notes to Financial Statements.
IV-21
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1: Basis of Presentation and Description of Business
On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics")
and General Motors Corporation ("GM"), the parent of Hughes Electronics
completed a series of transactions (the "Hughes Transactions") designed to
address strategic challenges facing the three principal businesses of Hughes
Electronics and unlock stockholder value in GM. The Hughes Transactions included
the tax-free spin-off of the defense electronics business ("Hughes Defense") to
holders of GM $1-2/3 par value and Class H common stocks, followed immediately
by the merger of Hughes Defense with Raytheon Company ("Raytheon").
Concurrently, Delco Electronics Corporation ("Delco"), the automotive
electronics business, was transferred to GM's Delphi Automotive Systems unit.
Finally, GM Class H common stock was recapitalized into a GM tracking stock
linked to the remaining telecommunications and space business. For the periods
prior to the consummation of the Hughes Transactions on December 17, 1997,
Hughes Electronics, consisting of its defense electronics, automotive
electronics and telecommunications and space businesses, is hereinafter referred
to as former Hughes.
In connection with the recapitalization of Hughes Electronics on December
17, 1997, the telecommunications and space business of former Hughes, consisting
principally of its direct-to-home broadcast, satellite services, satellite
manufacturing and network systems businesses, was contributed to the
recapitalized Hughes Electronics. Such telecommunications and space business,
both before and after the recapitalization, is hereinafter referred to as
Hughes. The accompanying financial statements and footnotes pertain only to
Hughes and do not include balances of former Hughes related to Hughes Defense or
Delco.
Prior to the Hughes Transactions, the Hughes businesses were effectively
operated as divisions of former Hughes. For the period prior to December 18,
1997, these financial statements include allocations of corporate expenses from
former Hughes, including research and development, general management, human
resources, financial, legal, tax, quality, communications, marketing,
international, employee benefits and other miscellaneous services. These costs
and expenses have been charged to Hughes based either on usage or using
allocation methodologies primarily based upon total revenues, certain tangible
assets and payroll expenses. Management believes the allocations were made on a
reasonable basis; however, they may not necessarily reflect the financial
position, results of operations or cash flows of Hughes on a stand-alone basis
in the future. Also, prior to December 18, 1997, interest expense in the
Statement of Income and Pro Forma Available Separate Consolidated Net Income
included an allocated share of total former Hughes' interest expense.
The Hughes Transactions had a significant impact on the Hughes balance
sheet. Prior to the consummation of the Hughes Transactions, Hughes participated
in the centralized cash management system of former Hughes, wherein cash
receipts were transferred to and cash disbursements were funded by former Hughes
on a daily basis. Accordingly, Hughes' balance sheet included only cash and cash
equivalents held directly by the telecommunications and space business. In
conjunction with the completion of the Hughes Transactions, certain assets and
liabilities were contributed by former Hughes to Hughes. The contributed assets
and liabilities consisted principally of cash, pension assets and liabilities,
liabilities for other postretirement benefits, deferred taxes, property and
equipment, and other miscellaneous items. In addition, Hughes received $4.0
billion of cash proceeds from the borrowings incurred by Hughes Defense prior to
its spin-off to GM. Since these asset and liability changes took place on
December 17, 1997, they are not included in the December 31, 1996 balance sheet
of Hughes.
The accompanying financial statements include the applicable portion of
intangible assets, including goodwill, and related amortization resulting from
purchase accounting adjustments associated with GM's purchase of Hughes Aircraft
Company in 1985.
Hughes is a leading manufacturer of communications satellites and provider
of satellite-based services. It owns and operates one of the world's largest
private fleets of geostationary communications satellites and is the world's
leading supplier of satellite-based private business networks. Hughes is also a
leader in the direct broadcast satellite market with its programming
distribution service known as DIRECTV(R), which was introduced in the U.S. in
1994 and was the first high-powered, all digital, Direct-To-Home ("DTH")
television distribution service in North America. DIRECTV began service in Latin
America in 1996 and Japan in 1997. Hughes also provides communications equipment
and services in the mobile communications and packet switching markets. Its
equipment and services are applied in, among other things, data, video and audio
transmission, cable and network television distribution, private business
networks, digital cellular communications and DTH satellite broadcast
distribution of television programming.
IV-22
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 2: Summary of Significant Accounting Policies
Principles of Combination and Consolidation
Prior to December 18, 1997, the financial statements present the financial
position, results of operations and cash flows of the telecommunications and
space business owned and operated by former Hughes on a combined basis.
Subsequent to the Hughes Transactions, the accompanying financial statements are
presented on a consolidated basis. The financial statements include the accounts
of Hughes and its domestic and foreign subsidiaries that are more than 50%
owned, with investments in associated companies, in which Hughes owns at least
20% of the voting securities, accounted for under the equity method of
accounting.
Use of Estimates in the Preparation of the Financial Statements The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect amounts reported therein. Due to the inherent uncertainty
involved in making estimates, actual results reported in future
periods may be based upon amounts which differ from those estimates.
Revenue Recognition
Revenues are generated from sales of satellites and telecommunications
equipment, DTH broadcast subscriptions, and the sale of transponder capacity and
related services through outright sales, sales-type leases and operating lease
contracts.
Sales under long-term contracts are recognized primarily using the
percentage-of-completion (cost-to-cost) method of accounting. Under this method,
sales are recorded equivalent to costs incurred plus a portion of the profit
expected to be realized, determined based on the ratio of costs incurred to
estimated total costs at completion. Profits expected to be realized on
long-term contracts are based on estimates of total sales value and costs at
completion. These estimates are reviewed and revised periodically throughout the
lives of the contracts, and adjustments to profits resulting from such revisions
are recorded in the accounting period in which the revisions are made. Estimated
losses on contracts are recorded in the period in which they are identified.
Certain contracts contain cost or performance incentives which provide for
increases in profits for surpassing stated objectives and decreases in profits
for failure to achieve such objectives. Amounts associated with incentives are
included in estimates of total sales values when there is sufficient information
to relate actual performance to the objectives.
Sales which are not pursuant to long-term contracts are generally
recognized as products are shipped or services are rendered. DTH subscription
revenues are recognized when programming is viewed by subscribers. Programming
billed in advance of viewing is recorded as deferred revenues in the Balance
Sheet.
Satellite transponder lease contracts qualifying for capital lease
treatment (typically based on the term of the lease) are accounted for as
sales-type leases, with revenues recognized equal to the net present value of
the future minimum lease payments. Upon entering into a lease, the cost basis of
the transponder is removed and charged to cost of products sold. The portion of
each periodic lease payment deemed to be attributable to interest income is
recognized as income in each respective period. Contracts for sales of
transponders typically include telemetry, tracking and control (TT&C) service
agreements. Revenues related to TT&C service agreements are recognized as the
services are performed.
Transponder and other lease contracts that do not qualify as sales-type
leases are accounted for as operating leases. Operating lease revenues are
recognized on a straight-line basis over the respective lease term. Differences
between operating lease payments received and revenues recognized are deferred
and included in accounts receivable.
Hughes has entered into agreements for the sale and leaseback of certain of
its satellite transponders. The leaseback transactions have been classified as
operating leases and, therefore, the capitalized cost and associated
depreciation related to satellite transponders sold are not included in the
accompanying financial statements. Gains resulting from such transactions are
deferred and amortized over the leaseback period. Leaseback expense is recorded
using the straight-line method over the term of the lease, net of amortization
of the deferred gains. Differences between operating leaseback payments made and
expense recognized are deferred and included in accrued operating leaseback
expense.
IV-23
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 2: Summary of Significant Accounting Policies - Continued
Cash Flows
Cash equivalents consist of highly liquid investments purchased with
original maturities of 90 days or less.
Net cash from operating activities includes cash payments made by Hughes
and by former Hughes on behalf of Hughes for interest of $156.8 million, $55.8
million and $75.7 million in 1997, 1996 and 1995, respectively. Cash payments
made by Hughes and by former Hughes on behalf of Hughes for income taxes
amounted to $24.0 million, $36.5 million and $160.5 million in 1997, 1996 and
1995, respectively.
Certain non-cash transactions occurred in connection with the consummation
of the Hughes Transactions on December 17, 1997, resulting in a contribution of
a net liability of $133.8 million.
In a separate non-cash transaction, PanAmSat converted its outstanding
preferred stock, acquired as part of the PanAmSat merger (see Note 16), into
debt amounting to $438.5 million.
Contracts in Process
Contracts in process are stated at costs incurred plus estimated profit,
less amounts billed to customers and advances and progress payments applied.
Engineering, tooling, manufacturing, and applicable overhead costs, including
administrative, research and development, and selling expenses, are charged to
costs and expenses when incurred. Contracts in process include amounts relating
to contracts with long production cycles, with $137.9 million of the 1997 amount
expected to be billed after one year. Amounts billed under retainage provisions
of contracts are not significant, and substantially all amounts are collectible
within one year. Under certain contracts with the U.S. Government, progress
payments are received based on costs incurred on the respective contracts. Title
to the inventories related to such contracts (included in contracts in process)
vests with the U.S. Government.
Inventories
Inventories are stated at the lower of cost or market principally using
the average cost method.
Major Classes of Inventories
(Dollars in Millions) 1997 1996
------ ------
Productive material and supplies $57.5 $82.6
Work in process 328.5 250.5
Finished goods 100.4 90.0
----- ------
Total $486.4 $423.1
===== =====
Deferred Subscriber Acquisition Costs
During 1996, Hughes introduced certain rebate programs which reduced the
net retail price of Digital Satellite System ("DSS(R)") equipment when consumers
subscribed to and prepaid for DIRECTV programming services for a minimum of one
year. The rebate costs have been recorded as deferred subscriber acquisition
costs and are being amortized over the one-year subscription commitment period.
Net deferred rebate costs totaled $26.4 million and $97.5 million at December
31, 1997 and 1996, respectively.
Property, Satellites and Depreciation
Property and Satellites are carried at cost. Satellite costs include
construction costs, launch costs, launch insurance and capitalized interest.
Capitalized satellite costs represent the costs of successful satellite
launches. Satellite costs related to unsuccessful launches, net of insurance
proceeds, are recognized in the period of failure. Depreciation is computed
generally using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lesser of the life of the
asset or term of the lease.
Intangible Assets
Intangible assets are amortized using the straight-line method over periods
not exceeding 40 years.
IV-24
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 2: Summary of Significant Accounting Policies - Continued
Software Development Costs
Other assets include certain software development costs capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. Capitalized software development costs at December 31, 1997 and 1996,
net of accumulated amortization of $107.7 million and $86.1 million,
respectively, totaled $99.0 million and $87.0 million. The software is amortized
using the greater of the units of revenue method or the straight-line method
over its useful life, not in excess of five years. Software program reviews are
conducted to ensure that capitalized software development costs are properly
treated and costs associated with programs that are not generating revenues are
appropriately written-off.
Valuation of Long-Lived Assets
Hughes periodically evaluates the carrying value of long-lived assets to be
held and used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair market values are reduced for
the cost of disposal.
Research and Development
Expenditures for research and development are charged to costs and expenses
as incurred and amounted to $120.4 million in 1997, $94.6 million in 1996 and
$74.6 million in 1995.
Foreign Currency
Substantially all of Hughes' foreign operations have determined the local
currency to be their functional currency. Accordingly, these foreign entities
translate assets and liabilities from their local currencies to U.S. dollars
using year-end exchange rates while income and expense accounts are translated
at the average rates in effect during the year. The resulting translation
adjustment is accumulated as a separate component of owner's equity. Net foreign
currency transaction gains and losses included in the operating results were not
material for all years presented.
Financial Instruments and Investments
Hughes maintains investments in equity securities of unaffiliated
companies. Investments in equity securities are considered available-for-sale
and carried at current fair value with unrealized gains or losses, net of tax,
reported as a separate component of owner's equity. Fair value is determined by
market quotes, when available, or by management estimate.
Market values of financial instruments, other than debt and derivative
instruments, are based upon management estimates. Market values of debt and
derivative instruments are determined by quotes from financial institutions.
The carrying value of cash and cash equivalents, accounts and notes
receivable, investments and other assets, accounts payable, amounts included in
accrued liabilities meeting the definition of a financial instrument and debt
approximate fair value at December 31, 1997. The fair value of derivative
financial instruments approximates their contract value at December 31, 1997.
Hughes' derivative contracts primarily consist of foreign exchange-forward
contracts. Hughes enters into these contracts to reduce its exposure to
fluctuations in foreign exchange rates. Foreign exchange-forward contracts are
accounted for as hedges to the extent they are designated as, and are effective
as, hedges of firm foreign currency commitments. Gains and losses on foreign
exchange-forward contracts designated as hedges of firm foreign currency
commitments are recognized in income in the same period as gains and losses on
the underlying transactions are recognized.
Stock Compensation
Hughes issues stock options to employees with grant prices equal to the
fair value of the underlying security at the date of grant. No compensation cost
has been recognized for options in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. See Note 11 for information regarding the pro forma effect on
earnings of recognizing compensation cost based on the estimated fair value of
the stock options granted, as required by SFAS No. 123, Accounting for
Stock-Based Compensation.
IV-25
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 2: Summary of Significant Accounting Policies - Continued
Market Concentrations and Credit Risk
Sales under U.S. Government contracts were 15.3%, 22.5% and 30.5% of total
revenues in 1997, 1996 and 1995, respectively. Hughes provides services and
extends credit to a large number of customers in the commercial satellite
communications market and to a large number of residential consumers. Management
monitors its exposure to credit losses and maintains allowances for anticipated
losses.
Note 3: Property and Satellites, Net
Estimated
Useful Lives
(Dollars in Millions) (years) 1997 1996
---------------- ----- ------
Land and improvements 10 - 20 $51.2 $47.5
Buildings and unamortized leasehold
improvements 3 - 45 305.8 272.4
Machinery and equipment 3 - 30 1,015.4 854.5
Furniture, fixtures and office
machines 3 - 10 83.2 67.3
Construction in progress - 169.9 106.2
------- -------
Total 1,625.5 1,347.9
Less accumulated depreciation 735.8 657.1
------- -------
Property, net $889.7 $690.8
===== =====
Satellites 9 - 16 $3,051.9 $1,400.1
Less accumulated depreciation - 408.5 343.5
-------- -------
Satellites, net $2,643.4 $1,056.6
======= =======
Hughes capitalized interest of $64.5 million, $12.9 million and $14.6
million for 1997, 1996 and 1995, respectively, as part of the cost of its
satellites under construction.
Note 4: Leasing Activities
Future minimum lease payments due from customers under noncancelable
satellite transponder operating leases, exclusive of amounts due from subleases
reported below, are $695.9 million in 1998, $666.1 million in 1999, $612.2
million in 2000, $571.6 million in 2001, $505.2 million in 2002 and $2,721.5
million thereafter.
The components of the net investment in sales-type leases are as follows:
(Dollars in Millions) 1997 1996
Total minimum lease payments $662.5 $678.7
Less unearned interest income (297.1) (337.5)
Total net investment in sales-type leases 365.4 341.2
Less current portion (27.8) (20.6)
Total $337.6 $320.6
Future minimum payments due from customers under sales-type leases and
related service agreements as of December 31, 1997 are $78.1 million in 1998,
$87.2 million in 1999, $85.8 million in 2000, $87.1 million in 2001, $87.6
million in 2002, and $305.5 million thereafter.
In February 1996, Hughes entered into a sale and leaseback of certain
satellite transponders on Galaxy III-R with General Motors Acceptance
Corporation ("GMAC"), a subsidiary of GM. Proceeds from the sale were $252.0
million, and the sale resulted in a gain of $108.8 million, which was deferred
and is being amortized over the seven-year leaseback period. In 1992 and 1991,
Hughes entered into agreements for the sale and leaseback of certain
transponders on Galaxy VII and SBS-6, respectively, resulting in deferred gains
of $180.0 million in 1992 and $96.1 million in 1991, which are being amortized
over their respective leaseback periods. The transponder leaseback terms include
early buyout options of $151.7 million in 1998 and $366.2 million in 1999. In
January 1998, PanAmSat exercised an early buy-out option for $96.6 million
related to transponders on SBS-6.
IV-26
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 4: Leasing Activities - Concluded
As of December 31, 1997, the future minimum leaseback amounts payable to
lessors under the operating leasebacks and the future minimum sublease amounts
due from subleases under noncancelable subleases are as follows:
Minimum Sublease
Leaseback Amounts
(Dollars in Millions) Payments Due
-------- -----------
1998 $102.5 $76.6
1999 133.3 74.9
2000 164.6 69.7
2001 90.9 67.0
2002 138.3 56.5
Thereafter 228.5 159.5
------ -----
Total $858.1 $504.2
===== =====
Note 5: Accrued Liabilities
(Dollars in Millions) 1997 1996
Payrolls and other compensation $200.2 $115.5
Contract-related provisions 76.0 159.5
Reserve for consumer finance and
rebate programs 86.9 120.5
Other 326.3 34.5
----- -----
Total $689.4 $430.0
===== =====
Note 6: Long-Term Debt
(Dollars in Millions) 1997 1996
------ ------
Bridge loan $100.0 $ -
Revolving credit facility 500.0 -
Other 37.6 -
------- ---
Total long-term debt $637.6 $ -
===== ===
At December 31, 1997, Hughes has $1 billion of unused credit available
under two unsecured revolving credit loan agreements, consisting of a $750
million multi-year facility and a $250 million 364-day facility. The multi-year
facility loan agreement provides for a commitment of $750.0 million through
December 5, 2002, subject to a facility fee of 0.07% per annum. Borrowings bear
interest at a rate which approximates the London Interbank Offered Rate plus
0.155%. The 364-day facility provides for a commitment of $250.0 million through
December 3, 1998, subject to a facility fee of 0.05% per annum. Borrowings bear
interest at a rate which approximates the London Interbank Offered Rate plus
0.175%. No amounts were outstanding under either agreement at December 31, 1997.
At December 31, 1997, Hughes had long-term notes outstanding of $28.5
million which are included in other long-term debt. The notes bear interest at
fixed rates as follows: $10.7 million at 9.61% and $17.8 million at 11.11%.
In December 1997, Hughes' subsidiary, PanAmSat, entered into a bank
borrowing agreement (the "Bank Agreement") that provided for bridge loans of up
to $300.0 million and loans of up to $500.0 million under a five-year revolving
credit facility. Borrowings bear interest at a rate which approximates the
London Interbank Offered Rate plus 0.40%.
In December 1997, using $100.0 million from the bridge loans, $500.0
million from the revolving credit facility and available cash (including cash
from the liquidation of certain marketable securities), PanAmSat completed a
debt tender offer and restructuring program (the "Program") for its outstanding
9.75% Senior Notes, 11.375% Senior Subordinated Discount Notes and 12.75% Senior
Subordinated Notes (collectively, the "Senior Notes"). In connection with the
Program, PanAmSat purchased approximately 99% of the principal amount of each
class of the Senior Notes then outstanding. PanAmSat retired Senior Notes having
a principal value of approximately $1.1 billion. The debt refinancing Program
resulted in the recognition of an extraordinary charge of $20.6 million ($34.4
million before taxes) related principally to the excess of the price paid for
the debt over its carrying value, net of deferred financing costs.
IV-27
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 6: Long-Term Debt - Concluded
In addition to its $600.0 million of bank borrowings, PanAmSat had $9.1
million of Senior Notes outstanding at December 31, 1997 which were not tendered
as part of its debt refinancing Program. The outstanding balance of the Senior
Notes is included in other long-term debt.
In January 1998, PanAmSat borrowed an additional $125.0 million under the
Bank Agreement, principally for the purpose of exercising an early buy-out
option on a satellite sale-leaseback agreement. Also in January 1998, PanAmSat
completed a private placement debt offering for five, seven, ten and thirty year
notes aggregating $750.0 million (the "Notes Offering"), the proceeds of which
were used to retire all of the outstanding borrowings under the Bank Agreement.
As a result of the Notes Offering, the bridge loan under the Bank Agreement
terminated, while the five year revolving credit facility remains in effect. As
all of the bank borrowings were refinanced on a long-term basis shortly after
year-end, these amounts have been classified as long-term as of December 31,
1997.
The aggregate maturities of long-term debt for the five years subsequent to
December 31, 1997 are $3.6 million in 2000 and $634.0 million in 2003 and
beyond.
Note 7: Income Taxes
The provision for income taxes is based on reported income before income
taxes. Deferred income tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes,
as measured by applying currently enacted tax laws.
Hughes and former Hughes, and their domestic subsidiaries join with General
Motors in filing a consolidated U.S. Federal income tax return. The portion of
the consolidated income tax liability recorded by Hughes is generally equivalent
to the liability it would have incurred on a separate return basis.
Prior to December 18, 1997, certain income tax assets and liabilities were
maintained by former Hughes. Income tax expense was allocated to Hughes as if
Hughes filed a separate income tax return. In connection with the Hughes
Transactions, certain income tax assets and liabilities were contributed to and
assumed by Hughes on December 17, 1997 and are included in the accompanying
balance sheet.
The income tax provision consists of the following:
(Dollars in Millions) 1997 1996 1995
U.S. federal, state and foreign taxes
currently payable $24.0 $36.5 $160.5
U.S. federal, state and foreign deferred tax
liabilities (assets), net 212.7 68.3 (129.1)
----- ----- -----
Total income tax provision $236.7 $104.8 $31.4
===== ===== ====
Income from continuing operations before income taxes, minority interests
and extraordinary item included the following components:
(Dollars in Millions) 1997 1996 1995
------ ------ ------
U.S. income $659.4 $218.4 $96.0
Foreign (loss) income (41.2) 3.7 1.6
------- ------ ------
Total $618.2 $222.1 $97.6
===== ===== ====
The combined income tax provision was different than the amount computed
using the U.S. statutory income tax rate for the reasons set forth in the
following table:
(Dollars in Millions) 1997 1996 1995
------ ------ ------
Expected tax at U.S. statutory income tax rate $216.4 $77.7 $34.2
Investment and research tax credits (39.3) - (5.0)
Foreign sales corporation tax benefit (25.5) (24.0) (19.7)
U.S. state and local income taxes 24.8 9.4 4.1
Purchase accounting adjustments 7.3 7.3 7.3
Losses of equity method investees 18.7 14.8 4.2
Minority interests in losses of partnership 17.5 17.7 2.0
Non-deductible goodwill amortization 9.7 - -
Other 7.1 1.9 4.3
------ ------ -----
Total income tax provision $236.7 $104.8 $31.4
===== ===== ====
IV-28
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 7: Income Taxes - Concluded
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities at December 31, 1997 and 1996 were as follows:
1997 1996
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
(Dollars in Millions) Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Profits on long-term contracts $156.0 $142.8 $124.8 $133.3
Sales and leasebacks 85.8 - 111.0 -
Employee benefit programs 64.3 114.0 - -
Postretirement benefits other
than pensions 72.9 - - -
Customer deposits and rebates 61.9 - 2.6 -
State taxes 50.0 - 19.8 -
Gain on PanAmSat merger - 195.0 - -
Satellite launch insurance costs - 43.7 - -
Depreciation - 438.6 - 255.2
Sale of equity interest in DIRECTV - 48.7 - 48.7
Other 63.9 35.4 35.8 23.9
------ -------- ------ ------
Subtotal 554.8 1,018.2 294.0 461.1
Valuation allowance (14.2) - (10.3) -
------ ------- ---- ------
Total deferred taxes $540.6 $1,018.2 $283.7 $461.1
===== ======= ===== =====
No provision has been made for U.S. federal income taxes related to the
portion of undistributed earnings of foreign subsidiaries deemed permanently
reinvested. At December 31, 1997 and 1996, undistributed earnings of foreign
subsidiaries amounted to approximately $18.2 million and $5.3 million,
respectively. Repatriation of all accumulated earnings would have resulted in
tax liabilities of $5.4 million in 1997 and $0.5 million in 1996.
At December 31, 1997, Hughes had $20.2 million of foreign operating loss
carryforwards which expire in varying amounts between 1998 and 2002. The
valuation allowance includes a provision of $12.3 million for foreign operating
loss carryforwards.
Hughes has an agreement with Raytheon which governs Hughes' rights and
obligations with respect to federal and state income taxes for all periods prior
to the merger of Hughes Defense with Raytheon. Hughes will be responsible for
any taxes pertaining to those periods prior to the merger, including any
additional taxes resulting from federal and state tax audits. Hughes will also
be entitled to any tax refunds relating to those years.
The federal income tax returns of former Hughes have been examined through
1990. All years prior to 1983 are closed. Issues relating to the years 1983
through 1990 are being contested through various stages of administrative
appeal. The Internal Revenue Service is currently examining former Hughes'
federal tax returns for years 1991 through 1994. Management believes that
adequate provision has been made for any adjustment which might be assessed for
open years. In addition, former Hughes has filed an affirmative claim for
additional research and experimentation credits for 1986 through 1994.
Note 8: Retirement Programs
Substantially all of Hughes' employees participate in Hughes' contributory
and non-contributory defined benefit retirement plans. Benefits are based on
years of service and compensation earned during a specified period of time
before retirement. Additionally, an unfunded, nonqualified pension plan covers
certain employees.
Prior to December 18, 1997, the pension-related assets and liabilities were
maintained by former Hughes for its non-automotive businesses and were not
included in the Hughes balance sheet. A portion of former Hughes' net pension
expense or income was allocated to Hughes and is included in the statement of
income. In connection with the Hughes Transactions, the pension assets and
liabilities related to Hughes employees were contributed to and assumed by
Hughes. These assets and liabilities are included in the December 31, 1997
balance sheet. The net pension expense (credit) allocation was $12.3 million,
$12.2 million and $(3.0) million for 1997, 1996 and 1995, respectively. The
pension expense components including benefits earned during the year, interest
accrued on benefits earned in prior years, actual return on assets and net
amortization and deferral, were not determined separately for the Hughes
participants.
IV-29
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 8: Retirement Programs - Concluded
Costs are actuarially determined using the projected unit credit method and
are funded in accordance with U.S. Government cost accounting standards to the
extent such costs are tax-deductible. SFAS No. 87, Employers' Accounting for
Pensions, requires the recognition of an additional pension liability to
increase the amounts recorded up to the unfunded accumulated benefit obligation.
The adjustment required to recognize the minimum pension liability required by
SFAS No. 87 is recorded as an intangible asset to the extent of unrecognized
prior service cost and the remainder, net of applicable deferred income taxes,
is recorded as a reduction of owner's equity. At December 31, 1997, the
additional minimum pension liability recorded was $76.5 million, of which $34.8
million was recorded as a reduction of owner's equity.
Plan assets are invested primarily in listed common stocks, cash and
short-term investment funds, U.S. Government securities and other investments.
The following table sets forth the funded status of the Hughes plans and
the amounts included in the balance sheet at December 31, 1997:
Assets Accumulated
Exceed Benefits
Accumulated Exceed
(Dollars in Millions) Benefits Assets
Actuarial present value of benefits
based on service to date and
present pay levels
Vested $1,162.8 $82.0
Nonvested 105.2 1.8
-------- -----
Accumulated benefit obligation 1,268.0 83.8
Additional amounts related to projected
pay increases 194.9 9.7
Total projected benefit obligation based
on service to date 1,462.9 93.5
Plan assets at fair value 1,906.1 0.0
------- -----
Plan assets in excess of (less than) projected
benefit obligation 443.2 (93.5)
Unamortized net amount resulting from changes
in plan experience and actuarial
assumptions (200.1) 77.8
Unamortized net asset at date of adoption (12.8) -
Unamortized net amount resulting from changes
in plan provisions (3.3) 8.4
Adjustment for unfunded pension liabilities - (76.5)
----- ----
Net prepaid pension cost (accrued liability) $227.0 $(83.8)
===== ====
The weighted-average discount rate used in determining the actuarial
present values of the projected benefit obligation shown in the table above was
7.25% at December 31, 1997. The rate of increase in future compensation levels
was 5.0% and the expected long-term rate of return on assets used in determining
pension cost was 9.5%.
Hughes maintains 401(k) plans for qualified employees. A portion of
employee contributions are matched by Hughes and amounted to $26.3 million,
$16.7 million and $14.9 million in 1997, 1996 and 1995, respectively.
Note 9: Other Postretirement Benefits
Hughes maintains a program for eligible retirees to participate in health
care and life insurance benefits generally until they reach age 65. Qualified
employees who elected to participate in the Hughes contributory defined benefit
pension plans may become eligible for these benefits if they retire from Hughes
between the ages of 55 and 65.
Prior to December 18, 1997, the postretirement benefit plans were
maintained by former Hughes for its non-automotive businesses and were not
included in the Hughes balance sheet. A portion of former Hughes' postretirement
benefit cost was allocated to Hughes and is included in the statement of income.
In connection with the Hughes Transactions, the postretirement benefit
obligation related to Hughes employees was assumed by Hughes on December 17,
1997 and is included in the December 31, 1997 balance sheet.
The postretirement benefit cost allocated to Hughes was $11.2 million,
$10.4 million and $8.7 million for 1997, 1996 and 1995, respectively. The
postretirement benefit cost components, including benefits earned during the
year, interest accrued on benefits earned in prior years and net amortization,
were not determined separately for the Hughes employees.
IV-30
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 9: Other Postretirement Benefits - Concluded
The following table displays the components of Hughes' obligation
recognized for postretirement benefit plans included in the Balance Sheet at
December 31, 1997:
(Dollars in Millions)
Accumulated postretirement benefit obligation attributable to
Current retirees $54.2
Fully eligible active plan participants 18.0
Other active plan participants 63.4
----
Accumulated postretirement benefit obligation 135.6
Unrecognized net amount resulting from changes in plan
experience and actuarial assumptions 31.0
----
Net postretirement benefit obligation 166.6
Less current portion 11.8
----
Net long-term postretirement benefit obligation $154.8
=====
The assumed weighted-average discount rate used in determining the
actuarial present value of the accumulated postretirement benefit obligation was
6.75% at December 31, 1997. The assumed weighted-average rate of increase in
future compensation levels related to pay-related life insurance benefits was
5.0% at December 31, 1997.
The assumed weighted-average health care cost trend rate was 10.5% in 1997,
assumed to decrease linearly each successive year until it reaches 6.0% in 2006,
after which it remains constant. A one percentage point increase in each year of
this annual trend rate would increase the accumulated postretirement benefit
obligation at December 31, 1997 by approximately $11 million, and increase the
service and interest cost components of the 1997 postretirement benefit expense
by approximately $1 million.
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 10: Owner's Equity
The authorized capital stock of Hughes consists of 1,000 shares of $1.00
par value common stock. All of the outstanding capital stock of Hughes is held
by GM. In connection with the Hughes Transactions, Hughes was recapitalized on
December 17, 1997 at which time 1,000 shares of common stock were issued to GM.
Prior to December 17, 1997, the equity of Hughes was comprised of former Hughes'
(Parent Company's) net investment in its telecommunications and space business.
During the fourth quarter of 1997, Hughes adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. The changes in
the components of other comprehensive income (loss), net of income taxes, are as
follows at December 31:
(Dollars in Millions)
1997 1996 1995
Pre-tax Tax Net Pre-tax Tax Net Pre-tax Tax Net
Amount Exp. Amount Amount Exp. Amount Amount Credit Amount
Foreign currency
translation
adjustments $1.0 $0.4 $0.6 $1.3 $0.5 $0.8 $(3.7) $(1.5) $(2.2)
=== === === === === === === === ===
IV-31
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 11: Incentive Plan
Under the Hughes Electronics Corporation Incentive Plan (the Plan), as
approved by the GM Board of Directors in 1997, shares, rights, or options to
acquire up to 25.8 million shares of GM Class H common stock were available for
grant through December 31, 1997.
The GM Executive Compensation Committee may grant options and other rights
to acquire shares of GM Class H common stock under the provisions of the Plan.
The option price is equal to 100% of the fair market value of GM Class H common
stock on the date the options are granted. These nonqualified options generally
vest over two to four years, expire 10 years from date of grant and are subject
to earlier termination under certain conditions.
As part of the Hughes Transactions, the outstanding options of former
Hughes employees who continued as Hughes employees were converted into options
to purchase the recapitalized GM Class H common stock. Recognition of
compensation expense was not required in connection with the conversion. The
following table summarizes information about the Plan stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
Weighted-
Average Weighted-
Number Remaining Weighted- Average
Range of Out- Contractual Average Number Exercise
Exercise Prices standing Life (years) Exercise Price Exercisable Price
$9.00 to $15.99 787,450 4 $13.66 787,450 $13.66
16.00 to$29.99 2,315,562 6 20.35 2,315,562 20.35
30.00 to 40.00 10,858,603 9 32.06 500,051 35.41
----- ---------- -----
$9.00 to $40.00 13,961,615 8 $29.08 3,603,063 $20.98
===== ========= =====
At December 31, 1997, no shares were available for grant under the Plan.
Effective May 6, 1997, PanAmSat, Hughes' 71.5% owned, publicly-traded
subsidiary, adopted a stock option incentive plan with terms similar to the
Plan. As of December 31, 1997, PanAmSat has issued 584,890 options to purchase
its common stock with exercise prices ranging from $29.00 per share to $38.25
per share. The options vest ratably over three years and have a remaining life
of approximately nine and one-half years. The PanAmSat options have been
considered in the following pro forma analysis.
The following table presents pro forma information as if Hughes recorded
compensation cost using the fair value of issued options on their grant date:
(Dollars in Millions) 1997 1996 1995
Reported net earnings used for pro forma
computation of available separate
consolidated net income $470.7 $183.5 $27.2
Assumed stock compensation cost, net of tax 43.5 8.8 2.6
------- ------ --------
Adjusted earnings used for pro forma computation
of available separate consolidated net income $427.2 $174.7 $24.6
===== ===== ====
Reported pro forma earnings per share $1.18 $0.46 $0.07
Adjusted pro forma earnings per share $1.07 $0.44 $0.06
==== ==== ====
Estimated compensation cost was based upon an allocation from former Hughes
which was calculated using the Black-Scholes valuation model for estimating the
fair value of its options. The following table presents the estimated
weighted-average fair value of options granted and the assumptions used for the
1997 calculation (stock volatility has been estimated based upon a study of a
Hughes determined peer group and may not be indicative of actual volatility for
future periods):
Estimated fair value per option granted $26.90
Average exercise price per option granted $31.71
Stock volatility 32.5%
Risk-free interest rate 5.87%
Option life in years 7
IV-32
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 12: Other Income and Expenses
(Dollars in Millions) 1997 1996 1995
----- ----- -----
Gain on PanAmSat merger $489.7 $- $-
Gain on sale of DIRECTV interest to AT&T - 120.3 -
Equity losses (72.2) (42.2) (9.6)
Other (26.8) (9.0) 12.6
---- ----- ----
Total Other, net $390.7 $69.1 $3.0
===== ==== ===
Note 13: Related-Party Transactions
In the ordinary course of its operations, Hughes provides
telecommunications services and sells electronic components to, and purchases
sub-components from, related parties. In addition, prior to December 18, 1997,
Hughes received allocations of corporate expenses and interest costs from former
Hughes and GM.
The following table summarizes the significant related party transactions
of Hughes with former Hughes and GM entities:
(Dollars in Millions) 1997 1996 1995
------ ------ ------
Revenues $45.2 $50.8 $53.6
Costs and expenses
Purchases 275.4 241.5 144.0
Allocation of corporate expenses 77.5 75.6 60.5
Allocated interest 55.6 53.2 74.7
Note 14: Pro Forma Earnings Per Share Attributable to GM Class H Common
Stock and Available Separate Consolidated Net Income
Earnings per share attributable to GM Class H common stock is determined
based on the relative amounts available for the payment of dividends to holders
of GM Class H common stock. Holders of GM Class H common stock have no direct
rights in the equity or assets of Hughes, but rather have rights in the equity
and assets of GM (which includes 100% of the stock of Hughes).
Amounts available for the payment of dividends on GM Class H common stock
are based on the Available Separate Consolidated Net Income of Hughes. The
Available Separate Consolidated Net Income of Hughes is determined quarterly and
is equal to the separate consolidated net income of Hughes, excluding the
effects of GM purchase accounting adjustments arising from GM's acquisition of
Hughes Aircraft Company (Earnings Used for Computation of Available Separate
Consolidated Net Income), multiplied by a fraction, the numerator of which is a
number equal to the weighted-average number of shares of GM Class H common stock
outstanding during the period and the denominator of which was 399.9 million
during 1997, 1996 and 1995. The denominator used in determining the Available
Separate Consolidated Net Income of Hughes may be adjusted from time-to-time as
deemed appropriate by the GM Board of Directors to reflect subdivisions or
combinations of the GM Class H common stock and to reflect certain transfers of
capital to or from Hughes. The GM Board's discretion to make such adjustments is
limited by criteria set forth in GM's restated Certificate of Incorporation.
In the accompanying financial statements, Available Separate Consolidated
Net Income and Earnings Attributable to General Motors Class H common stock are
presented on a pro forma basis. Historically, such amounts were calculated based
on the financial performance of former Hughes. Since these financial statements
relate only to the telecommunications and space business of former Hughes prior
to the consummation of the Hughes Transactions, they do not reflect the earnings
attributable to the GM Class H common stock on a historical basis. The pro forma
presentation is used, therefore, to present the financial results which would
have been achieved relative to the GM Class H common stock had they been
calculated based on the performance of the telecommunication and space business
of former Hughes for all periods presented.
Pro forma earnings per share represent basic earnings per share. There is
no dilutive effect resulting from the assumed exercise of stock options, since
the exercise of stock options would not effect the GM Class H dividend base
(denominator) used in calculating earnings per share. As Hughes has no other
common stock equivalents that may impact the calculation, diluted earnings per
share are not presented.
IV-33
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 14: Pro Forma Earnings Per Share Attributable to GM Class H Common
Stock and Available Separate Consolidated Net Income - Concluded
Dividends may be paid on the GM Class H common stock only when, as, and if
declared by GM's Board of Directors in its sole discretion. Dividends may be
paid on GM Class H common stock to the extent of the amount initially determined
to be available for the payment of dividends on Class H common stock, plus the
portion of earnings of GM after the closing of the Hughes Transactions
attributed to GM Class H common stock. The GM Board determined that the amount
initially available for the payment of dividends on shares of the recapitalized
GM Class H common stock was the cumulative amount available for the payment of
dividends on GM Class H common stock immediately prior to the closing of the
Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's
total stockholders' equity resulting from the Hughes Transactions. As of
December 31, 1997, the amount available for the payment of dividends on GM Class
H common stock was $3.7 billion. The GM Board does not currently anticipate
paying any cash dividends initially on the recapitalized GM Class H common
stock.
Note 15: Special Provision for Restructuring
In 1992, Hughes recorded a special restructuring charge of $155.6 million
primarily attributable to redundant facilities and related employment costs. The
special charge comprehended a reduction of Hughes' employment, a major
facilities consolidation and a reevaluation of certain business lines that no
longer met Hughes' strategic objectives. Restructuring costs of $8.8 million,
$19.4 million and $44.7 million were charged against the reserve during 1997,
1996 and 1995, respectively. The remaining liability of $15.1 million relates
primarily to reserves for excess facilities. It is expected that these costs
will be expended predominantly over the next several years.
Note 16: Acquisitions
In May 1997, Hughes and PanAmSat Corporation, a leading provider of
international satellite services, merged their respective satellite service
operations into a new publicly-held company, which retained the name PanAmSat.
Hughes contributed its Galaxy(R) satellite services business in exchange for a
71.5% interest in the new company. PanAmSat stockholders received a 28.5%
interest in the new company and $1.5 billion in cash. Such cash consideration
and other funds required to consummate the merger were funded by new debt
financing totaling $1,725.0 million provided by Hughes, which borrowed such
funds from GM.
For accounting purposes, the merger was treated by Hughes as an acquisition
of 71.5% of PanAmSat and was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the net assets acquired,
including intangible assets, based on estimated fair values at the date of
acquisition. The purchase price exceeded the fair value of net assets acquired
by $2.4 billion. In addition, the merger was treated as a partial sale of the
Galaxy business by Hughes and resulted in a one-time pre-tax gain of $489.7
million ($318.3 million after-tax).
As the Hughes 1997 financial statements include only PanAmSat's results of
operations since the date of acquisition, the following selected unaudited pro
forma information is being provided to present a summary of the combined results
of Hughes and PanAmSat as if the acquisition had occurred as of the beginning of
the respective periods, giving effect to purchase accounting adjustments. The
pro forma data is presented for informational purposes only and may not
necessarily reflect the results of operations of Hughes had PanAmSat operated as
part of Hughes for the years ended December 31, 1997 and 1996, nor are they
necessarily indicative of the results of future operations. The pro forma
information excludes the effect of non-recurring charges.
(Dollars in Millions except per share amounts) 1997 1996
Total revenues $5,247.9 $4,189.8
Income before extraordinary item 164.1 42.1
Net income 143.5 42.1
Pro forma available separate consolidated
net income 41.8 15.5
Pro forma earnings per share attributable
to GM Class H common stock $0.41 $0.16
In December 1997, Hughes repurchased from AT&T, a 2.5% equity interest in
DIRECTV, ending AT&T's marketing agreement to distribute the DIRECTV direct
broadcast satellite television service and DSS(R) equipment. The $161.8 million
repurchase resulted in goodwill of approximately $156.1 million.
IV-34
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 17: Derivative Financial Instruments and Risk Management
In the normal course of business, Hughes enters into transactions that
expose it to risks associated with foreign exchange rates. Hughes utilizes
derivative instruments in an effort to mitigate these risks. Hughes' policy is
not to speculate in derivative instruments to profit on foreign currency
exchange fluctuations, nor to enter trades for which there are no underlying
exposures. Instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and are designated as a hedge at the
inception of the contract. Accordingly, changes in market values of hedge
instruments are highly correlated with changes in market values of the
underlying transactions, both at the inception of the hedge and over the life of
the hedge contract.
Hughes primarily uses foreign exchange-forward contracts to hedge firm
commitments denominated in foreign currencies. Foreign exchange-forward
contracts are legal agreements between two parties to purchase and sell a
foreign currency, for a price specified at the contract date, with delivery and
settlement in the future. The total notional amounts of contracts afforded hedge
accounting treatment at December 31, 1997 and 1996 were not significant.
Hughes is exposed to credit risk in the event of non-performance of the
counterparties to its foreign exchange-forward contracts, which Hughes believes
is remote. Nevertheless, credit risk is managed through the periodic monitoring
and approval of financially sound counterparties.
In connection with PanAmSat's debt refinancing activities as discussed in
Note 6, PanAmSat entered into certain U.S. Treasury rate lock contracts to
reduce its exposure to fluctuations in interest rates. The aggregate notional
value of these contracts was $375.0 million and these contracts were accounted
for as hedges because they were applied to a specific refinancing plan that was
consummated shortly after December 31, 1997. The fair value of these financial
instruments at December 31, 1997 approximated their contract value. The cost to
settle these instruments in 1998 will be amortized to expense over the term of
the newly placed debt securities.
Note 18: Discontinued Operations
On December 15, 1997, Hughes sold substantially all of the assets and
liabilities of the Hughes Avicom International, Inc. ("Hughes Avicom") business
to Rockwell Collins, Inc. for cash. Hughes Avicom is a supplier of products and
services to the commercial airline market. Hughes recorded an after-tax gain of
$62.8 million on the sale. The net operating results of Hughes Avicom have been
reported, net of applicable income taxes, as "Income (loss) from discontinued
operations"; the net assets as "Net assets of discontinued operations"; and the
net cash flows as "Net cash used by discontinued operations".
Summarized financial information for Hughes Avicom follows:
(Dollars in Millions) 1997* 1996 1995
------ ------ ------
Revenues $102.5 $89.9 $49.6
Net income (loss) 1.2 (7.4) (64.6)
*Includes the results of Hughes Avicom through December 15, 1997.
December 31,
(Dollars in Millions) 1996
---------------
Current assets $73.6
Property, net 10.3
Other assets 13.9
Current liabilities (62.1)
Other liabilities (0.7)
------
Net assets of discontinued operations $35.0
IV-35
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 19: Segment Reporting
Hughes adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, during the fourth quarter of 1997. SFAS No. 131
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and assessing performance. The operating
segments are managed separately because each operating segment represents a
strategic business unit that offers different products and serves different
markets.
Hughes' reportable segments include Direct-To-Home Broadcast, Satellite
Services, Satellite Manufacturing and Network Systems. Direct-To-Home Broadcast
is engaged in acquiring, promoting, selling and/or distributing digital
programming via satellite, primarily to residential customers. Satellite
Services is engaged in the selling, leasing and operating of satellite
transponders and provides services for cable television systems, news companies
and private business networks. Satellite Manufacturing designs, manufactures and
markets satellites and satellite components. Network Systems products include
satellite-based business networks, cellular-based fixed wireless telephone
systems and mobile cellular digital packet data systems. Other includes the
corporate office and other entities.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Hughes generally
evaluates performance based on segment operating profit and accounts for
intersegment revenues and transfers as if the revenues or transfers were to
third parties, at current market prices.
<TABLE>
<CAPTION>
(Dollars in Millions)
Direct-To-
Home Satellite Satellite Network
Broadcast Services Manufact. Systems Other Elim. Total
<S> <C> <C> <C> <C> <C> <C> <C>
1997
External
Revenues $1,276.9 $537.3 $2,290.0 $998.3 $25.8 $- $5,128.3
Intersegment
Revenues - 92.6 201.9 13.0 2.7 (310.2) -
------- ----- ------- ---- ---- ----- -------
Total Revenues $1,276.9 $629.9 $2,491.9 $1,011.3 $28.5$(310.2) $5,128.3
------- ----- ------- ------ ---- ----- -------
Operating
Profit(1) $(254.6) $292.9 $226.3 $74.1 $(47.9) $(5.4) $285.4
Depreciation and
Amortization(1) 86.1 145.2 39.4 32.0 14.7 - 317.4
Intangibles, net - 2,498.5 - - 456.3 - 2,954.8
Segment Assets(2) 1,441.5 5,682.4 1,312.6 1,215.6 3,298.1 (186.4) 12,763.8
Capital
Expenditures(3) 105.6 625.7 113.9 43.1 0.4 (62.1) 826.6
------- ------- ------- ------- ------- ---- -----
1996
External Revenues $621.0 $381.7 $1,950.4 $1,049.6 $6.0 $- $4,008.7
Intersegment
Revenues - 101.1 106.0 20.4 1.7 (229.2) -
------- ----- ------- ------- --- ----- -------
Total Revenues $621.0 $482.8 $2,056.4 $1,070.0 $7.7$(229.2) $4,008.7
------ ----- ------- ------- --- ----- -------
Operating Profit(1)$(319.8) $239.1 $183.3 $107.7 $(13.5) $(7.7) $189.1
Depreciation and
Amortization(1) 67.3 58.5 34.4 28.3 27.1 - 215.6
Intangibles, net 72.9 395.1 468.0
Segment Assets(2) 1,067.2 1,275.5 757.8 964.0 457.1 (105.2) 4,416.4
Capital
Expenditures(3) 63.5 308.7 87.8 45.3 - (55.9) 449.4
------- ------- ------ ------ ----- ---- ------
1995
External Revenues $241.8 $341.3 $1,598.8 $919.0 $51.9 $- $3,152.8
Intersegment
Revenues - 44.8 132.7 0.3 2.4 (180.2) -
----- ----- ------ ----- ----- ----- -------
Total Revenues $241.8 $386.1 $1,731.5 $919.3 $54.3 $(180.2)$3,152.8
----- ----- ------- ----- ---- ----- -------
Operating Profit(1)$(160.8) $163.3 $151.5 $69.0 $(28.1) $(44.4) $150.5
Depreciation and
Amortization (1) 48.6 76.5 33.6 25.2 17.0 200.9
Intangibles, net 76.2 412.8 489.0
Segment Assets (2) 855.9 1,138.0 603.9 801.1 574.5 (20.8) 3,952.6
Capital
Expenditures(3) 107.5 280.5 53.2 50.5 - (49.4) 442.3
----- ------- ------ ----- ----- ---- -----
See Notes on next page.
</TABLE>
IV-36
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 19: Segment Reporting - Concluded
Certain amounts have been reclassified to conform with the 1997 presentation.
(1) Includes amortization arising from purchase accounting adjustments
related to GM's acquisition of Hughes Aircraft Company amounting to $3.3
million in each of the years for the Satellite Services segment and $17.7
million in each of the years in Other.
(2) Assets of the Satellite Services segment and Other include the unamortized
purchase accounting adjustments associated with the purchase of Hughes
Aircraft Company. Satellite Services includes unamortized purchase
accounting adjustments of $69.6 million in 1997, $72.9 million in 1996 and
$76.2 million in 1995. Other includes unamortized purchase accounting
adjustments of $378.0 million in 1997, $395.7 million in 1996 and $413.4
million in 1995.
(3) Includes expenditures related to satellites in segments as follows: $53.1
million in 1995 for Direct-To-Home Broadcast segment and $606.1 million,
$259.2 million and $234.9 million in 1997, 1996 and 1995, respectively, for
Satellite Services segment.
A reconciliation of operating profit shown above to Income from continuing
operations before income taxes, minority interests and extraordinary item shown
in the Statement of Income and Pro Forma Available Separate Consolidated Net
Income follows:
(Dollars in Millions) 1997 1996 1995
----- ------ -----
Operating profit $285.4 $189.1 $150.5
Interest income 33.1 6.8 5.2
Interest expense (91.0) (42.9) (61.1)
Other, net 390.7 69.1 3.0
----- ------ ------
Income from continuing operations before income taxes,
minority interests and extraordinary item $618.2 $222.1 $97.6
===== ===== ====
The following table presents revenues earned from customers located in
different geographic areas. Property and satellites are grouped by their
physical location. All satellites are reported as United States assets.
1997 1996 1995
---------------- -------------------- ------------------
Net Net Net
Property Property Property
Total and Total and Total and
Revenues Satellites Revenues Satellites Revenues Satellites
North America
United States $2,851.1 $3,507.1 $2,613.1 $1,725.1 $2,212.9 $1,630.2
Canada and
Mexico 101.3 - 27.4 - 18.8 -
------ -------- -------- -------- -------- -------
Total North
America 2,952.4 3,507.1 2,640.5 1,725.1 2,231.7 1,630.2
Europe 1,002.3 10.8 626.2 8.3 298.4 3.9
Latin America 221.6 - 71.7 - 34.2 -
Asia 826.7 15.2 640.2 14.0 558.9 13.3
Middle East 77.7 - 1.2 - 15.5 -
Other 47.6 - 28.9 - 14.1 -
-------- ------- -------- ------- ------- -------
Total $5,128.3 $3,533.1 $4,008.7 $1,747.4 $3,152.8 $1,647.4
======= ======= ======= ======= ======= =======
Note 20: Commitments and Contingencies
As a result of the Hughes Transactions, Hughes is subject to certain
potential adjustments which could require amounts to be paid to or received from
GM or Raytheon.
In connection with the transfer of Delco to Delphi, a projected balance
sheet for Delco as of December 31, 1997 was prepared. Within approximately four
months following the closing of the Hughes Transactions, GM will prepare a
balance sheet for Delco as of December 17, 1997, on a basis consistent with the
December 31, 1997 projected balance sheet. To the extent that this closing
balance sheet reflects a "net investment amount" of Delco different from the
"net investment amount" presented on the projected balance sheet by an amount
exceeding $50 million, a payment will be made from Hughes to GM or from GM to
Hughes as appropriate to compensate for such difference in excess of $50
million.
IV-37
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Continued
Note 20: Commitments and Contingencies - Continued
Similarly, within approximately four months after completion of the Hughes
Transactions, Hughes will prepare and deliver to Raytheon a final audited
balance sheet for the defense business of former Hughes as of December 17, 1997.
To the extent that this final balance sheet reflects an adjusted net worth that
deviates more than $50 million from a target amount, a payment will be made from
Hughes to Raytheon or from Raytheon to Hughes as appropriate to compensate for
such difference in excess of $50 million.
Any amounts resulting from these adjustments will be treated as equity
transactions at the time the amounts are determined.
Hughes has entered into agreements to procure commercial satellite
launches, a significant number of which are expected to be used in connection
with satellites ordered by outside customers. The agreements provide for
launches beginning in 1998 and also contain options for additional launch
vehicles. The total amount of the commitments, which is dependent upon the
number of options exercised, market conditions and other factors, could exceed
$2.0 billion.
Hughes has an agreement with a finance company under which the finance
company agreed to provide an open-end revolving credit program for consumer
purchases of DSS equipment, installations and ancillary items at selected retail
establishments. Funding under this program was discontinued effective September
10, 1996. The aggregate outstanding balance under this agreement at December 31,
1997 was approximately $190.0 million. Hughes has certain rights regarding the
administration of the program and the losses from qualifying accounts under this
program accrue to Hughes, subject to certain indemnity obligations of the
finance company. Hughes has established allowances to provide for expected
losses under the program. The allowances are subject to periodic review as
management collects additional information about the performance of the consumer
loan portfolios.
In December 1994, former Hughes entered into an agreement with Computer
Sciences Corporation (CSC) whereby CSC provides a significant amount of data
processing services required by the non-automotive businesses of former Hughes.
Baseline service payments to CSC are expected to aggregate approximately $1.5
billion over the term of the eight-year agreement for former Hughes. Based on
historical usage, approximately 17% of the costs incurred under the agreement
are attributable to Hughes. The contract is cancelable by Hughes with early
termination penalties.
At December 31, 1997, minimum future commitments under noncancelable
operating leases having lease terms in excess of one year, exclusive of
satellite transponders leaseback payments disclosed in Note 4, are primarily for
real property and aggregated $318.8 million, payable as follows: $50.4 million
in 1998, $46.5 million in 1999, $43.6 million in 2000, $43.0 million in 2001,
$41.4 million in 2002 and $93.9 million thereafter. Certain of these leases
contain escalation clauses and renewal or purchase options. Rental expenses
under operating leases were $72.2 million in 1997, $52.7 million in 1996 and
$54.7 million in 1995.
In conjunction with its performance on long-term contracts Hughes is
contingently liable under standby letters of credit and bonds in the amount of
$296.0 million and $152.5 million at December 31, 1997 and 1996, respectively.
In Hughes' past experience, no material claims have been made against these
financial instruments. In addition, Hughes has guaranteed up to $150.0 million
of certain American Mobile Satellite Corporation ("AMSC") bank debt due June
2001. Hughes owns approximately 27.0% of the common stock of AMSC. Hughes has
additional guarantees of up to $377.5 million, relating principally to a Surfin
Ltd. revolving credit facility which expires July 1999. Hughes owns
approximately 39% of Surfin Ltd, a company which finances the sale of subscriber
equipment in Latin America.
Hughes has commitments related to its programming agreements which are
variable based upon the number of underlying subscribers and market penetration
rates. Minimum payments over the terms of applicable contracts are anticipated
to be approximately $300 million to $400 million.
Hughes is subject to potential liability under government regulations and
various claims and legal actions which are pending or may be asserted against
it. The aggregate ultimate liability of Hughes under these claims and actions,
was not determinable at December 31, 1997. In the opinion of Hughes management,
such liability is not expected to have a material adverse effect on Hughes'
operations or financial position.
IV-38
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - Concluded
Note 20: Commitments and Contingencies - Concluded
Hughes has maintained a suit against the U.S. government since September
1973 regarding the Government's infringement and use of a Hughes patent (the
"Williams Patent") covering "Velocity Control and Orientation of a Spin
Stabilized Body," principally satellites. On June 17, 1994, the U.S. Court of
Claims awarded Hughes damages of $114.0 million. Because Hughes believed that
the record supported a higher royalty rate, it appealed that decision. The U.S.
government, contending that the award was too high, also appealed. On June 19,
1996, the Court of Appeals for the Federal Circuit ("CAFC") affirmed the
decision of the Court of Claims which awarded Hughes $114.0 million in damages,
together with interest. The U.S. government petitioned the CAFC for a rehearing.
That petition was denied in October 1996. The U.S. government then filed a
petition with the U.S. Supreme Court seeking certiorari. On April 21, 1997, the
U.S. Supreme Court, citing a recent decision it had rendered in Warner-Jenkinson
v. Hilton Davis, remanded the Hughes' suit over the Williams Patent back to the
CAFC in order to have the CAFC determine whether the ruling in the Williams
Patent matter was consistent with the U.S. Supreme Court's decision in the
Warner-Jenkinson case. The previous liability decision of the Court of Claims in
the Williams Patent matter, and its $114.0 million damage award to Hughes
currently remain in effect pending reconsideration of the case by the CAFC.
Hughes is unable to estimate the duration of this reconsideration process. While
no amount has been recorded in the financial statements of Hughes to reflect the
$114.0 million award or the interest accumulating thereon, a resolution of this
matter could result in a gain that would be material to the results of
operations.
* * *
IV-39
<TABLE>
HUGHES ELECTRONICS CORPORATION
SUPPLEMENTAL INFORMATION
Selected Quarterly Data (Unaudited)
<CAPTION>
1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
(Dollars in Millions
Except Per Share Amounts)
1997 Quarters
Revenues $1,024.0 $1,151.4 $1,258.3 $1,694.6
------- ------- ------- -------
Income from continuing operations before
income taxes, minority interests and
extraordinary item $5.6 $518.6 $87.1 $6.9
Income taxes 2.2 207.5 34.8 (7.8)
Minority interests 14.2 7.7 (5.1) 8.0
Income (loss) from discontinued
operations 1.0 0.3 (0.1) 62.8
Extraordinary item - - - (20.6)
----- ------- ------ ----
Net income 18.6 319.1 47.1 64.9
Earnings used for pro forma
computation of available separate
consolidated net income $23.9 $324.4 $52.4 $70.0
==== ===== ==== ====
Pro forma average number of shares of
General Motors Class H common stock
outstanding (in millions) 100.4 101.0 102.0 102.5
Class H dividend base (in millions) 399.9 399.9 399.9 399.9
Pro forma available separate consolidated
net income $6.0 $82.0 $13.4 $18.0
Pro forma earnings attributable to General Motors
Class H common stock on a per share basis:
Pro forma income from continuing operations
before extraordinary item $0.06 $0.81 $0.13 $0.07
Discontinued operations - - - 0.16
Extraordinary item - - - (0.05)
------- ------- ------- ----
Pro forma earnings attributable to
General Motors
Class H common stock $0.06 $0.81 $0.13 $0.18
==== ==== ==== ====
1996 Quarters
Revenues $826.6 $960.4 $1,000.5 $1,221.2
----- ----- ------- -------
Income from continuing operations before
income taxes and minority interests $132.4 $74.9 $(13.5) $28.3
Income taxes 53.0 36.4 (7.4) 22.8
Minority interests 3.5 11.9 14.0 23.2
Income (loss) from discontinued
operations (6.5) 0.3 (0.5) (0.7)
----- ---- --- -----
Net income 76.4 50.7 7.4 28.0
Earnings used for pro forma
computation of available separate
consolidated net income $81.7 $56.0 $12.7 $33.1
==== ==== ==== ====
Pro forma average number of shares of
General Motors Class H common stock
outstanding (in millions) 97.4 98.2 98.8 99.3
Class H dividend base (in millions) 399.9 399.9 399.9 399.9
Pro forma available separate consolidated
net income $19.9 $13.8 $3.3 $8.2
Pro forma earnings attributable to General Motors
Class H common stock on a per share basis:
Pro forma income from continuing
operations $0.23 $0.14 $0.03 $0.08
Discontinued operations (0.02) - - -
----- ------ ----- -------
Pro forma earnings attributable to General Motors
Class H common stock $0.21 $0.14 $0.03 $0.08
==== ==== ==== ====
The stock price range for GM Class H common stock, for the period December
18, 1997 through December 31, 1997, was a high of $40.00 and a low of $35.75.
The GM Class H common stock was recapitalized as part of the Hughes Transactions
on December 17, 1997. </TABLE>
IV-40
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
SUPPLEMENTAL INFORMATION - Concluded
<CAPTION>
Selected Financial Data
(Unaudited) 1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in Millions Except Per Share Amounts)
Revenues $5,128.3 $4,008.7 $3,152.8 $2,697.0 $2,195.0
Earnings used for pro forma
computation of available
separate consolidated
net income $470.7 $183.5 $27.2 $62.2 $173.9
Average number of shares
of General Motors
Class H common stock
outstanding (in millions) 101.5 98.4 95.5 92.1 88.6
Class H dividend base
(in millions) 399.9 399.9 399.9 399.9 399.9
Pro forma available separate
consolidated net income $119.4 $45.2 $6.5 $14.3 $38.5
Pro forma earnings attributable
to General Motors Class H common
stock on a per share basis $1.18 $0.46 $0.07 $0.16 $0.43
Capital expenditures(1) $826.6 $449.4 $442.3 $399.0 $274.2
Cash and cash equivalents $2,783.8 $6.7 $7.6 $5.8 $10.2
Working capital $3,323.3 $277.5 $311.9 $273.5 $336.4
Total assets $12,763.8 $4,416.4 $3,952.6 $3,609.3 $3,195.5
Long-term debt $637.6 $- $- $- $1.3
Minority interests $607.8 $21.6 $40.2 $- $-
Return on equity (2) 7.5% 6.7% 2.9% 4.6% 8.9%
Income before interest expense and
income taxes as a percent of
capitalization (3) 12.8% 12.5% 6.6% 9.6% 17.1%
Pre-tax return on total
assets (4) 7.5% 6.6% 2.7% 4.5% 8.5%
</TABLE>
(1) Includes expenditures related to telecommunications and other equipment
amounting to $575.3 million, $187.9 million, $274.6 million, $255.8 million
and $131.1 million in 1997, 1996, 1995, 1994 and 1993, respectively.
(2) Income from continuing operations before cumulative effect of accounting
change and extraordinary item divided by average owner's equity (General
Motors' equity in its wholly-owned subsidiary, Hughes). Holders of GM Class
H common stock have no direct rights in the equity or assets of Hughes, but
rather have rights in the equity and assets of GM which includes 100% of the
stock of Hughes.
(3) Income from continuing operations before interest expense, income taxes,
cumulative effect of accounting change and extraordinary item divided by
average owner's equity plus average debt.
(4) Income from continuing operations before income taxes, cumulative effect of
accounting change and extraordinary item divided by average total assets.
IV-41
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion excludes purchase accounting adjustments related
to GM's acquisition of Hughes Aircraft Company (see Supplemental Data beginning
on page IV-48).
Statements made concerning expected financial performance, ongoing
financial performance strategies, and possible future action which Hughes (as
defined below) intends to pursue to achieve strategic objectives for each of its
four principal business segments constitute forward-looking information. The
implementation of these strategies and of such future actions and the
achievement of such financial performance are each subject to numerous
conditions, uncertainties and risk factors, and, accordingly, no assurance can
be given that Hughes will be able to successfully accomplish its strategic
objectives or achieve such financial performance. The principal important risk
factors which could cause actual performance and future actions to differ
materially from the forward-looking statements made herein include economic
conditions, product demand and market acceptance, government action,
competition, ability to achieve cost reductions, technological risk,
interruptions to production attributable to causes outside of Hughes' control,
the success of satellite launches, in-orbit performance of satellites and
Hughes' ability to access capital to maintain its financial flexibility.
General
On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics")
and General Motors Corporation ("GM"), the parent of Hughes Electronics,
completed a series of transactions (the "Hughes Transactions") designed to
address strategic challenges facing the three principal businesses of Hughes
Electronics and unlock stockholder value in GM. The Hughes Transactions included
the tax-free spin-off of the defense electronics business ("Hughes Defense") to
holders of GM $1-2/3 par value and Class H common stocks, followed immediately
by the merger of Hughes Defense with Raytheon Company. Concurrently, Delco
Electronics Corporation ("Delco"), the automotive electronics business, was
transferred to GM's Delphi Automotive Systems unit. Finally, GM Class H common
stock was recapitalized into a GM tracking stock linked to the remaining
telecommunications and space business. For the periods prior to the consummation
of the Hughes Transactions on December 17, 1997, Hughes Electronics, consisting
of its defense electronics, automotive electronics, and telecommunications and
space businesses, is hereinafter referred to as former Hughes.
In connection with the recapitalization of Hughes Electronics on December
17, 1997, the telecommunications and space business of former Hughes, consisting
principally of its direct-to-home broadcast, satellite services, satellite
manufacturing and network systems businesses, was contributed to the
recapitalized Hughes Electronics. Such telecommunications and space business,
both before and after the recapitalization, is hereinafter referred to as
Hughes. The following discussion and accompanying financial statements pertain
only to Hughes and do not pertain to balances of former Hughes related to Hughes
Defense or Delco. For additional information on the basis of presentation, see
Note 1 to the financial statements.
As a result of the May 1997 PanAmSat merger (see further discussion in Note
16 to the financial statements), Hughes' 1997 financial information includes
PanAmSat's results of operations from the date of merger.
Results of Operations
1997 compared to 1996
Revenues. Hughes reported that 1997 revenues increased 27.9% to $5,128.3
million compared with $4,008.7 million in 1996. The increase reflects strong
subscriber growth in the Direct-To-Home Broadcast segment, increased revenues in
the Satellite Services segment resulting primarily from the PanAmSat merger and
increased sales on commercial satellite programs in the Satellite Manufacturing
segment.
Direct-To-Home Broadcast segment revenues more than doubled to $1,276.9
million from $621.0 million in 1996. The increase resulted from strong
subscriber growth and continued low subscriber churn rates. Domestic DIRECTV(R)
fueled this growth with revenues of $1,103.3 million, a 78.5% increase over
prior year's revenues of $618.2 million. Hughes' Latin American DIRECTV
subsidiary, Galaxy Latin America ("GLA"), had revenues of $70.0 million compared
with $2.7 million in 1996. Total DIRECTV subscribers as of December 31, 1997
were 3,301,000 in the United States and 300,000 in Latin America. DIRECTV Japan
initiated its service in December 1997.
Revenues for the Satellite Services segment in 1997 increased 30.5% to
$629.9 million from $482.8 million in 1996. The increased revenues were due to
the PanAmSat merger and increased operating lease revenues for both video
distribution and business communications services. PanAmSat's services were
expanded in 1997 with the successful launch of two dedicated direct-to-home
satellites and a new cable TV distribution satellite in Latin America leading to
an increase of approximately 25% in total transmission capability since the May
merger.
IV-42
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Satellite Manufacturing segment revenues increased 21.2% in 1997 to
$2,491.9 million from $2,056.4 million in 1996 primarily due to higher
commercial satellite sales in the HS 601HP and mid-earth orbit satellite product
lines.
Revenues in 1997 for the Network Systems segment were $1,011.3 million
compared with $1,070.0 million in 1996. The decline was primarily due to lower
domestic mobile cellular telephone equipment sales, which were partially offset
by higher satellite-based mobile telephony equipment sales.
Operating Profit. Operating profit for Hughes increased to $306.4 million
in 1997 from $210.1 million in 1996. The 45.8% increase reflects reduced losses
in the Direct-To-Home Broadcast segment, higher commercial satellite sales and
the completion of the PanAmSat merger.
The operating loss in the Direct-To-Home Broadcast segment in 1997 was
$254.6 million compared with an operating loss of $319.8 million in 1996. The
full-year 1997 operating loss for domestic DIRECTV was $137.0 million compared
with $192.0 million in 1996. GLA's operating loss was $116.0 million in 1997
versus $131.0 million in 1996. The lower operating losses in 1997 were
principally due to increased subscriber revenues which more than offset higher
marketing and subscriber related expenditures.
With respect to the worldwide DIRECTV businesses, particularly in the
United States, Hughes has implemented a number of strategic initiatives designed
to expand its market share and enhance its competitive position. These include
new distribution channels, expanded services, broader programming and marketing
and other promotional strategies designed to address "barriers to entry"
identified by consumers. The implementation of such strategies is likely to
increase subscriber acquisition costs and, as a result, is likely to affect the
timing and amount of revenues and the overall profitability of the DIRECTV
businesses. However, Hughes believes that early capture of market share and the
establishment of market leadership are important to the maximization of the
long-term value of the DIRECTV businesses.
The Satellite Services segment operating profit was $296.2 million in 1997,
an increase of 22.2% over the prior year's operating profit of $242.4 million.
The increase resulted primarily from the PanAmSat merger and increased operating
lease revenues for both video distribution and business communications services.
Operating profit margin in 1997 declined to 46.5% from 49.5% in the prior year
principally due to goodwill amortization associated with the PanAmSat merger.
Operating profit for the Satellite Manufacturing segment in 1997 was $226.3
million, an increase of 23.5% over $183.3 million in 1996. The increase was
primarily due to the higher commercial program sales noted above. The operating
profit margin for the year was 9.1% compared with 8.9% in the prior year.
The Network Systems segment operating profit in 1997 was $74.1 million
versus $107.7 million in 1996 and operating profit margin declined to 7.3% from
10.1% last year. These decreases were primarily the result of lower domestic
mobile cellular telephone equipment sales, increased research and development
expenditures and higher marketing expenditures associated with the launch of the
DirecPC/DirecDuo products.
Costs and Expenses. Selling, general and administrative expenses increased
to $1,119.9 in 1997 from $788.5 in 1996. The increase resulted principally from
the PanAmSat merger, increased programming and subscriber acquisition costs in
the Direct-To-Home Broadcast segment and increased research and development and
marketing expenditures in the Network Systems segment. The increase in
depreciation and amortization expense to $296.4 in 1997 from $194.6 in 1996,
resulted from increased goodwill amortization related to the PanAmSat merger and
additional satellite depreciation in 1997.
Interest Income and Expense. Interest income increased $26.3 million in
1997 compared to 1996 due primarily to higher cash balances resulting from the
PanAmSat merger as well as increased cash resulting from the Hughes
Transactions. Interest expense increased $48.1 million in 1997 versus 1996 due
to the increased borrowings resulting from the PanAmSat merger.
Other, net. The 1997 amount included a $489.7 million pre-tax gain related
to the PanAmSat merger, partially offset by losses from unconsolidated
subsidiaries of $72.2 million attributable principally to equity investments in
American Mobile Satellite Corporation, DIRECTV Japan and Surfin Ltd. The 1996
amount included a $120.3 million pre-tax gain recognized from the sale of 2.5%
of DIRECTV to AT&T, partially offset by losses from unconsolidated subsidiaries
of $42.2 million, primarily related to American Mobile Satellite Corporation.
Income Taxes. The effective income tax rate was 37.0% in 1997 and 43.1% in
1996. The decrease in the effective income tax rate in 1997 was due primarily to
an increase in research and development credits and favorable resolution of
certain tax contingencies in 1997.
Discontinued Operations and Extraordinary item. On December 15, 1997,
Hughes Avicom was sold to Rockwell Collins, Inc., resulting in an after-tax gain
of $62.8 million. Hughes recorded an extraordinary after-tax charge of $20.6
million in 1997 related to premiums paid for the refinancing of PanAmSat's debt
(for additional information see Note 6 to the financial statements).
IV-43
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
1997 compared to 1996 - Concluded
Net Earnings. 1997 earnings were $470.7 million, or $1.18 per share of GM
Class H common stock on a pro forma basis, compared with 1996 earnings of $183.5
million, $0.46 per share of GM Class H common stock on a pro forma basis.
Earnings per share are presented on a pro forma basis assuming the recapitalized
GM Class H common stock was outstanding during all periods presented (See
further discussion in Note 14 to the financial statements).
Backlog. The 1997 year-end backlog of $10,337.6 million increased from
the $6,780.5 million reported at the end of 1996, primarily due to the
PanAmSat merger.
1996 compared to 1995
Revenues. Hughes revenues were $4,008.7 million in 1996, a 27.1% increase
from the $3,152.8 million reported in 1995. The increase resulted from a
substantial increase in subscribers in the Direct-To-Home Broadcast segment,
increased transponder capacity and demand in the Satellite Services segment,
increased commercial and government satellite sales in the Satellite
Manufacturing segment, and increased revenues for the Network Systems segment.
Direct-To-Home segment sales increased to $621.0 million in 1996 from
$241.8 million in 1995. This increase was primarily due to the continued
expansion of the DIRECTV subscriber base by over one million subscribers from
1995.
Satellite Services segment revenues grew to $482.8 million in 1996 from
$386.1 million in 1995. This growth was fueled by improved performance in cable,
broadcast and direct-to-home distribution services principally as a result of
additional transponder capacity due to the successful launches of Galaxy III-R
and IX.
Revenues from the Satellite Manufacturing segment increased to $2,056.4
million in 1996 from $1,731.5 million in 1995 due to higher commercial and
government satellite sales, spread over all product lines.
Revenues increased for the Network Systems segment to $1,070.0 million in
1996 from $919.3 million in 1995 resulting from higher wireless product sales
coupled with the introduction and sales of digital satellite system (DSS(R))
products.
Operating Profit. Operating profit for 1996 was $210.1 million, a 22.5%
increase from the $171.5 million reported in 1995. The operating loss in the
Direct-To-Home Broadcast segment in 1996 was $319.8 million compared to a loss
of $160.8 million in 1995. The increased loss resulted from increased costs
related to DIRECTV for consumer financing, marketing and operating costs and
operating losses related to the start of service by the Company's DIRECTV
business in Latin America. The Satellite Services segment operating profit
increased to $242.4 million in 1996 from $166.6 million in 1995 due to increased
utilization and capacity on existing and new satellites. Operating profit for
the Satellite Manufacturing segment in 1996 was $183.3 million compared to
$151.5 million in 1995 resulting from the increased sales noted above. The
Network Systems segment operating profit increased to $107.7 million in 1996
from $69.0 million in 1995, reflecting the strong performance of the wireless
product lines.
Costs and Expenses. Selling, general and administrative expenses were
$788.5 million in 1996 compared to $488.4 million in 1995. The increase was
primarily related to subscriber acquisition costs related to DIRECTV businesses
for both domestic and international operations. In addition, costs associated
with international expansion activities for satellite services and the wireless
product lines contributed to the increase.
Interest Income and Expense. Interest income in 1996 of $6.8 million was
relatively unchanged from the $5.2 million in 1995. Interest expense decreased
to $42.9 million in 1996 from $61.1 million in 1995 resulting from a decrease in
interest expense allocated from former Hughes.
Other, net. The 1996 amount included a $120.3 million pre-tax gain
recognized from the sale of 2.5% of DIRECTV to AT&T, partially offset by losses
in unconsolidated subsidiaries of $42.2 million, primarily related to American
Mobile Satellite Corporation.
Income Taxes. The effective income tax rate was 43.1% in 1996 and 26.5% in
1995. The variance in the rate was primarily due to the effect of the foreign
sales corporation's ("FSC") tax benefits as a percentage of the pre-tax profits
for these years. The impact of the FSC benefit on the 1995 tax rate was
considerably higher due to the lower operating results in 1995.
Net Earnings. Hughes 1996 earnings were $183.5 million, or $0.46 per share
of GM Class H common stock on a pro forma basis, compared with 1995 earnings of
$27.2 million, or $0.07 per share of GM Class H common stock on a pro forma
basis. Earnings per share are estimated on a pro forma basis assuming the
recapitalized GM Class H Common stock was outstanding during all periods
presented (See further discussion in Note 14 to the financial statements).
Backlog. The 1996 year-end backlog of $6,780.5 million decreased from the
$7,057.0 million reported at the end of 1995, primarily due to the completion of
various government programs, offset in part by increased customer commitments
for the HS 601HP satellite.
IV-44
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $2,783.8 million
at December 31, 1997 compared to $6.7 million at December 31, 1996. The
significant increase in cash resulted primarily from the Hughes Transactions
pursuant to which Hughes received cash proceeds of $4,392.8 million on December
17, 1997. The $4,392.8 million of cash proceeds resulted from $4.0 billion
received from borrowings incurred by Hughes Defense prior to its spin-off to GM
and $392.8 million from former Hughes. The May 1997 PanAmSat merger also had a
significant impact on cash and debt, as Hughes acquired existing cash and
non-marketable securities of $296.9 million and $330.0 million, respectively and
assumed existing debt of $613.4 million and preferred stock of $395.8 million,
that was subsequently exchanged into debt on September 30, 1997. In December
1997, PanAmSat completed a $1.1 billion tender offer, which resulted in the
retirement of substantially all of its existing outstanding debt. The tender
offer was funded with $600 million of bank borrowings and available cash
(including cash from the liquidation of marketable securities).
Cash provided by continuing operations was $10.5 million in 1997, compared
to $367.4 million in 1996 and $98.8 million in 1995. The change in 1997 from
1996 resulted primarily from a build-up of working capital, while the change in
1996 from 1995 resulted primarily from a decrease in working capital.
Net cash used in investing activities was $2,231.5 million in 1997, $80.5
million in 1996 and $373.5 million in 1995. The substantial increase in 1997
compared to 1996 resulted from an increase in satellites, increased equity
investments, the repurchase of AT&T's 2.5% equity interest in DIRECTV and the
PanAmSat merger, offset by proceeds received from the sale of Hughes Avicom. The
decrease in net cash used in investing activities in 1996 compared to 1995 was
due to proceeds received in 1996 for the sale and leaseback of satellite
transponders and sale of a 2.5% equity interest in DIRECTV to AT&T.
Net cash provided by (used in) financing activities was $5,014.0 million in
1997, compared with $(279.8) million and $301.7 million in 1996 and 1995,
respectively. The change in 1997 from 1996 resulted from the Hughes Transactions
and PanAmSat Merger, discussed above, and increased contributions from former
Hughes to Hughes to fund 1997 operations. The change in financing activities in
1996 from 1995 was the result of Hughes distributing $279.8 million to former
Hughes in 1996 compared to receiving contributions from former Hughes of $301.7
million in 1995.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio
of current assets to current liabilities) at December 31, 1997 and 1996 was 3.24
and 1.23, respectively. Working capital increased by $3,045.8 million to
$3,323.3 million at December 31, 1997 from $277.5 million at December 31, 1996.
These increases were due principally to the cash infusion resulting from the
Hughes Transactions.
Property and Equipment. Property, net of accumulated depreciation,
increased $198.9 million to $889.7 million in 1997 from the $690.8 million
reported in 1996. Satellites increased $1,586.8 million to $2,643.4 million in
1997 from the $1,056.6 million reported in 1996. The increase in property and
satellites resulted primarily from the PanAmSat merger and increased capital
expenditures. Capital expenditures, including expenditures related to
satellites, increased to $826.6 million in 1997 from $449.5 million in 1996. The
increase reflects additions to the Galaxy satellite fleet, as well as additions
to property and equipment to support revenue growth at various Hughes
businesses.
Dividend Policy and Use of Cash. As discussed in Note 14 to the Financial
Statements, GM does not initially anticipate paying cash dividends to holders of
GM Class H common stock. Alternatively, Hughes anticipates using its cash to
fund 1998 capital expenditures for property and equipment, as well as
spacecraft, of approximately $1.2 billion, the early buy-out of satellite
sale-leasebacks and to fund additional equity investments. Additionally, Hughes
may be required to make cash payments for purchase price adjustments related to
the Hughes Transactions. See further discussion in Note 19 to the Financial
Statements.
Debt and Credit Facilities. Hughes maintains two unsecured revolving credit
facilities, consisting of a $750 million multi-year facility and a $250 million
364-day facility. There were no borrowings against the credit facilities at
December 31, 1997.
In December 1997, Hughes' subsidiary, PanAmSat, entered into a bank
borrowing agreement (the "Bank Agreement") that provided for bridge loans of up
to $300.0 million and loans of up to $500.0 million under a five-year revolving
credit facility. Outstanding borrowings under the Bank Agreement at December 31,
1997 consisted of $100.0 million in bridge loans and $500.0 million under the
revolving credit facility. As noted previously, the proceeds from such
borrowings, along with cash from the liquidation of marketable securities, were
used to retire substantially all of the existing PanAmSat debt then outstanding.
In January 1998, PanAmSat borrowed an additional $125.0 million under the
Bank Agreement, principally for the purpose of exercising an early buy-out
option on a satellite sale-leaseback agreement. Also in January 1998, PanAmSat
completed a private placement debt offering for five, seven, ten and thirty year
notes aggregating $750.0 million (the "Notes Offering"), the proceeds of which
were used to retire all of the outstanding borrowings under the Bank Agreement.
As a result of the Notes Offering, the bridge loan under the Bank Agreement
terminated, while the five-year revolving credit facility remains in effect.
IV-45
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Liquidity and Capital Resources - Concluded
Hughes believes that existing cash balances and amounts available under its
credit facilities, will provide sufficient resources to meet currently
identified working capital requirements, debt service and other cash needs.
Acquisitions. In December, 1997, Hughes repurchased from AT&T a 2.5% equity
interest in DIRECTV for $161.8 million, ending AT&T's marketing agreement to
distribute the DIRECTV direct broadcast satellite television service and DSS(R)
equipment.
In May 1997, Hughes and PanAmSat completed the merger of their respective
satellite service operations into a new publicly-held company. Hughes
contributed its Galaxy(R) satellite services business in exchange for a 71.5%
interest in the new company. Existing PanAmSat stockholders received a 28.5%
interest in the new company and $1.5 billion in cash. Such cash consideration
and other funds required to consummate the merger were funded by new debt
financing totaling $1,725.0 million borrowed from GM, which was subsequently
repaid in December 1997.
Divestitures. On December 15, 1997, Hughes sold substantially all of
the assets and liabilities of the Hughes Avicom business to Rockwell Collins,
Inc. for cash, which resulted in an after-tax gain of $62.8 million. Hughes
Avicom is treated as a discontinued operation for all periods presented.
In March 1996, Hughes Electronics sold a 2.5% equity interest in DIRECTV to
AT&T for $137.5 million, with options to increase their ownership interest under
certain conditions. The sale resulted in a $120.3 million pre-tax gain, which is
included in other income.
Year 2000
Certain Hughes information systems have potential operational problems in
connection with applications that contain a date and/or use a date in a
comparative manner as the date transitions into the Year 2000. Hughes has a
comprehensive program to identify and remediate potential problems related to
the Year 2000 in its information systems, infrastructure, and production and
manufacturing facilities. In addition, Hughes has initiated formal
communications with all of its significant external interfaces to determine the
extent to which Hughes is vulnerable to third parties' failures to remediate
their own potential problems related to the Year 2000. The inability of Hughes
or significant external interfaces of Hughes to adequately address Year 2000
issues could cause disruption of Hughes' business operations.
Many of Hughes' systems are Year 2000 compliant, or have been scheduled for
replacement in Hughes' ongoing systems plans. Through December 31, 1997, Hughes
has incurred and expensed approximately $2 million related to the assessment of,
and preliminary efforts in connection with, its Year 2000 program and
remediation plan. Future spending for software modifications and testing
required for Year 2000 are currently estimated to be approximately $15 million
to $25 million with the majority expected to be incurred in 1998. Hughes' target
date for completing its Year 2000 modifications is December 31, 1998 with
additional testing and refinements to identified systems planned for 1999.
Security Ratings
In December 1997, Standard and Poor's Rating Services (S&P) affirmed its
long-term debt rating of Hughes at A-. The S&P A- credit rating is the seventh
highest within the 10 investment grade ratings available from S&P for long-term
debt, based on a strong capability to pay interest and repay principal, although
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories. Additionally, S&P also
affirmed its A-2 rating on Hughes' commercial paper. The A-2 commercial paper
rating is the third highest category available and indicates the degree of
safety regarding timely payment is satisfactory. S&P's ratings outlook for
Hughes remains developing.
Also in December 1997, Moody's Investors Service (Moody's), confirmed the
long-term credit rating of Hughes at A-3, seventh highest within the 10
investment grade ratings available from Moody's for long-term debt. Moody's
defines A-3 bonds as having "upper-medium grade" quality. Moody's ratings for
Hughes' commercial paper remained unchanged at P-2. The rating is the second
highest rating available and indicates that the issuer has a strong ability for
repayment relative to other issuers.
Debt ratings by the various rating agencies reflect each agency's opinion
of the ability of issuers to repay debt obligations punctually. 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.
IV-46
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Market Risk Disclosure
General
Hughes' cash flows and earnings are subject to fluctuations resulting from
changes in foreign exchange rates, interest rates and changes in the market
value of its equity investments. Hughes manages its exposure to these market
risks through internally established policies and procedures and, when deemed
appropriate, through the use of derivative financial instruments. Hughes' policy
is not to speculate in derivative instruments, nor to enter into derivative
instruments for which there are no underlying exposures. Hughes does not use
financial instruments for trading purposes and is not a party to any leveraged
derivatives.
Foreign Currency Risk
Hughes conducts business in a variety of currencies and therefore is
exposed to fluctuations in foreign currency exchange rates. Hughes' objective in
managing the exposure to foreign currency changes is to reduce earnings and cash
flow volatility associated with foreign exchange rate fluctuations to allow
management to focus its attention on its core business issues and challenges.
Accordingly, Hughes primarily enters into foreign exchange-forward contracts to
protect the value of its existing assets, liabilities and firm commitments.
Foreign exchange-forward contracts are legal agreements between two parties to
purchase and sell a foreign currency, for a price specified at the contract
date, with delivery and settlement in the future. At December 31, 1997, Hughes
held foreign exchange-forward contracts with an aggregate notional amount of
approximately $10.9 million to buy and sell Japanese yen, Spanish pesetas and
British pounds. The fair value of these contracts at December 31, 1997, as
determined by market quotes, was $12.6 million.
Investments
Hughes maintains investments in the publicly-traded common stock of two
unaffiliated companies and is therefore subject to equity price risk. Both
investments are classified as available-for-sale and, consequently, reflected in
the balance sheet at fair value with unrealized gains or losses, net of tax,
reported as a separate component of owner's equity. At December 31, 1997, the
fair value of the investments in such common stock was $21.7 million. The
investments were valued at the market closing price at December 31, 1997. No
actions have been taken by Hughes to hedge this market risk exposure. A 20%
decline in the market price of both investments would cause the fair value of
the investments in common stock to decrease by $4.3 million.
Interest Rate Risk
Hughes is subject to interest rate risk related to its $637.6 million of
debt outstanding at December 31, 1997. Debt consisted of PanAmSat's variable
rate bank borrowings of $600.0 million, PanAmSat's fixed rate borrowings of $9.1
and Hughes' fixed rate borrowings of $28.5 million. Hughes is subject to
fluctuating interest rates which may adversely impact its results of operations
and cash flows for its variable rate bank borrowings. Fluctuations in interest
rates may also adversely effect the market value of Hughes' fixed rate
borrowings. The fair market value of debt with a fixed interest rate will
increase as interest rates fall, and the fair market value will decrease as
interest rates rise. Bank borrowings bear interest at a rate which approximates
the London Interbank Offered Rate plus 0.40%, equal to 6.09% at December 31,
1997. Other borrowings bear interest at fixed rates ranging from 9.61% to
12.75%.
In connection with PanAmSat's debt refinancing activities, PanAmSat entered
into certain U.S. Treasury rate lock contracts to reduce its exposure to
fluctuations in interest rates. The aggregate notional value of these contracts
was $375.0 million. These contracts were accounted for as hedges as they related
to a specific refinancing plan that was consummated shortly after December 31,
1997. The fair value of these financial instruments at December 31, 1997
approximated their contract value. The cost to settle these instruments in 1998
will be amortized to expense over the term of the newly placed debt securities.
Subsequent to the refinancing, all Hughes debt, including that of PanAmSat, will
be fixed-rate debt. Hughes does not currently hedge this market risk exposure.
Credit Risk
Hughes is exposed to credit risk in the event of non-performance of the
counterparties to its foreign currency and treasury rate lock contracts, which
Hughes does not believe to be likely. Nevertheless, credit risk is managed
through the periodic monitoring and approval of financially sound
counterparties.
IV-47
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - Concluded
Supplemental Data
The Financial Statements reflect the application of purchase accounting
adjustments as described in Note 1 to the Financial Statements. However, as
provided in GM's Certificate of Incorporation, the earnings attributable to GM
Class H common stock for purposes of determining the amount available for the
payment of dividends on GM Class H common stock specifically excludes such
adjustments. More specifically, amortization of the intangible assets associated
with GM's purchase of Hughes Aircraft Company amounted to $21.0 million in 1997,
1996 and 1995. Such amounts are excluded from the earnings available for the
payment of dividends on GM Class H common stock and are charged against earnings
available for the payment of dividends on GM's $1-2/3 par value stock.
Unamortized purchase accounting adjustments associated with GM's purchase of
Hughes Aircraft Company were $447.6 million, $468.6 million, and $489.6 million
at December 31, 1997, 1996 and 1995, respectively.
In order to provide additional analytical data to the users of Hughes'
financial information, supplemental data in the form of unaudited summary pro
forma financial data are provided. Consistent with the basis on which earnings
of Hughes available for the payment of dividends on the GM Class H common stock
is determined, the pro forma data exclude purchase accounting adjustments
related to General Motors' acquisition of Hughes Aircraft Company. Included in
the supplemental data are certain financial ratios which provide measures of
financial returns excluding the impact of purchase accounting adjustments. The
pro forma data are not presented as a measure of GM's total return on its
investment in Hughes.
IV-48
<PAGE>
HUGHES ELECTRONICS CORPORATION
<TABLE>
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
(Dollars in Millions
Except per Share Amounts)
Total revenues $5,128.3 $4,008.7 $3,152.8
Total costs and expenses 4,821.9 3,798.6 2,981.3
------- ------- -------
Operating profit 306.4 210.1 171.5
Non-operating income 332.8 33.0 (52.9)
Income taxes 236.7 104.8 31.4
Minority interests in net losses of subsidiaries 24.8 52.6 4.6
Income (loss) from discontinued operations 64.0 (7.4) (64.6)
Extraordinary item (20.6) - -
---- ------- --------
Earnings Used for Pro Forma Computation of
Available Separate Consolidated Net Income $470.7 $183.5 $27.2
===== ===== ====
Pro Forma Earnings Attributable to General Motors Class H
Common Stock on a Per Share Basis:
Income from continuing operations before
extraordinary item $1.07 $0.48 $0.23
Discontinued operations 0.16 (0.02) (0.16)
Extraordinary item (0.05) - -
---- ------ ------
Pro Forma Earnings Attributable to General Motors
Class H Common Stock $1.18 $0.46 $0.07
==== ==== ====
Pro Forma Condensed Consolidated Balance Sheet
December 31,
ASSETS 1997 1996
<S> <C> <C>
(Dollars in Millions)
Total Current Assets $4,805.9 $1,497.1
Satellites, net 2,643.4 1,056.6
Property, net 889.7 690.8
Net Investment in Sales-type Leases 337.6 320.6
Intangible Assets, Investments and Other Assets, net 3,639.6 382.7
Total Assets $12,316.2 $3,947.8
LIABILITIES AND OWNER'S EQUITY
Total Current Liabilities $1,482.6 $1,219.6
Long-Term Debt 637.6 -
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 1,724.1 683.6
Minority Interests 607.8 21.6
Total Owner's Equity (1) 7,864.1 2,023.0
------- -------
Total Liabilities and Owner's Equity (1) $12,316.2 $3,947.8
======== =======
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes Aircraft Company.
(1)General Motors' equity in its wholly-owned subsidiary, Hughes. Holders of GM
Class H common stock have no direct rights in the equity or assets of Hughes,
but rather have rights in the equity and assets of GM (which includes 100% of
the stock of Hughes).
</TABLE>
IV-49
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
<CAPTION>
Unaudited Summary Pro Forma Financial Data* - Continued
Pro Forma Selected Segment Data
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
(Dollars in Millions)
Direct-To-Home Broadcast
Total Revenues $1,276.9 $621.0 $241.8
Operating Loss (254.6) (319.8) (160.8)
Depreciation and Amortization 86.1 67.3 48.6
Segment Assets 1,441.5 1,067.2 855.9
Capital Expenditures (1) 105.6 63.5 107.5
Satellite Services
Total Revenues $629.9 $482.8 $386.1
Operating Profit 296.2 242.4 166.6
Depreciation and Amortization 141.9 55.2 73.2
Segment Assets 5,612.8 1,202.6 1,061.8
Capital Expenditures (1) 625.7 308.7 280.5
Satellite Manufacturing
Total Revenues $2,491.9 $2,056.4 $1,731.5
Operating Profit 226.3 183.3 151.5
Depreciation and Amortization 39.4 34.4 33.6
Segment Assets 1,312.6 757.8 603.9
Capital Expenditures 113.9 87.8 53.2
Network Systems
Total Revenues $1,011.3 $1,070.0 $919.3
Operating Profit 74.1 107.7 69.0
Depreciation and Amortization 32.0 28.3 25.2
Segment Assets 1,215.6 964.0 801.1
Capital Expenditures 43.1 45.3 50.5
</TABLE>
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes Aircraft Company.
Certain amounts for 1996 and 1995 have been reclassified to conform with 1997
classifications.
(1)Includes expenditures related to satellites in the segments as follows:
$53.1 million in 1995 for Direct-To-Home Broadcast segment and $606.1
million, $259.2 million and $234.9 million in 1997, 1996 and 1995,
respectively, for Satellite Services segment.
IV-50
<PAGE>
HUGHES ELECTRONICS CORPORATION
<TABLE>
Unaudited Summary Pro Forma Financial Data* - Concluded
<CAPTION>
Pro Forma Selected Financial Data
Years Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(Dollars in Millions
Except Per Share Amounts)
Operating profit $306 $210 $172 $235 $189
Income from continuing operations before
income taxes, minority interests,
cumulative effect of accounting
change and extraordinary item $639 $243 $119 $174 $289
Earnings used for pro forma computation
of available separate consolidated
net income $471 $184 $27 $62 $174
Average number of GM Class H dividend
base shares (1) 399.9 399.9 399.9 399.9 399.9
Owner's equity** $7,864 $2,023 $2,119 $1,790 $1,442
Working capital $3,323 $278 $312 $274 $336
Operating profit as a percent of
revenues 6.0% 5.2% 5.4% 8.7% 8.6%
Income from continuing operations before
income taxes, minority interests,
cumulative effect of accounting
change and extraordinary
item as a percent of revenues 12.5% 6.1% 3.8% 6.5% 13.2%
Net income as a percent of revenues** 9.2% 4.6% 0.9% 2.3% 7.9%
Return on equity**(2) 9.5% 8.9% 1.4% 3.8% 13.2%
Income before interest expense and
income taxes as a percent of
capitalization (3) 14.3% 16.3% 9.4% 14.0% 25.3%
Pre-tax return on total assets (4) 8.2% 8.0% 3.8% 6.0% 11.1%
</TABLE>
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes Aircraft Company.
** Includes unfavorable cumulative effect of accounting changes of $30.4 million
in 1994.
(1)Class H dividend base shares is used in calculating earnings attributable to
GM Class H common stock on a per share basis. This is not the same as the
average number of GM Class H shares outstanding, which was 101.5 million in
1997.
(2)Earnings used for computation of available separate consolidated net income
divided by average stockholder's equity (General Motors' equity in its
wholly-owned subsidiary, Hughes). Holders of GM Class H common stock have no
direct rights in the equity or assets of Hughes, but rather have rights in
the equity and assets of GM (which includes 100% of the stock of Hughes).
(3)Income from continuing operations before interest expense, income taxes,
cumulative effect of accounting change and extraordinary item divided by
average stockholder's equity plus average total debt.
(4)Income from continuing operations before income taxes, cumulative effect of
accounting change and extraordinary item divided by average total assets.
* * * * * * *
IV-51
