SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported):
April 28, 1999
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GENERAL MOTORS CORPORATION
--------------------------
(Exact Name of Registrant)
Delaware 1-143 38-0572515
(State of Incorporation) (Commission File No.) (IRS Employer
Identification Number)
100 Renaissance Center, Detroit, Michigan 48265-1000
3044 West Grand Boulevard, Detroit, Michigan 48202-3091
(Address of Principal Executive Offices)
(313) 556-5000
(Registrant's telephone number)
NY2:\457779\03\9t8303!.DOC\53356.0068
<PAGE>
Item 2. Acquisition of Assets
On April 28, 1999, Hughes Electronics Corporation ("Hughes" or
the "Company"), a Delaware corporation and a wholly-owned subsidiary of General
Motors Corporation ("General Motors") acquired the medium-power direct broadcast
satellite business of PRIMESTAR, Inc., a Delaware corporation ("Primestar"),
pursuant to the terms of an Asset Purchase Agreement dated as of January 22,
1999 by and among the Company, Primestar, PRIMESTAR Partners L.P., PRIMESTAR
MDU, Inc. and the stockholders (or the parent entities of those stockholders) of
Primestar signatory thereto (the "Agreement"). The Company intends to operate
the PRIMESTAR medium-power business for approximately 24 months, during which
time it will transition PRIMESTAR subscribers to the Company's DIRECTV service.
During this transition period, PRIMESTAR's former distribution and service
network will continue to provide service to PRIMESTAR subscribers.
Pursuant to the terms and conditions of the Agreement, as
consideration for the medium-power assets, the Company paid to Primestar $1.1
billion in cash and 4,871,448 shares of General Motors Class H Common Stock. The
purchase price was determined through arm's-length negotiations between the
parties.
The Company funded the cash portion of the purchase price
through its commercial paper program and a short-term bridge loan made pursuant
to the Bridge Funding Agreement among the Company, Goldman Sachs Credit Partners
L.P. and Merrill Lynch Capital Corporation.
See Item 7 for pro forma effect of the aforementioned
transaction on General Motors' consolidated financial statements.
Item 5. Other Events
On May 5, 1999, General Motors filed a Registration Statement
on Form S-3 (the "S-3 Registration Statement") to register the issuance of
additional shares of its Class H Common Stock. Presently, General Motors has an
effective Registration Statement on Form S-4 containing the prospectus (the
"Prospectus") for the General Motors Class H Common Stock to be issued in
connection with the proposed merger of U.S. Satellite Broadcasting Company, Inc.
("USSB") with and into the Company. The S-3 Registration Statement contains
additional and/or updated information that may be of interest to USSB
shareholders in reviewing the Prospectus.
See Item 7 for pro forma effect of the aforementioned
transaction on General Motors' consolidated financial statements.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Financial Statements of Businesses Acquired.
<PAGE>
The audited Consolidated Financial Statements of Primestar are
incorporated herein by reference to the financial statements of Primestar
included in Primestar's Annual Report on Form 10-K filed on April 15, 1999.
(b) Unaudited Pro Forma Combined General Motors Financial
Statements.
UNAUDITED PRO FORMA COMBINED GENERAL MOTORS FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements have
been prepared from the historical consolidated financial statements of General
Motors, USSB, PRIMESTAR and TCI Satellite Entertainment, the parent company of
Tempo Satellite, to give effect to:
- the merger of Hughes and USSB;
- Hughes' acquisition of PRIMESTAR's direct broadcast satellite
medium-power business and related high-power satellite assets of
Tempo Satellite; and
- the S-3 Registration Statement offering of approximately 9 million
shares of Class H common stock and the use of proceeds therefrom.
The unaudited pro forma combined statement of income (loss) from
continuing operations reflects adjustments as if these transactions had each
taken place on January 1, 1998. The unaudited pro forma combined balance sheet
reflects adjustments as if these transactions had each occurred on December 31,
1998. The pro forma adjustments described in the accompanying notes are based on
preliminary estimates and various assumptions that General Motors management
believes are reasonable in these circumstances.
The unaudited pro forma combined statement of income (loss) from
continuing operations does not give effect to any cost savings that may be
realized from the PRIMESTAR/Tempo Satellite acquisition and the merger with
USSB, which savings relate primarily to the reduction of duplicative selling,
general and administrative expenses.
The unaudited pro forma combined financial statements should be read in
conjunction with the General Motors consolidated financial statements, including
the notes thereto, located in the Current Report on Form 8-K dated April 12,
1999 and filed on April 15, 1999 and the USSB, PRIMESTAR and TCI Satellite
Entertainment financial statements, including the notes thereto, which were
incorporated by reference into the S-3 Registration Statement included at
Exhibit 99.1, each as of and for the period ended December 31, 1998.
- 2 -
<PAGE>
GENERAL MOTORS CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
U.S. SATELLITE
BROADCASTING
HISTORICAL HISTORICAL MERGER HISTORICAL
GENERAL U.S. SATELLITE PRO FORMA PRO FORMA PRIMESTAR
MOTORS BROADCASTING ADJUSTMENTS COMBINED /TEMPO
------ ------------ ----------- -------- ------
<S> <C> <C> <C> <C> <C>
ASSETS
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS
Cash and cash equivalents $9,728 $66 $(646) (a) $9,148
Marketable securities 402 402
------- ----- ------- ------- ------
Total cash and marketable securities 10,130 66 (646) 9,550 -
Accounts and notes receivable (less allowances) 4,750 48 (19) (b) 4,779 $140
Inventories (less allowances) 10,437 10,437
Net assets of discontinued operations 77 77
Equipment on operating leases
(less accumulated depreciation) 4,954 4,954
Deferred income taxes and other current assets 10,051 9 10,060 4
------ ---- ------ ------ -----
Total current assets 40,399 123 (665) 39,857 144
Equity in net assets of nonconsolidated associates 950 950
Property - net 32,222 59 32,281 1,611
Intangible assets - net 9,994 9,994 317
Deferred income taxes 14,967 14,967
Other assets 16,062 8 (42) (b) 16,028 34
Excess of purchase price over book value of
net liabilities acquired 1,670 (a) 1,670
----------- ----- ----- --------- --------
Total Automotive, Electronics and
Other Operations assets 114,594 190 963 115,747 2,106
FINANCING AND INSURANCE OPERATIONS
Cash and cash equivalents 146 146
Investments in securities 8,748 8,748
Finance receivables - net 70,436 70,436
Investment in leases and other receivables 32,798 32,798
Other assets 18,807 18,807
Net receivable from Automotive, Electronics and
Other Operations 816 816
------- ------ ------ ---------- ---------
Total Financing and Insurance Operations assets 131,751 - - 131,751 -
------- ------ ------ ------- ---------
TOTAL ASSETS $246,345 $190 $963 $247,498 $2,106
======= === === ======= =====
</TABLE>
Table Continued........
<TABLE>
<CAPTION>
PRIMESTAR
/TEMPO
ACQUISITION OFFERING
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS
Cash and cash equivalents $887 (i) $8,556 $(887) (s) $8,154
(1,479) (i,j) 485 (t)
Marketable securities 402 402
-------- ------- ------ ------
Total cash and marketable securities (592) 8,958 (402) 8,556
Accounts and notes receivable (less allowances) 4,919 4,919
Inventories (less allowances) 10,437 10,437
Net assets of discontinued operations 77 77
Equipment on operating leases
(less accumulated depreciation) 4,954 4,954
Deferred income taxes and other current assets 10,064 10,064
------ ------ ------- ------
Total current assets (592) 39,409 (402) 39,007
Equity in net assets of nonconsolidated associates 950 950
Property - net (15) (j) 33,877 33,877
Intangible assets - net 10,311 10,311
Deferred income taxes 14,967 14,967
Other assets (28) (j) 16,034 16,034
Excess of purchase price over book value of
net liabilities acquired 122 (j) 1,792 1,792
--- --------- -------- ---------
Total Automotive, Electronics and
Other Operations assets (513) 117,340 (402) 116,938
FINANCING AND INSURANCE OPERATIONS
Cash and cash equivalents 146 146
Investments in securities 8,748 8,748
Finance receivables - net 70,436 70,436
Investment in leases and other receivables 32,798 32,798
Other assets 18,807 18,807
Net receivable from Automotive, Electronics and
Other Operations 816 816
-------- ---------- ------- ----------
Total Financing and Insurance Operations assets - 131,751 - 131,751
------- ------- ------- -------
TOTAL ASSETS $(513) $249,091 $(402) $248,689
=== ======= === =======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
- 3 -
<PAGE>
GENERAL MOTORS CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS (CONCLUDED)
AS OF DECEMBER 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
U.S. SATELLITE
BROADCASTING
HISTORICAL HISTORICAL MERGER HISTORICAL
GENERAL U.S. SATELLITE PRO FORMA PRO FORMA PRIMESTAR
MOTORS BROADCASTING ADJUSTMENTS COMBINED /TEMPO
------ ------------ ----------- -------- ------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS
Accounts payable (principally trade) $13,542 $66 $13,608 $196
Loans payable 1,204 1,204 575
Accrued expenses 30,548 91 (19) (b) 30,620 252
Net payable to Financing and Insurance Operations 816 816
-------- ----- ---- -------- --------
Total current liabilities 46,110 157 (19) 46,248 1,023
Long-term debt 7,118 7,118 1,258
Postretirement benefits other than pensions 33,503 33,503
Pensions 4,410 4,410
Other liabilities and deferred income taxes 17,807 87 (42) (b) 17,852 116
-------- --- -- ------ ------
Total Automotive, Electronics and Other
Operations liabilities 108,948 244 (61) 109,131 2,397
FINANCING AND INSURANCE OPERATIONS
Accounts payable 4,148 4,148
Debt 107,753 107,753
Deferred income taxes and other liabilities 9,661 9,661
Total Financing and Insurance Operations liabilities 121,562 - - 121,562 -
Minority interests 563 563
General Motors - obligated mandatorily redeemable
preferred securities of subsidiary
trusts holding solely junior subordinated
debentures of General Motors
Series D 79 79
Series G 141 141
STOCKHOLDERS' EQUITY
Preference stocks 1 1
$1-2/3 par value common stock 1,092 1,092
Class H common stock 11 2 (a) 13
Capital surplus (principally additional paid-in capital) 12,661 (54) 1,022 (a) 13,629 (291)
Retained earnings 6,984 6,984
------- ----- --------- ------- -------
Subtotal 20,749 (54) 1,024 21,719 (291)
Accumulated foreign currency translation adjustments (1,089) (1,089)
Net unrealized gains on securities 481 481
Minimum pension liability adjustment (5,089) (5,089)
----- -----
Accumulated other comprehensive loss (5,697) (5,697)
----- -----
Total stockholders' equity 15,052 (54) 1,024 16,022 (291)
-------- --- ----- ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $246,345 $190 $963 $247,498 $2,106
======= === === ======= =====
</TABLE>
Table Continued....
<TABLE>
<CAPTION>
PRIMESTAR
/TEMPO
ACQUISITION OFFERING
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS
Accounts payable (principally trade) $13,804 $13,804
Loans payable (575) (j) 2,091 (887) (s) 1,204
887 (i)
Accrued expenses (50) (j) 30,822 30,822
Net payable to Financing and Insurance Operations 816 816
------ -------- ------- --------
Total current liabilities 262 47,533 (887) 46,646
Long-term debt (1,258) (j) 7,118 7,118
Postretirement benefits other than pensions 33,503 33,503
Pensions 4,410 4,410
Other liabilities and deferred income taxes (41) (j) 17,927 17,927
------ -------- -------- --------
Total Automotive, Electronics and Other
Operations liabilities (1,037) 110,491 (887) 109,604
FINANCING AND INSURANCE OPERATIONS
Accounts payable 4,148 4,148
Debt 107,753 107,753
Deferred income taxes and other liabilities 9,661 9,661
-------
Total Financing and Insurance Operations liabilities - 121,562 121,562
Minority interests 563 563
General Motors - obligated mandatorily redeemable
preferred securities of subsidiary
trusts holding solely junior subordinated
debentures of General Motors
Series D 79 79
Series G 141 141
STOCKHOLDERS' EQUITY
Preference stocks 1 1
$1-2/3 par value common stock 1,092 1,092
Class H common stock 13 1 (t) 14
Capital surplus (principally additional paid-in capital) 524 (i, j) 13,862 484 (t) 14,346
Retained earnings 6,984 6,984
------ ------- ------ -------
Subtotal 524 21,952 485 22,437
Accumulated foreign currency translation adjustments (1,089) (1,089)
Net unrealized gains on securities 481 481
Minimum pension liability adjustment (5,089) (5,089)
----- -----
Accumulated other comprehensive loss (5,697) (5,697)
----- ------ -----
Total stockholders' equity 524 16,255 485 16,740
--- ------- --- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $(513) $249,091 $(402) $248,689
=== ======= === =======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
- 4 -
<PAGE>
GENERAL MOTORS CORPORATION
UNAUDITED PRO FORMA COMBINED
STATEMENT OF INCOME (LOSS) FROM CONTINUING OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
U.S. SATELLITE
BROADCASTING
HISTORICAL HISTORICAL MERGER HISTORICAL
GENERAL U.S. SATELLITE PRO FORMA PRO FORMA PRIMESTAR
MOTORS BROADCASTING ADJUSTMENTS COMBINED /TEMPO
------ ------------ ----------- -------- ------
<S> <C> <C> <C> <C> <C>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Manufactured products sales and revenues $134,276 $551 $(3) (b) $134,824 $1,290
Financing revenues 13,585 13,585
Other income 7,584 4 (32) (f) 7,556
--------- ----- ---- -------- ---------
Total net sales and revenues 155,445 555 (35) 155,965 1,290
------- --- -- ------- -----
Cost of sales and other operating expenses,
exclusive of items listed below 114,542 328 75 (c) 114,945 655
Selling, general and administrative expenses 15,867 267 (75) (c) 16,034 486
(3) (b)
(22) (d)
Depreciation and amortization expense 11,147 17 42 (e) 11,206 1,493
Interest expense 6,629 6,629 146
Other expenses 2,316 2,316 8
--------- ------ ---- --------- -------
Total costs and expenses 150,501 612 17 151,130 2,788
------- --- -- ------- -----
Income from continuing operations before income taxes
and minority interests 4,944 (57) (52) 4,835 (1,498)
Income tax expense (benefit) 1,636 (27) (g) 1,609 (148)
Minority interests (20) (20)
Losses of nonconsolidated associates (239) (239)
------ ------- ---- ------ --------
INCOME FROM CONTINUING OPERATIONS $3,049 $(57) $(25) $2,967 $(1,350)
(Loss) from discontinued operations (93) - - (93) -
------- ----- ---- ------- --------
NET INCOME $2,956 $(57) $(25) $2,874 $(1,350)
----- -- -- ----- ------
Dividends on preference stocks 63 - - 63 -
------- ---- --- ------ --------
EARNINGS ON COMMON STOCKS $2,893 $(57) $(25) $2,811 $(1,350)
===== == == ===== =====
</TABLE>
Table Continued....
<TABLE>
<CAPTION>
PRIMESTAR
/TEMPO
ACQUISITION OFFERING
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Manufactured products sales and revenues $136,114 $136,114
Financing revenues 13,585 13,585
Other income 7,556 7,556
-------- -------- -------- ---------
Total net sales and revenues 157,255 157,255
-------- ------- -------- -------
Cost of sales and other operating expenses,
exclusive of items listed below 85 (k) 115,685 115,685
Selling, general and administrative expenses (85) (k) 16,435 16,435
Depreciation and amortization expense (950) (l) 11,775 11,775
6 (m)
20 (n)
Interest expense 47 (o) 6,676 (47) (u) 6,629
(146) (p)
Other expenses 2,324 2,324
------ --------- ----- --------
Total costs and expenses (1,023) 152,895 (47) 152,848
----- ------- -- -------
Income from continuing operations before income taxes
and minority interests 1,023 4,360 47 4,407
Income tax expense (benefit) 148 (q) 1,419 19 (v) 1,438
(190) (r)
Minority interests (20) (20)
Losses of nonconsolidated associates (239) (239)
-------- ------- ----- ------
INCOME FROM CONTINUING OPERATIONS $1,065 $2,682 $28 $2,710
(Loss) from discontinued operations - (93) (93)
-------- ------ ---- -------
NET INCOME $1,065 $2,589 $28 $2,617
----- ----- -- -----
Dividends on preference stocks - 63 63
-------- ------ ----- --------
EARNINGS ON COMMON STOCKS $1,065 $2,526 $28 $2,554
===== ===== == =====
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
- 5 -
<PAGE>
GENERAL MOTORS CORPORATION
UNAUDITED PRO FORMA COMBINED
STATEMENT OF INCOME (LOSS) FROM CONTINUING OPERATIONS (CONCLUDED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
U.S. SATELLITE
BROADCASTING
HISTORICAL HISTORICAL MERGER HISTORICAL
GENERAL U.S. SATELLITE PRO FORMA PRO FORMA PRIMESTAR
MOTORS BROADCASTING ADJUSTMENTS COMBINED /TEMPO
------ ------------ ----------- -------- ------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS
$1-2/3 par value common stock
Continuing operations $4.40 $4.30
Discontinued operations (0.14) (0.14)
---- ----
Earnings per share attributable to $1-2/3 par value $4.26 $4.16
==== ====
Earnings per share attributable to Class H $0.68 $0.46
==== ====
DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS
$1-2/3 par value common stock
Continuing operations $4.32 $4.22
Discontinued operations (0.14) (0.14)
---- ----
Earnings per share attributable to $1-2/3 par value $4.18 $4.08
==== ====
Earnings per share attributable to Class H $0.68 $0.46
==== ====
Average number of shares of common stock
outstanding - basic (in millions)
- $1-2/3 par value 663 663
- Class H 105 124 (h)
Average number of shares of common stock
outstanding - diluted (in millions)
- $1-2/3 par value 674 674
- Class H 109 128 (h)
Class H dividend base (in millions) 400 419 (h)
</TABLE>
Table Continued....
<TABLE>
<CAPTION>
PRIMESTAR
/TEMPO
ACQUISITION OFFERING
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS
$1-2/3 par value common stock
Continuing operations $4.00 $4.03
Discontinued operations (0.14) (0.14)
---- ----
Earnings per share attributable to $1-2/3 par value $3.86 $3.89
==== ====
Earnings per share attributable to Class H $(0.22) $(0.15)
==== ====
DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS
$1-2/3 par value common stock
Continuing operations $3.93 $3.96
Discontinued operations (0.14) (0.14)
---- ----
Earnings per share attributable to $1-2/3 par value $3.79 $3.82
==== ====
Earnings per share attributable to Class H $(0.22) $(0.15)
==== ====
Average number of shares of common stock
outstanding - basic (in millions)
- $1-2/3 par value 663 663
- Class H 129 (i) 138 (t)
Average number of shares of common stock
outstanding - diluted (in millions)
- $1-2/3 par value 674 674
- Class H 129 (1) 138 (1)
Class H dividend base (in millions) 424 (i) 442 (t)
</TABLE>
(1) Excludes stock options because effect would be anti-dilutive.
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
- 6 -
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited pro forma combined financial statements have
been derived from the historical consolidated financial
statements of General Motors, USSB, PRIMESTAR and TCI Satellite Entertainment.
The unaudited pro forma combined financial statements give effect to:
- the merger of Hughes and USSB;
- Hughes' acquisition of PRIMESTAR's direct broadcast satellite
medium-power business and related high-power satellite assets of
Tempo Satellite, Inc., a wholly owned subsidiary of TCI Satellite
Entertainment; and
- the S-3 Registration Statement offering of approximately 9 million
shares of Class H common stock and the use of proceeds therefrom.
The unaudited pro forma combined statement of income (loss) from
continuing operations presents the historical results of operations of General
Motors, USSB, PRIMESTAR and TCI Satellite Entertainment for the year ended
December 31, 1998, as if the above- mentioned transactions had each occurred on
January 1, 1998. The unaudited pro forma combined balance sheet presents the
historical balance sheets of General Motors, USSB, PRIMESTAR and TCI Satellite
Entertainment as of December 31, 1998, as if the above- mentioned transactions
had each been consummated as of December 31, 1998. The pro forma adjustments
reflected in the accompanying unaudited pro forma combined financial statements
were prepared using the purchase method of accounting.
The unaudited pro forma combined financial statements do not purport to
present the financial position or results of operations of General Motors had
the transactions and events assumed therein occurred on the dates specified, nor
are they necessarily indicative of the results of operations that may be
achieved in the future. The unaudited pro forma combined statement of income
(loss) from continuing operations does not give effect to any cost savings that
may be realized from the PRIMESTAR/Tempo Satellite acquisition and the merger
with USSB, which savings relate primarily to the reduction of duplicative
selling, general and administrative expenses.
The unaudited pro forma combined financial statements should be read in
conjunction with the General Motors consolidated financial statements, including
the notes thereto, located in the Current Report on Form 8-K dated April 12,
1999 and filed on April 15, 1999, and the USSB, PRIMESTAR and TCI Satellite
Entertainment audited financial statements, including the notes thereto, which
were incorporated by reference into the S-3 Registration Statement, each as of
and for the period ended December 31, 1998.
Various reclassifications have been made to the historical financial
statements of USSB, PRIMESTAR and TCI Satellite Entertainment to conform to the
unaudited pro forma combined financial statement presentation. As more fully
described in Note 3 to PRIMESTAR's 1998 consolidated financial statements, the
historical operating results of PRIMESTAR reflect the operations of its
predecessor, TCI Satellite Entertainment, prior to the restructuring transaction
on April 5, 1998.
- 7 -
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
USSB MERGER PRO FORMA ADJUSTMENTS
The following adjustments, which are set forth in millions, except per
share amounts, give pro forma effect to the USSB merger:
a. To record the exchange consideration at closing. The total purchase
price will be based on the average price of Class H common stock for
the 20 consecutive trading days ending on and including the second
trading day before the USSB merger. For purposes of the pro forma
calculation, the share price is assumed to be $53.05. Accordingly,
based on this price, USSB shareholders would receive $18.00 for each
share of USSB stock owned.
For purposes of the accompanying pro forma combined financial
statements, the excess purchase price over book value of net
liabilities acquired has been estimated as follows:
Outstanding shares of USSB stock 89.8
Consideration per share $18.00
------
Subtotal--purchase price 1,616
USSB net liabilities 54
------
Preliminary excess of purchase price over book value
of net liabilities acquired $1,670
======
Holders of USSB stock may elect to receive consideration in the form of
Class H common stock or the cash equivalent. However, not more than 50%
of the total consideration will be payable in cash, and not more than
70% of the total consideration will be in the form of Class H common
stock. For purposes of the accompanying pro forma combined financial
statements, it is assumed that 60% of the total consideration will be
paid in Class H common stock ($970) and 40% in cash ($646).
b. To eliminate intercompany transactions between GM and USSB.
c. To reclassify certain amounts in the historical financial statements of
USSB to conform to the GM presentation.
d. To eliminate a non-recurring loss recorded by USSB during 1998 and to
provide for the termination of various contracts as specified in the
USSB merger agreement.
e. GM has not as yet completed an analysis of the relative fair market
value of USSB's net liabilities in order to determine a preliminary
allocation of the purchase price to the net liabilities acquired.
Accordingly, the excess of the purchase price over the carrying value
of USSB's net liabilities has been presented as a single caption in the
accompanying pro forma combined balance sheet (see pro forma adjustment
at (a) above). GM believes the vast majority of the excess will be
allocated to USSB's FCC licenses and enterprise value goodwill. Both of
these intangible assets are considered to have indefinite lives and
will be amortized over 40 years.
f. To reduce interest income on cash required for the USSB merger assuming
GM's historical interest rate of 5.0% on pro forma adjustment (a)
above.
- 8 -
<PAGE>
g. Income taxes associated with the pro forma adjustments discussed above
have been calculated at an assumed combined federal and state rate of
40%, excluding amortization associated with the excess purchase price
over book value of net liabilities acquired, which is not deductible
for tax purposes.
The unaudited pro forma combined statement of income (loss) from
continuing operations has also been adjusted to recognize a tax
benefit, at an assumed combined federal and state rate of 40%, for
USSB's historical losses from continuing operations for the year ended
December 31, 1998. This adjustment recognizes that, if the USSB merger
had taken place on January 1, 1998, the tax benefit of USSB's losses
would have been realized in the consolidated federal tax return of GM.
h. In connection with the USSB merger, GM will contribute to the capital
of Hughes an amount of cash at least sufficient to enable Hughes to
purchase from GM, for fair value as determined by the GM board, the
number of shares of Class H common stock to be delivered to USSB
shareholders in the merger. In connection therewith, the GM board will
increase the Class H dividend base by the number of shares issued,
which for purposes of this pro forma presentation is assumed to be 18.3
million based on the assumptions described in note (a) above, including
that the Class H common stock price is $53.05.
PRIMESTAR/TEMPO SATELLITE ACQUISITION PRO FORMA ADJUSTMENTS
The following adjustments, which are set forth in millions, except per
share amounts, give pro forma effect to the PRIMESTAR/Tempo Satellite
acquisition:
i. To record incremental debt incurred by Hughes to finance the
PRIMESTAR/Tempo Satellite acquisition. For purposes of the accompanying
pro forma combined financial statements, it is assumed that $592 of the
cash consideration was funded through available Hughes cash and $887
was financed through Hughes' commercial paper program and a short-term
bridge loan. The remaining consideration was settled through the
issuance of 4.9 million shares of Class H common stock. Hughes acquired
these shares from GM for a cash payment, which was funded by Hughes
with a capital contribution from GM. In connection therewith, the GM
board increased the Class H dividend base by 4.9 million.
j. To record the exchange consideration at closing. The total purchase
price of $1,833 will be adjusted upon consummation of the
PRIMESTAR/Tempo Satellite acquisition based upon the net working
capital of PRIMESTAR (as defined in the PRIMESTAR asset purchase
agreement) at closing. For purposes of this pro forma calculation, the
December 31, 1998 net working capital of PRIMESTAR, a liability of
$121, was used to calculate the exchange consideration of the
PRIMESTAR/Tempo Satellite acquisition ($1,712).
For purposes of the accompanying pro forma combined financial
statements, the excess purchase price over book value of net assets
acquired has been estimated as follows:
Exchange consideration of PRIMESTAR/Tempo Satellite
Acquisition $1,712
Less book value of PRIMESTAR
Historical book value of PRIMESTAR $ (291)
Less: excluded assets (43)
Plus: excluded liabilities 1,924
------
Subtotal 1,590
------
Preliminary excess purchase cost over book value of
net assets acquired (see note m, below) $ 122
- 9 -
<PAGE>
As defined in the PRIMESTAR asset purchase agreement, excluded assets
include high-power direct broadcast satellite inventory and deferred
loan costs. Excluded liabilities include debt and related interest
payable, restructuring accruals and employee-related liabilities.
k. To reclassify certain amounts in the historical financial statements of
PRIMESTAR to conform to the GM presentation.
l. To eliminate a non-recurring impairment loss and related income tax
benefit recorded by PRIMESTAR during 1998 to reduce the carrying amount
of certain assets to their net realizable values based upon the assumed
purchase price of the PRIMESTAR/Tempo Satellite acquisition.
m. GM has not as yet completed an analysis of the relative fair market
value of the net assets acquired from PRIMESTAR and Tempo Satellite in
order to determine a preliminary allocation of the purchase price.
Accordingly, the excess of the purchase price over the carrying value
of the net assets acquired from PRIMESTAR and Tempo Satellite has been
presented as a single caption in the accompanying pro forma combined
balance sheet. For purposes of the accompanying combined statement of
income (loss) from continuing operations, such excess is being
amortized using an estimated weighted-average composite life of 20
years.
n. To record depreciation on the in-orbit satellite acquired by Hughes in
connection with the PRIMESTAR/Tempo Satellite acquisition over the
estimated remaining useful life of 12 years.
o. To reflect interest expense associated with the incremental debt
incurred by Hughes to finance the PRIMESTAR/Tempo Satellite
acquisition. For purposes of pro forma calculation, GM's historical
interest rate of LIBOR + 0.25% (5.3% in total) was used to compute
interest on the incremental debt discussed in pro forma adjustment (i)
above.
p. To reduce interest expense associated with PRIMESTAR debt not assumed
by Hughes.
q. To eliminate PRIMESTAR's historical income tax benefit recorded in
connection with PRIMESTAR's restructuring consummated during 1998.
r. Income taxes associated with the pro forma adjustments discussed above
have been calculated at an assumed combined federal and state rate of
40%. Since the PRIMESTAR/Tempo Satellite acquisition is a taxable
transaction, amortization of any goodwill generated is expected to be
deductible over 15 years for income tax purposes.
The unaudited pro forma combined statement of income (loss) from
continuing operations has also been adjusted to recognize a tax
benefit, at an assumed combined federal and state rate of 40%, for
PRIMESTAR's historical losses from continuing operations for the year
ended December 31, 1998. This adjustment recognizes that, if the
PRIMESTAR/Tempo Satellite acquisition had taken place on January 1,
1998, the tax benefit of PRIMESTAR's and Tempo Satellite's losses would
have been realized in the consolidated federal tax return of GM.
OFFERING ADJUSTMENTS
s. To reflect the pay down of short-term debt with proceeds from the
offering and cash.
- 10 -
<PAGE>
t. The estimated net proceeds from the offering will be approximately $485
million, assuming no exercise of the underwriters' over-allotment
option. The average number of shares of Class H common stock
outstanding and the Class H dividend base will be increased by the
number of shares sold in the offering, which, based on an assumed share
price of $55.50, would be 9.0 million.
The Class H dividend base will be further increased to reflect the
contribution of an additional $500 million by GM. The actual increase
to the Class H dividend base as a result of this contribution will be
determined based on the price per share of Class H common stock in the
offering. For purposes of this pro forma adjustment, the share price is
assumed to be $55.50. Accordingly, the contribution by GM will increase
the Class H dividend base by an additional 9.0 million.
u. To reduce interest expense for the result of the pay down of short-term
debt assuming GM's historical interest rate of 5.3%. See pro forma
adjustment (s) above.
v. To reflect the income tax effects of a reduction in interest expense
that resulted from the pay down of short-term debt at an assumed
combined federal and state tax rate of 40%.
- 11 -
<PAGE>
(c) Exhibits.
2.1 Asset Purchase Agreement by and among PRIMESTAR, Inc.,
PRIMESTAR Partners L.P., PRIMESTAR MDU, Inc., the stockholders of PRIMESTAR,
Inc. (or the parent entities of those stockholders) listed therein and Hughes
Electronics Corporation, dated as of January 22, 1999 (incorporated by reference
to Exhibit 99.1 of the Current Report on Form 8-K of General Motors Corporation
filed on February 5, 1999).
10.1 Bridge Funding Agreement among Hughes Electronics
Corporation, as Borrower, and Goldman Sachs Credit Partners L.P. and Merrill
Lynch Capital Corporation, as Lenders, dated as of April 19, 1999.
99.1 Registration Statement on Form S-3 filed on May 5, 1999.
99.2 Press Release dated April 28, 1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
GENERAL MOTORS CORPORATION
Date: May 13, 1999 By: /s/ Peter R. Bible
-------------------------------
Name: Peter R. Bible
Title: Chief Accounting Officer
13
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
2.1 Asset Purchase Agreement by and among PRIMESTAR, Inc., PRIMESTAR
Partners L.P., PRIMESTAR MDU, Inc., the stockholders of PRIMESTAR, Inc.
(or the parent entities of those stockholders) listed therein and
Hughes Electronics Corporation, dated as of January 22, 1999
(incorporated by reference to Exhibit 99.1 of the Current Report on
Form 8-K of General Motors Corporation filed on February 5, 1999).
10.1 Bridge Funding Agreement among Hughes Electronics Corporation, as
Borrower, and Goldman Sachs Credit Partners L.P. and Merrill Lynch
Capital Corporation, as Lenders, dated as of April 19, 1999.
99.1 Registration Statement on Form S-3 filed on May 5, 1999.
99.2 Press Release dated April 28, 1999.
Exhibit 10.1
THIS BRIDGE FUNDING AGREEMENT (as amended, modified and supplemented
from time to time, this "Agreement") is entered into as of April 19, 1999 among
HUGHES ELECTRONICS CORPORATION, a Delaware corporation ("BORROWER"), and GOLDMAN
SACHS CREDIT PARTNERS L.P. ("GS") and MERRILL LYNCH CAPITAL CORPORATION ("ML"
and, together with GS, the "LENDERS").
W I T N E S S E T H:
WHEREAS, Borrower has asked the Lenders to enter into this Agreement to
provide credit to Borrower.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1.
DEFINITIONS
1.1. Defined Terms
The following terms when used in this Agreement shall each have the
definition set forth below.
"AGREEMENT" is defined in the preamble to this Agreement.
"BORROWER" is defined in the preamble to this Agreement.
"BORROWING" means the borrowing of a Loan.
"BUSINESS DAY" means any day that is not a Saturday, Sunday or
a day on which commercial banks in New York, New York are required or permitted
by law to be closed.
"COMMITMENT" of a Lender means its commitment to make Loans in
an aggregate amount set forth opposite its name on Annex I hereto.
"INDEMNITEES" is defined in Section 9.3.
"INTEREST RATE" means, in respect of each day, the rate of
interest specified in Bloomberg's index for such day for the Fed H.15 A2/P2
non-financial CP 30-day discount rate [H15S030D] minus 5 basis points; provided
that if no such rate is specified for any date, the rate for such date shall be
the most recently available such rate.
<PAGE>
"LENDER" is defined in the preamble to this Agreement.
"LOAN" is defined in Section 2.1.
"MAJORITY LENDERS" means the Lenders holding more than 50% of
the sum of the unborrowed Commitments and the outstanding Loans.
"MATURITY DATE" means the date 364 days after the date hereof.
"NOTICE OF BORROWING" is defined in Section 2.2.
"REVOLVING CREDIT AGREEMENT" means the Revolving Credit
Agreement (Multi-Year Facility), dated as of December 5, 1997, among Borrower,
the banks named therein and Bank of America National Trust and Savings
Association, as administrative agent, as at any time amended.
ARTICLE 2.
LOANS
2.1. Commitments.
Subject to the terms and conditions of this Agreement, each
Lender severally agrees to make up to five Loans to Borrower (each, a "LOAN" and
collectively, the "LOANS") from time to time from and including the date hereof
until the Business Day prior to the Maturity Date in an aggregate amount not to
exceed its Commitment.
2.2. Procedures for Borrowings.
To request a Borrowing of Loans, Borrower shall deliver to
each Lender a written notice (a "NOTICE OF BORROWING"). Each Notice of Borrowing
shall specify the Business Day on which Borrower requests that such Loans be
made and the amount of the Loans to be made. Notices of Borrowing shall be
received by each Lender not later than 3:00 p.m. New York time on the second
Business Day prior to the date of the proposed Borrowing. Borrower shall provide
to each Lender a list, with specimen signatures, of officers authorized to
request Loans. Each Lender is entitled to rely upon such list until it is
replaced by Borrower.
2.3. Disbursement of Loans.
Each Lender shall disburse to Borrower, no later than 1:00
p.m. New York time on the date of the proposed Borrowing as set forth in the
Notice of Borrowing, an amount in immediately available funds equal to such
Lender's pro rata share of the requested Borrowing (based on the proportion of
its Commitment to all the Lenders' Commitments); provided, however, that in no
event shall such amount exceed the unutilized amount of such Lender's Commitment
to make Loans.
2
<PAGE>
ARTICLE 3.
INTEREST AND PREPAYMENTS
3.1. Interest.
Borrower shall pay to the Lenders, quarterly in arrears, on
the last Business Day of each calendar quarter and on the Maturity Date,
interest on outstanding Loans at an interest rate per annum equal to the
Interest Rate for each day such Loans have been outstanding since the date
thereof or, if later, since the last date to which interest has been paid in
accordance herewith.
3.2. Voluntary Prepayments.
Borrower shall have the right to prepay the Loans in whole or
in part at any time and from time to time, subject to Borrower giving each
Lender written notice, which notice shall be irrevocable, of its intent to
prepay the Loans, at least one (1) Business Day prior to such prepayment, which
notice shall specify the amount of such prepayment. Each such prepayment shall
be accompanied by the payment of any accrued and unpaid interest on the
principal amount being prepaid.
3.3. Mandatory Payments.
Borrower shall pay the outstanding Loans in full on the
Maturity Date. Borrower shall prepay the Loans from time to time with the net
proceeds received by Borrower from the transactions contemplated in that certain
engagement letter, dated April 19, 1999, among Borrower and the Lenders. Each
such prepayment shall be accompanied by the payment of any accrued and unpaid
interest on the principal amount being prepaid.
3.4. Payments; Calculations; Commitment Reductions.
Borrower shall make all payments owing by it to each Lender
hereunder in immediately available funds at the office of each Lender specified
on Annex I hereto prior to 1:00 p.m. New York time on the date such amounts are
due. All calculations of interest hereunder shall be made on the basis of the
actual number of days elapsed in the period for which such interest is payable
and a 365/366 day year (including the first day but excluding the last day). All
payments made by Borrower under Sections 3.2 and 3.3 hereof shall be distributed
among the Lenders pro rata, according to each such Lender's outstanding Loans.
Borrower may reduce the Commitments at any time and from time to time in whole
or in part; provided that such reduction shall be pro rata among the Lenders.
3
<PAGE>
ARTICLE 4.
CONDITIONS PRECEDENT
The obligation of the Lenders to make the Loans hereunder is
subject to the following conditions, and Borrower is deemed to certify that each
of the following conditions is true on each date on which a Notice of Borrowing
is sent to the Lenders: (a) to the best knowledge of Borrower, the
representations and warranties contained in Article 6 of this Agreement are true
and correct in all material respects on the date of such Notice of Borrowing,
and (b) to the best knowledge of Borrower, no Event of Default referred to in
Article 8 of this Agreement or event which with notice or lapse of time or both
would become such an Event of Default has occurred and is continuing except such
Events of Default or events as have been expressly waived by or on behalf of the
Lenders.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that, as of the date hereof,
each of the representations and warranties made by Borrower in Section 6 of the
Revolving Credit Agreement (other than the representations made in the first
sentence and the last sentence of Section 6.6 thereunder, each of which shall be
deemed to refer to the Company's December 31, 1998 financial statements), a copy
of which section is attached hereto as Schedule I, and all defined terms in the
Revolving Credit Agreement used in such sections, in each case as in effect on
the date hereof, are hereby incorporated by reference herein mutatis mutandis
(whether or not the Revolving Credit Agreement is terminated or any amount is
outstanding thereunder); provided that (x) the parenthetical in the first
sentence of Section 6.6 and (y) the second sentence of Section 6.6 shall not be
incorporated herein; and, further, provided that (i) all references to the
Administrative Agent and the Banks therein shall be deemed to be references to
the Lenders hereunder, (ii) all references to the Notes therein shall be deemed
to be references to the Loans hereunder, (iii) all references to the Agreement
therein shall be deemed to be references to this Agreement and (iv) the
references in Section 6.8 of the Revolving Credit Agreement shall be deemed to
refer to the Loans hereunder;.
ARTICLE 6.
COVENANTS
Borrower covenants and agrees that so long as the Lenders are
obligated to make the Loans hereunder and until repayment in full of the Loans
and all interest thereon, the covenants made by Borrower in Sections 7 and 8 of
the Revolving Credit Agreement (other than the covenants made in Sections 7.1
and 7.8 thereunder), a copy of which sections is attached hereto as Schedule II,
4
<PAGE>
and all defined terms in the Revolving Credit Agreement used in such sections,
in each case as in effect on the date hereof, are hereby incorporated by
reference herein mutatis mutandis (whether or not the Revolving Credit Agreement
is terminated or any amount is outstanding thereunder); provided that (i) all
references to the Administrative Agent and the Banks therein shall be deemed to
be references to the Lenders hereunder, (ii) all references to Availability
Period therein shall be deemed to mean to the period from the date hereof until
the Maturity Date hereunder, (iii) all references to the Majority Banks therein
shall be deemed to be references to the Majority Lenders, (iv) all references to
the Commitments therein shall be deemed to be references to the Commitments
hereunder and (v) all references to the Loans therein shall be deemed to be
references to the Loans hereunder. Borrower agrees to comply with such covenants
until the repayment in full of the Loans and all interest thereon.
ARTICLE 7.
EVENTS OF DEFAULT
7.1. Events of Default.
Sections 9.1(a) through (l), inclusive, of the Revolving
Credit Agreement, a copy of which section is attached hereto as Schedule III,
and all defined terms in the Revolving Credit Agreement used in such sections,
in each case as in effect on the date hereof, is hereby incorporated by
reference herein mutatis mutandis (whether or not the Revolving Credit Agreement
is terminated or any amount is outstanding thereunder) and each such section
shall be deemed an "Event of Default" hereunder; provided that (i) all
references to the Administrative Agent and the Banks therein shall be deemed to
be references to the Lenders hereunder, (ii) all references to the Loans therein
shall be deemed to be references to the Loans hereunder and (iii) all references
to the Agreement therein shall be deemed to be references to this Agreement.
7.2. Remedies.
(a) Automatically upon the occurrence of an Event of Default
under Section 9.1(d) of the Revolving Credit Agreement, as incorporated in
Section 7.1 hereunder, the Commitments shall immediately terminate, and all
Loans and other liabilities and obligations under this Agreement shall, without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived, be forthwith due and payable, if not herein otherwise then due
and payable, together with all costs and expenses (including break and funding
costs and other costs in connection with the relending, reborrowing, funding or
other employing of funds) incurred by the Lenders as a result thereof, anything
herein or in any agreement, contract, indenture, document or instrument
contained to the contrary notwithstanding; and (b) at any time after the
occurrence of an Event of Default other than under such section described in the
immediately previous clause, and in each and every such case, unless such Event
of Default shall have been remedied by Borrower to the satisfaction of the
5
<PAGE>
Majority Lenders or waived in writing by the Majority Lenders (except in the
case of an Event of Default under Section 9.1(a) of the Revolving Credit
Agreement, as incorporated in Section 7.1 hereunder, the waiver of which shall
require the consent of all the Lenders), the Lenders may immediately terminate
the Commitments, whereupon the same shall be cancelled and reduced to zero and
any Notice of Borrowing given on or after the date of such notice of
cancellation shall cease to have effect and all Loans and accrued interest
thereon and all other liabilities and obligations outstanding under this
Agreement shall, thereupon, without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived, be forthwith due and
payable, if not otherwise then due and payable. Thereafter, any Lender or the
Lenders may immediately, and without expiration of any period of grace, enforce
payment of all liabilities and obligations of Borrower under this Agreement.
ARTICLE 8.
FURTHER AGREEMENT
Borrower hereby agrees to permit the Loans hereunder to, at
the option of the Lenders, convert to notes at any time after the 90th day after
the date hereof and prior to the Maturity Date, such notes to be in form and
substance mutually acceptable to Borrower and the Lenders.
ARTICLE 9.
MISCELLANEOUS
9.1. GOVERNING LAW.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT
AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE
GOVERNED BY THE INTERNAL LAWS AND DECISIONS OF THE STATE OF NEW YORK.
9.2. Termination.
Borrower may terminate the obligations of the Lenders to make
the Loans hereunder at any time by giving the Lenders at least one (1) Business
Day prior written notice and by paying in full any outstanding Loans and all
accrued and unpaid interest thereon on the date of such termination. Any such
notice of termination shall be irrevocable.
9.3. Indemnification.
Borrower agrees to indemnify the Lenders and their respective
directors, officers, agents, partners and employees (collectively, the
"INDEMNITEES") from and hold each of them harmless against any and all losses,
6
<PAGE>
liabilities, claims, damages or expenses reasonably incurred by any of them
arising out of or by reason of any investigation by governmental or judicial
authorities or being made a party to any litigation or other similar proceeding
related to any use made or proposed to be made by Borrower of the proceeds of
any Loan for the acquisition of any other Person including, without limitation,
the reasonable fees and disbursements of counsel (including allocated costs for
in-house legal services) incurred in connection with any such investigation,
litigation or other proceeding; provided, however, that Borrower shall have no
obligation to indemnify or pay for the costs and expenses of more than one
counsel for the Indemnitees, unless any Indemnitee shall in good faith
reasonably determine that there is a conflict of interest that causes it to be
reasonably necessary for any Indemnitees to be represented by other counsel.
Counsel chosen to represent any Indemnitee pursuant to the previous sentence
shall be reasonably satisfactory to Borrower. The obligations of Borrower under
this Section 9.3 shall survive the termination of this Agreement.
9.4. Notices.
Except as otherwise provided herein, all notices and
correspondences hereunder shall be in writing and sent by certified or
registered mail, return receipt requested, or by overnight delivery service,
with all charges prepaid, if to any of the Lenders, then to its address for
notices set forth on Annex I or such other address as such Lender may notify the
other parties hereto from time to time, or by facsimile transmission, promptly
confirmed in writing sent by first class mail, to the appropriate telecopier
number set forth on Annex I or to such other number as any Lender may notify the
other parties hereto from time to time, and if to Borrower, then to Borrower at
the following address or facsimile number, as applicable, or to such other
number as Borrower may notify the other parties hereto from time to time:
If to Borrower:
Hughes Electronics Corporation
Mail Station A-148
200 North Sepulveda Blvd.
P.O. Box 956
El Segundo, California 90245-0956
Tel: (310) 662-9761
Fax: (310) 640-1734
Attn: Edward B. Clarkson, Assistant Treasurer
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Tel: (212) 310-8000
Fax: (212) 310-8007
Attn: Warren T. Buhle, Esq.
7
<PAGE>
All such notices and correspondence shall be deemed given (i) if sent by
certified or registered mail, three Business Days after being delivered to the
United States Postal Service, (ii) if sent by overnight delivery service, when
received at the above stated addresses or when delivery is refused, and (iii) if
sent by telex or facsimile transmission, when receipt of such transmission is
acknowledged.
9.5. Assignments and Participations.
(a) Borrower Assignment. Borrower shall not assign this
Agreement, or any rights or obligations hereunder, without the prior written
consent of all of the Lenders.
(b) Lender Assignments. No Lender shall assign this Agreement,
or any rights or obligations hereunder, without the prior written consent of
Borrower, such consent not to be unreasonably withheld; provided, however, that
neither GS nor ML shall need Borrower's consent in connection with assignments
to (i) any wholly-owned domestic subsidiary of such Lender or (ii) the other
Lender if, in connection with such assignments, such assigning Lender causes its
assignee to certify in writing its acceptance of the obligations under this
Agreement, such writing to be in form and substance satisfactory to Borrower.
Each Lender may assign all or a portion of its rights and obligations under this
Agreement; provided that no such assignment shall be for less than $10,000,000,
unless it constitutes the sum of the entire remaining Commitment and the
outstanding Loans of the assigning Lender. Upon any assignment by the Lenders,
at the option of Borrower, Borrower and the Lenders agree to make appropriate
modifications to this Agreement relating to the creation of an administrative
agent.
9.6. Amendments.
No amendment of any provision of this Agreement shall be
effective unless the same shall be in writing and signed by (i) the Majority
Lenders and (ii) Borrower.
9.7. Expenses.
Borrower and each Lender shall pay all of its own expenses
incurred in connection with the preparation and consummation of this Agreement.
9.8. Counterparts and Effectiveness.
This Agreement and any waiver or amendment hereto may be
executed in any number of counterparts and by the different parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument. This Agreement shall become effective on the date on which all of
8
<PAGE>
the parties hereto shall have executed and delivered a copy hereof (whether the
same or different copies).
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their proper and duly authorized
officers as of the date set forth above.
BORROWER:
HUGHES ELECTRONICS CORPORATION
By: /s/ Mark A. McEachon
--------------------------------
Name: Mark A. McEachon
Title: Corporate Vice President
and Treasurer
LENDERS:
GOLDMAN SACHS CREDIT PARTNERS L.P.
By:/s/ Stephen B. King
--------------------------------
Name: Stephen B. King
Title: Authorized Signatory
MERRILL LYNCH CAPITAL CORPORATION
By: /s/ Christopher Birosak
--------------------------------
Name: Christopher Birosak
Title: Vice President
10
<PAGE>
ANNEX I
LENDERS AND COMMITMENT AMOUNTS
Name and Address of Lender
Goldman Sachs Credit Partners L.P. $250,000,000
Attention:
Tel:
Fax No.: (212)
Account for payments:
Merrill Lynch Capital Corporation $250,000,000
Attention:
Tel:
Fax No.:
Account for payments:
Total Commitments: $500,000,000
============
11
EXHIBIT 99.1
As filed with the Securities and Exchange Commission on May 5, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
--------------
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
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
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Peter R. Bible
Chief Accounting Officer
General Motors Corporation
3044 West Grand Boulevard
Detroit, Michigan 48202-3091
(313) 556-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
Warren G. Andersen Jill Sugar Factor Marcy J. K. TiffanyFrancis J. Morison
General Motors Kirkland & Ellis Hughes Electronics Sarah Beshar
Corporation 200 East Randolph Corporation Davis Polk &
3031 West Grand Drive 200 North Sepulveda Wardwell
Boulevard Chicago, Illinois Boulevard 450 Lexington
Detroit, Michigan 60601-6636 El Segundo, Avenue
48202-3091 (312) 861-2000 California 90245 New York, New York
(313) 974-1528 (310) 647-1000 10017
(212) 450-4000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
_______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the followingbox and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
_______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class
of
Securities to be Proposed Maximum Amount of
Registered Aggregate Offering Price Registration Fee
- ----------------------------------------------------------------
<S> <C> <C>
Class H Common Stock,
$0.10 par value $575,000,000 (1) $159,850
- ----------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated in accordance with Rule 457(o) solely for the purpose of
determining the registration fee and includes shares that may be purchased
by the underwriters pursuant to an over-allotment option.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and is not soliciting an +
+offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated May 5, 1999
PROSPECTUS
- ---------
Shares
[Hughes General Motors Corporation
logo]
Class H Common Stock
-----------
General Motors Corporation is offering all of the Class H common stock
offered hereby.
General Motors' Class H common stock tracks the performance of its wholly
owned subsidiary, Hughes Electronics Corporation. The financial performance of
Hughes determines the earnings per share of the Class H common stock and the
amounts available for the payment of dividends on the Class H common stock.
The Class H common stock is listed for trading on the New York Stock
Exchange under the symbol "GMH". On May 4, 1999, the closing sale price of the
Class H common stock was $55.50 per share.
Investing in the Class H common stock involves risks which are described in
the "Risk Factors" section beginning on page 15 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per
Share Total
-------- --------
<S> <C> <C>
Public offering price................................. $ $
Underwriting discount................................. $ $
Proceeds, before expenses, to GM...................... $ $
</TABLE>
The underwriters may also purchase up to an additional shares of
Class H common stock at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover over-
allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of Class H common stock will be ready for delivery in New York,
New York on or about , 1999.
-----------
Merrill Lynch & Co. Goldman, Sachs & Co.
Morgan Stanley Dean Witter Salomon Smith Barney
Donaldson, Lufkin & Jenrette
ING Baring Furman Selz LLC
J.P. Morgan & Co.
SG Cowen
-----------
The date of this prospectus is , 1999
<PAGE>
Inside Front Cover Page of Prospectus
[Pictures relating to the DIRECTV service]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 15
Use of Proceeds.......................................................... 20
Class H Common Stock Price Range......................................... 20
Pro Forma Consolidated Capitalization of Hughes.......................... 21
Hughes Selected Financial Data........................................... 23
Unaudited Pro Forma Combined Condensed Hughes Financial Information...... 25
Hughes Management's Discussion and Analysis.............................. 33
Recent Acquisitions...................................................... 46
Business of Hughes....................................................... 48
Management of Hughes..................................................... 67
Overview of GM Capital Stock............................................. 68
Description of Class H Common Stock...................................... 75
Material U.S. Federal Tax Considerations for Non-U.S. Holders of Class H
Common Stock............................................................ 82
Underwriting............................................................. 86
Legal Matters............................................................ 89
Experts.................................................................. 89
Disclosure Regarding Forward-Looking Statements.......................... 90
Where You Can Find More Information...................................... 90
Appendix A: Financial Statements of Hughes............................... A-1
</TABLE>
-----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy the securities offered hereby only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus regardless of the time of delivery of this
prospectus or of any sale of the securities offered hereby.
-----------------
DIRECTV(R), Galaxy(R), Spaceway(TM), AIReach(TM), DirecDuo(TM), Turbo
Internet(TM), SPOTbytes(R), PRIMESTAR(R) and DirecPC(R) are trademarks of
Hughes Electronics Corporation or its subsidiaries. USSB(R) and U.S. Satellite
Broadcasting(R) are registered trademarks of United States Satellite
Broadcasting Company, Inc. All other trademarks are properties of their
respective owners.
-----------------
This preliminary prospectus is subject to completion prior to this
offering. This preliminary prospectus describes Hughes' planned acquisition of
United States Satellite Broadcasting Company, Inc. However, as of the date of
the filing of this preliminary prospectus, this acquisition has not yet been
consummated by Hughes and is subject to certain contingencies that could
prevent its completion. These contingencies include the approval of the
shareholders of United States Satellite Broadcasting Company, Inc. Hughes
cannot assure you that this approval will be obtained or that this acquisition
will be completed. See "Recent Acquisitions."
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before deciding to invest in the securities offered hereby. We urge
you to read this entire prospectus carefully, including the "Risk Factors"
section and the consolidated financial statements and the notes to those
statements included and incorporated by reference herein.
Overview
General Motors has two classes of common stock, Class H common stock and
$1 2/3 common stock. The financial performance of Hughes determines the
earnings per share attributable to the Class H common stock. GM will contribute
the funds raised in this offering to Hughes. In addition, GM intends to
contribute an additional $500 million to Hughes at or about the closing of this
offering. Hughes intends to use the offering proceeds and other contributed
funds to repay debt incurred in connection with its recent acquisitions of
PRIMESTAR, Inc., the related high-power satellite assets purchased to date of
Tempo Satellite and United States Satellite Broadcasting Company, Inc.
General Motors
General Motors is primarily engaged in the automotive and satellite and
wireless communications industries. GM is the world's largest manufacturer of
automotive vehicles. GM also has financing and insurance operations and, to a
lesser extent, engages in other industries. GM's principal executive offices
are located at 100 Renaissance Center, Detroit, Michigan 48243-7301 and its
telephone number is (313) 556-5000.
Hughes
Overview
Hughes is a leading global provider of digital direct broadcast satellite
entertainment services, satellite communications services and satellite-based
private business networks. Hughes is also a leading global manufacturer of
satellite systems. Since its founding, Hughes has been a pioneer in many
aspects of the satellite and wireless communications industry, and its
technologies have driven the creation of new services and markets. Hughes
believes that its ability to identify, define and develop new markets early has
provided it with a significant competitive advantage in building sustainable
market leadership positions.
Since its reorganization in 1997, Hughes has focused on providing
advanced communications services on a global basis. By leveraging its
technological leadership in satellite and wireless communications systems,
Hughes has developed a range of entertainment, information, and communications
services for the home and business markets, including video, data, voice,
multimedia and Internet services. These services provide the potential for
higher margins and higher growth than Hughes' traditional manufacturing
businesses.
Hughes' business is comprised of:
. DIRECTV, which is the world's leading digital direct broadcast
satellite provider based on number of subscribers. DIRECTV
includes businesses in the United States, Latin America and Japan,
and constitutes Hughes' Direct-to-Home segment. As referred to
herein, the direct broadcast satellite industry does not include
providers and subscriber data for the large satellite receiving
dish, C-band direct-to-home services market.
. PanAmSat, which owns and operates the largest commercial satellite
fleet in the world with 19 satellites that can transmit signals to
geographic areas covering 99% of the
4
<PAGE>
world's population. PanAmSat Corporation, a publicly-held
corporation which is 81% owned by Hughes, constitutes Hughes'
Satellite Services segment.
. Spaceway(TM), which is a planned satellite-based
broadband communications platform that is expected to provide
customers with high-speed two-way multimedia transmission on a
more cost-efficient basis than current systems beginning in 2002.
Spaceway is currently not a separately reported business segment.
. Hughes Network Systems, which is a leading provider of satellite
and wireless communications ground equipment and services with an
estimated 55% to 60% share of the global market for very small
aperture terminal private business networks. Hughes Network
Systems constitutes Hughes' Network Systems segment.
. Hughes Space and Communications, which is a leading satellite
manufacturer that has won over 50% of its competitive bids from
1991 through 1998. Hughes Space and Communications is the
principal component of Hughes' Satellite Systems segment.
Industry Trends
Based on the inherent competitive advantages of satellite technology over
ground-based communications technologies for many applications, Hughes seeks to
capitalize on several key trends that are revolutionizing the communications
industry, including:
. Growing demand for an increased variety of digital broadcast
entertainment services;
. Increasing demand for digitized data and Internet services for
both home and business users; and
. Emerging demand for mobile satellite services, including
telephony, paging and information systems.
Strategy
Hughes' business objective is to maximize the creation of shareholder
value by leveraging its satellite and wireless communications systems expertise
and capitalizing on its competitive advantages described below in order to
enhance its position as a premier global communications company with an
emphasis on higher margin, higher growth services. Hughes' core strategies for
achieving its business objective are to:
. Achieve sustainable market leadership positions through
innovation;
. Lead multichannel entertainment market;
. Exploit growth opportunities in the markets for digitized data and
Internet services;
. Increase revenue-per-user through provision of enhanced services;
. Focus on customer satisfaction and quality; and
. Focus on key performance measurements.
Competitive Advantages
Hughes believes that its satellite and wireless communications
technological capabilities, together with the inherent advantages of satellite
technology over ground-based technologies for many applications, provide it
with competitive advantages. Hughes believes these competitive advantages are
critical to its ability to achieve its business objective. Hughes further
believes these competitive
5
<PAGE>
advantages should enable it to achieve sustainable market leadership positions
and accelerate revenue and operating cash flow growth. These competitive
advantages include:
. DIRECTV Brand and Franchise. The recent PRIMESTAR and U.S.
Satellite Broadcasting Company acquisitions solidify DIRECTV's
leadership position in the United States direct broadcast
satellite market. Hughes believes it can leverage this leadership
in selected international markets. In the United States, DIRECTV
has:
. the largest subscriber base--about 75% of direct broadcast
satellite subscribers, which provides greater opportunity to
obtain programming on favorable terms, secure exclusive
programming and introduce new services;
. substantial channel capacity--currently delivers about 225
channels and, following the successful launch of an additional
satellite scheduled for the third quarter of 1999 and the
completion of the pending Tempo Satellite in-orbit satellite
acquisition, will have capacity for about 370 channels; and
. the largest distribution network--based on retail points of
sale, including national retailers such as Circuit City, Radio
Shack and Best Buy, several regional Bell operating companies
which provide installation, customer service and billing and
the PRIMESTAR dealer network in small urban and rural markets.
. Direct Digital Interactive and Broadband Links to Home and
Business. Hughes believes that its established customer
relationships in both the business and home segments will become
increasingly valuable as key portals to offer expanded services.
Consumers and businesses are increasingly demanding the flow of
greater amounts of data at higher speeds than can be provided by
traditional computer modems and phone lines. To address this
demand, for example, through DIRECTV, Hughes intends to provide
Internet-based services and interactive television services in the
United States and is already offering some of these services in
Japan. Also, beginning in North America in 2002, Hughes plans to
begin migrating existing corporate data network clients and
satellite Internet customers, many of whom are Fortune 500
companies, to Spaceway.
. Global Spectrum and Orbital Slots. Hughes considers its regulatory
authorization to use desirable broadcast spectrum and orbital
slots for its current and planned global satellite fleet to be a
significant competitive advantage. Operation of an international
satellite fleet requires significant international and national
regulatory approvals. Hughes and PanAmSat have received regulatory
approval for 27 licenses in the C-band, the traditional network
and cable television distribution band, the Ku-band, the band used
for many telecommunications services and direct-to-home
television, or both bands. In addition, Hughes and PanAmSat have
obtained United States Federal Communications Commission
authorization for 17 licenses in the Ka-band, a high-power
spectrum that will enable new broadband, high-speed data and
Internet service offerings.
. Global Market Leader. Hughes believes that its global leadership
positions in its target markets--digital direct-to-home
entertainment, satellite transponder leasing, very small aperture
terminal business networks, and satellite systems manufacturing--
enable it to achieve economies of scale. The satellite and
wireless communications business is characterized by high fixed
costs with relatively lower variable costs. A market leadership
position enables the cost of developing expanded services, such as
exclusive programming for DIRECTV or specialized broadcasting
services for PanAmSat, to be spread across a larger customer base.
Similarly, Hughes Space and Communications and Hughes Network
Systems have benefitted from economies of scale in manufacturing.
6
<PAGE>
. Comprehensive Portfolio of Global Satellite Businesses. Hughes
believes that its presence in several major segments of the
satellite communications industry affords significant synergies,
vertical integration benefits and the ability to remain at the
forefront of the latest industry growth trends. Hughes has
leveraged its satellite manufacturing and systems expertise to
develop new service businesses such as DIRECTV, satellite
transponder leasing and Spaceway. In addition, Hughes' vertically
integrated structure has enabled it to respond quickly to the
growth needs of its services businesses. For example, Hughes
Network Systems' ability to increase production of DIRECTV
receiving equipment on short notice enabled DIRECTV to achieve
record subscriber growth in 1998.
. Technology Leadership. Hughes believes that its leadership
positions in its markets result in large part from its
technological capabilities, particularly in satellite design,
production and operation. Hughes' technologies have significantly
enhanced the transmission capacity, power and efficiency of
satellites and improved their cost effectiveness. Because these
innovations have improved the economics of the commercial
satellite business, Hughes believes that its technological
leadership has expanded, and will continue to expand, the market
for satellites, satellite equipment, and satellite services.
Hughes also believes that its technological expertise provides it
with an advantage in its other equipment and services businesses.
For example, Hughes' technologies enabled DIRECTV to be first to
market with digital direct broadcast satellite services and these
technologies will be critical to the successful development of
Spaceway broadband services.
Hughes' principal executive offices are located at 200 North Sepulveda
Boulevard, El Segundo, California 90245 and its telephone number is (310) 647-
1000.
Recent Acquisitions
Hughes has recently made the following acquisitions:
. PRIMESTAR and Tempo Satellite. On April 28, 1999, Hughes acquired
the direct broadcast satellite medium-power business of PRIMESTAR
for about $1.1 billion in cash and about 4.9 million shares of
Class H common stock. PRIMESTAR operates a 160-channel medium-
power direct broadcast service using leased satellite capacity at
85(degrees) west longitude. In a related transaction, Hughes
agreed to acquire the high-power satellite assets of Tempo
Satellite for $500 million in cash. Of this purchase price, $150
million was paid in March 1999 for a satellite that has not yet
been launched. The remaining $350 million for an in-orbit
satellite and related satellite orbital frequencies is payable
upon Federal Communications Commission approval of the transfer of
the 11 frequencies. We cannot assure you that such transfer will
be approved or that this portion of the Tempo Satellite
transaction will be completed. The PRIMESTAR acquisition provides
DIRECTV with an immediate increase in revenues from the more than
2.3 million existing PRIMESTAR subscribers and ongoing revenues
from those subscribers that transition to the DIRECTV service.
PRIMESTAR had revenues of $1.3 billion in 1998. After this
acquisition, Hughes has over seven million subscribers for its
direct broadcast satellite services in the United States under the
DIRECTV and PRIMESTAR brand names.
. U.S. Satellite Broadcasting Company. On , 1999, Hughes
acquired the direct-broadcast satellite business of U.S. Satellite
Broadcasting Company for cash and Class H common stock totaling
$ billion. U.S. Satellite Broadcasting Company provides
subscription television programming, including premium networks,
to households throughout the continental United States via the
digital satellite broadcasting system
7
<PAGE>
that it shares with DIRECTV. As of March 31, 1999, U.S. Satellite
Broadcasting Company had over 2.2 million subscribers, over 90% of
whom were also DIRECTV subscribers. The acquisition of U.S.
Satellite Broadcasting Company provides DIRECTV with the
opportunity to increase average revenue per subscriber through the
provision of premium programming previously provided by U.S.
Satellite Broadcasting Company and expanded channel offerings. The
acquisition also provides DIRECTV with the opportunity to achieve
cost savings through the consolidation of duplicate operations.
For additional information regarding these acquisitions, see the "Recent
Acquisitions" section of this prospectus.
The Offering
The number of shares of Class H common stock outstanding shown below is
based on the number of shares outstanding on , 1999 and includes the
shares issued in Hughes' recent acquisitions. For purposes of this prospectus,
unless otherwise stated, we have assumed that shares of Class H common
stock are issued in connection with the U.S. Satellite Broadcasting Company
acquisition. The actual number is not known at this time because the former
U.S. Satellite Broadcasting Company shareholders, within a limited range, have
the right to elect to receive consideration in the form of Class H common stock
or the cash equivalent. Not more than 50% of the total consideration will be
payable in cash and not more than 70% of the total consideration will be in the
form of Class H common stock. Accordingly, no more than shares and no fewer
than shares of Class H common stock will be issued in the U.S. Satellite
Broadcasting Company acquisition. Unless we specifically state otherwise, the
information in this prospectus does not take into account the issuance of up to
shares of Class H common stock which the underwriters have the option to
purchase solely to cover over-allotments. If the underwriters exercise their
over-allotment option in full, shares of Class H common stock will be
outstanding after the offering.
<TABLE>
<C> <S>
Class H common stock offered
hereby........................ shares
Class H common stock
outstanding after the shares
offering......................
Use of Proceeds................ The net proceeds from the offering will be
approximately $ million. GM will
contribute these proceeds to Hughes, which
will use these funds, together with an
additional $500 million contributed to it by
GM, to repay debt that it incurred in
connection with its acquisitions of
PRIMESTAR, including the related satellite
assets of Tempo Satellite purchased to date,
and U.S. Satellite Broadcasting Company. See
"Use of Proceeds."
Current Class H dividend base..
Estimated Class H dividend base
after giving effect to the
offering and GM contribution..
NYSE symbol.................... GMH
</TABLE>
GM's Class H common stock is one of two classes of common stock issued by
GM and tracks the performance of Hughes. GM owns 100% of the stock of Hughes.
The financial performance of Hughes determines the earnings per share of the
Class H common stock and the amounts available for the payment of dividends on
the Class H common stock. However, in the event of a GM liquidation,
8
<PAGE>
insolvency or similar event, holders of Class H common stock would have no
direct claim against the assets of Hughes. Rather, such holders would only have
rights in the assets of GM as common stockholders of GM.
A fraction is used to determine the portion of Hughes' earnings that is
allocated to the Class H common stock for purposes of determining the earnings
per share and amounts available for the payment of dividends on the Class H
common stock. The numerator of this fraction is the weighted average number of
shares of Class H common stock outstanding during the applicable period. The
denominator of this fraction is the notional number of shares of Class H common
stock which, if outstanding, would represent 100% of the tracking stock
interest in the earnings of Hughes. The denominator is also referred to as the
Class H dividend base. It can be adjusted by the GM board of directors in
specified circumstances, including to reflect contributions by GM to Hughes.
The fraction is generally determined at the end of each quarter. As of
March 31, 1999, the portion of Hughes' earnings allocable to the Class H common
stock was about 26.6%. The PRIMESTAR/Tempo Satellite and U.S. Satellite
Broadcasting Company acquisitions, this offering and the additional $500
million contribution to Hughes by GM have an effect on the fraction. After
taking into account the shares of Class H common stock issued in the PRIMESTAR
and U.S. Satellite Broadcasting Company acquisitions, the effect of this
offering and the contribution to Hughes by GM for a full quarter, about % of
Hughes' earnings will be allocated to the Class H common stock for earnings per
share and dividend purposes. The balance, about %, will be allocated to GM's
other class of common stock, its $1 2/3 common stock. For such purpose, we have
assumed that the price to the public in the offering is $ per share. See
"Description of Class H Common Stock--Detailed Calculation of Amount Available
for Dividends on Class H Common Stock--Calculation of Fraction Following the
Offering" for a detailed description of how the fraction is calculated.
The payment of dividends on Class H common stock is determined by GM's
board of directors. Since the completion in 1997 of a series of transactions
which effected the restructuring of the predecessor of Hughes, no dividends
have been paid on the Class H common stock, nor are dividends currently
expected to be paid in the foreseeable future.
For more information regarding the Class H common stock and the
determination of the earnings per share and amounts available for payment of
dividends on the Class H common stock, including under what circumstances the
GM board of directors may adjust the denominator of the fraction, see
"Description of Class H Common Stock--GM Restated Certificate of Incorporation
Provisions Regarding Dividends."
Hughes Summary Financial Data
The following summary financial information has been derived from Hughes'
financial statements for the years presented, which have been audited by
Deloitte & Touche LLP, independent auditors, except for the 1994 balance sheet
information which is derived from its unaudited combined financial statements.
You should read the data below in conjunction with the "Hughes Management's
Discussion and Analysis" section of this prospectus and Hughes' financial
statements and the notes thereto which appear elsewhere in this prospectus.
On December 17, 1997, Hughes' predecessor and GM completed a series of
transactions which restructured Hughes' predecessor and which were designed to
address strategic challenges facing its three principal businesses. These
transactions included the tax-free spin-off of its defense electronics business
to holders of GM's $1 2/3 common stock and old Class H common stock, the
transfer of Delco Electronics Corporation to GM's Delphi Automotive Systems
business sector, which is now a separate corporation, and the recapitalization
of the old GM Class H common stock into the Class H common stock that is
9
<PAGE>
currently outstanding. These transactions were followed immediately by the
merger of the defense electronics business with Raytheon Company.
In connection with these transactions, the telecommunications and space
business of Hughes' predecessor, consisting principally of its direct-to-home
broadcast, satellite services, network systems and satellite systems businesses
were contributed to the recapitalized Hughes. These telecommunications and
space businesses, both before and after the recapitalization, are referred to
as Hughes. The financial information presented for Hughes, unless otherwise
noted, represents the financial information of the recapitalized Hughes.
Earnings per share attributable to the Class H common stock is determined
based on the relative amounts of Hughes net income available for the payment of
dividends to holders of Class H common stock and to holders of $1 2/3 common
stock. The manner in which this allocation is made is described in the section
of this prospectus titled "Description of Class H Common Stock--GM Restated
Certificate of Incorporation Provisions Regarding Dividends."
<TABLE>
<CAPTION>
As of or for the years ended
December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
(in millions, except per share
amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues....................... $ 5,964 $ 5,128 $4,009 $3,153 $2,697
Total operating costs and expenses... 5,715 4,843 3,820 3,002 2,483
------- ------- ------ ------ ------
Operating profit..................... 249 285 189 151 214
Income from continuing operations
before extraordinary item and
cumulative effect of accounting
change.............................. 260 406 170 71 97
Income (loss) from discontinued
operations, net of taxes............ 1 (7) (65) (54)
Gain on sale of discontinued
operations, net of taxes............ 63
Extraordinary item, net of taxes..... (20)
Cumulative effect of accounting
changes............................. (9) (2)
------- ------- ------ ------ ------
Net income.......................... 251 450 163 6 41
Adjustments to exclude the effect
of GM purchase accounting
adjustments........................ 21 21 21 21 21
------- ------- ------ ------ ------
Earnings used for computation of
available separate consolidated net
income.............................. $ 272 $ 471 $ 184 $ 27 $ 62
======= ======= ====== ====== ======
Earnings per share attributable to
Class H common stock:
Basic and diluted earnings per
share from continuing operations
before extraordinary item and
cumulative effect of accounting
change............................. $ 0.70 $ 1.07 $ 0.48 $ 0.23 $ 0.30
Discontinued operations........... 0.16 (0.02) (0.16) (0.14)
Extraordinary item................ (0.05)
Cumulative effect of accounting
change........................... (0.02)
------- ------- ------ ------ ------
Basic and diluted earnings per
share.............................. $ 0.68 $ 1.18 $ 0.46 $ 0.07 $ 0.16
======= ======= ====== ====== ======
Cash dividends declared per share....
Balance Sheet Data:
Total assets......................... $13,435 $12,731 $4,373 $3,942 $3,609
Long-term debt....................... 779 638
Owner's equity....................... 8,382 8,312 2,492 2,609 2,301
Other Data:
EBITDA............................... $ 704 $ 602 $ 405 $ 352 $ 375
Capital expenditures................. 1,429 827 449 442 399
</TABLE>
"EBITDA" is defined as operating profit, plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
generally accepted accounting principles. Hughes management believes it is a
meaningful measure of performance and is commonly used by other large
communications, entertainment and media service providers. See "Business of
Hughes--Strategy--Focus on Key Performance Measurements." EBITDA does not give
effect to cash used for debt service requirements and thus does not reflect
funds available for investment in the business of Hughes, dividends or other
discretionary uses.
10
<PAGE>
In addition, EBITDA as presented herein may not be comparable to similarly
titled measures reported by other companies.
Earnings per share for the years prior to 1998 do not reflect the
earnings attributable to the Class H common stock on a historical basis;
rather, they present the financial results that would have been achieved
relative to the Class H common stock had they been calculated on the
performance of the telecommunications and space businesses of Hughes'
predecessor.
11
<PAGE>
GM Summary Consolidated Financial Data
GM's board of directors has approved the complete separation of Delphi
Automotive Systems Corporation from GM. Prior to 1999, Delphi was a business
segment of GM. The first step of the separation was an initial public offering
of about 17.7% of Delphi's common stock in February 1999. GM will complete the
separation on May 28, 1999, principally by means of a pro rata dividend of
Delphi common stock to holders of GM's $1 2/3 common stock. The following
statement of operations data for each of the three years in the period ended
December 31, 1998 and the following balance sheet data as of December 31, 1998
and 1997 has been derived from GM's consolidated financial statements,
reflecting Delphi Automotive Systems Corporation as discontinued operations,
which have been audited by Deloitte & Touche LLP, independent auditors. The
statement of operations data for each of the two years in the period ended
December 31, 1995 and the balance sheet data as of December 31, 1996, 1995 and
1994 were derived from the unaudited consolidated financial statements of GM,
reflecting Delphi Automotive Systems Corporation as discontinued operations
and, in the opinion of management, include all adjustments necessary to present
fairly such data. The following summary consolidated financial data also
reflects Electronic Data Systems Corporation as discontinued operations for the
periods presented prior to its June 7, 1996 split-off from GM.
You should read the data below in conjunction with GM's Current Reports
on Form 8-K dated April 12, 1999 and filed on April 15, 1999 and April 21,
1999, which included restated consolidated financial statements for GM and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations to reflect Delphi Automotive Systems Corporation as discontinued
operations and which are incorporated herein by reference.
12
<PAGE>
<TABLE>
<CAPTION>
As of or for the years ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total net sales and revenues... $155,445 $172,580 $158,281 $154,954 $143,740
Income from continuing
operations before cumulative
effect of accounting changes.. 3,049 6,483 4,100 4,726 3,633
(Loss) Income from discontinued
operations.................... (93) 215 863 2,207 2,026
Cumulative effect of accounting
changes....................... (52) (758)
-------- -------- -------- -------- --------
Net income.................. $ 2,956 $ 6,698 $ 4,963 $ 6,881 $ 4,901
======== ======== ======== ======== ========
$1 2/3 common stock
Basic earnings per share
(EPS) from continuing
operations................... $ 4.40 $ 8.52 $ 5.08 $ 5.57 $ 3.59
Basic (loss) EPS from
discontinued operations...... (0.14) 0.18 0.98 1.71 1.63
Diluted EPS from continuing
operations................... 4.32 8.45 5.04 5.52 3.54
Diluted (loss) EPS from
discontinued operations...... (0.14) 0.17 0.98 1.69 1.61
Cash dividends declared per
share........................ 2.00 2.00 1.60 1.10 0.80
Class H common stock subsequent
to the Hughes transactions
Basic EPS from continuing
operations................... 0.68 0.02
Diluted EPS from continuing
operations................... 0.68 0.02
Class H common stock prior to
the Hughes transactions
Basic EPS from continuing
operations................... 2.30 1.83 1.39 1.46
Basic EPS from discontinued
operations................... 0.87 1.05 1.38 1.16
Diluted EPS from continuing
operations................... 2.30 1.83 1.39 1.46
Diluted EPS from discontinued
operations................... 0.87 1.05 1.38 1.16
Cash dividends declared per
share........................ 1.00 0.96 0.92 0.80
Class E common stock
Basic EPS from discontinued
operations................... 0.04 1.96 1.71
Diluted EPS from discontinued
operations................... 0.04 1.96 1.71
Cash dividends declared per
share........................ 0.30 0.52 0.48
Balance Sheet Data:
Total assets................... $246,345 $221,400 $215,690 $208,898 $186,141
Long-term debt................. 7,118 5,669 5,352 4,100 5,047
GM-obligated mandatorily
redeemable preferred
securities of subsidiary
trusts........................ 220 222
Stockholders' equity........... 15,052 17,584 23,413 23,310 12,814
</TABLE>
The earnings per share amounts for Class H common stock subsequent to the
Hughes transactions present the earnings attributable to Class H common stock
subsequent to its recapitalization on December 17, 1997, related to Hughes,
consisting principally of its direct-to-home broadcast, satellite services,
satellite systems and network systems businesses.
The earnings per share amounts for Class H common stock prior to the
Hughes transactions present the earnings attributable to Class H common stock
prior to its recapitalization on December 17, 1997, related to Hughes'
predecessor, consisting principally of its defense electronics, automotive
electronics and telecommunications and space businesses.
Long-term debt totals are calculated from GM's automotive, satellite and
wireless communications and other operations only.
13
<PAGE>
Recent Developments
Hughes' Financial Results for the First Quarter of 1999. Hughes' revenues
for the first quarter of 1999 were $1,451.8 million, compared with $1,291.0
million in the first quarter of 1998, a 12.5% increase. This increase was due
primarily to the Direct-to-Home Broadcast segment, where revenues increased
43.5% to $556.6 million from $387.9 million in the first quarter of 1998. This
increase resulted from continued strong subscriber growth, as well as strong
average monthly revenue per subscriber in the United States.
Hughes' earnings were $78.3 million, or $0.20 per share of Class H common
stock, in the first quarter of 1999 versus $44.5 million, or $0.11 per share of
Class H common stock, in the same period last year. First quarter earnings,
excluding one-time items, were $40.1 million in 1999 compared to $53.7 million
in the same period for 1998, resulting in earnings per share of Class H common
stock of $0.10 and $0.13 for the first quarter of 1999 and 1998, respectively.
Excluding one-time items, the declines in earnings and earnings per share of
Class H common stock were primarily due to lower interest income and higher
depreciation and amortization expenses.
One-time items in the first quarter of 1999 were a $94.3 million after-
tax, or $154.6 million pre-tax, gain related to the settlement of a patent
infringement case and a $56.1 million after-tax, or $92.0 million pre-tax,
charge related to the Asia-Pacific Mobile Telecommunications contract
termination. See "Hughes Management's Discussion and Analysis--General." The
one-time item in the first quarter of 1998 was a $9.2 million after-tax charge
for the cumulative effect of an accounting change mandated by the American
Institute of Certified Public Accountants for the write-off of previously
capitalized start-up costs.
With respect to Hughes' balance sheet, the cash balance declined $562.1
million in the quarter to $780.0 million as of March 31, 1999, primarily due to
working capital requirements, purchase of the Tempo ground spare satellite, and
PanAmSat's early buy-out of satellite sale-leasebacks, which were partially
offset by proceeds from the settlement of the patent infringement case with the
United States government. See "Hughes Management's Discussion and Analysis--
General." Long-term debt increased $77.9 million to $856.6 million principally
from an increase in PanAmSat's commercial paper borrowings to fund its
satellite fleet expansion and PanAmSat's early buy-out of sale-leasebacks.
GM's Financial Results for the First Quarter of 1999. For the first
quarter of 1999, GM reported an all-time quarterly record of $3.10 basic
earnings per share of $1 2/3 common stock on consolidated net income of $2.1
billion. That compares with net income of $1.6 billion, or $2.31 per share of
$1 2/3 common stock, in the first quarter of 1998. The results include Delphi
Automotive Systems which, as described above, is being spun off as an
independent company and is now classified by GM as a discontinued operation.
Excluding Delphi, net income and earnings per share of $1 2/3 common stock from
continuing operations were an all-time quarterly record of $1.8 billion, or
$2.73 basic earnings per share. That compares with $1.4 billion, or $1.96 per
share of $1 2/3 common stock from continuing operations in the first quarter of
1998.
14
<PAGE>
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this prospectus before deciding to invest in
the Class H common stock. The following risks relate principally to:
. The business of Hughes; and
. GM's dual-class common stock capital structure.
The risks and uncertainties described below are not the only ones facing
GM, Hughes and your investment. You should carefully review the information
set forth elsewhere in this prospectus and in the documents incorporated by
reference in this prospectus. Additional risks and uncertainties not presently
known to us or that we currently believe to be immaterial may also adversely
affect GM, Hughes and your investment in Class H common stock.
If any of the following risks and uncertainties develop into actual
events, Hughes' business, financial condition or results of operations could
be materially adversely affected. In such case, the trading price of the Class
H common stock could decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Hughes' actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by Hughes described below and elsewhere in
this prospectus.
Risk Factors Relating to the Business of Hughes
Hughes Will Be Adversely Affected If It Fails to Maintain Leading
Technological Capabilities
The rapid technological changes and innovation inherent in the satellite
and wireless communications industry could cause the products and services
offered by Hughes to become obsolete. If the new technologies on which Hughes
is currently focusing its research and development investments fail to achieve
acceptance in the marketplace, Hughes would suffer a material adverse effect
on its future competitive position and results of operations. For example,
competitors of Hughes could be the first to obtain proprietary technologies
that are perceived by the market as being superior. In addition, after
substantial research and development expenditures, one or more of the
technologies under development by Hughes could become obsolete even prior to
its introduction.
Hughes' operating results will depend to a significant extent on its
ability to continue to introduce new products and services on a timely basis
and to reduce costs of existing products and services. We cannot assure you
that Hughes will successfully identify new product or service opportunities
and develop and market these opportunities in a timely or cost-effective
manner. The success of new product development depends on many factors,
including proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of competitors and market
acceptance.
Technological innovation depends, to a significant degree, on the work
of technically skilled employees. Competition for the services of such
employees is vigorous. We cannot assure you that Hughes will be able to
attract and retain these employees. If Hughes were unable to attract and
maintain technically skilled employees, its competitive position could be
adversely affected.
Hughes Could Have Inadequate Access to Capital for Growth
Hughes may not be able to raise adequate capital to complete some or all
of its business strategies or to react rapidly to changes in technology,
products, services or the competitive landscape.
15
<PAGE>
Hughes believes that key success factors in the satellite and wireless
communications industry include superior access to capital and financial
flexibility. Industry participants often face high capital requirements in
order to take advantage of new market opportunities, respond to rigorous
competitive pressures and react quickly to changes in technology. For example,
as a result of its competitive environment, DIRECTV may have to incur increased
subscriber acquisition costs through competitive offers in the future to
maintain its market leadership.
Hughes expects the global satellite and wireless communications services
market to continue to grow due to the high demand for communications
infrastructure and the opportunities created by industry deregulation. Many of
Hughes' competitors are committing substantial capital and, in many instances,
are forming alliances to acquire or maintain market leadership. Hughes'
strategy is to be a leader in providing satellite and wireless communications
products and services by building on its experience in satellite technology and
by making acquisitions and establishing, maintaining and restructuring
strategic alliances as appropriate. See "Business of Hughes--Acquisitions,
Strategic Alliances and Divestitures." This strategy will require substantial
investments of capital over the next several years. Hughes may be unable to
satisfy its capital requirements in the future, whether through lack of
competitive access to capital markets, GM's overall financial condition,
restrictions imposed by GM or otherwise. GM's ability to issue Class H common
stock as a means of funding Hughes' capital requirements may be limited in the
event of the enactment of a proposal to amend the Internal Revenue Code that is
included in the Clinton administration's budget proposal for the fiscal year
2000. This amendment, which is proposed to apply to tracking stock, including
exercises of existing employee stock options, issued on or after the date of
enactment, would require GM to recognize gain for federal income tax purposes
when it issues Class H common stock.
Hughes Is Vulnerable to Satellite Failure
DIRECTV, including the PRIMESTAR operations, PanAmSat and other Hughes
businesses own or utilize satellites in their businesses. The complete or
partial loss of a satellite, in-orbit or during launch, could have a material
adverse impact on the operation of these Hughes businesses. Orbiting satellites
are subject to the risk of failing prematurely due to, among other things,
mechanical failure, a collision with objects in space or an inability to
maintain proper orbit. Satellites are subject to the risk of launch delay and
failure, destruction and damage while on the ground or during launch and
failure to become fully operational once launched. With respect to both in-
orbit and launch problems, insurance carried by PanAmSat and Hughes does not
compensate for business interruption or loss of future revenues or customers.
In addition, any future in-orbit failures involving satellites built by Hughes
could adversely impact satellite sales by Hughes Space and Communications.
These risks were highlighted during 1998, when four Hughes-built
satellites, three owned and operated by PanAmSat and the fourth owned by
DIRECTV, experienced the failure of a primary spacecraft control processor.
With the exception of the Galaxy IV satellite owned and operated by PanAmSat,
control of the satellites was automatically switched to a backup processor and
the spacecraft are operating normally. The backup processor on the Galaxy IV
satellite had previously failed, resulting in the loss of the satellite. An
extensive investigation by Hughes revealed that electrical shorts involving
tin-plated relay switches were the most likely cause of the primary spacecraft
control processor failure. The failure of the backup control processor on
Galaxy IV appears to be unrelated and is being treated as an isolated anomaly.
Hughes believes the probability of a primary and a backup processor failing in
one satellite is low, however there can be no assurance that additional
spacecraft control processor failures will not occur.
Battery anomalies have occurred in two other Hughes-built PanAmSat
satellites. In both cases, battery cells have failed, resulting in the need to
briefly shut off a number of transponders during twice-yearly eclipse periods.
It is possible that service to full-time customers could be interrupted for
brief periods during future eclipse periods, or that additional battery cell
failures will occur in the future. Such future service interruptions, depending
on their extent, could result in claims by affected customers for termination
of their transponder agreements.
16
<PAGE>
In addition, following the launch of another PanAmSat satellite that was
not built by Hughes, an error by the satellite's manufacturer was discovered
that affected the geographical coverage or flexibility of a number of the
transponders on the satellite. PanAmSat is evaluating the impact of the error
and currently believes that a portion of those transponders will not be
marketable for their intended purpose, although the affected transponders may
be capable of generating revenue at a reduced rate.
Grand Jury Investigation/State Department Review Could Result in
Sanctions
There is a pending grand jury investigation into whether Hughes should be
indicted for criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the failure of a Long March rocket in
China in 1996. Hughes is also subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participation in government
contracts. Hughes does not expect the grand jury investigation or State
Department review to result in a material adverse effect upon its business.
However, there can be no assurance as to those conclusions. In addition, a
congressional committee chaired by Representative Cox has prepared a report
that is expected to be publicly released during May 1999. This report may
contain negative commentary about the compliance of U.S. satellite
manufacturers, including Hughes, with the export control laws.
The U.S. Government Could Adversely Impact the Ability of the U.S.
Satellite Industry to Compete for Foreign Satellite Commerce
The U.S. government has broad discretion over the issuance of export
licenses for the sale to foreign customers and/or overseas launches of
commercial communication satellites. Hughes sells a substantial number of
satellites to foreign customers and launches a substantial number of satellites
overseas. Effective March 1999, Congress directed that satellites and their
components be placed on the munitions list and made subject to the export
licensing jurisdiction of the State Department. Prior to March 1999, satellites
were classified as dual-use exports under the jurisdiction of the Department of
Commerce. It is anticipated that future licenses for satellite exports will not
be granted in the same manner and time frame as was previously the case, which
could adversely impact the ability of not only Hughes, but all other domestic
satellite manufacturers, to compete on equal footing with international
satellite manufacturers for foreign satellite sales.
In February 1999, the Department of Commerce notified Hughes that it
intended to deny the export licenses required by Hughes to fulfill its
contractual obligations to Asia-Pacific Mobile Telecommunications Satellite
Pte. Ltd., a Singapore-based company with a majority interest held by Chinese
entities. As a result, Asia-Pacific Mobile Telecommunications and Hughes
terminated the contract, resulting in a pre-tax charge to Hughes' earnings of
$92.0 million in the first quarter of 1999. See "Hughes Management's Discussion
and Analysis--General."
Disputes with Raytheon Regarding Former Defense Operations Could Result
in a Material Payment from Hughes to Raytheon
As part of the 1997 spin-off of the defense electronics business of
Hughes' predecessor and the subsequent merger of that business with Raytheon,
agreements entered into by Hughes and Raytheon provided processes for resolving
disputes that might arise in connection with post-closing financial adjustments
that were also called for by the terms of the merger agreement. Such financial
adjustments
17
<PAGE>
might require a cash payment from Raytheon to Hughes or vice versa. A dispute
currently exists regarding the post-closing adjustments that Hughes and
Raytheon have proposed to one another and related issues regarding the
completeness and accuracy of disclosures made to Raytheon in the period prior
to consummation of the merger. In an attempt to resolve the dispute, Hughes
gave notice to Raytheon to commence the arbitration process specified in the
merger agreement. Raytheon responded by filing an action in the Delaware
Chancery Court which seeks to enjoin the arbitration as premature. That
litigation is now inactive and Raytheon and Hughes are now proceeding with the
dispute resolution process. It is possible that the ultimate resolution of the
post-closing financial adjustment and of related disclosure issues may result
in Hughes making a payment to Raytheon that would be material to Hughes.
However, the amount of any payment that either party might be required to make
to the other cannot be determined at this time. Hughes intends to vigorously
pursue resolution of the disputes through the arbitration process, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that it
has proposed.
Hughes Might Fail to Realize the Benefits of Recent Acquisitions
There can be no assurance that the anticipated benefits of the
PRIMESTAR/Tempo Satellite and U.S. Satellite Broadcasting Company acquisitions
will be realized. Hughes could experience difficulties integrating the
operations of these companies with its own operations, or could find that the
anticipated cost savings from such integration do not materialize.
Risk Factors Relating to GM's Dual-Class Common Stock Capital Structure
Class H Stockholders Have No Direct Interest in Hughes
Class H stockholders are stockholders of GM and, as a result, have rights
in the equity and assets of GM rather than Hughes. Although the net income of
Hughes is allocated for accounting purposes to calculate the amounts which may
be used to pay dividends on each class of GM common stock, such allocation does
not result in a physical segregation of the assets of GM or Hughes, or the
establishment of separate accounts or dividend or liquidation preferences. If a
liquidation, insolvency or similar event occurred with respect to Hughes,
creditors of Hughes, as well as GM as the sole stockholder of Hughes, would
receive payment from the assets of Hughes. The holders of Class H common stock
would not be entitled to any payment from the assets of Hughes. See
"Description of Class H Common Stock."
We Cannot Assure You That Cash Dividends Will Ever Be Paid on the Class H
Common Stock
We cannot assure you that cash dividends will ever be paid on the Class H
common stock and such stock may not be an appropriate investment for you if you
wish to receive a dividend. Since the completion of the restructuring of Hughes
in late 1997, the GM board has not paid, and does not currently intend to pay,
cash dividends on the Class H common stock. Future earnings of Hughes are
expected to be retained for the development of the businesses of Hughes. The GM
board reserves the right to reconsider from time to time its policies and
practices regarding dividends on the Class H common stock and to pay or not to
pay, or increase or decrease the dividends paid on the Class H common stock, if
any, on the basis of GM's consolidated financial position, including liquidity
and other factors, such as the earnings and consolidated results of operations
and financial condition of Hughes. See "Description of Class H Common Stock--GM
Restated Certificate of Incorporation Provisions Regarding Dividends" and "--
Dividend Policy."
18
<PAGE>
The Interests of GM's Other Common Stockholders May Conflict With the
Interests of Class H Stockholders
The holders of Class H common stock may have different interests than the
holders of GM's other class of common stock, its $1 2/3 common stock, with
respect to various intercompany transactions and other matters. Although these
two classes of common stock are both stocks of GM, they have separate dividend
rights pertaining to earnings of GM attributable to Hughes. Under Delaware law,
the GM board owes an equal fiduciary duty to all holders of GM common stock and
must act with due care and on an informed basis in the best interests of GM and
all of its common stockholders. It is not clear how these fiduciary duties
would be applied in the context of a capital structure involving multiple
classes or series of tracking stock, such as GM's. The officers and directors
of GM may pursue policies and practices or transactions that are different from
those that they would pursue if the Class H common stock was the only class of
common stock of GM. The GM board, in the discharge of its fiduciary duties,
oversees, principally through its capital stock committee, the policies,
programs and practices of GM which may give rise to conflicts of interest
between GM's two classes of common stock. However, we cannot assure you as to
the resolution of any such conflicts. See "Overview of GM Capital Stock," which
contains the policy statement of the GM board with respect to certain capital
stock matters.
The Trading Price of Class H Common Stock Could Be Adversely Affected by
GM's Results
The trading prices of the Class H common stock and the $1 2/3 common
stock are generally affected by different events. A transaction which is
beneficial to the holders of $1 2/3 common stock may not positively affect the
trading price of the Class H common stock, which historically in general has
been affected more by the results of Hughes rather than those of GM. However,
if GM were to experience a significant financial or other setback, this could
have an adverse effect on the trading price of the Class H common stock as well
as the $1 2/3 common stock.
GM Board Policies and Practices Relating to Class H Common Stock Can Be
Changed Without Stockholder Approval
The GM board has adopted a policy statement governing matters relating to
its dual-class common stock capital structure. This statement is subject to
change at any time without stockholder approval. The policy statement sets
forth principles to guide the board's actions relating to, among other things,
transactions between GM and Hughes and the relationship between dividends, if
any, to be paid by Hughes to GM and by GM to the Class H stockholders. The GM
board may adopt additional policies, practices or policy statements which could
have a significant impact on the Class H common stock, in each case without the
approval of GM's common stockholders.
Your Class H Common Stock May Be Converted to GM $1 2/3 Common Stock
Without Your Consent
All outstanding shares of Class H common stock are potentially subject to
mandatory recapitalization into shares of GM $1 2/3 common stock. Any
recapitalization would significantly change both the form and nature of your
investment in Class H common stock, without your consent. Any recapitalization
can be effected at a 120% exchange ratio at any time after December 31, 2002 in
the sole discretion of the GM board, or automatically, if GM disposes of 80% or
more of the business of Hughes to a person, entity or group of which GM is not
the majority owner. See "Description of Class H Common Stock--Recapitalization
and Certain Other Transactions." We cannot predict the impact on the market
price of the $1 2/3 common stock that any exercise by GM of its
recapitalization right would have. Consistent with GM's restated certificate of
incorporation, applicable corporate law and the GM board policy statement
referred to above, the GM board may submit from time to time to the GM common
stockholders for their consideration and approval one or more alternative
transactions on terms different from those provided for by these provisions
concerning recapitalization of Class H common stock at a 120% exchange ratio.
See "Description of Class H Common Stock--Recapitalization and Certain Other
Transactions."
19
<PAGE>
USE OF PROCEEDS
GM will receive net proceeds from this offering of about $ million, or
about $ million if the underwriters exercise their over-allotment option in
full. GM will contribute such proceeds to the capital of Hughes. Hughes will
use these funds, together with an additional $500 million to be contributed to
it by GM on or about the closing of the offering, principally to repay debt
that it incurred in connection with the PRIMESTAR/Tempo Satellite and U.S.
Satellite Broadcasting Company transactions. Of this debt, $500 million is in
the form of loans provided by affiliates of some of the underwriters. These
loans mature on April 17, 2000, and bear interest at a floating rate which as
of May 3, 1999 was 4.91%. The remaining debt being repaid is in the form of
other short term borrowings. Any funds remaining after payment of this debt and
all related interest and fees will be used for general corporate purposes.
CLASS H COMMON STOCK PRICE RANGE
The table below shows the range of reported per share sale prices on the
New York Stock Exchange Composite Tape for the Class H common stock for the
periods indicated. Due to the restructuring of Hughes late in 1997 and the
related recapitalization of the Class H common stock, no price data is
presented for any period prior to 1998.
<TABLE>
<CAPTION>
Calendar Year High Low
------------- ------ ------
<S> <C> <C>
1998
First Quarter............................................. $48.00 $31.50
Second Quarter............................................ 57.88 42.75
Third Quarter............................................. 50.81 35.00
Fourth Quarter............................................ 42.38 30.38
1999
First Quarter............................................. $53.00 $38.50
Second Quarter (through May 4, 1999)...................... 57.38 49.31
</TABLE>
Since the completion of the restructuring of Hughes in late 1997, GM has
not paid dividends on the Class H common stock and does not expect to do so in
the foreseeable future. Future earnings of Hughes are expected to be retained
for the development of the business of Hughes. See "Description of Class H
Common Stock--Dividend Policy."
20
<PAGE>
PRO FORMA CONSOLIDATED CAPITALIZATION OF HUGHES
The following table sets forth the capitalization of Hughes and its
consolidated subsidiaries at December 31, 1998 and as adjusted to reflect the
pro forma effects of:
. the merger of Hughes with U.S. Satellite Broadcasting Company,
. Hughes' acquisition of PRIMESTAR's direct broadcast satellite
medium-power business and related high-power satellite assets of
Tempo Satellite;
. the offering and the use of proceeds therefrom, and
. the $500 million contribution to Hughes from GM to be consummated
substantially simultaneously with this offering and the use of
such funds by Hughes,
as if each of these transactions had occurred on December 31, 1998. The
following table should be read in conjunction with Hughes' financial
statements, including the notes thereto, "Unaudited Pro Forma Combined
Condensed Hughes Financial Information" and "Hughes Management's Discussion and
Analysis," which are included in this prospectus. See also the "Description of
Class H Common Stock--Detailed Calculation of Amount Available for Dividends on
Class H Common Stock" section of this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------
Offering and
Acquisitions Contribution
Historical Pro Forma Pro Forma Pro Forma Pro Forma
Hughes Adjustments Combined Adjustments Combined
---------- ------------ --------- ------------ ---------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Notes and loans
payable................ $ 935 $ 887(a) $ 1,822 $(887)(c) $ 935
------ ------ ------- ----- -------
Minority interests...... 482 482 482
------ ------ ------- ----- -------
Owner's Equity
Capital stock and
additional paid-in
capital................ 8,146 233(a) 9,349 985 (d) 10,334
970(b)
Net income retained for
use in the business.... 258 258 258
------ ------ ------- ----- -------
Subtotal.............. 8,404 1,203 9,607 985 10,592
Minimum pension
liability adjustment... (37) (37) (37)
Accumulated foreign
currency translation
adjustments............ 16 16 16
Net unrealized gains on
investments in certain
debt and equity
securities............. (1) (1) (1)
------ ------ ------- ----- -------
Total Owner's Equity.. 8,382 1,203 9,585 985 10,570
------ ------ ------- ----- -------
Total Capitalization.. $9,799 $2,090 $11,889 $ 98 $11,987
====== ====== ======= ===== =======
Average number of shares
of Class H common stock
outstanding (in
millions) (numerator).. 105.3 4.9(a) 128.5 9.0 (d) 137.5
18.3(b)
Class H dividend base
(in millions)
(denominator).......... 399.9 4.9(a) 423.1 18.0 (d) 441.1
18.3(b)
</TABLE>
21
<PAGE>
NOTES TO UNAUDITED
PRO FORMA CONSOLIDATED CAPITALIZATION OF HUGHES
a. To record incremental short-term debt incurred by Hughes to finance the
PRIMESTAR/Tempo Satellite acquisition. For purposes of the accompanying pro
forma consolidated capitalization table, it is assumed that $592 million of
the cash consideration was funded through available Hughes cash and $887
million was financed through Hughes' commercial paper program and a short-
term bridge loan.
The remaining consideration was settled through the issuance of 4.9 million
shares of Class H common stock. Hughes acquired these shares from GM for a
cash payment which was funded by Hughes with a capital contribution from
GM. In connection therewith, the GM board increased the Class H dividend
base by the number of shares issued.
b. To record the exchange consideration for the U.S. Satellite Broadcasting
Company merger. The total purchase price will be based on the average price
of Class H common stock for the 20 consecutive trading days ending on and
including the second trading day before the U.S. Satellite Broadcasting
Company merger is consummated. For purposes of the pro forma consolidated
capitalization table, the share price is assumed to be $53.05. Accordingly,
based on this price, U.S. Satellite Broadcasting Company shareholders would
receive $18.00 for each share of U.S. Satellite Broadcasting Company stock
owned.
Holders of U.S. Satellite Broadcasting Company stock may elect to receive
consideration in the form of Class H common stock or the cash equivalent.
However, not more than 50% of the total consideration will be payable in
cash, and not more than 70% of the total consideration will be in the form
of Class H common stock. For purposes of the accompanying pro forma
consolidated capitalization table, it is assumed that 60% of the total
consideration will be paid in Class H common stock ($970 million) and 40%
in cash ($646 million), which is assumed to be funded through available
cash at December 31, 1998. Accordingly it is also assumed that 18.3 million
shares of Class H common stock will be issued in the U.S. Satellite
Broadcasting Company merger. Hughes will acquire these shares from GM for a
cash payment, which will be funded by Hughes with a capital contribution
from GM. In connection therewith, the GM board will increase the Class H
dividend base by the number of shares issued. As the purchase price remains
fixed if the Class H common stock price exceeds $47.68, the ultimate number
of shares of Class H common stock issued to effect the U.S. Satellite
Broadcasting Company merger may decrease.
c. To reflect the pay down of short-term debt with proceeds from the offering
and the contribution of funds by GM.
d. To reflect the estimated net proceeds of the offering and the contribution
by GM.
The estimated net proceeds from the offering will be approximately $485
million, assuming no exercise of the underwriters' over-allotment option.
GM will contribute these proceeds to Hughes. The average number of shares
of Class H common stock outstanding and the Class H dividend base will be
increased by the number of shares sold in the offering, which, based on an
assumed share price of $55.50, would be 9.0 million.
The Class H dividend base will be further increased to reflect the
contribution of an additional $500 million by GM. The actual increase to
the Class H dividend base as a result of this contribution will be
determined based on the price per share of Class H common stock in this
offering. For purposes of the pro forma consolidated capitalization table,
the share price is assumed to be $55.50. Accordingly, the contribution by
GM will increase the Class H dividend base by an additional 9.0 million.
22
<PAGE>
HUGHES SELECTED FINANCIAL DATA
The following selected historical financial data have been derived from
the financial statements of Hughes. The data should be read in conjunction with
Hughes' financial statements and notes thereto which are contained elsewhere in
this prospectus and the "Hughes Management's Discussion and Analysis" section
of this prospectus. The statement of operations data for the periods ended
December 31, 1998, 1997, 1996, 1995 and 1994 and balance sheet data as of
December 31, 1998, 1997, 1996 and 1995 have been derived from the financial
statements of Hughes audited by Deloitte & Touche LLP, independent auditors.
The balance sheet data as of December 31, 1994 has been derived from the
unaudited financial statements of Hughes. In the opinion of management, the
unaudited financial statements reflect all adjustments, consisting only of
normal recurring items, that are necessary for the fair presentation of the
financial portion and results of operations for such periods.
<TABLE>
<CAPTION>
As of or for the Years Ended
December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
(in millions, except per share
amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues....................... $ 5,964 $ 5,128 $4,009 $3,153 $2,697
Costs and expenses................... 5,694 4,822 3,799 2,981 2,462
Amortization of GM purchase
accounting adjustments.............. 21 21 21 21 21
------- ------- ------ ------ ------
Total operating costs and
expenses......................... 5,715 4,843 3,820 3,002 2,483
------- ------- ------ ------ ------
Operating profit..................... 249 285 189 151 214
Interest expense..................... 17 91 43 61 52
Other (expense) income, net.......... (41) 424 76 8 (9)
------- ------- ------ ------ ------
Income from continuing operations
before income taxes and minority
interests........................... 191 618 222 98 153
Income tax (benefit) expense......... (45) 237 105 31 56
Minority interests in net losses of
subsidiaries........................ 24 25 53 4
------- ------- ------ ------ ------
Income from continuing operations
before extraordinary item and
cumulative effect of accounting
changes............................. 260 406 170 71 97
Income (loss) from discontinued
operations, net of taxes............ 1 (7) (65) (54)
Gain on sale of discontinued
operations, net of taxes............ 63
Extraordinary item, net of taxes..... (20)
Cumulative effect of accounting
change.............................. (9) (2)
------- ------- ------ ------ ------
Net income.......................... 251 450 163 6 41
Adjustments to exclude the effect
of GM purchase accounting
adjustments........................ 21 21 21 21 21
------- ------- ------ ------ ------
Earnings used for computation of
available separate consolidated net
income.............................. $ 272 $ 471 $ 184 $ 27 $ 62
======= ======= ====== ====== ======
Earnings per share attributable to
Class H common stock(1):
Basic and diluted earnings per
share from continuing operations
before extraordinary item and
cumulative effect of accounting
change............................. $ 0.70 $ 1.07 $ 0.48 $ 0.23 $ 0.30
Discontinued operations............. 0.16 (0.02) (0.16) (0.14)
Extraordinary item.................. (0.05)
Cumulative effect of accounting
change............................. (0.02)
------- ------- ------ ------ ------
Basic and diluted earnings per
share.............................. $ 0.68 $ 1.18 $ 0.46 $ 0.07 $ 0.16
======= ======= ====== ====== ======
Cash dividends declared per share....
Balance Sheet Data:
Total assets......................... $13,435 $12,731 $4,373 $3,942 $3,609
Long-term debt....................... 779 683
Owner's equity....................... 8,382 8,312 2,492 2,609 2,301
Other Data:
EBITDA(2)............................ $ 704 $ 602 $ 405 $ 352 $ 375
Depreciation and amortization........ 455 317 216 201 161
Capital expenditures................. 1,429 827 449 442 399
</TABLE>
- --------
(1) Earnings per share for the years prior to 1998 do not reflect the earnings
attributable to Class H common stock on a historical basis; rather, they
present the financial results that would have been achieved relative to the
Class H common stock had they been calculated on the performance of the
telecommunications and space businesses of the predecessor of Hughes.
23
<PAGE>
(2) "EBITDA" is defined as operating profit, plus depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in accordance
with generally accepted accounting principles. Hughes management believes
it is a meaningful measure of performance and is commonly used by other
large communications, entertainment and media service providers. See
"Business of Hughes--Strategy--Focus on Key Performance Measurements."
EBITDA does not give effect to cash used for debt service requirements and
thus does not reflect funds available for investment in the business of
Hughes, dividends or other discretionary uses. In addition, EBITDA as
presented herein may not be comparable to similarly titled measures
reported by other companies.
24
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED HUGHES FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
have been prepared from the historical consolidated financial statements of
Hughes, U.S. Satellite Broadcasting Company, PRIMESTAR and TCI Satellite
Entertainment, the parent company of Tempo Satellite, to give effect to:
. the merger of Hughes and U.S. Satellite Broadcasting Company;
. Hughes' acquisition of PRIMESTAR's direct broadcast satellite
medium-power business and related high-power satellite assets of
Tempo Satellite;
. this offering and the use of proceeds therefrom; and
. the $500 million contribution to Hughes from GM to be consummated
substantially simultaneously with this offering and the use of
such funds by Hughes.
The unaudited pro forma combined condensed statement of income (loss)
from continuing operations reflects adjustments as if these transactions had
each taken place on January 1, 1998. The unaudited pro forma combined condensed
balance sheet reflects adjustments as if these transactions had each occurred
on December 31, 1998. The pro forma adjustments described in the accompanying
notes are based on preliminary estimates and various assumptions that Hughes
management believes are reasonable in these circumstances.
The unaudited pro forma combined condensed statement of income (loss)
from continuing operations does not give effect to any cost savings that may be
realized from the PRIMESTAR/Tempo Satellite acquisition and the merger with
U.S. Satellite Broadcasting Company, which savings relate primarily to the
reduction of duplicative operating, general and administrative expenses.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the Hughes financial statements, including the notes
thereto, located in the appendix to this prospectus and the U.S. Satellite
Broadcasting Company, PRIMESTAR and TCI Satellite Entertainment financial
statements, including the notes thereto, which are incorporated by reference
into this prospectus, each as of and for the period ended December 31, 1998.
25
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. SATELLITE PRIMESTAR/ OFFERING AND
HISTORICAL BROADCASTING TEMPO GM
U.S. MERGER PRO PRO ACQUISITION PRO CONTRIBUTION PRO
HISTORICAL SATELLITE FORMA FORMA HISTORICAL PRO FORMA FORMA PRO FORMA FORMA
HUGHES BROADCASTING ADJUSTMENTS COMBINED PRIMESTAR/TEMPO ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
------ ------------ ----------- -------- --------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.. $1,342 $ 66 $ (646)(a) $ 762 $ 887 (i) $ 170 $ (887) (t) $ 268
(1,479)(j) 985 (u)
Accounts and notes
receivable, net......... 922 48 (19)(b) 951 $ 140 1,091 1,091
Contracts in process (less
advances and progress
payments)............... 784 784 784
784
Other current assets...... 798 9 807 4 811 811
------- ------ ------- ------- --------- --------- ------- ------ --------
Total Current Assets........ 3,846 123 (665) 3,304 144 (592) 2,856 98 2,954
Satellites, net............. 3,198 37 (c) 3,235 463 3,698 3,698
Property, net............... 1,059 59 (37)(c) 1,081 1,148 (15)(j) 2,214 2,214
Intangible assets, net...... 3,552 3,552 317 3,869 3,869
Investments and other assets 1,780 8 (42)(b) 1,746 34 (28)(j) 1,752 1,752
Excess of purchase price over
book value of net
liabilities
acquired.................. 1,670 (a) 1,670 122 (j) 1,792 1,792
------- ------ ------- ------- --------- --------- ------- ------ --------
Total Assets................ $ 13,435 $ 190 $ 963 $ 14,588 $ 2,106 $ (513) $ 16,181 $ 98 $ 16,279
======== ====== ======= ======= ========= ========= ======= ====== ========
LIABILITIES AND
OWNER'S EQUITY
CURRENT LIABILITIES
Accounts payable.......... $ 764 $ 66 $ 830 $ 196 $ 1,026 $ 1,026
Current portion of
long-term
debt.................... 156 156 575 $ (575)(j) 1,043 $ (887)(t) 156
887 (i)
Other current liabilities.. 1,089 91 $ (19)(b) 1,161 252 (50)(j) 1,363 1,363
------- ------ ------- ------- --------- --------- ------- ------ --------
Total Current Liabilities... 2,009 157 (19) 2,147 1,023 262 3,432 (887) 2,545
Long-term debt.............. 779 779 1,258 (1,258)(j) 779 779
Other liabilities and
deferred credits............ 1,139 87 (42)(b) 1,184 41 (41)(j) 1,184 1,184
Deferred income taxes....... 644 644 75 719 719
Minority interests.......... 482 482 482 482
Owner's Equity.............. 8,382 (54) 1,024 (a) 9,352 (291) 524 (j) 9,585 985 (u) 10,570
------- ------ ------- ------- --------- --------- ------- ------ --------
Total Liabilities and Owner's
Equity.................... $13,435 $ 190 $ 963 $14,588 $ 2,106 $ (513) $16,181 $ 98 $16,279
======== ====== ======= ======= ========= ========= ======= ====== ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
condensed financial statements.
26
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF INCOME (LOSS) FROM CONTINUING OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. SATELLITE PRIMESTAR/ OFFERING
HISTORICAL BROADCASTING TEMPO AND GM
U.S. MERGER PRO PRO HISTORICAL ACQUISITION PRO CONTRIBUTION PRO
HISTORICAL SATELLITE FORMA FORMA PRIMESTAR/ PRO FORMA FORMA PRO FORMA FORMA
HUGHES BROADCASTING ADJUSTMENTS COMBINED TEMPO ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
------ ------------------------ -------- ----- ----------- -------- ----------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Product sales................. $3,360 $ 3,360 $ 3,360 $ 3,360
Direct broadcast, leasing and 4,442
other services.............. 2,604 $ 551 $ (3)(b) 3,152 $ 1,290 4,442
------ ------- ----------- ------ -------- --------- --------
Total Revenues................ 5,964 551 (3) 6,512 1,290 7,802 7,802
------ ------- ----------- ------ -------- --------- --------
Operating Costs and Expenses
Cost of products sold......... 2,627 2,627 2,627 2,627
Broadcast programming and
other costs................. 1,176 328 75 (c) 1,579 655 $ 85 (k) 2,319 2,319
Selling, general, and
administrative expenses..... 1,457 267 (75)(c) 1,624 486 (85)(k) 2,025 2,025
(3)(b)
(22)(d)
Impairment of long-lived
assets...................... 950 (950)(l)
Depreciation and amortization. 455 17 42 (e) 514 543 6(m) 1,083 1,083
20(n)
------ ------- ----------- ------ -------- -------- --------- --------
Total operating costs and 8,054
expenses.................... 5,715 612 17 6,344 2,634 (924) 8,054
------ ------- ----------- ------ -------- -------- --------- --------
Operating Profit (Loss).......... 249 (61) (20) 168 (1,344) 924 (252) (252)
Interest income (expense), net... 95 4 (32)(f) 67 (146) (47)(o) 20 $ 47 (v) 67
146 (p)
Other, net....................... (153) (153) (8) (161) (161)
------ ------- ----------- ------ -------- -------- --------- --------- --------
Income (Loss) from Continuing
Operations Before Income
Taxes and Minority
Interests... 191 (57) (52) 82 (1,498) 1,023 (393) 47 (346)
Income tax benefit (expense)..... 45 27 (g) 72 148 (148)(q) 262 (19)(w) 243
190 (r)
Minority interests in net losses
of subsidiaries............... 24 24 24 24
------ ------- ----------- ------ -------- -------- --------- --------- --------
Income (Loss) from Continuing
Operations Before Cumulative
Effect of Accounting Change... 260 (57) (25) 178 (1,350) 1,065 (107) 28 (79)
Adjustments to exclude the
effect of GM purchase
accounting related to Hughes
Aircraft Company ............. 21 21 21 21
------ ------ --------- --------
Earnings (Loss) Used for
Computation of Available
Separate Consolidated Income
from Continuing Operations
Before Cumulative Effect of
Accounting Change............. $ 281 $ 199 $ (86) $ (58)
====== ====== ========= ========
Available Separate Consolidated
Income (Loss) from Continuing
Operations Before Cumulative
Effect of Accounting Change:
Average number of shares of
GM Class H Common Stock
outstanding (in millions)
(numerator)............... 105.3 18.3 (h) 123.6 4.9 (s) 128.5 9.0 (u) 137.5
Class H dividend base (in
millions) (denominator)(1) 399.9 18.3 (h) 418.2 4.9 (s) 423.1 18.0 (u) 441.1
Available Separate
Consolidated Income
(Loss) from Continuing
Operations Before
Cumulative Effect of
Accounting Change......... $ 74 $ 59 $ (26) $ (18)
------ ------ --------- --------
Earnings (Loss) Per Share from
Continuing Operations Before
Cumulative Effect of
Accounting Change............. $ 0.70 $ 0.48 $ (0.20) $ (0.13)
====== ====== ========= ========
</TABLE>
- -------
(1) See discussion of Class H dividend base in "Description of Class H Common
Stock."
The accompanying notes are an integral part of the unaudited pro forma combined
condensed financial statements.
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited pro forma combined condensed financial
statements have been derived from the historical consolidated financial
statements of Hughes, U.S. Satellite Broadcasting Company, PRIMESTAR and TCI
Satellite Entertainment. The unaudited pro forma combined condensed financial
statements give effect to:
. the merger of Hughes and U.S. Satellite Broadcasting Company;
. Hughes' acquisition of PRIMESTAR's direct broadcast satellite medium-
power business and related high-power satellite assets of Tempo
Satellite, Inc., a wholly owned subsidiary of TCI Satellite
Entertainment;
. this offering and the use of proceeds therefrom; and
. the $500 million contribution to Hughes from GM to be consummated
substantially simultaneously with the offering.
The unaudited pro forma combined condensed statement of income (loss)
from continuing operations presents the historical results of operations of
Hughes, U.S. Satellite Broadcasting Company, PRIMESTAR and TCI Satellite
Entertainment for the year ended December 31, 1998, as if the above- mentioned
transactions had each occurred on January 1, 1998. The unaudited pro forma
combined condensed balance sheet presents the historical balance sheets of
Hughes, U.S. Satellite Broadcasting Company, PRIMESTAR and TCI Satellite
Entertainment as of December 31, 1998, as if the above- mentioned transactions
had each been consummated as of December 31, 1998. The pro forma adjustments
reflected in the accompanying unaudited pro forma combined condensed financial
statements were prepared using the purchase method of accounting.
The unaudited pro forma combined condensed financial statements do not
purport to present the financial position or results of operations of Hughes
had the transactions and events assumed therein occurred on the dates
specified, nor are they necessarily indicative of the results of operations
that may be achieved in the future. The unaudited pro forma combined condensed
statement of income (loss) from continuing operations does not give effect to
any cost savings that may be realized from the PRIMESTAR/Tempo Satellite
acquisition and the merger with U.S. Satellite Broadcasting Company, which
savings relate primarily to the reduction of duplicative operating, general and
administrative expenses.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the Hughes financial statements, including the notes
thereto, located in the appendix to this prospectus, and the U.S. Satellite
Broadcasting Company, PRIMESTAR and TCI Satellite Entertainment audited
financial statements, including the notes thereto, which are incorporated by
reference into this prospectus, each as of and for the period ended December
31, 1998.
Various reclassifications have been made to the historical financial
statements of U.S. Satellite Broadcasting Company, PRIMESTAR and TCI Satellite
Entertainment to conform to the unaudited pro forma combined condensed
financial statement presentation. As more fully described in Note 3 to
PRIMESTAR's 1998 consolidated financial statements, the historical operating
results of PRIMESTAR reflect the operations of its predecessor, TCI Satellite
Entertainment, prior to the restructuring transaction on April 5, 1998.
28
<PAGE>
U.S. Satellite Broadcasting Company Merger Pro Forma Adjustments
The following adjustments, which are set forth in millions, except per
share amounts, give pro forma effect to the U.S. Satellite Broadcasting Company
merger.
a. To record the exchange consideration at closing. The total purchase price
will be based on the average price of Class H common stock for the 20
consecutive trading days ending on and including the second trading day
before the U.S. Satellite Broadcasting Company merger. For purposes of
the pro forma calculation, the share price is assumed to be $53.05.
Accordingly, based on this price, U.S. Satellite Broadcasting Company
shareholders would receive $18.00 for each share of U.S. Satellite
Broadcasting Company stock owned.
For purposes of the accompanying pro forma combined condensed financial
statements, the excess purchase price over book value of net liabilities
acquired has been estimated as follows:
<TABLE>
<S> <C>
Outstanding shares of U.S. Satellite Broadcasting Company
stock.......................................................... 89.8
Consideration per share......................................... $18.00
------
Subtotal--purchase price...................................... 1,616
U.S. Satellite Broadcasting Company net liabilities............. 54
------
Excess of purchase price over net book value of liabilities
acquired....................................................... $1,670
======
</TABLE>
Holders of U.S. Satellite Broadcasting Company stock may elect to
receive consideration in the form of Class H common stock or the cash
equivalent. However, not more than 50% of the total consideration will
be payable in cash, and not more than 70% of the total consideration
will be in the form of Class H common stock. For purposes of the
accompanying pro forma combined condensed financial statements, it is
assumed that 60% of the total consideration will be paid in Class H
common stock ($970) and 40% in cash ($646).
b. To eliminate intercompany transactions between Hughes and U.S. Satellite
Broadcasting Company.
c. To reclassify certain amounts in the historical financial statements of
U.S. Satellite Broadcasting Company to conform to the Hughes
presentation.
d. To eliminate a non-recurring loss recorded by U.S. Satellite Broadcasting
Company during 1998 and to provide for the termination of various
contracts as specified in the U.S. Satellite Broadcasting Company merger
agreement.
e. Hughes has not as yet completed an analysis of the relative fair market
value of U.S. Satellite Broadcasting Company's net liabilities in order
to determine a preliminary allocation of the purchase price to the net
liabilities acquired. Accordingly, the excess of the purchase price over
the carrying value of U.S. Satellite Broadcasting Company's net
liabilities has been presented as a single caption in the accompanying
pro forma combined condensed balance sheet. Hughes believes the vast
majority of the excess will be allocated to U.S. Satellite Broadcasting
Company's FCC licenses and enterprise value goodwill. Both of these
intangible assets are considered to have indefinite lives and will be
amortized over 40 years.
f. To reduce interest income on cash required for the U.S. Satellite
Broadcasting Company merger assuming Hughes' historical interest rate of
5.0% on pro forma adjustment (a) above.
g. Income taxes associated with the pro forma adjustments discussed above
have been calculated at an assumed combined federal and state rate of
40%, excluding amortization associated with the excess purchase price
over book value of net liabilities acquired, which is not deductible for
tax purposes.
29
<PAGE>
The unaudited pro forma combined condensed statement of income (loss)
from continuing operations has also been adjusted to recognize a tax
benefit, at an assumed combined federal and state rate of 40%, for U.S.
Satellite Broadcasting Company's historical losses from continuing
operations for the year ended December 31, 1998. This adjustment
recognizes that, if the U.S. Satellite Broadcasting Company merger had
taken place on January 1, 1998, the tax benefit of U.S. Satellite
Broadcasting Company's losses would have been realized in the
consolidated federal tax return of GM.
h. In connection with the U.S. Satellite Broadcasting Company merger, GM
will contribute to the capital of Hughes an amount of cash at least
sufficient to enable Hughes to purchase from GM, for fair value as
determined by the GM board, the number of shares of Class H common stock
to be delivered to U.S. Satellite Broadcasting Company shareholders in
the merger. In connection therewith, the GM board will increase the Class
H dividend base by the number of shares issued, which for purposes of
this pro forma presentation is assumed to be 18.3 million based on the
assumptions described in note (a) above, including that the Class H
common stock price is $53.05.
PRIMESTAR/Tempo Satellite Acquisition Pro Forma Adjustments
The following adjustments, which are set forth in millions, except per
share amounts, give pro forma effect to the PRIMESTAR/Tempo Satellite
acquisition:
i. To record incremental debt incurred by Hughes to finance the
PRIMESTAR/Tempo Satellite acquisition. For purposes of the accompanying
pro forma combined condensed financial statements, it is assumed that
$592 of the cash consideration was funded through available Hughes cash
and $887 was financed through Hughes' commercial paper program and a
short-term bridge loan. The remaining consideration was settled through
the issuance of 4.9 million shares of Class H common stock.
j. To record the exchange consideration at closing. The total purchase price
of $1,833 will be adjusted upon consummation of the PRIMESTAR/Tempo
Satellite acquisition based upon the net working capital of PRIMESTAR (as
defined in the PRIMESTAR asset purchase agreement) at closing. For
purposes of this pro forma calculation, the December 31, 1998 net working
capital of PRIMESTAR, a liability of $121, was used to calculate the
exchange consideration of the PRIMESTAR/Tempo Satellite acquisition
($1,712).
For purposes of the accompanying pro forma combined condensed financial
statements, the excess purchase price over book value of net assets
acquired has been estimated as follows:
<TABLE>
<S> <C> <C>
Exchange consideration of PRIMESTAR/Tempo Satellite
acquisition............................................ $1,712
Less book value of PRIMESTAR
Historical book value of PRIMESTAR.................... $ (291)
Less: excluded assets................................. (43)
Plus: excluded liabilities............................ 1,924
------
Subtotal.............................................. 1,590
------
Preliminary excess purchase cost over net book value of
assets acquired (see note m, below).................... $ 122
======
</TABLE>
As defined in the PRIMESTAR asset purchase agreement, excluded assets
include high-power direct broadcast satellite inventory and deferred
loan costs. Excluded liabilities include debt and related interest
payable, restructuring accruals and employee-related liabilities.
k. To reclassify certain amounts in the historical financial statements of
PRIMESTAR to conform to the Hughes presentation.
30
<PAGE>
l. To eliminate a non-recurring impairment loss and related income tax
benefit recorded by PRIMESTAR during 1998 to reduce the carrying amount
of certain assets to their net realizable values based upon the assumed
purchase price of the PRIMESTAR/Tempo Satellite acquisition.
m. Hughes has not as yet completed an analysis of the relative fair market
value of the net assets acquired from PRIMESTAR and Tempo Satellite in
order to determine a preliminary allocation of the purchase price.
Accordingly, the excess of the purchase price over the carrying value of
the net assets acquired from PRIMESTAR and Tempo Satellite has been
presented as a single caption in the accompanying pro forma combined
condensed balance sheet. For purposes of the accompanying condensed
combined statement of income (loss) from continuing operations, such
excess is being amortized using an estimated weighted-average composite
life of 20 years.
n. To record depreciation on the in-orbit satellite acquired by Hughes in
connection with the PRIMESTAR/Tempo Satellite acquisition over the
estimated remaining useful life of 12 years.
o. To reflect interest expense associated with the incremental debt incurred
by Hughes to finance the PRIMESTAR/Tempo Satellite acquisition. For
purposes of pro forma calculation, Hughes' historical interest rate of
LIBOR + 0.25% (5.3% in total) was used to compute interest on the
incremental debt discussed in pro forma adjustment (i) above.
p. To reduce interest expense associated with PRIMESTAR debt not assumed by
Hughes.
q. To eliminate PRIMESTAR's historical income tax benefit recorded in
connection with PRIMESTAR's restructuring consummated during 1998.
r. Income taxes associated with the pro forma adjustments discussed above
have been calculated at an assumed combined federal and state rate of
40%. Since the PRIMESTAR/Tempo Satellite acquisition is a taxable
transaction, amortization of any goodwill generated is expected to be
deductible over 15 years for income tax purposes.
The unaudited pro forma combined condensed statement of income (loss)
from continuing operations has also been adjusted to recognize a tax
benefit, at an assumed combined federal and state rate of 40%, for
PRIMESTAR's historical losses from continuing operations for the year
ended December 31, 1998. This adjustment recognizes that, if the
PRIMESTAR/Tempo Satellite acquisition had taken place on January 1,
1998, the tax benefit of PRIMESTAR's and Tempo Satellite's losses would
have been realized in the consolidated federal tax return of GM.
s. Based on the PRIMESTAR asset purchase agreement, 4.9 million shares of
Class H common stock were issued to effect the PRIMESTAR acquisition.
Hughes acquired these shares from GM for a cash payment, which was funded
by Hughes with a capital contribution from GM. In connection therewith,
the GM board increased the Class H dividend base by 4.9 million.
Offering and GM Contribution Adjustments
t. To reflect the pay down of short-term debt with proceeds from the
offering and the contribution of funds by GM.
u. To reflect the estimated net proceeds of the offering and the
contribution by GM.
The estimated net proceeds from the offering will be approximately $485
million, assuming no exercise of the underwriters' over-allotment
option. GM will contribute these proceeds to Hughes. The average number
of shares of Class H common stock outstanding and the Class H dividend
base will be increased by the number of shares sold in the offering,
which, based on an assumed share price of $55.50, would be 9.0 million.
31
<PAGE>
The Class H dividend base will be further increased to reflect the
contribution of an additional $500 million by GM. The actual increase to
the Class H dividend base as a result of this contribution will be
determined based on the price per share of Class H common stock in this
offering. For purposes of this pro forma adjustment, the share price is
assumed to be $55.50. Accordingly, the contribution by GM will increase
the Class H dividend base by an additional 9.0 million.
v. To reduce interest expense for the result of the pay down of short-term
debt assuming Hughes' historical interest rate of 5.3%. See pro forma
adjustment (t) above.
w. To reflect the income tax effects of a reduction in interest expense that
resulted from the pay down of short-term debt at an assumed combined
federal and state tax rate of 40%.
32
<PAGE>
HUGHES MANAGEMENT'S DISCUSSION AND ANALYSIS
As provided in GM's restated certificate of incorporation, the earnings
attributable to Class H common stock for purposes of determining the amount
available for the payment of dividends on Class H common stock excludes
purchase accounting adjustments related to GM's acquisition of Hughes Aircraft
Company, a predecessor of Hughes, in 1985. Therefore, the following discussion
excludes such adjustments. You should review this section in connection with
Hughes' unaudited summary financial statements, which exclude these
adjustments, and Hughes' audited financial statements, which reflect these
adjustments, both of which are included in Appendix A to this prospectus. See
also "Prospectus Summary--Recent Developments."
General
On December 17, 1997, Hughes' predecessor, which was also known as Hughes
Electronics Corporation, and GM completed a series of transactions designed to
address strategic challenges facing its then-three principal businesses and
unlock stockholder value in GM. These transactions included:
. the tax-free spin-off of its defense electronics business to
holders of GM $1 2/3 common stock and Class H common stock;
. the transfer of Delco Electronics Corporation, its automotive
electronics business, to GM's Delphi Automotive Systems unit,
which is now a separate corporation; and
. the recapitalization of GM Class H common stock into a new
tracking stock of the same name, that is linked to Hughes'
telecommunications and space businesses.
These transactions were followed immediately by the merger of the defense
electronics business with Raytheon Company. In connection with this
recapitalization, the telecommunications and space business, consisting
principally of the direct-to-home broadcast, satellite services, network
systems and satellite systems businesses, were contributed to the recapitalized
Hughes by its predecessor. The following discussion and accompanying financial
statements pertain only to Hughes as it now exists, and do not pertain to
balances of Hughes for the period prior to its recapitalization, the defense
electronics business or Delco. For additional information on the basis of
presentation, see Note 1 to the Hughes financial statements included elsewhere
in this prospectus.
In May 1997, Hughes and PanAmSat Corporation merged their respective
satellite service operations into a new publicly-held company, which retained
the name PanAmSat Corporation. As a result of this merger, Hughes' 1997
financial information includes PanAmSat's results of operations from the date
of merger. For further information regarding this merger, see note 14 to
Hughes' financial statements included elsewhere in this prospectus.
During 1998, four Hughes-built satellites experienced the failure of a
primary spacecraft control processor. Three of these satellites were owned and
operated by PanAmSat and the fourth was owned by DIRECTV. With the exception of
the Galaxy IV satellite, operated by PanAmSat, control of the satellites was
automatically switched to the spare control processor and the spacecraft are
operating normally. The spare control processor on the Galaxy IV satellite had
previously failed, resulting in the loss of the satellite.
An extensive investigation by Hughes revealed that electrical shorts
involving tin-plated relay switches are the most likely cause of the primary
control processor failures. Although there exists the possibility of failure of
other currently operating spacecraft control processors, Hughes believes the
probability of a primary and spare control processor failing in any one in-
orbit HS-601 satellite is low. Hughes is confident that the phenomenon will not
be repeated on satellites currently being built and those ready for launch,
although there can be no assurance in this regard. The failure of the second
control processor on Galaxy IV appears to be unrelated and is being treated as
an isolated anomaly.
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Battery anomalies have occurred on two other Hughes-built PanAmSat
satellites. In both cases, battery cells have failed resulting in the need to
shut-off a number of transponders for a brief time during twice-yearly eclipse
periods. To date, the impact on customers has been minimal. There can be no
assurance, however, that service to all full-time customers will not be
interrupted for brief periods during future eclipse periods or that additional
battery cell failures will not occur in the future. Such future service
interruptions, depending on their extent, could result in a claim by affected
customers for termination of their transponder agreements or the displacement
of other customers. PanAmSat is developing solutions for its customers that may
include transition of the affected services to other PanAmSat satellites or the
launch of replacement satellites.
In August 1998, Galaxy X, a PanAmSat satellite, was destroyed as a result
of the launch failure of a Boeing Delta III rocket. Galaxy X was fully insured.
On February 24, 1999, the Department of Commerce notified Hughes that it
intended to deny a U.S. government export license Hughes was required to obtain
in connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. for the provision of a satellite-based mobile
telecommunications system. As a result, Asia-Pacific Mobile Telecommunications
and Hughes terminated the contract on April 9, 1999, which led to Hughes
recording a pre-tax charge to earnings of $92 million in the first quarter of
1999.
Hughes has maintained a suit against the U.S. government since September
1973 regarding the U.S. government's infringement and use of a Hughes satellite
technology patent. On April 7, 1998, the U.S. Court of Appeals for the Federal
Circuit reaffirmed earlier decisions in this case, including awarding $114.0
million in damages, plus interest. In March 1999, Hughes received and
recognized, as other income, net, a $154.6 million payment from the U.S.
government as a final settlement of the suit.
Results of Operations
1998 compared to 1997
Revenues. 1998 revenues increased 16.3% to $5,963.9 million compared with
$5,128.3 million in 1997. Each of Hughes' four primary business segments
contributed to the growth in revenue, including continued strong subscriber
growth in the Direct-to-Home Broadcast segment, the effect of the PanAmSat
merger and increased operating lease revenues for video, data and Internet-
related services in the Satellite Services segment, increased sales of
DIRECTV(TM) receiver equipment in the Network Systems segment and increased
sales of commercial satellites in the Satellite Systems segment.
Direct-to-Home Broadcast segment revenues for 1998 increased 42.2% to
$1,816.1 million from $1,276.9 million in 1997. The large increase in revenues
resulted from record U.S. subscriber growth, increased average monthly revenue
per subscriber and low subscriber churn rates. Domestic DIRECTV was the biggest
contributor to this growth, with revenues of $1,604.1 million for 1998, a 45.4%
increase over prior year's revenues of $1,103.3 million. Hughes' Latin American
DIRECTV subsidiary, Galaxy Latin America, LLC, had revenues of $141.3 million
compared with $70.0 million in 1997. Total DIRECTV subscribers as of December
31, 1998 were 4,458,000 in the United States and 484,000 in Latin America. In
addition, Hughes' unconsolidated affiliate, DIRECTV Japan, which initiated its
service in December 1997, had a total of 231,000 subscribers as of December 31,
1998.
Revenues for the Satellite Services segment in 1998 increased 21.8% to
$767.3 million from $629.9 million in 1997. The increase in revenues was due to
the May 1997 PanAmSat merger and increased operating lease revenues from the
commencement of service agreements for full-time video distribution, as well as
short-term special events and an increase in data and Internet-related service
agreements. The increase was partially offset by a decrease in sales and sales-
type lease revenues.
Revenues in 1998 for the Network Systems segment were $1,076.7 million
compared with $1,011.3 million in 1997. The increase in revenues resulted from
the growth in sales of DIRECTV
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receiver equipment and the increased sales of private business networks and
satellite-based mobile telephony equipment offset by lower international sales
of wireless telephone systems and private business networks, primarily in the
Asia Pacific region.
Satellite Systems segment revenues increased 13.6% in 1998 to $2,831.1
million from $2,491.9 million in 1997, primarily due to higher commercial
satellite sales to customers such as Thuraya Satellite Telecommunications
Company, PanAmSat, ICO Global Communications and Orion Asia Pacific
Corporation.
Operating Profit. Operating profit, excluding amortization of purchase
accounting adjustments related to GM's acquisition of Hughes, was $270.1
million in 1998 compared with $306.4 million in 1997. Full-year 1998 operating
profit margin on the same basis was 4.5% compared with 6.0% in 1997. The lower
1998 operating profit and operating profit margin resulted principally from
lower sales of wireless telephone systems and private business networks in the
Asia Pacific region, as well as provisions for estimated losses at Hughes
Network Systems associated with uncollectible amounts due from certain wireless
customers. Also contributing to the decline was goodwill amortization
associated with the May 1997 PanAmSat merger and the additional May 1998
investment in PanAmSat.
The operating loss in the Direct-to-Home Broadcast segment in 1998 was
$228.1 million compared with an operating loss of $254.6 million in 1997. The
full-year 1998 operating loss for domestic DIRECTV was $100.0 million compared
with $137.0 million in 1997. Galaxy Latin America's operating loss was $125.8
million in 1998 versus $116.0 million in 1997. The lower operating loss for
domestic DIRECTV in 1998 was principally due to increased subscriber revenues
which more than offset increased sales and marketing expenditures.
As a result of the increased revenues described above, the Satellite
Services segment operating profit increased 8.6% to $321.6 million in 1998,
compared with the prior year's operating profit of $296.2 million. Operating
profit margin in 1998 declined to 41.9% from 47.0% in the prior year
principally due to goodwill amortization associated with the PanAmSat merger, a
provision for losses relating to the May 1998 failure of PanAmSat's Galaxy IV
satellite and increased depreciation expense resulting from increased capital
expenditures by PanAmSat.
The Network Systems segment operating profit in 1998 was $10.9 million
versus $74.1 million in 1997 and operating profit margin declined to 1.0% from
7.3% last year. The decrease in operating profit and operating profit margin
was primarily due to a $26 million provision for estimated losses associated
with the bankruptcy filing by a customer, provision for uncollectible amounts
due from certain wireless customers and lower international sales of wireless
telephone systems and private business networks, primarily in the Asia Pacific
region.
Operating profit for the Satellite Systems segment in 1998 was $246.3
million, an increase of 8.8% over $226.3 million in 1997. The increase was
primarily due to the higher commercial satellite sales noted above. The
operating profit margin for the year was 8.7% compared with the 9.1% margin
earned in the prior year.
Costs and Expenses. Selling, general and administrative expenses
increased to $1,457.0 million in 1998 from $1,119.9 million in 1997. The
increase in these expenses resulted primarily from increased marketing and
subscriber acquisition costs in the Direct-to-Home Broadcast segment and
increased expenditures to support the growth in the remaining business
segments. The increase in depreciation and amortization expense to $433.8
million in 1998 from $296.4 million in 1997 resulted from increased goodwill
amortization related to the May 1997 PanAmSat merger and the purchase of an
additional 9.5% interest in PanAmSat in May 1998, and increased capital
expenditures in the Direct-to-Home Broadcast and Satellite Services segments.
Interest Income and Expense. Interest income increased to $112.3 million
in 1998 compared to $33.1 million in 1997, due primarily to higher cash
balances resulting from the recapitalization of
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Hughes. Interest expense decreased $73.5 million to $17.5 million in 1998
versus $91.0 million in 1997, resulting from the repayment at the end of 1997
of debt arising from the PanAmSat merger.
Other, net. Other, net for 1998 relates primarily to losses from
unconsolidated subsidiaries of $128.3 million, attributable principally to
equity investments, including American Mobile Satellite Corporation and DIRECTV
Japan, and a provision for estimated losses associated with bankruptcy filings
by two customers. The amount for 1997 includes the $489.7 million pre-tax gain
recognized in connection with the May 1997 PanAmSat merger offset by losses
from unconsolidated subsidiaries of $72.2 million.
Income Taxes. The effective income tax rate was (21.1)% in 1998 and 37.0%
in 1997. The effective income tax rate in 1998 benefitted from the favorable
adjustment relating to an agreement with the Internal Revenue Service regarding
the treatment of research and experimentation costs for the years 1983 through
1995.
Discontinued Operations and Extraordinary Item. On December 15, 1997,
Hughes Avicom International, Inc. was sold to Rockwell Collins, Inc., resulting
in an after-tax gain of $62.8 million. Hughes recorded an extraordinary after-
tax charge of $20.6 million in 1997 related to the refinancing of PanAmSat's
debt. For additional information see Note 6 to the Hughes financial statements
included elsewhere in this prospectus.
Accounting Changes. In 1998, Hughes adopted American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities. Statement of Position 98-5 requires that all start-up
costs previously capitalized be written off and recognized as a cumulative
effect of accounting change, net of taxes, as of the beginning of the year of
adoption. On a prospective basis, these types of costs are required to be
expensed as incurred. The unfavorable cumulative effect of this accounting
change at January 1, 1998 was $9.2 million after-tax, or $0.02 per share of GM
Class H common stock.
Earnings. 1998 earnings were $271.7 million, or $0.68 per share of GM
Class H common stock, compared with 1997 earnings of $470.7 million, $1.18 per
share of GM Class H common stock on a pro forma basis. 1997 earnings per share
are presented on a pro forma basis assuming the recapitalized GM Class H common
stock was outstanding for all of 1997. For further discussion see Note 13 to
the Hughes financial statements included elsewhere in this prospectus.
Backlog. The 1998 year-end backlog of $10,064.9 million decreased from
the $10,337.6 million reported at the end of 1997, primarily due to a decrease
in the Satellite Services segment.
1997 compared to 1996
Revenues. 1997 revenues increased 27.9% to $5,128.3 million compared with
$4,008.7 million in 1996. The increase reflects strong subscriber growth in the
Direct-to-Home Broadcast segment, increased revenues in the Satellite Services
segment resulting primarily from the PanAmSat merger and increased sales on
commercial satellite programs in the Satellite Systems segment.
Direct-to-Home Broadcast segment revenues more than doubled to $1,276.9
million from $621.0 million in 1996. This increase resulted from strong
subscriber growth and continued low subscriber churn rates. Domestic DIRECTV
fueled this growth with revenues of $1,103.3 million, a 78.5% increase over
1996 revenues of $618.2 million. Galaxy Latin America, LLC 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
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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 in total transmission capability since the May
merger.
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.
Satellite Systems segment revenues increased 21.2% in 1997 to $2,491.9
million from $2,056.4 million in 1996, primarily due to higher commercial
satellite sales within the high-powered product line of satellites and on the
ICO Global Communications satellite contracts.
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. Galaxy Latin America's operating loss was $116.0
million in 1997 versus $131.0 million in 1996. The lower operating losses in
1997 were principally due to increased subscriber revenues which more than
offset higher marketing and subscriber related expenditures.
The Satellite Services segment operating profit was $296.2 million in
1997, an increase of 22.2% over the prior year's operating profit of $242.4
million. The increase resulted primarily from the PanAmSat merger and increased
operating lease revenues for both video distribution and business
communications services. Operating profit margin in 1997 declined to 47.0% from
50.2% in 1996, principally due to goodwill amortization associated with the
PanAmSat merger.
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% in 1996. These decreases were primarily the result of lower domestic
mobile cellular telephone equipment sales, increased research and development
expenditures and higher marketing expenditures associated with the launch of
the DirecPC(R)/DirecDuo(TM) products.
Operating profit for the Satellite Systems segment in 1997 was $226.3
million, an increase of 23.5% over $183.3 million in 1996. The increase was
primarily due to the higher commercial program sales noted above. The operating
profit margin for the year was 9.1% compared with 8.9% in the prior year.
Costs and Expenses. Selling, general and administrative expenses
increased to $1,119.9 million in 1997 from $788.5 million in 1996. The increase
resulted principally from the PanAmSat merger, increased programming and
subscriber acquisition costs in the Direct-to-Home Broadcast segment and
increased research and development and marketing expenditures in the Network
Systems segment. The increase in depreciation and amortization expense to
$296.4 million in 1997 from $194.6 million in 1996 resulted from increased
goodwill amortization related to the PanAmSat merger and additional satellite
depreciation in 1997.
Interest Income and Expense. Interest income increased $26.3 million in
1997 compared to 1996 due primarily to higher cash balances resulting from the
PanAmSat merger as well as increased cash resulting from the recapitalization
of Hughes. 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
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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 Hughes financial
statements included elsewhere in this prospectus.
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, or $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. For further discussion in Note 13 to the Hughes financial statements
included elsewhere in this prospectus.
Backlog. The 1997 year-end backlog of $10,337.6 million increased from
the $6,780.5 million reported at the end of 1996, primarily due to the PanAmSat
merger.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents were $1,342.1 million at December 31, 1998
compared to $2,783.8 million at December 31, 1997. The decrease in cash
resulted primarily from the purchase of an additional 9.5% interest in
PanAmSat, expenditures for PanAmSat and DIRECTV satellites, other equity
investments and cash paid to GM for a post-closing price adjustment related to
the transfer of Delco Electronics Corporation as part of the 1997 restructuring
transactions, offset in part by proceeds from insurance claims related to the
loss of the Galaxy IV and Galaxy X satellites.
Cash provided by continuing operations was $875.2 million in 1998,
compared to $10.5 million in 1997 and $367.4 million in 1996. The change in
1998 from 1997 resulted primarily from increased revenues and a decrease in
working capital, while the change in 1997 from 1996 resulted primarily from an
increase in working capital.
Net cash used in investing activities was $2,253.3 million in 1998,
$2,231.5 million in 1997 and $80.5 million in 1996. The increase in 1998
reflects the purchase of an additional 9.5% interest in PanAmSat, the early
buy-out of satellite sale-leasebacks at PanAmSat and an increase in
expenditures for satellites compared to 1997, offset in part by proceeds from
insurance claims related to the loss of the Galaxy IV and Galaxy X satellites.
The increase in 1997 reflects the repurchase of AT&T's 2.5% equity interest in
DIRECTV, the PanAmSat merger, and an increase in satellites and equity
investments compared to 1996, offset by proceeds received from the sale of
Hughes Avicom and the sale of investments.
Net cash used in financing activities was $63.6 million in 1998, compared
with net cash provided by financing activities of $5,014.0 million in 1997 and
net cash used in financing activities of $279.8 million in 1996. 1998 financing
activities include the payment to General Motors for the Delco post-closing
price adjustment, offset in part by net long-term borrowings. 1997 financing
activities reflect the impact of the PanAmSat merger, the recapitalization of
Hughes and cash contributions from pre-
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recapitalization Hughes, while the 1996 amount consisted of cash distributions
to pre-recapitalization Hughes.
Liquidity Measurement
As a measure of liquidity, the current ratio, which is the ratio of
current assets to current liabilities, at December 31, 1998 and 1997 was 1.91
and 3.29, respectively. Working capital decreased by $1,486.4 million to
$1,836.9 million at December 31, 1998 from $3,323.3 million at December 31,
1997. The change in working capital resulted principally from the decrease in
cash discussed above.
Property and Satellites
Property, net of accumulated depreciation, increased $169.5 million to
$1,059.2 million in 1998 from $889.7 million in 1997. Satellites, net of
accumulated depreciation, increased $554.1 million to $3,197.5 million in 1998
from $2,643.4 million in 1997. The increase in property and satellites resulted
primarily from the construction of an additional broadcast center and increased
capital expenditures for satellites. Capital expenditures, including
expenditures related to satellites, increased to $1,428.5 million in 1998 from
$826.6 million in 1997. The increase reflects additions to property and
equipment to support revenue growth at various Hughes' businesses, as well as
additional satellites to support future operations, the replacement of certain
satellites, including Galaxy X, and to provide spare satellites as part of
Hughes' satellite sparing strategy.
Dividend Policy and Use of Cash
As discussed in Note 13 to the Hughes financial statements included
elsewhere in this prospectus, since the completion of the recapitalization of
Hughes in late 1997, the GM board has not paid, and does not currently intend
to pay in the foreseeable future, cash dividends on its Class H common stock.
Similarly, since such time, Hughes has not paid dividends to GM and does not
currently intend to do so in the foreseeable future. Future Hughes earnings, if
any, are expected to be retained for the development of the businesses of
Hughes. Expected cash requirements in 1999 relate to capital expenditures for
property and equipment and expenditures for additional satellites of
approximately $1.9 billion, the early buy-out of satellite sale-leasebacks, the
funding of business acquisitions, including the acquisitions discussed below,
and additional equity investments. These cash requirements are expected to be
funded from a combination of existing cash balances, amounts available under
existing credit facilities, additional borrowings and equity offerings, as
needed, and this offering and the related equity contribution from GM. Also,
although Hughes may be required to make a cash payment to or receive a cash
payment from Raytheon Company arising from the merger of the Hughes defense
electronics business with Raytheon, the amount of a cash payment to or from
Raytheon, if any, is not determinable at this time. See further discussion in
Note 18 to the Hughes financial statements included elsewhere herein and in
"Risk Factors--Disputes With Raytheon Regarding Former Defense Operations Could
Result in a Material Payment from Hughes to Raytheon."
Debt and Credit Facilities
In January 1998, PanAmSat issued five, seven, ten and thirty-year notes
totaling $750.0 million. The proceeds received were used by PanAmSat to repay a
revolving credit facility of $500.0 million and bridge loan of $100.0 million.
The outstanding principal balances and interest rates for the five, seven, ten
and thirty-year notes as of December 31, 1998 were $200.0 million at 6.00%,
$275.0 million at 6.13%, $150.0 million at 6.38% and $125.0 million at 6.88%,
respectively. Principal on the notes is payable at maturity, while interest is
payable semiannually.
At December 31, 1998, Hughes' 59.1% owned subsidiary, SurFin, had a total
of $155.9 million outstanding under two separate $150.0 million unsecured
revolving credit facilities. Borrowings under these credit facilities bear
interest at the Eurodollar rate plus 0.15%, and are subject to a facility fee
of
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0.10% per annum. These facilities are expected to be replaced in May 1999 with
a single $400.0 million unsecured revolving credit facility.
At December 31, 1998, other long-term debt of $28.9 million, which
consisted of notes bearing fixed rates of interest of 9.61% to 11.11%, was
outstanding. Principal is payable at maturity in April 2007 while interest is
payable semiannually.
Hughes has $1.0 billion of unused credit available under two unsecured
revolving credit facilities, consisting of a $750.0 million multi-year facility
and a $250.0 million 364-day facility. The multi-year credit facility provides
for a commitment of $750.0 million through December 5, 2002, subject to a
facility fee of 0.07% per annum. Borrowings bear interest at a rate which
approximates the London Interbank Offered Rate, or LIBOR, plus 0.155%. The 364-
day credit facility provides for a commitment of $250.0 million through
December 1, 1999, subject to a facility fee of 0.05% per annum. Borrowings bear
interest at a rate which approximates LIBOR plus 0.25%, with an additional
0.125% utilization fee when borrowings exceed 50% of the commitment. No amounts
were outstanding under either facility at December 31, 1998. These facilities
provide back-up capacity for Hughes' $1.0 billion commercial paper program. No
amounts were outstanding under the commercial paper program at December 31,
1998. Hughes expects to issue between $500 million and $1 billion of publicly
registered notes in the third and fourth quarters of 1999.
PanAmSat maintains a $500.0 million multi-year revolving credit facility
that provides for short-term and long-term borrowings and a $500.0 million
commercial paper program that provides for short-term borrowings. The multi-
year revolving credit facility provides for a commitment through December 24,
2002, subject to a facility fee of 0.10% per annum. Borrowings bear interest at
a rate which approximates LIBOR plus 0.30%. Borrowings under the credit
facility and commercial paper program are limited to $500.0 million in the
aggregate. No amounts were outstanding under either agreement at December 31,
1998.
Acquisitions and Divestitures
On , 1999, Hughes acquired by merger all of the outstanding
capital stock of U.S. Satellite Broadcasting Company, a provider of
subscription television via the digital broadcasting system that it shares with
DIRECTV, for cash and shares of Class H common stock totaling $ billion.
The former shareholders of U.S. Satellite Broadcasting Company, within a
limited range, have the right to elect to receive consideration in the form of
Class H common stock or the cash equivalent. Not more than 50% of the total
consideration will be payable in cash and not more than 70% of the total
consideration will be in the form of Class H common stock. Accordingly, the
cash paid by Hughes will be between $ and $ and between
shares and shares of Class H common stock will be issued.
Hughes will account for the U.S. Satellite Broadcasting Company acquisition
using the purchase method of accounting.
On April 28, 1999, Hughes acquired PRIMESTAR's medium-power direct-to-
home business. In a related transaction, Hughes also agreed on January 22, 1999
to acquire the high-power satellite assets and direct-broadcast satellite
orbital frequencies of Tempo Satellite. The transactions will be accounted for
using the purchase method of accounting. The purchase price for the direct-to-
home business consisted of $1.1 billion in cash and 4,871,448 shares of GM
Class H common stock, for a total purchase price of $1.33 billion, based on the
average market price of $47.87 per share of Class H common stock at the time
the acquisition agreement was signed. The purchase price for the Tempo
Satellite assets consists of $500.0 million in cash. Of this purchase price,
$150.0 million was paid on March 10, 1999 for a satellite that has not yet been
launched. The remaining $350.0 million is for an in-orbit satellite and related
satellite orbital frequencies. Such amount is payable upon Federal
Communications Commission approval of the transfer of the 11 frequencies, which
is expected in mid-1999. There can be no assurance that the Federal
Communications Commission will approve this transfer or that this portion of
the Tempo Satellite transaction will be consummated.
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In February 1999, Hughes acquired an additional ownership interest in
Grupo Galaxy Mexicana, S.A. de C.V., a Galaxy Latin America local operating
company located in Mexico, from Grupo MVS, S.A. de C.V. Hughes' equity
ownership represents 49.0% of the voting equity and all of the non-voting
equity of Grupo Galaxy Mexicana. The transaction will be accounted for using
the purchase method of accounting. The increased ownership resulted in
consolidation of Grupo Galaxy Mexicana since the date of acquisition. As part
of the transaction, in October 1998 Hughes acquired from Grupo MVS an
additional 10.0% interest in Galaxy Latin America, increasing its ownership
interest to 70.0%, as well as an additional 19.8% interest in SurFin, a company
providing financing of subscriber receiver equipment for certain local
operating companies located in Latin America and Mexico, increasing its
ownership percentage from 39.3% to 59.1%. The Galaxy Latin America and SurFin
transactions were accounted for using the purchase method of accounting. The
increased ownership in SurFin resulted in its consolidation since the date of
acquisition. The aggregate purchase price for the transactions was $197.0
million in cash.
In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for
$851.4 million in cash, increasing Hughes' ownership interest in PanAmSat from
71.5% to 81.0%.
In May 1997, Hughes and PanAmSat completed the merger of their respective
satellite service operations into a new publicly-held company, which retained
the name PanAmSat Corporation. Hughes contributed its Galaxy(R) satellite
services business in exchange for a 71.5% interest in the new company. Existing
PanAmSat stockholders received a 28.5% interest in the new company and $1.5
billion in cash. Such cash consideration and other funds required to consummate
the merger were funded by new debt financing totaling $1,725.0 million borrowed
from GM, which was subsequently repaid in December 1997.
On December 15, 1997, Hughes sold substantially all of the assets and
liabilities of the Hughes Avicom business to Rockwell Collins, Inc. for cash,
which resulted in an after-tax gain of $62.8 million. Hughes Avicom is treated
as a discontinued operation for all periods presented.
In March 1996, Hughes sold a 2.5% equity interest in DIRECTV to AT&T for
$137.5 million, with options to increase AT&T's ownership interest under
certain conditions. The sale resulted in a $120.3 million pre-tax gain, which
was included in other income. In December 1997, Hughes repurchased from AT&T
the 2.5% equity interest in DIRECTV for $161.8 million, ending AT&T's marketing
agreement to distribute the DIRECTV(R) direct-broadcast satellite television
service and DIRECTV(TM) receiver equipment and its options to increase its
ownership in DIRECTV.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires all derivatives to
be recorded as either assets or liabilities and the instruments to be measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives are to be recognized immediately or deferred depending on the use
of the derivative and whether or not it qualifies as a hedge. Hughes plans to
adopt this statement by January 1, 2000, as required. Management is currently
assessing the impact of this statement on Hughes' results of operations and
financial position.
Year 2000
Many computer technologies made or used by Hughes throughout its business
have the potential for operational problems if they lack the ability to handle
the transition to the Year 2000. Computer technologies include both information
technology in the form of hardware and software, as well as non-information
technology which includes embedded technology such as microprocessors.
Because of the potential disruption that this issue could cause to
Hughes' business operations and its customers, a comprehensive, company-wide,
Year 2000 program was initiated in 1996 to identify
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and remediate potential Year 2000 problems. The Year 2000 program addresses
both information technology and non-information technology systems related to
internal systems and Hughes' products and services.
Hughes' Year 2000 program is being implemented in seven phases, some of
which are being conducted concurrently:
(1) Awareness--establish project teams made up of project leaders from
each Hughes operating company, assign responsibilities and establish awareness
of Year 2000 issues. The awareness phase has been completed.
(2) Inventory--identify all systems within Hughes, determine if they are
critical and identify responsible personnel for compliance. The inventory phase
has been completed. Many of Hughes' systems are already Year 2000 compliant, or
had already been scheduled for replacement as part of Hughes' ongoing systems
plans.
(3) Assessment--categorize all systems and determine activities that are
required to achieve compliance, including contacting and assessing the Year
2000 readiness of material third party vendors and suppliers of hardware and
software. The assessment phase is substantially complete. All critical systems
have been identified in this phase and are the primary focus of the project
teams. Critical systems identified requiring remediation include satellite
control and communication software, broadcast systems, systems utilized in
customer service/billing, engineering and manufacturing operations. Hughes has
also identified the need to upgrade network control software for customers who
have maintenance agreements with Hughes. Hughes' in-orbit satellites do not
have date-dependent processing.
(4) Remediation--modify, repair or replace categorized systems.
Remediation has begun on many systems and is targeted for completion by the end
of the second quarter of 1999, with the exception of satellite control software
and teleport data router hardware and software, which are expected to be
completed early in the fourth quarter of 1999. The remediation tasks for the
satellite control software and ground stations delivered by Hughes are being
coordinated with Raytheon, the supplier.
(5) Testing--test remediated systems to assure normal function when
placed in their original operating environment and further test for Year 2000
compliance. Overall testing is completed at approximately the same time as
remediation due to the overlap of the remediation and testing phases. Testing
is currently underway and is expected to be a primary focus of the project
teams over the next several quarters. Hughes expects to complete this phase
shortly after the remediation phase, with ongoing review and follow-up.
(6) Implementation--once a remediated system and its interfaces have been
successfully tested, the system will be put into its operating environment. A
number of remediated systems have already been put back into operations. The
remaining remediated systems will be put into operations during 1999.
(7) Contingency Planning--development and execution of plans that narrow
the focus on specific areas of significant concern and concentrate resources to
address them. All Year 2000 critical systems are expected to be Year 2000
compliant by the end of 1999. However, Hughes is in the process of developing
contingency plans to address the risk of any system not being Year 2000
compliant and expects to complete such plans in the third quarter of 1999.
Hughes currently believes that the most reasonably likely worst case scenario
is a temporary loss of functionality in satellite control and communication
software. The loss of real-time satellite control software functionality would
be addressed through the use of back-dated processors or through manual
procedures but could result in slightly higher operating costs until the Year
2000 problems are corrected.
Hughes is utilizing both internal and external resources for the
remediation and testing of its systems that are undergoing Year 2000
modification. Hughes' Year 2000 program is on schedule. Hughes has incurred and
expensed approximately $2.0 million through 1997 and approximately $7.0 million
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during 1998 related to the assessment of, and ongoing efforts in connection
with, its Year 2000 program. Future spending for system remediation and testing
subsequent to December 31, 1998 is currently estimated to be from $15 million
to $19 million, with the majority of the expense expected to be incurred during
the second quarter of 1999. Each Hughes operating company is funding its
respective Year 2000 efforts with current and future operating cash flows.
Hughes has mailed Year 2000 verification request letters to its suppliers
and other third parties and is coordinating efforts to assess and reduce the
risk that Hughes' operations could be adversely affected by the failure of
these third parties to adequately address the Year 2000 issue. A high
percentage of the third parties have replied and a large number of Hughes'
third parties' systems are Year 2000 compliant or are expected to be Year 2000
compliant in a timely manner. For those third party systems that are not yet
Year 2000 compliant, Hughes will continue to identify action plans or
alternatives to meet Hughes' requirements.
In view of the foregoing, Hughes does not currently anticipate that it
will experience a significant disruption of its business as a result of the
Year 2000 issue. However, there is still uncertainty about the broader scope of
the Year 2000 issue as it may affect Hughes and third parties that are critical
to Hughes' operations. For example, lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure could pose significant impediments to Hughes' ability to
carry on its normal operations. If the modifications and conversions required
to make Hughes Year 2000 ready are not made or are not completed on a timely
basis and in the event that Hughes is unable to implement adequate contingency
plans in the event that problems are encountered internally or externally by
third parties, the resulting problems could have a material adverse effect on
Hughes' results of operations and financial condition.
Security Ratings
In March 1999, Standard and Poor's Rating Services lowered the long-term
debt rating of Hughes from A- to BBB. The Standard and Poor's BBB credit rating
indicates the issuer has adequate capacity to pay interest and repay principal.
Additionally, Standard and Poor's affirmed its A-2 rating on Hughes' commercial
paper. The A-2 commercial paper rating is the third highest category available
and indicates a strong degree of safety regarding timely payment. Standard and
Poor's ratings outlook for Hughes remains developing.
In April 1999, Moody's Investors Service lowered the long-term credit
rating of Hughes from Baa1 to Baa2. The Baa2 rating for senior debt indicates
medium-grade obligations with adequate likelihood of interest and principal
payment and principal security. 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. Moody's ratings outlook for Hughes' long-term and short-term
debt is stable.
Debt ratings by the various rating agencies reflect each agency's opinion
of the ability of issuers to repay debt obligations punctually. The lowered
ratings reflect increased financial leverage at Hughes resulting from a
significant acceleration of its growth initiatives, including the recent
PRIMESTAR/Tempo and U.S. Satellite Broadcasting Company transactions,
PanAmSat's satellite deployment and restoration plan, and the investment in
Spaceway. Lower ratings generally result in higher borrowing costs. A security
rating is not a recommendation to buy, sell, or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other
rating.
Market Risk Disclosure
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially
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from such assumptions because the amounts noted below are the result of
analyses used for the purpose of assessing possible risks and the mitigation
thereof. Accordingly, the forward-looking statements should not be considered
projections by Hughes of future events or losses.
General
Hughes' cash flows and earnings are subject to fluctuations resulting
from changes in foreign currency exchange rates, interest rates and changes in
the market value of its equity investments. Hughes manages its exposure to
these market risks through internally established policies and procedures and,
when deemed appropriate, through the use of derivative financial instruments.
Hughes' policy does not allow speculation in derivative instruments for profit
or execution of derivative instrument contracts for which there are no
underlying exposures. Hughes does not use financial instruments for trading
purposes and is not a party to any leveraged derivatives.
Foreign Currency Risk
Hughes generally conducts its business in U.S. dollars with a small
amount of business conducted in a variety of foreign currencies and therefore
is exposed to fluctuations in foreign currency exchange rates. Hughes'
objective in managing the exposure to foreign currency changes is to reduce
earnings and cash flow volatility associated with foreign exchange rate
fluctuations to allow management to focus its attention on its core business
issues and challenges. Accordingly, Hughes primarily enters into foreign
exchange-forward contracts to protect the value of its existing assets,
liabilities and firm commitments. Foreign exchange-forward contracts are legal
agreements between two parties to purchase and sell a foreign currency, for a
price specified at the contract date, with delivery and settlement in the
future. At December 31, 1998, the impact of a hypothetical 10% adverse change
in exchange rates on the fair values of foreign exchange-forward contracts and
foreign currency denominated assets and liabilities would not be significant.
Investments
Hughes maintains investments in publicly-traded common stock of
unaffiliated companies and is therefore subject to equity price risk. These
investments are classified as available-for-sale and, consequently, are
reflected in the balance sheet at fair value with unrealized gains or losses,
net of tax, recorded as part of accumulated other comprehensive income (loss),
a separate component of owner's equity. At December 31, 1998, the fair value of
the investments in such common stock was $8.0 million. The investments were
valued at the market closing price at December 31, 1998. No actions have been
taken by Hughes to hedge this market risk exposure. A 20% decline in the market
price of both investments would cause the fair value of the investments in
common stock to decrease by $1.6 million.
Interest Rate Risk
Hughes is subject to interest rate risk related to its $934.8 million of
debt outstanding at December 31, 1998. Debt, which is classified as held-to-
maturity, consisted of PanAmSat's fixed-rate borrowings of $750.0 million,
SurFin's variable rate borrowings of $155.9 million and Hughes' fixed-rate
borrowings of $28.9 million. Hughes is subject to fluctuating interest rates
which may adversely impact its results of operations and cash flows for its
variable rate bank borrowings. Fluctuations in interest rates may also
adversely affect the market value of Hughes' fixed-rate borrowings. At December
31, 1998, outstanding borrowings bore interest at rates ranging from 5.55% to
11.11%. The potential fair value loss resulting from a hypothetical 10%
decrease in interest rates related to Hughes' outstanding debt would be
approximately $32.5 million.
In connection with debt refinancing activities by PanAmSat in 1997,
PanAmSat entered into certain U.S. Treasury rate lock contracts to reduce its
exposure to fluctuations in interest rates. The aggregate notional value of
these contracts was $375.0 million and these contracts were accounted for as
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hedges. The cost to settle these instruments in 1998 was $9.1 million and is
being amortized to interest expense over the term of the related debt
securities.
Credit Risk
Hughes is exposed to credit risk in the event of non-performance by the
counterparties to its foreign exchange-forward contracts. While Hughes believes
this risk is remote, credit risk is managed through the periodic monitoring and
approval of financially sound counterparties.
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RECENT ACQUISITIONS
Hughes has recently made the following acquisitions:
PRIMESTAR and Tempo Satellite
Hughes acquired the direct-broadcast satellite medium-power business of
PRIMESTAR and agreed to acquire the related high-power satellite assets of
Tempo Satellite, a wholly owned subsidiary of TCI Satellite Entertainment, in
related transactions. PRIMESTAR operates a 160-channel medium-power direct
broadcast service using leased satellite capacity at 85(degrees) west
longitude. As of March 31, 1999, PRIMESTAR had 2.3 million subscribers in the
United States. DIRECTV intends to operate the medium-power PRIMESTAR business
for a period of approximately two years, during which time PRIMESTAR
subscribers will be offered the opportunity to transition to the high-power
DIRECTV service. During this period, PRIMESTAR's distribution network will
continue servicing PRIMESTAR subscribers and begin offering the DIRECTV service
to new subscribers.
The purchase price for the PRIMESTAR medium-power business was about $1.1
billion in cash and about 4.9 million shares of Class H common stock. The
purchase price for the Tempo high-power satellite assets is $500 million in
cash. Of this purchase price, $150 million was paid in March 1999 for a
satellite that has not yet been launched. The remaining $350 million for an in-
orbit satellite and related satellite orbital frequencies is payable upon
Federal Communications Commission approval of the transfer of the 11
frequencies, which is expected in mid-1999. However, there can be no assurance
that this transfer will be approved or that this portion of the Tempo Satellite
transaction will be consummated.
The PRIMESTAR acquisition provides DIRECTV with an immediate increase in
revenues from the existing PRIMESTAR subscribers, and ongoing revenues from
those subscribers that transition to the DIRECTV service.
The Tempo Satellite in-orbit satellite and related frequencies
acquisition, if completed, will provide DIRECTV with 11 high-power DBS
frequencies at 119(degrees) west longitude, from which it can begin delivering
programming to the contiguous United States at any time.
U.S. Satellite Broadcasting Company
Hughes has acquired by merger all of the outstanding capital stock of
U.S. Satellite Broadcasting Company in exchange for cash and shares of Class H
common stock totalling $ billion. U.S. Satellite Broadcasting Company
provides subscription television programming to households throughout the
continental United States via the digital satellite broadcasting system that it
shares with DIRECTV. U.S. Satellite Broadcasting Company currently delivers 25
channels of video programming, including premium networks such as HBO(R),
Showtime(R), Cinemax(R) and The Movie Channel(R). The programming delivered by
U.S. Satellite Broadcasting Company includes over 800 movies per month.
The total consideration payable in the merger is $ billion in cash and
shares of Class H common stock. The former shareholders of U.S. Satellite
Broadcasting Company, within a limited range, have the right to elect to
receive consideration in the form of Class H common stock or the cash
equivalent. Not more than 50% of the total consideration will be payable in
cash and not more than 70% of the total consideration will be in the form of
Class H common stock. Accordingly, the cash paid by Hughes will be between $
and $ and between shares and shares of Class H common stock will be
issued.
As of March 31, 1999, U.S. Satellite Broadcasting Company had over 2.2
million subscribers. Over 90% of U.S. Satellite Broadcasting Company's
subscribers were also DIRECTV subscribers. DIRECTV plans to integrate the U.S.
Satellite Broadcasting Company business into its business as soon
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as possible and to begin immediately offering more diverse programming packages
to subscribers, including the premium programming currently offered by U.S.
Satellite Broadcasting Company.
The acquisition of U.S. Satellite Broadcasting Company provides DIRECTV
with:
. the opportunity to achieve cost savings through the consolidation
of duplicate operations;
. the opportunity to increase its average revenue per subscriber;
and
. the ability to expand its channel offering from 185 to more than
210 via the addition of U.S. Satellite Broadcasting Company's
premium channels.
Class H Common Stock Issued in PRIMESTAR and U.S. Satellite Broadcasting
Company Acquisitions
In connection with the PRIMESTAR acquisition, 4,871,448 shares of Class H
common stock were issued to PRIMESTAR. These shares were not registered under
the Securities Act of 1933 and may not be transferred prior to the first
anniversary of the April 28, 1999 closing of the PRIMESTAR acquisition, except
for limited transfers from PRIMESTAR to its stockholders and certain related
parties. Under an agreement with GM, PRIMESTAR and these other holders, at any
time after 10 months after the closing of the PRIMESTAR acquisition, may demand
on two occasions registration of these shares under the Securities Act of 1933,
provided that GM is not required to register any shares that can be sold
publicly without registration. As a result, shares held by non-affiliates of GM
will generally not be entitled to registration rights after the first
anniversary of the PRIMESTAR closing. GM has the right to delay any required
registration if GM certifies that such registration could materially interfere
with the business activities or plans of Hughes or GM. GM may not delay any
registration for more than an aggregate of 90 days in any 12 month period
pursuant to the preceding sentence. In addition, GM is not required to register
any shares for 30 days prior to the anticipated consummation of a public
offering by GM of its securities and 90 days subsequent to the consummation of
such public offering where, in the good faith judgment of the managing
underwriter(s), such registration would have an adverse effect on such
offering. GM will be required to bear the expenses of all required
registrations and provide customary indemnification to the selling holders.
Of the shares of Class H common stock issued in the U.S. Satellite
Broadcasting Company acquisition, Hughes currently expects that a substantial
portion will not be freely transferrable and may only be transferred in
accordance with Rule 145 under the Securities Act of 1933. In addition, the
holders of these restricted shares have agreed to sign lock-up agreements in
connection with underwritten offerings of Class H common stock, including this
offering, for two years after the completion of Hughes' May 1999 acquisition of
U.S. Satellite Broadcasting Company. See "Underwriting."
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BUSINESS OF HUGHES
Overview
Hughes is a leading global provider of digital direct broadcast satellite
entertainment services, satellite communications services and satellite-based
private business networks. Hughes is also a leading global manufacturer of
satellite systems. Since its founding, Hughes has been a pioneer in many
aspects of the satellite and wireless communications industry, and its
technologies have driven the creation of new services and markets. Hughes
believes that its ability to identify, define and develop new markets early has
provided it with a significant competitive advantage in building sustainable
market leadership positions.
Since its reorganization in 1997, Hughes has focused on providing
advanced communications services on a global basis. By leveraging its
technological leadership in satellite and wireless communications systems,
Hughes has developed a range of entertainment, information, and communications
services for the home and business markets, including video, data, voice,
multimedia and Internet services. These services provide the potential for
higher margins and higher growth than Hughes' traditional manufacturing
businesses.
Hughes' business includes:
. DIRECTV, which is the world's leading digital direct broadcast
satellite service based on number of subscribers. DIRECTV includes
businesses in the United States, Latin America and Japan, and
constitutes Hughes' Direct-to-Home Broadcast segment. As referred
to herein, the direct broadcast satellite industry does not
include providers and subscriber data for the large satellite
receiving dish, C-band direct-to-home services market.
. PanAmSat, which owns and operates the largest commercial satellite
fleet in the world with 19 satellites that can transmit signals to
geographic areas covering 99% of the world's population. PanAmSat,
a publicly-held company owned 81% by Hughes, constitutes Hughes'
Satellite Services segment.
. Spaceway, which is a planned satellite-based broadband
communications platform that is expected to provide customers with
high-speed two-way multimedia transmission on a more cost-
efficient basis than current systems beginning in 2002. Spaceway
currently is not a separately reported business segment.
. Hughes Network Systems, which is a leading provider of satellite
and wireless communications ground equipment and services with an
estimated 55% to 60% share of the global market for very small
aperture terminal or "VSAT" private business networks. Hughes
Network Systems constitutes Hughes' Network Systems segment.
. Hughes Space and Communications, which is a leading satellite
manufacturer that has won over 50% of its competitive bids from
1991 through 1998. Hughes Space and Communications is the
principal component of Hughes' Satellite Systems segment.
Industry Trends and Opportunities
Hughes seeks to capitalize on several key trends that are revolutionizing
the communications industry, including:
. Growing demand for an increased variety of digital broadcast
entertainment services. Hughes believes that satellite direct-to-
home entertainment will continue to be the fastest growing sector
of the multichannel entertainment industry both in the United
States and internationally. Since 1994, the total number of direct
broadcast satellite subscribers in the United States has grown
from 570,000 to 9.3 million as of March 31,
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1999. Direct broadcast satellite is now the largest sector of the
satellite communications services industry based on revenues.
. Increasing demand for digitized data and Internet services for
both home and business users. Hughes believes that the next wave
of demand for satellite-based communications services will be
fueled by the increasing need for digitized data, Internet and
broadband services. Drivers of this demand include the need for
cost-effective, high-speed data transmission and increasing
Internet traffic.
. Emerging demand for mobile satellite services, including
telephony, paging and information systems. Worldwide,
approximately 70% of the earth's land mass lacks cellular
coverage. Mobile satellite services are increasingly being used to
meet wireless telephony and other communications needs of end
users in these markets.
In meeting the demand created by these trends, satellite technology has
inherent competitive advantages over ground-based communications technologies
for many applications, including:
. the ability to broadcast hundreds of channels economically to
millions of recipients over very wide geographic areas;
. the potential for low cost two-way communications to areas of low
subscriber density;
. the ability to roll-out new infrastructure to a large number of
customers quickly; and
. the ability to deliver large amounts of information at high
transmission speeds.
Competitive Advantages
Hughes believes that its satellite and wireless communications
technological capabilities, together with the inherent advantages of satellite
technology over ground-based technology for many applications, provide it with
competitive advantages. Hughes believes these competitive advantages should
enable it to achieve sustainable market leadership positions and accelerate
revenue and operating cash flow growth. These competitive advantages include:
. DIRECTV Brand and Franchise. The recent PRIMESTAR and U.S.
Satellite Broadcasting Company acquisitions solidify DIRECTV's
leadership position in the United States direct broadcast
satellite market. In the United States, DIRECTV has:
. the largest subscriber base--about 75% of direct broadcast
satellite subscribers, which provides greater opportunity to
obtain programming on favorable terms, secure exclusive
programming and introduce new services;
. substantial channel capacity--currently delivers about 225
channels and, following the successful launch of an additional
satellite scheduled for the third quarter of 1999 and the
completion of the pending Tempo Satellite in-orbit satellite
acquisition, will have capacity for about 370 channels; and
. the largest distribution network--based on retail points of
sale, including national retailers such as Circuit City, Radio
Shack and Best Buy, several regional Bell operating companies
which provide installation, customer service and billing and
the PRIMESTAR dealer network in small urban and rural markets.
In addition, there are currently only three licensed United
States orbital slots that provide the capability to deliver high-
power television signals throughout the contiguous United States.
Out of a total of 96 available frequencies at these orbital
slots, DIRECTV is authorized to use 35 frequencies and, following
the Tempo in-orbit satellite acquisition, will have authorization
to use 46 frequencies.
Hughes believes these factors, together with DIRECTV's brand
name, provide it with significant competitive advantages over
other U.S. multichannel service providers. Hughes also believes
that DIRECTV's high quality digital picture and sound, its
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increased variety of programming and its high quality customer
service provide competitive advantages over traditional cable
television. Hughes is utilizing the DIRECTV brand name and U.S.
leadership position to accelerate growth in selected
international markets.
. Direct Digital Interactive and Broadband Links to Home and
Business. Hughes believes that its established customer
relationships in both the business and home segments will become
increasingly valuable as key portals to offer expanded services.
Consumers and businesses are increasingly demanding the flow of
greater amounts of data at higher speeds than can be provided by
traditional computer modems and phone lines. In many cases,
satellite-based systems are well suited to address this need on a
cost-effective basis. In meeting this demand, Hughes intends to
capitalize on its existing customer relationships. For example,
through DIRECTV, Hughes intends to provide Internet-based services
and interactive television services in the United States and is
already offering some of these services in Japan. Also, beginning
in North America in 2002, Hughes plans to begin migrating existing
corporate data network clients and satellite Internet customers,
many of whom are Fortune 500 companies, to Spaceway.
. Global Spectrum and Orbital Slots. Hughes considers its regulatory
authorization to use desirable broadcast spectrum and orbital
slots for its current and planned global satellite fleet to be a
significant competitive advantage. Operation of an international
satellite fleet requires significant international and national
regulatory approvals. Hughes and PanAmSat have received regulatory
approval for 27 licenses in the C-band, the traditional network
and cable television distribution band, the Ku-band, the band used
for many telecommunications services and direct-to-home
television, or both bands. In addition, Hughes and PanAmSat have
obtained United States Federal Communications Commission
authorization for 17 licenses in the Ka-band, a high-power
spectrum that will enable new broadband, high-speed data and
Internet service offerings.
. Global Market Leader. Hughes believes that its global leadership
positions in its target markets--digital direct-to-home
entertainment, satellite transponder leasing, very small aperture
terminal business networks, and satellite systems manufacturing--
enable it to achieve economies of scale. The satellite and
wireless communications business is characterized by high fixed
costs with relatively lower variable costs. A market leadership
position enables the cost of developing expanded services, such as
exclusive programming for DIRECTV or specialized broadcasting
services for PanAmSat, to be spread across a larger customer base.
Similarly, economies of scale have enabled Hughes Space and
Communications to increase standardization of manufacturing
processes by developing a family of satellite structures,
electronics, and propulsion and power systems which can be
replicated at relatively low cost in a variety of commercial and
defense configurations. In addition, Hughes Network Systems has
benefitted from economies of scale in manufacturing VSATs.
. Comprehensive Portfolio of Global Satellite Businesses. Hughes
believes that its presence in several major segments of the
satellite communications industry affords significant synergies,
vertical integration benefits and the ability to remain at the
forefront of the latest industry growth trends. Hughes has
leveraged its satellite manufacturing and systems expertise to
develop new service businesses such as DIRECTV, satellite
transponder leasing and Spaceway. In addition, Hughes' vertically
integrated structure has enabled it to respond quickly to the
growth needs of its services businesses. For example, Hughes
Network Systems' ability to increase production of DIRECTV
receiving equipment on short notice enabled DIRECTV to achieve
record subscriber growth in 1998. In addition, Hughes' complete
range of integrated satellite and wireless communication services
enables Hughes to meet its customers' needs for end-to-end
communication solutions.
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. Technology Leadership. Hughes believes that its leadership
positions in its markets results in large part from its
technological capabilities, particularly in satellite design,
production and operation. Hughes' technologies have significantly
enhanced the transmission capacity, power and efficiency of
satellites and improved their cost effectiveness. Because these
innovations have improved the economics of the commercial
satellite business, Hughes believes that its technological
leadership has expanded, and will continue to expand, the market
for satellites, satellite equipment, and satellite services.
Hughes also believes that its technological expertise provides it
with an advantage in its other equipment and services businesses.
For example, Hughes' technologies enabled DIRECTV to be first to
market with digital direct broadcast satellite services and these
technologies will be critical to the successful development of
Spaceway broadband services.
Strategy
Hughes' business objective is to maximize the creation of shareholder
value by leveraging its satellite and wireless communications systems expertise
and capitalizing on the competitive advantages discussed above in order to
enhance its position as a premier global communications company with an
emphasis on higher margin, higher growth services. Hughes' core strategies for
achieving its business objective are to:
. Achieve Sustainable Market Leadership Positions Through
Innovation. Hughes has achieved market leadership positions
through its core competence in identifying, defining and
developing new markets and its ability to develop innovative
products and services to serve these markets. For example:
. early development of satellite transponder leasing has allowed
Hughes to capture a significant share of the world's limited
supply of both satellite orbital slots and broadcast spectrum;
. early entry into the digital high-powered direct-to-home
broadcast industry has provided Hughes with direct
relationships with consumers to whom an expanded array of
services can be offered; and
. based on its commercial satellite systems manufacturing and
private business network services expertise, Hughes announced
its intention to make a significant investment in an advanced
global broadband satellite network. Hughes expects to be an
early entrant into the market, allowing Spaceway to attain a
leadership position in the high-speed transfer of digitized
data through broadband networks.
In addition, Hughes has pursued and will continue to pursue
acquisitions and strategic alliances to extend its leadership in
core markets and divest or reposition businesses in those markets
where leadership can not be attained.
. Lead Multichannel Entertainment Market. Hughes intends to
capitalize on favorable demand trends for multichannel
entertainment in the United States and selected international
markets. Hughes intends to maintain DIRECTV's leadership in the
United States by providing a premier line-up of exclusive
entertainment programming, high definition television or "HDTV"
programming, unique interactive services and Internet based
services. Hughes is leveraging its United States direct-to-home
broadcast satellite expertise and brand name in selected
international markets.
. Exploit Growth Opportunities in the Markets for Digitized Data and
Internet Services. Hughes believes that the digitized data and
Internet revolution will have a major impact on the satellite and
wireless communications industry. Hughes has several initiatives
in this area, including:
. DIRECTV expects to integrate a range of web-based and
interactive technologies into its programming in the United
States and Latin America.
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. Hughes Network Systems has developed an array of digitized
data, intranet and Internet services for the private business
systems and the consumer markets.
. PanAmSat has developed a range of Internet-related services,
including SPOTbytes(R), a bundled Internet service that offers
links from international locations to the United States
Internet backbone via PanAmSat teleports, and a new service
that provides the direct broadcast of web content to local
servers in the United States and internationally.
. Hughes expects that, beginning in North America in 2002, the
Spaceway platform will enable service providers, including
Hughes Network Systems and PanAmSat, to offer customers a wide
range of two-way, high-data-rate applications under their own
brands.
. Increase Revenue-Per-User Through Provision of Enhanced Services.
A core principle of Hughes' consumer and business service strategy
is to increase average revenue-per-user. Examples of this include:
. DIRECTV's monthly revenue per residential U.S. subscriber has
increased from about $39 in 1995 to about $47 as of March 1999
and, after implementing the conversion of PRIMESTAR and U.S.
Satellite Broadcasting Company subscribers, is expected to
increase to about $55 to $60.
. PanAmSat has increased its revenue from existing customers by
providing unique one-stop shopping for customers' national,
regional or global satellite transmissions, network design and
systems engineering, transmission of video channels and the
management of private business network traffic from PanAmSat
teleports.
. Hughes Network Systems has generated incremental revenue by
offering networking and other services to equipment customers.
. Focus on Customer Satisfaction and Quality. Hughes emphasizes
customer satisfaction and quality in all of its manufacturing and
services businesses. For example:
. the cumulative channel availability of in-orbit satellites
manufactured by Hughes is above 98%;
. DIRECTV's surveys show a customer satisfaction rating of over
90% in the United States; and
. Hughes Network Systems has shipped over 1 million DIRECTV set-
top boxes with a defect rate of less than two-tenths of one
percent.
Hughes believes that a continued focus on customer satisfaction
and quality is key to its ability to expand its customer base and
maintain leadership positions in each of its businesses.
. Focus on Key Performance Measurements. Hughes focuses on
performance measurements that it believes will best help it
achieve its goal of maximizing long-term shareholder value. These
include:
. Performance of Class H common stock. A portion of the
compensation of all full-time Hughes employees, excluding
employees of non-100% owned subsidiaries, is linked to the
Class H common stock price. In particular, more than half of
the compensation of Hughes' top executives is based on the
Class H common stock price.
. Long-term EBITDA growth and EBITDA margin improvement. Hughes
believes EBITDA serves as a good proxy for operating cash
flow.
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<PAGE>
. Revenue growth, subscriber growth and growth in average
revenue-per-subscriber. Hughes believes that these
measurements are especially relevant to DIRECTV, where the
initial cost incurred in acquiring a customer is offset by the
long-term profit potential of that customer.
Hughes believes that these measurements are similar to those
tracked by other large communications, entertainment and media
service providers, such as cable and wireless communications
companies, and are consistent with its transformation from an
aerospace, defense and automotive electronics company to a
satellite and wireless communications company.
DIRECTV
<TABLE>
<CAPTION>
Highlights Strategic Goals
- ---------------------------------- ----------------------------------
<S> <C>
. Over 7 million U.S. subscribers . Expand channel capacity and add
under the DIRECTV and PRIMESTAR new and exclusive programming
brand names
. Monthly revenue per residential
U.S. subscriber of about $47 as . Broaden and strengthen
of March 1999, which is expected distribution channels
to increase to $55 to $60 after
implementing the conversion of
PRIMESTAR and U.S. Satellite
Broadcasting Company subscribers . Increase average revenue-per-
subscriber
. Currently delivers about 225
video channels, and, following
successful launch of an
additional satellite later in . Minimize subscriber churn
1999 and completion of the Tempo
Satellite in-orbit satellite
acquisition, will have capacity
of about 370 video channels in
the United States . Introduce new interactive and
web-based services
. The broadest U.S. distribution
network in its market based on
retail points of sale
. A leading multi-channel . Leverage U.S. expertise to
television provider in Latin accelerate growth in selected
America and Japan international markets
</TABLE>
Introduced in June 1994, DIRECTV was the first digital direct broadcast
satellite service in North America. Currently, DIRECTV provides programming in
the 48 contiguous United States, 25 countries in Latin America and Japan.
Hughes recently acquired PRIMESTAR and U.S. Satellite Broadcasting Company. For
a further discussion of these acquisitions and DIRECTV's plans to integrate
PRIMESTAR and U.S. Satellite Broadcasting Company, see "Recent Acquisitions."
United States. DIRECTV, under the DIRECTV and PRIMESTAR brands, currently
has about 7.1 million of the 9.3 million direct broadcast satellite subscribers
in the U.S. This includes approximately 1.1 million subscribers located
primarily in rural areas of the continental United States who receive DIRECTV
services under an arrangement with the National Rural Telecommunications
Cooperative. Excluding National Rural Telecommunications Cooperative
subscribers and related revenues, average DIRECTV revenue per residential U.S.
subscriber was about $47 per month as of March 31, 1999. After implementing the
conversion of PRIMESTAR and U.S. Satellite Broadcasting Company subscribers,
Hughes expects average revenue per residential U.S. subscriber to increase to
$55 to $60 per month, the highest in the United States direct broadcast
satellite industry.
Currently, DIRECTV subscribers may receive about 225 channels of
television shows, premium movies, sports and pay-per-view events and 31 audio
channels. DIRECTV also provides premium sports and other premium programming
such as THE NFL SUNDAY TICKET(R), which allows subscribers, subject to local
restrictions, to view every National Football League game played each Sunday
during the
53
<PAGE>
regular season. DIRECTV is the exclusive small dish provider of THE NFL SUNDAY
TICKET through 2002. Hughes believes that DIRECTV's increased channel
offerings, channel capacity and subscriber base resulting from the PRIMESTAR
and U.S. Satellite Broadcasting Company acquisitions provides DIRECTV with a
competitive advantage in acquiring subscribers, obtaining exclusive programming
from leading content providers on favorable terms and generating advertising
revenue. Also, Hughes believes it has enhanced ability to provide consumers new
and innovative program offerings. For example, DIRECTV expects to introduce:
. data-enhanced programming, e-commerce, Internet-based services and
interactive advertising; and
. a series of products that are designed to allow subscribers to
control the programming they watch by being able to pause live TV
and create their own TV programming line-up based on personal
preferences.
Hughes believes that the frequencies DIRECTV is authorized to use for
delivering digital television signals in the United States are significant
assets. There are currently only three licensed United States orbital slots
that provide the capability to deliver high-power television signals throughout
the contiguous United States. These orbital slots have a total of 96 available
frequencies. DIRECTV controls 35 of these frequencies, and, following the Tempo
Satellite in-orbit high-power satellite purchase, will control 46 of these
frequencies.
Currently, in the United States, DIRECTV is prohibited from providing
local television channels in local markets. DIRECTV believes this inability is
a disadvantage with respect to competing with cable television. Currently
pending legislation would authorize the delivery of local broadcast channels by
satellite. If adopted, this legislation would enhance the competitiveness of
DIRECTV as compared to cable television. DIRECTV expects to begin offering
local channels in selected markets promptly after any adoption of the enabling
legislation. There can be no assurance as to if or when this legislation will
be adopted.
DIRECTV programming service and equipment are currently distributed
through consumer electronics stores such as Circuit City, Radio Shack and Best
Buy, and satellite television dealers. In addition, Hughes has agreements with
several regional Bell operating companies to distribute DIRECTV programming and
service by bundling it with local phone services. The regional Bell operating
companies provide installation, customer service and billing. In addition,
Hughes believes that DIRECTV's ability to reach rural and small urban areas has
been enhanced by the addition of PRIMESTAR's dealer network which primarily
serves these areas.
DIRECTV's net subscriber churn was about 1% per month in 1998. This
compares to an average churn rate of about 2.5% for the cable television
industry. Net subscriber churn is expected to increase, primarily as a result
of PRIMESTAR's and U.S. Satellite Broadcasting Company's higher historical
churn rates. DIRECTV's net subscriber churn for a given period is calculated by
dividing the number of subscribers canceling service during the period by the
total number of subscribers at the end of the period.
In 1999, DIRECTV's cost of acquiring new subscribers is expected to
increase due to, among other things, incentives granted by U.S. Satellite
Broadcasting Company to manufacturers of DIRECTV receiving equipment which were
assumed by DIRECTV in connection with its acquisition of U.S. Satellite
Broadcasting Company. In addition, depending on the competitive environment,
subscriber acquisition costs could increase further due to increased incentives
to dealers and consumers. Beyond 1999, subscriber acquisition costs will
continue to be largely determined by the competitive environment.
DIRECTV is currently broadcast from three Hughes Space and Communications
HS 601 satellites directly to 18-inch receiving antennae and decoding boxes
located in households and businesses. A fourth satellite under construction and
scheduled for launch in the third quarter of 1999 will provide additional
channels and allow for additional back-up capability to DIRECTV's satellite
fleet, including the satellite which experienced the failure of its primary
spacecraft control processor in 1998. See "Risk
54
<PAGE>
Factors--Risk Factors Relating to the Business of Hughes--Hughes Is Vulnerable
to Satellite Failure." In addition, DIRECTV has acquired a ground satellite
from Tempo Satellite and, subject to Federal Communications Commission
approval, has agreed to acquire an in-orbit satellite and 11 related satellite
orbital frequencies from Tempo Satellite that will provide additional channel
capacity. The acquisition of this satellite and related frequencies is subject
to Federal Communications Commission approval. DIRECTV's signal originates from
its 55,000 square foot broadcast facility in Castle Rock, Colorado. In mid-
1999, DIRECTV expects to complete a second broadcast center in Los Angeles
which will provide expanded capacity for additional channels, as well as back-
up for the Castle Rock facility.
DIRECTV receiving equipment is manufactured by a number of name brand
consumer electronics companies. Equipment prices have fallen steadily from the
initial $699-$899 range in June 1994 to approximately $99-$249 today. The
technology for the DIRECTV service is based, in part, on Hughes' satellite and
satellite-based services experience and in part, on the expertise of the
consumer electronics manufacturers which produce the equipment. DIRECTV has
outsourced many of the significant facets of consumer marketing, the operation
of the related infrastructure and support services to vendors experienced in
the respective fields.
International. Hughes believes it can leverage the DIRECTV brand name and
market leadership position in the United States in selected international
markets. Hughes currently provides DIRECTV service in 25 countries in Latin
America and in Japan. The direct-to-home broadcast business of Hughes in Latin
America is conducted under the DIRECTV brand name by Galaxy Latin America, a
partnership in which Hughes is the majority owner. The direct-to-home broadcast
business in Japan is conducted by DIRECTV Japan Management, Inc., a joint
venture in which Hughes holds a 42.2% ownership interest. Hughes evaluates on
an ongoing basis opportunities to expand DIRECTV to serve other international
markets.
As a result of the competitive environment in its international markets,
DIRECTV may have to incur increased subscriber acquisition costs through
competitive offers in the future to maintain or improve its market positions.
Latin America. Introduced in 1996, Galaxy Latin America was the first
direct-to-home satellite television service available in Latin America and
currently offers over 197 video and 35 audio channels. Hughes holds a 70%
ownership share in Galaxy Latin America. Cisneros Group of Venezuela holds 20%
and TV Abril of Brazil holds 10%.
Local operating companies in each country provide marketing, sales,
distribution, customer service and other infrastructure services. Hughes
believes that having an equity stake, and in some situations a controlling
interest, in the local operating companies will help it to pursue a coordinated
strategy throughout Latin America. In furtherance of this strategy, Hughes has
recently increased its ownership of the local operating company in Mexico and
now manages its day-to-day operations. Also, Hughes has purchased or plans to
purchase an interest in each of the local operating companies operating in
other large Latin American markets, including Brazil, Venezuela, Colombia and
Argentina.
As of March 31, 1999, there were approximately 550,000 subscribers in
Latin America. The local operating companies' average revenue per subscriber is
currently about $35 per month. Galaxy Latin America believes that approximately
one-half of television households in Latin America, or about 50 million
households, earn an income sufficient to afford multichannel pay television
services, but only a small fraction currently subscribe to such services.
Japan. Hughes estimates that there are more than 40 million television
households in Japan, with very low cable penetration due to regulatory
restrictions. Hughes believes that DIRECTV Japan's competitive strengths
include its programming line-up, which contains a number of unique local
Japanese programs and major U.S. programming channels, and its interactive
services. The DIRECTV Japan service commenced commercial operations in December
1997 with a partial offering of channels. Full service began in April 1998 with
88 channels and capacity was expanded to 190 channels in December 1998. DIRECTV
Japan ended March 1999 with approximately 250,000 subscribers and average
monthly revenue per subscriber of about $40.
55
<PAGE>
PanAmSat
<TABLE>
<CAPTION>
Highlights Strategic Goals
- ----------------------------------- ----------------------------------
<S> <C>
. A leading commercial provider of . Pursue a satellite fleet
global satellite communications expansion plan designed to
services, based on sales volume provide unparalleled growth and
back-up resources for customers
. Global network of 19 satellites worldwide
supported by seven teleport
operations facilities in the . Continue to offer customers
United States and more than 500 unique one-stop shopping for
sales, marketing and engineering their national, regional or
employees on five continents global satellite transmission
needs
. A unique one-stop provider of
global satellite services . Expand innovative value-added
services and applications such as
Internet distribution and HDTV
</TABLE>
Through its 81% interest in PanAmSat Corporation, Hughes offers
comprehensive end-to-end satellite services. PanAmSat, a publicly-held
corporation traded on the Nasdaq National Market System, was created through
the merger of Hughes' and PanAmSat's satellite services operations in May 1997.
Today, the PanAmSat network:
. Distributes cable and broadcast television programming that
reaches more than 125 million households each day for clients
including: CNN, CBS, NBC, ABC, Disney, Fox, Sony, TCI, Viacom,
Turner Broadcasting, ESPN, the British Broadcasting Corporation,
NHK (Japan), Cisneros Group (Venezuela) and the Australian
Broadcasting Corporation.
. Operates platforms for current and planned direct-to-home
television services to Latin America, South Africa, Taiwan and
India that cumulatively will broadcast more than 500 channels.
. Provides live transmission services for news, sports and special
events coverage, and transmits news coverage for virtually every
major news gathering organization in the world.
. Provides satellite services to more than 35 telecommunications
carriers worldwide, including MCI-WorldCom, Sprint, ImpSat,
Microspace and Telstra (Australia).
. Provides access to the U.S. Internet backbone in more than 50
countries to Internet Service Providers or "ISPs" and other
telecommunications providers.
. Relays digitized data via more than 125,000 VSATs to the private
networks of clients such as the Associated Press, Citicorp, Hughes
Network Systems, IBM, Reuters and the University of Southern
California.
Hughes believes that PanAmSat's global transmission capability,
especially its ability to transmit signals among all of the world's major
regions, provides it with a significant advantage over commercial competitors
who operate fleets limited to regional coverage. PanAmSat currently operates
the largest commercial network of communications satellites capable of
remaining directly above a fixed location on the earth, known as geosynchronous
satellites, and possesses the ability to transmit signals to a geographic area
that includes 99% of the world's population. PanAmSat is the only commercial
entity that offers geosynchronous satellite services on a global, one-stop-
shopping basis.
To maintain this advantage, PanAmSat plans to expand its fleet from 19
satellites to 25 by the end of 2000, increasing transponder capacity by about
70%, from about 530 transponders in 1998 to about 910 transponders in 2000.
This will involve the launch of seven additional satellites and the retirement
of one existing satellite. These additional satellites are intended to meet the
expected demand for additional satellite capacity, replace capacity affected by
satellite anomalies and provide additional
56
<PAGE>
back-up to existing capacity. See "Risk Factors--Risk Factors Relating to the
Business of Hughes--Hughes is Vulnerable to Satellite Failure." There can be no
assurance, however, that the schedule for PanAmSat's future satellite launches
will be met. Delays in the production or successful launch of these satellites
could materially affect the ability of PanAmSat to deliver services and benefit
from the opportunities it is currently pursuing. In addition, revenues
attributable to satellites affected by anomalies could be at reduced levels.
Hughes considers PanAmSat's regulatory authorization to use various
broadcast spectrums and the desirable orbital locations of its satellite fleet
to be a significant competitive advantage. PanAmSat has regulatory approval to
operate its satellite fleet in the C-band, the traditional network and cable
television distribution band, the Ku-band, the band used for many
telecommunications services and direct-to-home television, or both bands. In
addition, PanAmSat has obtained Federal Communications Commission authorization
for 9 licenses in the Ka-band. The Ka-band is a high-powered frequency that
will be used primarily for broadband, high-speed data and Internet service
offerings.
Like other Hughes business units, PanAmSat seeks to obtain market
leadership positions by identifying, defining and developing new markets early.
In 1983, Hughes revolutionized the television industry by launching Galaxy I,
the first cable television satellite for the United States. Hughes pioneered
the "cable neighborhood" concept in the satellite services industry by securing
key cable programming for Galaxy I. Similar to the "anchor tenant" strategy
pursued by shopping mall operators, this strategy prompted a core group of
cable operators to focus their ground antennas on Galaxy I's orbital position.
Because so many cable head-end antennas were focused on Galaxy I, transmission
capacity on the satellite sold at a premium.
PanAmSat provides satellite services to its customers primarily through
long-term operating lease contracts for the use of full or partial transponder
capacity. PanAmSat also offers services to its customers through sales and
sales-type lease contracts. PanAmSat currently provides service to hundreds of
video distribution and telecommunications customers worldwide. As of March 31,
1999, PanAmSat had long-term arrangements for satellite services representing
future payments of approximately $6.3 billion, including amounts due from
affiliated companies, as well as approximately $400 million relating to
arrangements on satellites that are under construction and are expected to be
launched within 12 months.
Spaceway
<TABLE>
<CAPTION>
Highlights Strategic Goals
- ------------------------------------ ----------------------------------
<S> <C>
. Approval for $1.4 billion . Become the first satellite-based
investment in a broadband network broadband service in North
for North America America serving large businesses,
telecommuters, small office/home
. Leverages Hughes' satellite office users and consumers in
industry leadership in 2002
manufacturing, business networks,
direct-to-home entertainment and . Migrate Hughes Network Systems'
services existing extensive blue-chip
business customer base to
. Expected to utilize innovative Spaceway and sell broadband
satellite technology such as on- services to DIRECTV subscribers
board digital processing, packet
switching and spot beams to offer . Work with global strategic
high-speed bandwidth-on-demand partners to roll out additional
broadband services geosynchronous systems in other
regions as the markets develop
. Expected to seamlessly integrate
and be compatible with land-based . Further expand the network's
systems global capacity by launching
complementary nongeosynchronous
satellites
</TABLE>
57
<PAGE>
Hughes intends to spend $1.4 billion to implement Spaceway, a broadband
communications platform, in North America. Spaceway will provide "bandwidth-on-
demand," the ability to transmit and receive data, video, audio, and multimedia
while offering customers the opportunity to use and pay for only the amount of
bandwidth they need for their specific application, from e-mail to high-
bandwidth, high-speed corporate networks. In addition, Spaceway is expected to
provide an overlay to current ground-based networks, providing network
operators with a wireless extension of their existing capabilities.
Offering space-based broadband services will be a key growth opportunity
for Hughes in the 21st century, and Hughes believes it will be among the first
to a market for which the demand has been forecast to increase dramatically in
the future. Hughes expects that beginning in North America in 2002, the
Spaceway platform will supply service providers, including Hughes Network
Systems and PanAmSat, with the ability to offer customers a wide range of two-
way, high data-rate applications under their own brands. These include desktop
video conferencing, distance learning, teleimaging, corporate intranet and
extranet connectivity, and Internet access.
Hughes is already a market leader in VSAT corporate data networking and
satellite broadband Internet businesses. See "--Hughes Network Systems." By
migrating these existing customers, many of which are Fortune 500 companies, to
Spaceway, Hughes expects to provide expanded capabilities to these businesses
while keeping end-user costs low enough to provide competitive advantages over
ground-based and other satellite offerings.
Hughes' advanced technologies and networking services expertise will be
the key to Spaceway's success. The system will start with the construction and
launch of three HS 702 spacecraft to be built by Hughes Space and
Communications, and will utilize ground stations and very small satellite
dishes designed by Hughes Network Systems. PanAmSat will provide expertise in
satellite and network operations, and will resell capacity in certain markets.
DIRECTV will cross-sell the services to its extensive customer base.
Hughes anticipates working with strategic global partners to roll out
Spaceway systems in other regions, including Europe, Latin America, Africa and
Asia. As these markets and the technology evolve, Hughes' strategy contemplates
making additional investments to add a fleet of spacecraft in lower earth
orbits that will support additional interactive broadband services, including
services without a transmission delay, in high-traffic markets.
Spaceway is still under development and is subject to a number of risks
and uncertainties. Thus, there can be no assurance that the introduction of the
Spaceway system will not be delayed or that the Spaceway system will ever be
implemented, or if implemented, that it will operate properly or be accepted by
the marketplace.
Hughes Network Systems
<TABLE>
<CAPTION>
Highlights Strategic Goals
- ----------------------------------- ----------------------------------
<S> <C>
. World's leading supplier of . Maintain leadership in core
satellite-based private business markets for private business
networks, based on an estimated networks
worldwide market share of 55% to
60% . Significantly expand production
of DIRECTV subscriber equipment
. Has shipped over 300,000 one-way
and two-way VSATs to customers in . Leverage products and
85 countries technologies into service
business opportunities
. The second largest manufacturer
of DIRECTV subscriber equipment . Lead Hughes' development of the
emerging market for broadband
. Provides satellite-based high- communications services
speed access to the Internet
through its DirecPC service
</TABLE>
58
<PAGE>
Hughes Network Systems is the leading supplier, based on market share, of
very small aperture terminals or VSATs used in satellite-based private business
networks. Hughes Network Systems has delivered or received orders for more than
300,000 of these terminals for use in the private networks of companies,
government agencies, universities and research institutions. These include more
than 9,000 terminals installed in the GM Pulsar network, the world's largest
private business network. Since 1987, Hughes Network Systems has sold private
business networks to a variety of customers worldwide, including
DaimlerChrysler, Ford, Toyota, Chevron, Texaco, Mobil, Amoco, Wal-Mart, Toys
"R" Us, Jusco (Japan) and France Telecom.
Utilizing its expertise in private business networks, satellite-delivered
Internet services and advanced ground-based communications infrastructure,
Hughes Network Systems plans to focus on offering new broadband services to a
wide range of customers, including its existing blue-chip customer base.
Because of its early investments in broadband technology and its networking
expertise, Hughes Network Systems believes it will be a leader in offering
innovative broadband services to businesses, government agencies and
individuals.
Hughes Network Systems began manufacturing subscriber equipment for
DIRECTV in 1996 and is now the second leading supplier of this equipment in
terms of volume. Hughes Network Systems was able on short notice to increase
its production of DIRECTV receivers in 1998 to more than 650,000 units,
enabling DIRECTV to achieve record subscriber growth. Hughes Network Systems
intends to continue its production of DIRECTV units and expects its production
to continue to grow.
Hughes Network Systems developed DirecPC, a satellite-based information
delivery service that uses a small antenna and high-speed digital transmission
to make software, documents, desk-top video, games, news and other information
accessible through personal computers. For example, through DirecPC's Turbo
Internet(TM) service, a personal computer user can download data and video at
speeds up to 400 kilobits per second. Hughes Network Systems is working with
partners, including Compaq Computer Corporation, to establish DirecPC as the
global standard for high-speed multimedia transmission via satellite to
personal computers in homes and small offices.
Hughes believes that significant opportunities exist for fixed wireless
telecommunications networks and mobile communications systems in areas with
deficient communications infrastructures. For example, in October 1998, Hughes
Ispat Limited, a limited liability company in which Hughes has a minority
ownership interest, began providing basic telecommunications services within
the Indian state of Maharashtra.
Hughes also believes that significant opportunities exist in utilizing
digital ground-based technologies to provide broadband fiber-quality wireless
access to businesses worldwide. For example, Hughes Network Systems has entered
into agreements to provide competitive local exchange carriers Winstar
Communications, Inc. and Teligent, Inc. with its AIReach(TM) Broadband system.
The AIReach Broadband system uses wireless technology to provide high-quality,
high-speed access to buildings not reached by fiber optic cables.
Hughes Network Systems believes that its technologies and other
capabilities position it to become a leading provider of satellite-based mobile
communications equipment and services. Several programs that have been awarded
in recent years to provide satellite ground telecommunications networking
equipment have established Hughes Network Systems' credentials in this sector.
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<PAGE>
Hughes Space and Communications
<TABLE>
<CAPTION>
Highlights Strategic Goals
- --------------------------------- ----------------------------------
<S> <C>
. Manufactured the world's first . Leverage technology leadership
communications satellite to gain a competitive
capable of remaining directly advantage and create new
above a fixed location on the opportunities in Hughes'
earth, known as a service businesses
geosynchronous satellite
. Provide customers with total
. 98% cumulative channel satellite systems solutions
availability on Hughes built
in-orbit satellites . Focus on quality in design and
manufacturing
. Won over 50% of its
competitive bids between 1991 . Further improve productivity
and 1998 while decreasing the time it
takes to build a satellite
</TABLE>
Hughes Space and Communications designs and builds satellite systems for
commercial customers worldwide and for the Department of Defense, NASA and
other government agencies. About 75% of Hughes Space and Communications
revenues in 1998 were from commercial customers.
As of March 31, 1999, Hughes Space and Communications had outstanding
orders to construct 34 communications satellites for companies and government
agencies in several countries, representing over $3.4 billion in backlog. In
1998, 11 satellites built by Hughes were launched. In 1999, 19 satellites built
by Hughes Space and Communications are scheduled for launch. Launch schedules
are subject to a number of factors, some of which are beyond the control of
Hughes Space and Communications, including weather, availability of launch
vehicles, launch vehicle problems and governmental and political pressures.
Launch difficulties and delays, as well as construction delays, can result in
increased costs to Hughes Space and Communications.
Hughes believes that Hughes Space and Communications' leadership position
in the competitive satellite manufacturing industry results from its
technological superiority in satellite design, production and operation. Since
the launch of Hughes Space and Communications' first satellite in 1963, its
satellites have accumulated over 1,000 years of in-orbit experience, with
channel availability of 98% on HS 376, HS 601 and other current generation in-
orbit commercial satellites. Approximately 95% of Hughes Space and
Communications' satellites have remained in service past their originally
scheduled retirement dates.
Hughes Space and Communications' technological capabilities have enhanced
the power and capacity of its satellites and improved their cost effectiveness.
This enhances Hughes' competitiveness as a satellite manufacturer and also
results in increases in both revenue-per-satellite and the margin earned on
those revenues for satellite owners and operators. These improvements
strengthen Hughes' leadership position and expand the market for satellites as
a whole. For example, Hughes Space and Communications has developed a family of
satellite structures, electronics, propulsion and power systems which can be
replicated at relatively low cost in a variety of commercial and government
configurations. In addition, Hughes Space and Communications has applied signal
compression and other methods to enhance the efficiency of transponders. The
newest product in this family is the HS 702 satellite, which will offer
substantially higher power levels than those previously achieved. Advances in
digital electronics, high-power amplifiers, antenna implementations and
propulsion systems offer improved performance capabilities of satellites built
by Hughes Space and Communications, which Hughes expects will provide it with a
competitive advantage both as a manufacturer and as a service provider.
In order to enhance its competitive position in both the government and
commercial satellite manufacturing markets, Hughes Space and Communications
continues to work to lower its costs and improve productivity and quality. For
example, satellite manufacturing productivity has improved by approximately
64%, measured by satellite sales dollars per employee, since 1992, and order to
delivery
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<PAGE>
cycle times have been reduced to as low as 12 to 14 months for new HS 376 and
HS 601 spacecraft. In addition, Hughes Space and Communications has secured
commitments for 45 launch vehicles over the next several years, which will
facilitate its access to space at competitive costs.
Corporate and Other
Hughes owns equity interests in other businesses in addition to those
described above. These businesses are reported as part of the "corporate and
other" segment in Hughes' financial statements and the revenues of these
businesses are not, in the aggregate, material to Hughes. For example, Hughes
is the largest stockholder of American Mobile Satellite Corporation, with a
current equity interest of approximately 21%. American Mobile's common stock is
publicly traded and other stockholders include Motorola, Singapore
Telecommunications, Ltd. and AT&T Wireless Services. In addition, Spaceway is
currently reported as part of the "corporate and other" segment in Hughes'
financial statements.
Acquisitions, Strategic Alliances and Divestitures
Due to rapid growth in the telecommunications and space industry,
particularly internationally, and increasing competitive pressures, Hughes
reviews its competitive position on an ongoing basis and from time to time
considers various acquisitions, strategic alliances and divestitures in order
to continue to compete effectively, grow its business and allocate its
resources efficiently. It is especially important for Hughes to form strategic
partnerships with other firms to bring together the necessary expertise, such
as distribution, market knowledge and technology, to address competitive
pressures and meet new market demands. Hughes has done this in its
international DIRECTV businesses as well as its network systems businesses.
Hughes also seeks acquisitions which will improve its position in these high
growth and increasingly competitive markets. The PRIMESTAR/Tempo Satellite and
U.S. Satellite Broadcasting Company transactions and the PanAmSat merger are
significant recent examples of this strategy. Hughes continues to evaluate
acquisitions, alliances and divestitures, and from time to time engages in
discussions regarding possible transactions, which it believes will improve its
competitive position and financial results.
Regulation
Various aspects of Hughes' businesses are subject to federal and state
regulation. Noncompliance by Hughes with such regulation may result in the
suspension or revocation of licenses or registrations at issue, the termination
or loss of contracts at issue or the imposition of contractual damages, civil
fines or criminal penalties. In particular, the ability of Hughes to sell
satellites and other technologies to businesses outside the United States is
dependent on Hughes obtaining export licenses from the United States
government. See "Risk Factors--Risk Factors Relating to the Business of
Hughes--The U.S. Government Could Adversely Impact the Ability of the U.S.
Satellite Industry to Compete in Foreign Satellite Commerce" and "--Grand Jury
Investigation/State Department Review Could Result In Sanctions."
U.S. Government Contracts
Hughes acts as a prime contractor or major subcontractor with respect to
U.S. government programs. Principally, this business is performed by Hughes
Space and Communications. Sales to the U.S. government may be affected by:
. changes in acquisition policies;
. budget considerations;
. changing concepts of national defense;
. civilian space needs;
. spending priorities; and
. other factors that are outside Hughes' control.
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<PAGE>
U.S. government spacecraft acquisition programs generally follow a life
cycle of three phases. The first is the research and development phase,
followed by an engineering development phase which includes the first
spacecraft, and finally progressing into a production phase for the remaining
spacecraft. The production phase may continue with refinements and improvements
for several years. Large programs with significant start-up costs, which are
usually incurred in the research and development phase, do not become
profitable until the engineering development phase. The U.S. government
typically uses multiple sources during the research and development phase to
intensify competition and selects one source to perform the later phases of the
program. Therefore, Hughes may not be selected for engineering development and
production phases even when considerable resources have been expended in the
research and development phase of a program.
Hughes performs its U.S. government business under two general types of
contracts:
. Fixed-Price Contracts. Under fixed-price contracts, Hughes
realizes all the benefit or detriment caused by decreased or
increased costs of performing the contract.
. Cost Reimbursement Contracts. Under cost reimbursement contracts,
Hughes receives reimbursement of its reasonable costs that are
allocable to the particular contract and allowable under
applicable regulations, plus a fee.
Approximately 37% of Hughes' total sales to the U.S. government in 1998 were
under fixed-price contracts, and approximately 63% were under cost
reimbursement contracts. Net sales to the U.S. government in 1998 were
approximately $700 million.
Most of Hughes' contracts with the U.S. government which are the basis of
Hughes' backlog are incrementally funded and therefore are subject to
appropriations decisions subsequent to award. Once awarded, contracts may be
contested by other bidders. In addition, Hughes' contracts with the U.S.
government are subject to termination by the U.S. government, either for its
own convenience or because of Hughes' default. In the event of a termination
for convenience, Hughes may not receive full reimbursement for its costs, and
the profit or fee Hughes receives may be lower than that which it had expected
for the portion of the contract performed. In the event of a termination for
default, normal contract remedies generally apply.
The U.S. government has broad discretion to suspend or prohibit
contractors from engaging in new government business, and often determines the
period of suspension or prohibition. A contractor may be prohibited based on a
conviction or civil judgment involving various offenses, including fraud in
connection with obtaining or performing a public contract or subcontract, and
may be suspended, if indicted for such an offense or if there is other adequate
evidence that such an offense has been committed. Like other government
contractors, Hughes is subject to civil and criminal audits and investigations
of its contracting activity. This liability includes potential contract cost
reductions due to the defective pricing claims. See also "Risk Factors--Risk
Factors Relating to the Business of Hughes--Grand Jury Investigation/State
Department Review Could Result In Sanctions."
Competition
Although Hughes has certain advantages which it believes help it compete
in its markets, each of its markets is highly competitive. Some of Hughes'
competitors in each of its markets have similar or better financial,
technological and personnel resources than Hughes. As described elsewhere in
this document, Hughes believes technological capabilities and innovation and
the ability to invest in new and developing businesses are critical to
obtaining and maintaining leadership in Hughes' markets and the communications
industry in general. We cannot assure you as to the effect that competition may
have on the financial condition or results of operations of Hughes. See also
"Risk Factors--Risk Factors Relating to the Business of Hughes--Hughes Could
Have Inadequate Access to Capital for Growth."
. DIRECTV. DIRECTV faces stiff competition from local cable
operations as well as other direct-to-home satellite systems in
each of its regional markets. With respect to
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traditional cable television, DIRECTV believes that it can compete
effectively because it provides higher quality picture and sound
and greater programming variety and believes it provides higher
quality customer service. DIRECTV expects to face increasing
competition from digital cable television over time. Digital cable
is capable of delivering high quality picture and sound and a
broader range of programming than traditional cable. Hughes
believes that the current prohibition in the United States on
delivering by satellite local television channels into local
markets is a disadvantage with respect to competing with cable
television. Currently pending legislation would remove this
prohibition. See "--DIRECTV--United States."
With Hughes' acquisition of PRIMESTAR and U.S. Satellite
Broadcasting Company, Echostar Communications Corporation is the
only other direct-broadcast service company currently in operation
in the United States. Echostar has recently announced its
acquisition of the satellites and orbital slots owned by The News
Corporation Limited and MCI WorldCom, Inc. DIRECTV faces
competition from other direct broadcast service providers in major
regions of Latin America and in Japan. DIRECTV service also
competes with telephone companies, broadcast television and other
entertainment services, including video rentals. Hughes believes
that DIRECTV can compete effectively through a combination of its
broad range of programming, including exclusive programming, and
extensive distribution.
As a result of this competitive environment, DIRECTV may have to
incur increased subscriber acquisition costs through competitive
offers in the future to maintain its market leadership.
. PanAmSat. PanAmSat primarily competes with companies and
organizations that own or utilize satellite or ground-based
transmission facilities. Satellite operators include global
competitors such as Intelsat, regional operators expanding
globally, such as Loral Space and Communications, GE Americom, and
Lockheed Martin, and numerous other regional operators and
governments. Hughes believes PanAmSat can compete favorably in its
markets because of its large satellite fleet, global satellite
coverage and the location of its orbital positions.
. Spaceway. Spaceway will face competition from companies that offer
both ground-based and satellite-based broadband services.
Companies offering ground-based broadband services include AT&T
Corporation, Qwest Communications, Time Warner and Bell Atlantic.
Companies who may offer satellite-based broadband services include
Teledesic LLC, Skybridge LP and Loral Space & Communication's
Cyberstar. Hughes believes it will compete favorably because of
its advanced technology for satellites and the related ground
equipment, and because of Hughes Network Systems' and DIRECTV's
existing customer bases.
. Hughes Network Systems. Hughes Network Systems business faces
global competition in the VSAT market from Gilat Satellite
Networks Ltd. and in its wireless communications markets from
firms such as Lucent Technologies Inc., Telefonaktiebolaget LM
Ericsson, AT&T Corporation, as well as other large
telecommunications companies and the various regional Bell
operating companies. Hughes Network Systems faces competition from
RCA/Thomson Consumer Electronics and Sony in the manufacturing of
DIRECTV subscriber equipment. Hughes believes that Hughes Network
Systems' technologies and other capabilities provide it with a
competitive advantage in its markets.
. Hughes Space and Communications. Hughes Space and Communications
faces competition in the United States from companies such as TRW,
Inc., Loral Space & Communications Ltd. and Lockheed Martin and
internationally from Matra Marconi, Alcatel and DASA. Hughes
believes Hughes Space and Communications can compete favorably
because of its family of satellite structures, electronics,
propulsion and power systems and its technological capabilities.
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In addition, Hughes' businesses compete generally with other
communications technologies and systems, such as telecommunications systems for
fixed and mobile applications, fiber optics networks, cable systems, wire
telephony and radio-based systems and other satellite-based systems.
Research and Intellectual Property
The ability to continue to generate technological innovations is critical
to ensure Hughes' long-term success and the competitiveness of its business.
See "Risk Factors--Risk Factors Relating to the Business of Hughes--Hughes Will
Be Adversely Affected If It Fails to Maintain Leading Technological
Capabilities." The continued development of new technologies may provide new
and improved products which will continue to fuel business opportunities and
product improvements which, among other things, will enable the extension of
profitable production programs. Research and development is carried on in each
of Hughes' business units in connection with ongoing product improvement
efforts. In addition, HRL Laboratories LLC, a company of which Hughes owns 50%,
conducts long-range applied research in the specialized fields of physics,
chemistry, electronics and information sciences.
Hughes utilizes a large number of patents and trademarks which are held
by Hughes or its affiliates. Hughes believes that, in the aggregate, the rights
existing under such patents, trademarks and licenses are important. Hughes
believes that its competitive position is dependent on research, engineering
and production capabilities. Hughes actively pursues patent and trademark
protections of its technological and engineering innovations, and actively
pursues enforcement of its intellectual property rights.
Legal Proceedings
Satellite Contract Dispute. On or about October 25, 1996, an action was
commenced by Comsat Corporation against PanAmSat, News Corporation Limited and
Grupo Televisa, S.A., in the United States District Court for the Central
District of California. The complaint alleges that News Corp. wrongfully
terminated an agreement with Comsat for the lease of transponders on an
Intelsat satellite over the term of a five-year lease, breached certain alleged
promises related to such agreement, and breached its alleged obligations under
a tariff filed by Comsat with the Federal Communications Commission. As to
PanAmSat, the complaint alleges that PanAmSat, alone and in conspiracy with
Grupo Televisa, intentionally interfered with the alleged agreement and with
Comsat's economic relationship with News Corp. Comsat had previously filed a
similar action in the United States District Court for the District of
Maryland. By order dated October 10, 1996, the Maryland District Court
dismissed without prejudice the complaint in that action on the ground that the
court lacked personal jurisdiction over all of the defendants. The complaint in
the present action seeks actual and consequential damages, and punitive or
exemplary damages in an amount to be determined at trial. PanAmSat believes
this action is without merit. It intends to vigorously contest this matter,
although there can be no assurance that PanAmSat will prevail. Following the
completion of pretrial discovery, all defendants moved for summary judgment
dismissing the case. These motions are awaiting action by the court. If
PanAmSat were not to prevail, the amounts involved could be material to
PanAmSat.
Financing Contract Dispute. General Electric Capital Corporation and
DIRECTV, Inc. entered into a contract on July 31, 1995, in which General
Electric Capital agreed to provide financing for consumer purchases of DIRECTV
programming and related hardware. Under the contract, General Electric Capital
also agreed to provide certain related services to DIRECTV, including credit
risk scoring, billing and collections services. DIRECTV agreed to act as a
surety for loans complying with the terms of the contract. Hughes guaranteed
DIRECTV's performance under the contract. A complaint and counterclaim have
been filed by the parties in the U.S. District Court for the District of
Connecticut concerning General Electric Capital's performance and DIRECTV's
obligation to act as a surety. General Electric Capital claims damages from
DIRECTV in excess of $140 million. DIRECTV is seeking damages from General
Electric Capital in excess of $70 million. Management of Hughes intends to
vigorously contest General Electric Capital's allegations and pursue its own
contractual right and remedies. The management of Hughes does not believe that
the litigation will have a material adverse impact on Hughes results of
operations or financial position. Pretrial discovery is not yet completed in
the case and no trial date has been set.
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Raytheon Purchase Price Adjustment Dispute. In connection with the 1997
spin-off of the defense electronics business of Hughes' predecessor and the
subsequent merger of that business with Raytheon Company, the terms of the
merger agreement provided processes for resolving disputes that might arise in
connection with post-closing financial adjustments that were also called for by
the terms of the merger agreement. Such financial adjustments might require a
cash payment from Raytheon to Hughes or vice versa. A dispute currently exists
regarding the post-closing adjustments which Hughes and Raytheon have proposed
to one another and related issues regarding the adequacy of disclosures made by
Hughes to Raytheon in the period prior to consummation of the merger. In an
attempt to resolve the dispute, Hughes gave notice to Raytheon to commence an
arbitration process pursuant to the procedures under the merger agreement.
Raytheon responded by filing an action in Delaware Chancery Court which seeks
to enjoin the arbitration as premature. That litigation is now inactive and
Raytheon and Hughes are now proceeding with the dispute resolution process. It
is possible that the ultimate resolution of the post-closing financial
adjustment and of related disclosure issues may result in Hughes making a
payment to Raytheon that would be material to Hughes. However, the amount of
any payment that either party might be required to make to the other cannot be
determined at this time. Hughes intends to vigorously pursue resolution of the
disputes through the arbitration processes, opposing the adjustments proposed
by Raytheon, and seeking the payment from Raytheon that it has proposed.
Personalized Media Patent Dispute. In November 1996, Personalized Media
Communications, Inc. brought an International Trade Commission proceeding
against DIRECTV, U.S. Satellite Broadcasting Company, Hughes Network Systems
and other manufacturers of receivers for the DIRECTV system. Personalized Media
sought to prevent importation of certain receivers manufactured in Mexico,
alleging infringement of one of its patents. During 1997, the International
Trade Commission held for DIRECTV and other respondents on all claims at issue,
finding each to be invalid. Personalized Media appealed these adverse rulings
to the Court of Appeals for the Federal Circuit. During 1998, the Court of
Appeals affirmed the lower holdings as to three of the claims, and remanded to
the International Trade Commission for further deliberation on a remaining
claim. Also in 1996, Personalized Media filed a related action in the U.S.
District Court for the Northern District of California. This case has been
stayed pending outcome of the International Trade Commission proceeding. The
complaint alleges infringement and willful infringement of three Personalized
Media patents, and seeks unspecified damages, trebling of damages, an
injunction and attorneys' fees. Hughes denies that it engaged in acts of
infringement of the asserted patents and intends to vigorously contest these
claims.
In addition, Hughes is involved in routine litigation incidental to the
conduct of its business. Hughes does not believe that any of such litigation
will have a material adverse effect on its business.
Employees
As of March 31, 1999, Hughes employed approximately 15,500 persons.
As of March 31, 1999, approximately 13% of Hughes' work force in the
United States was represented by unions. Hughes has not experienced any
significant labor problems in the past five years, and management considers its
employee relations to be good.
Properties
As of March 31, 1999, Hughes had approximately 152 locations operating in
20 states and 51 cities in the United States and approximately 28 additional
locations in 19 cities in approximately 17 countries outside the United States.
At such date, approximately 2.8 million square feet of space was owned by
Hughes and an additional 2.8 million square feet of space was leased.
Environmental
Hughes is subject to the requirements of federal, state, local and
foreign environmental and occupational safety and health laws and regulations.
These include laws regulating air emissions, water
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discharge and waste management. Hughes has an environmental management
structure designed to facilitate and support its compliance with these
requirements. Hughes cannot assure you, however, that it is at all times in
complete compliance with all such requirements. Although Hughes has made and
will continue to make capital and other expenditures to comply with
environmental requirements, it does not expect capital or other expenditures
for environmental compliance to be material in 1999. Environmental requirements
are complex, change frequently and have tended to become more stringent over
time. Accordingly, there can be no assurance that these requirements will not
change or become more stringent in the future in a manner that could have a
material adverse effect on Hughes' business.
Hughes is also subject to environmental laws requiring the investigation
and cleanup of environmental contamination. Hughes believes its reserve is
adequate to cover environmental investigation and cleanup, although there can
be no assurance that Hughes' environmental cleanup costs and liabilities will
not exceed the current amount of its reserve.
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MANAGEMENT OF HUGHES
The principal executive officers and executives having primary
responsibility for business units of Hughes include the following:
<TABLE>
<CAPTION>
Name Age Positions
------------------- --- ------------------------------------------------
<C> <C> <S>
Michael T. Smith 55 Chairman of the Board and Chief Executive
Officer
Charles H. Noski 46 President and Chief Operating Officer
Steven D. Dorfman 63 Vice Chairman
Jack A. Shaw 60 Corporate Executive Vice President and Chairman
and Chief Executive Officer, Hughes Network
Systems
Roxanne S. Austin 38 Corporate Senior Vice President and Chief
Financial Officer
Eddy W. Hartenstein 48 Corporate Senior Vice President and President,
DIRECTV
Pradman P. Kaul 52 Corporate Senior Vice President and President
and Chief Operating Officer, Hughes Network
Systems
Tig H. Krekel 45 Corporate Senior Vice President and President
and Chief Executive Officer, Hughes Space and
Communications Company
Larry D. Hunter 48 Corporate Vice President and Chairman and
President, DIRECTV Japan Management Inc.
Kevin N. McGrath 46 Chairman, Galaxy Latin America LLC
R. Douglas Kahn 46 President and Chief Executive Officer, PamAmSat
Corporation
Marcy J. K. Tiffany 50 Corporate Vice President and General Counsel
</TABLE>
Mr. Dorfman will retire effective June 1, 1999.
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OVERVIEW OF GM CAPITAL STOCK
General
GM is authorized to issue 2,706,000,000 shares of capital stock,
consisting of:
. 6,000,000 shares of preferred stock, without par value;
. 100,000,000 shares of preference stock, $0.10 par value, 3,925,000
shares of which are designated as series D 7.92% preference stock,
and 5,750,000 shares of which are designated as series G 9.12%
preference stock; and
. 2,600,000,000 shares of GM common stock comprising two classes,
which currently include 2,000,000,000 shares of common stock, $1
2/3 par value, and 600,000,000 shares of Class H common stock.
On April 15, 1999, the following shares of capital stock of GM were
outstanding:
. 753,663 shares of series D 7.92% preference stock, represented by
approximately 3,014,654 depositary shares;
. 1,253,852 shares of series G 9.12% preference stock, represented
by approximately 5,015,410 depositary shares;
. 648,638,131 shares of $1 2/3 par value common stock; and
. 106,792,158 shares of Class H common stock.
There are currently no outstanding shares of preferred stock.
GM Preferred Stock
GM's restated certificate of incorporation authorizes the board of
directors to issue shares of preferred stock from time to time in distinctly
designated series, with each series ranking equally and identical in all
respects except as to the dividend rate and redemption price. Preferred stock,
if any, would rank senior to preference stock and common stock with respect to
payments of dividends and distributions in liquidation. If any shares of
preferred stock are issued, no cash dividends could be paid on any class of
common stock or any series of preference stock if current assets of GM in
excess of its current liabilities were less than $75 per share of outstanding
preferred stock.
There are currently no outstanding shares of preferred stock and GM's
board of directors has no current intent to issue any preferred stock. However,
if any shares were issued, they would not be entitled to vote except that:
. they would vote together with the holders of common stock on the
disposition of GM's assets as an entirety;
. if GM has defaulted in paying dividends on preferred stock for six
months, the holders of preferred stock, voting as a class, would
be entitled to elect one-quarter of the directors; and
. certain mortgaging or pledging of, or the placing of certain liens
upon, GM's property would require the approval of the holders of
three-fourths of any outstanding preferred stock.
Preference Stock
GM's restated certificate of incorporation authorizes GM's board to issue
series of preference stock from time to time in distinctly designated series,
with the terms of each series fixed by GM's board in the resolutions providing
for the issuance of such series. GM's preference stock ranks senior to its
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common stock and junior to its preferred stock, if any, with respect to
payments of dividends and distributions in liquidation. GM currently has two
series of preference stock outstanding: Series D 7.92% preference stock and
Series G 9.12% preference stock. The Series D and Series G preference shares
are represented by Series D and Series G depositary shares, respectively, which
are listed on the New York Stock Exchange.
Dividends. Subject to the rights of the holders of preferred stock, if
any were outstanding, dividends will be paid on the outstanding Series D and
Series G preference shares when, as and if declared by GM's board out of
General Motors' assets legally available therefor. Dividends may be subject to
restrictions contained in any future debt agreements of General Motors and to
limitations contained in future series or classes of preferred stock or
preference stock.
Holders of Series D preference shares are entitled to receive cumulative
cash dividends, at the annual rate of 7.92% of the per share stated value,
which is equivalent to $7.92 per annum per Series D preference share. Holders
of Series G preference shares are entitled to receive cumulative cash
dividends, at the annual rate of 9.12% of the per share stated value, which is
equivalent to $9.12 per annum per Series G preference share. Dividends on the
Series D and Series G preference shares are payable quarterly for each of the
quarters ending March, June, September and December of each year, payable in
arrears on the first day that is not a legal holiday of each succeeding May,
August, November and February, respectively. Each such dividend will be paid to
holders of record on each record date, which is the day not less than 10 nor
more than 50 days preceding the payment date fixed by GM's board. Dividends on
the Series D and Series G preference shares, whether or not declared, are
cumulative from the respective dates of original issue of the Series D and
Series G preference shares. The amount of dividends payable for any period
shorter than a full quarterly dividend period will be determined on the basis
of a 360-day year consisting of twelve 30-day months. Accrued but unpaid
dividends do not bear interest.
Preferential dividends accrue whether or not General Motors has earnings,
whether or not there are funds legally available for the payment of such
dividends and whether or not such dividends are declared. Dividends accumulate
to the extent they are not paid on the dividend payment date following the
calendar quarter for which they accrue. Accumulated preferential dividends do
not bear interest. Unless the full preferred dividends accumulated on all
outstanding Series D and Series G preference shares have been paid, GM may not:
. pay dividends on any class of its common stock or other stock
ranking junior to the Series D and Series G preference shares,
other than a dividend payable in shares of any class of common
stock; or
. redeem, repurchase or otherwise acquire any shares of its common
stock or other stock ranking junior to the Series D and Series G
preference shares, other than a redemption or purchase of shares
of common stock made in connection with employee incentive or
benefit plans of General Motors or its subsidiaries.
Dividends will not be declared on any series of preference stock for any prior
dividend payment period unless there shall have been declared on all
outstanding shares of preference stock ranking on a parity with such series, in
respect of all dividend payment periods of such parity stock terminating with
or before such prior dividend payment period, like proportionate dividends
determined ratably in proportion to the respective preferential dividends
accumulated to date on such series and the dividends accumulated on all such
outstanding parity preference stock.
Conversion. The Series D and Series G preference shares are not
convertible into shares of any other class of capital stock of General Motors.
Redemption. The Series D and Series G preference shares may not be
redeemed prior to August 1, 1999 and January 1, 2001, respectively. On or after
August 1, 1999 and January 1, 2001, respectively, General Motors may, at its
option, on not less than 35 nor more than 60 days' notice, redeem the Series
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D and Series G preference shares, as a whole or in part, at any time or from
time to time, for cash in an amount equal to $100 per Series D or Series G
preference share, as applicable, plus an amount equal to all dividends accrued
and unpaid thereon to the date fixed for redemption. If less than all of the
outstanding shares of the series of preference shares are to be redeemed,
shares to be redeemed will be selected by General Motors by lot or pro rata or
by any other method determined by General Motors in its sole discretion to be
equitable. Holders of Series D and Series G preference shares have no right to
require redemption of such shares.
Liquidation Preference. In the event of the liquidation, dissolution or
winding up of the business of General Motors, whether voluntary or involuntary,
the holders of Series D and Series G preference shares would be entitled to the
liquidation preference described below, after the holders of preferred stock,
if any were outstanding, received the full preferential amounts to which they
are entitled and before any distribution to holders of common stock. The
holders of the Series D and Series G preference shares would be entitled to
receive for each share $100 plus an amount equal to all dividends accrued and
unpaid thereon to the date of final distribution to such holders, subject to
the right of the holders of record of any Series D or Series G preference share
on a record date for payment of dividends thereon to receive a dividend payable
on the date of final distribution, but such holders shall not be entitled to
any further payment. If there are insufficient assets to permit full payment to
holders of the Series D and Series G preference shares and the holders of all
other series of preference stock on parity with the Series D and G preference
shares as to liquidation rights, then the holders of the Series D and Series G
preference shares and such other shares shall be paid ratably in proportion to
the full distributable amounts to which holders of all such parity shares are
respectively entitled upon such dissolution, liquidation or winding up.
Voting. The Series D and Series G preference shares do not entitle
holders thereof to voting rights, except:
. with respect to any amendment or alteration of any provision of
the General Motors' restated certificate of incorporation which
would adversely affect the powers, preference or special rights of
the Series D or Series G preference shares, which requires the
prior approval of the holders of at least two-thirds of the
outstanding Series D or Series G preference shares, as the case
may be;
. in the event General Motors fails to pay accumulated preferential
dividends on the Series D or Series G preference shares in full
for any six quarterly dividend payment periods, whether or not
consecutive, and all such dividends remain unpaid; and
. as required by law.
In the event of a preferential dividend default as described above, the number
of directors of General Motors will be increased by two and the holders of the
outstanding Series D or Series G preference shares, as the case may be, voting
together as a class with all other series of preference stock ranking junior to
or on a parity with such preference shares and then entitled to vote on the
election of such directors, will be entitled to elect such two additional
directors until the full dividends accumulated on all outstanding Series D or
Series G preference shares, as the case may be, have been paid.
GM's Dual-Class Common Stock Capital Structure
GM has two classes of common stock: $1 2/3 common stock and Class H
common stock. GM's restated certificate of incorporation restricts the power of
the GM board to declare and pay dividends on either class of common stock. The
amounts which may be declared and paid by the GM board as dividends on common
stock are allocated to each separate class of common stock and are subject to
the amount legally available for the payment of dividends by GM. For dividend
purposes, this allocation serves to preserve for each class of GM common
stockholders an interest in retained earnings that is not shared by the other
class. This restriction does not require a physical segregation of the assets
of GM on the one hand and Hughes on the other. It also does not require
separate accounts or separate dividend or
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liquidation preferences of GM and Hughes assets for the benefit of the holders
of either of the separate classes of GM common stock. The holders of Class H
common stock, like the holders of $1 2/3 common stock, have liquidation rights
in the equity and assets of GM.
The existence of two classes of common stock with separate dividend
rights can give rise to potential divergences among the interests of the
holders of the two classes of GM common stock concerning various intercompany
transactions and other matters. The laws of Delaware govern the duties of the
GM board with respect to these divergences. Under Delaware law, the GM board
owes an equal fiduciary duty to all holders of GM common stock and must act
with due care and on an informed basis in the best interests of GM and all
common stockholders, regardless of class. In this regard, the GM board, in the
discharge of its fiduciary duties, principally through its capital stock
committee, oversees the policies, programs and practices of GM which may impact
the potentially divergent interests of the two classes of GM common stock. The
capital stock committee is comprised entirely of independent directors of GM.
The GM by-laws currently provide that the capital stock committee is
responsible for reviewing the policies and practices of GM with respect to
matters in which the two classes of stockholders may have divergent interests,
particularly as they relate to:
. the business and financial relationships between GM and any of its
units and Hughes;
. dividends in respect of, disclosures to stockholders and the
public concerning, and transactions by GM or any of its
subsidiaries in, shares of Class H common stock; and
. any matters arising concerning these items;
all to the extent the capital stock committee may deem appropriate. The capital
stock committee may also recommend changes in policies, programs and practices
as it may deem appropriate.
The capital stock committee's principal role is not to make decisions
concerning matters referred to its attention, but rather to oversee the process
by which decisions concerning these matters are made. The capital stock
committee conducts its oversight with a view toward, among other things,
assuring a process of fair dealing between GM and Hughes as well as fair
consideration of the interests of all of GM's common stockholders in the
resolution of these matters.
GM Board Policy Statement
In connection with its determination of the terms of the Class H common
stock at the time of the Hughes reorganization transactions in December 1997,
the GM board adopted a policy statement concerning GM's dual-class common stock
structure.
As set forth therein, this policy statement may be modified or rescinded
at any time and from time to time by the GM board. Also, notwithstanding the
policy statement or the provisions concerning recapitalization of the Class H
common stock into $1 2/3 common stock at a 120% exchange ratio as provided
under certain circumstances in GM's restated certificate of incorporation, the
GM board may propose to GM's common stockholders for their approval one or more
transactions on terms different from those provided for by such provisions or
by this policy statement. GM's board has no present intention to modify or
rescind this policy statement or to propose a recapitalization of the Class H
common stock. See "Risk Factors--Risk Factors Relating to GM's Dual-Class
Common Stock Capital Structure--GM Board Policies and Practices Relating to
Class H Common Stock Can Be Changed Without Stockholder Approval."
The policy statement is set forth below in its entirety. Terms defined
below in the GM board policy statement do not apply to the rest of this
document.
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GM Board Policy Statement Regarding Certain Capital Stock Matters
(A) General Policy. It is the policy of the Board of Directors of General
Motors Corporation (the "GM Board"):
(1) that all material matters as to which the holders of the two
classes of GM common stock may have potentially divergent interests
shall be resolved in a manner which the GM Board determines to be in
the best interests of General Motors Corporation and all of its
common stockholders after giving fair consideration to the
potentially divergent interests and all other relevant interests of
the holders of the separate classes of GM common stock; and
(2) that a process of fair dealing shall govern the relationship
between GM and HEC and the means by which the terms of any material
transaction between them shall be determined.
(B) Additional Matters. In relation to the foregoing policy, it is the
further policy of the GM Board that:
(1) Quarterly Dividends.
(a) In contemplation of the GM Board's duty periodically to
consider an appropriate dividend policy and practice in relation to
Class H common stock and its expectation that the Board of Directors
of HEC (the "HEC Board") shall, at least annually, consider and
determine a quarterly dividend policy with respect to the common
stock of HEC (100% of which is held by GM), the GM Board shall, at
least annually, determine a quarterly dividend policy with respect to
the Class H common stock.
(b) The quarterly dividend policy of the GM Board with respect to
the Class H common stock shall be to declare and pay quarterly
dividends on the Class H common stock in an amount equal to the
product of (i) the aggregate amount of each quarterly dividend
received by GM as a stockholder of HEC, if any, multiplied by (ii)
the fraction used to determine the Available Separate Consolidated
Net Income of Hughes (as such term is used in GM's restated
certificate of incorporation, as amended) at the time such dividend
was declared by HEC.
(c) GM's payment of a quarterly dividend on the Class H common
stock shall be made as soon as practicable after receipt of the
corresponding dividend payment from HEC.
(2) Principles Governing Dividends and Distributions Other Than
Quarterly Dividends.
(a) Except as provided in paragraph (B)(2)(b) below, in the event
that HEC directly or indirectly makes any transfer of material assets
to GM or to GM's stockholders:
(i) Transfers of HEC Assets to GM. If such transfer of assets by
HEC is to GM, the GM Board shall as soon thereafter as practicable
declare and pay a dividend or make other provision with respect to
a distribution on the Class H common stock so that there shall be
distributed to the holders of Class H common stock a portion of
such assets transferred to GM that is not less than the fraction
used to determine the Available Separate Consolidated Net Income of
Hughes at the time of such transfer to GM; provided that, if the GM
Board determines that it is not reasonably practicable or not in
the best interests of the holders of Class H common stock for GM to
distribute any such assets to the holders of Class H common stock,
GM shall distribute to such holders cash or other noncash assets
having an equivalent fair value; and
(ii) Transfers of HEC Assets to GM's Stockholders. If such
transfer of assets by HEC is to GM's stockholders, the portion of
such assets transferred to the holders of Class H common stock
shall be not less than the fraction used to determine the Available
Separate Consolidated Net Income of Hughes at the time of such
transfer.
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(b) Exceptions to Foregoing Principles. The provisions of
paragraph (B)(2)(a) above shall not apply to any of the following
asset transfers:
(i) any transfer that results in the recapitalization of Class H
common stock into $1 2/3 Par Value Common Stock pursuant to the
provisions of paragraph (c) of Division I of Article Fourth of GM's
restated certificate of incorporation, as amended;
(ii) any transfer that is made pursuant to the quarterly dividend
policy described in paragraph (B)(1) above;
(iii) any transfer that is made in the ordinary course of HEC's
business;
(iv) any transfer for which HEC shall have received fair
compensation as determined pursuant to this policy as described in
paragraph (A) above, provided that, where required by paragraph
(B)(3) below, stockholder consent to such transfer shall have been
received; and
(v) any transfer which shall have received the consent of the
holders of a majority of the outstanding shares of Class H common
stock, voting as a separate class, and $1 2/3 Par Value Common
Stock, voting as a separate class.
(3) Separate Class Votes of GM's Stockholders as a Condition to
GM's Acquisition of a Significant Portion of HEC Assets. GM shall not
acquire in one transaction or a series of related transactions a
significant portion of the business of HEC for compensation without
receiving the consent of the holders of a majority of the outstanding
shares of Class H common stock, voting as a separate class, and $1
2/3 Par Value Common Stock, voting as a separate class. For purposes
of this paragraph, "significant portion of the business of HEC" shall
mean more than 33% of the business of HEC, based on the fair market
value of the assets, both tangible and intangible, of HEC as of the
time that the proposed transaction is approved by the GM Board.
(4) Basis for Commercial Transactions Between GM and HEC. GM and
HEC shall operate on the principle that all material commercial
transactions between them shall be based on commercially reasonable
terms.
(C) Meaning of "GM" and "HEC" Within This Policy. For purposes of this
policy, "GM" shall mean General Motors Corporation and its affiliates (other
than HEC), and "HEC" shall mean Hughes Electronics Corporation, including any
person controlled by Hughes Electronics Corporation.
(D) Role of Capital Stock Committee Relating to This Policy. The Capital
Stock Committee of the GM Board shall oversee the implementation of, and shall
have authority to interpret, this policy.
(E) Delegation. In administering this policy, the GM Board may, at its
option, delegate its authority, including to the Capital Stock Committee, and
may delegate to members of management the authority to implement any matter
pursuant to this policy.
(F) Fiduciary Obligations. In making any and all determinations in
connection with this policy, either directly or by appropriate delegation of
authority, the GM Board shall act in its fiduciary capacity and pursuant to
legal guidance concerning its obligations under applicable law.
(G) GM Board May Make Future Proposals to Stockholders for
Recapitalization Transactions Which Would Be on Terms Different from Those in
GM's Current Restated Certificate of Incorporation, as Amended. Consistent with
the terms of both GM's restated certificate of incorporation, as amended, and
Delaware General Corporation Law, the GM Board may, in the future, propose
recapitalization transactions to GM stockholders on terms different from those
provided for under GM's restated certificate of incorporation, as amended. Such
alternative proposals were utilized by GM's Board of Directors in connection
with the split-off of Electronic Data Systems Corporation in 1996 and the spin-
off of the defense electronics business of HEC in 1997.
(H) Interpretation, Amendments and Modifications of This Policy. This
policy may at any time and from time to time be modified, rescinded and
interpreted by the GM Board, and the GM Board
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may adopt additional or other policies or make exceptions with respect to the
application of this policy in connection with particular facts and
circumstances, all as the GM Board may determine, consistent with its fiduciary
duties to General Motors Corporation and all of its common stockholders, to be
in the best interests of General Motors Corporation and all of its common
stockholders, and any such action may be taken with or without the approval of
the stockholders of General Motors Corporation.
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DESCRIPTION OF CLASS H COMMON STOCK
Introduction to The Class H Common Stock
The following is a general description of the Class H common stock. In
addition to this description, we urge you to refer to Article Fourth of GM's
restated certificate of incorporation, which sets forth in full the terms of
the Class H common stock. See "Where You Can Find More Information."
Class H common stock is designed to provide holders with financial
returns based on the financial performance of Hughes. To further this
objective:
. GM's restated certificate of incorporation allocates earnings of
GM attributable to Hughes between amounts available for the
payment of dividends on Class H common stock and amounts available
for the payment of dividends on the $1 2/3 common stock, which
also permits a corresponding calculation of the earnings per share
of GM attributable to the Class H common stock and the $1 2/3
common stock; and
. the GM board adopts dividend policies and practices concerning the
Class H common stock consistent with this design objective as more
fully described below and under "Overview of GM Capital Stock."
GM is the issuer of the Class H common stock. The GM board is free at any time
to change its dividend policies and practices concerning the Class H common
stock or the $1 2/3 common stock. See "Risk Factors--Risk Factors Relating to
GM's Dual-Class Common Stock Capital Structure--GM Board Policies and Practices
Relating to Class H Common Stock Can Be Changed Without Stockholder Approval."
GM Restated Certificate of Incorporation Provisions Regarding Dividends
Calculation of Amount Available for Dividends on Class H Common Stock
The financial performance of Hughes determines the earnings per share of
Class H common stock and the portion of GM's earnings out of which dividends on
the Class H common stock may be paid. In order to determine what amount is
available to pay dividends on the Class H common stock, the following steps are
taken:
. the net income of Hughes is determined for each quarterly
accounting period;
. the net income of Hughes determined for each quarter is divided
into amounts allocated to the Class H common stock and the $1 2/3
common stock; and
. the amount allocated to the Class H common stock, referred to as
the available separate consolidated net income of Hughes, is
accumulated from quarter to quarter, together with any surplus
attributable to shares of Class H common stock issued from time to
time, and is reduced by the amount of any dividends actually paid
on the Class H common stock.
GM Board's Discretion Regarding Payment of Dividends on Class H Common
Stock
After the amount available to pay dividends on the Class H common stock
is determined as provided above, the GM board may decide to pay or not pay
dividends on the Class H common stock in its discretion. This discretion is
subject to the following restrictions:
. The holders of GM preferred stock, if any, and GM preference stock
may have a higher priority claim on amounts that would otherwise
be available to pay dividends on the Class H common stock, to the
extent that dividends have been accumulated but not paid on GM's
preferred or preference stock.
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. Under Delaware law, GM can only pay dividends to the extent that
it has surplus--the extent to which the fair market value of GM's
net assets exceeds the amount of GM's capital--or the extent of
GM's net profits for the then current and/or the preceding fiscal
year.
Due to the foregoing restrictions, it is possible that, even though the net
income of Hughes is sufficient to permit the payment of a dividend on the Class
H common stock, payment of a dividend on the Class H common stock would not be
permitted because of the requirements for the payment of dividends on GM
preferred or preference stock or the Delaware law surplus restriction described
above.
Any dividends declared or paid on each class of GM common stock from time
to time will reduce the amount available for future payments of dividends on
that class. The amount available for dividends on each class will also depend
on any adjustments to GM's capital or surplus due to repurchases or issuances
of shares of that class. In addition, as provided by Delaware law, the GM board
may adjust for any reason it deems appropriate the amount of surplus, and
therefore the amount available for dividends on each class. Delaware law also
permits the board of directors to adjust in the exercise of its business
judgment the total amount legally available for the payment of dividends to
reflect a re-valuation of the corporation's assets and liabilities.
Within the constraints mentioned above, the GM board can determine, in
its sole discretion, the timing of declarations and payments, and the amounts,
of dividends on each class of GM common stock. The GM board may, in its sole
discretion, declare dividends payable exclusively to the holders of $1 2/3
common stock, exclusively to the holders of Class H common stock, or to the
holders of both classes in equal or unequal amounts. The GM board may make its
decision notwithstanding the respective amounts of surplus available for
dividends to each class, the voting and liquidation rights of each class, the
amount of prior dividends declared on each class or any other factor. However,
the maximum amount declared as dividends on either class of GM common stock
cannot exceed the amount available for dividends on each class of common stock
under the GM restated certificate of incorporation. See "--Dividend Policy."
As of December 31, 1998, based on the stockholders' equity of GM
reflected in its consolidated balance sheet and subject to the GM board's
authority to make adjustments, the cumulative amount available for payment of
dividends on GM common stock was approximately $19.0 billion. Of this total,
approximately $15.2 billion was available for dividends on the $1 2/3 common
stock and approximately $3.8 billion was available for dividends on the Class H
common stock.
You should note that, since the completion of the restructuring of Hughes
in late 1997, although payment of dividends on the Class H common stock has
been permitted, the GM board has decided not to pay, and does not intend to pay
in the foreseeable future, cash dividends on Class H common stock.
Class H Dividend Base Adjustments
Under the GM restated certificate of incorporation, the GM board may
adjust the denominator of the fraction that determines the net income of Hughes
attributable to the Class H common stock, i.e., the Class H dividend base, from
time to time as the GM board deems appropriate to reflect the following:
. subdivisions and combinations of the Class H common stock and
stock dividends payable in shares of Class H common stock to
holders of Class H common stock;
. the fair market value of contributions of cash or property by GM
to Hughes, or of cash or property of GM to or for the benefit of
employees of Hughes for employee benefit plans or arrangements of
GM, Hughes or other GM subsidiaries;
. the contribution of shares of capital stock of GM to or for the
benefit of employees of Hughes or its subsidiaries for benefit
plans or arrangements of GM, Hughes or other GM subsidiaries;
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. payments made by Hughes to GM of amounts applied to the repurchase
by GM of shares of Class H common stock, so long as the GM board
has approved the repurchase and applied the payment to each
repurchase; and
. the repurchase by Hughes of shares of Class H common stock that
are no longer outstanding, so long as the GM board approved the
repurchase.
Detailed Calculation of Amount Available for Dividends on Class H Common Stock
General
The following is a more detailed description of the method used to
determine the amount of Hughes' earnings available for the payment of dividends
on the Class H common stock, i.e., the available separate consolidated net
income of Hughes. The available separate consolidated net income of Hughes is
the net income of Hughes, its subsidiaries and successors after December 17,
1997 on a consolidated basis, determined in accordance with generally accepted
accounting principles, without giving effect to any adjustment which would
result from accounting for the 1985 acquisition by GM of Hughes Aircraft
Company, a predecessor of Hughes, using the purchase method of accounting,
calculated for each quarterly accounting period and multiplied by a fraction.
The fraction reflects the derivative or "tracking stock" interests of each of
GM's classes of common stock in the earnings of Hughes for dividend purposes.
. The numerator of the fraction is the weighted average number of
shares of Class H common stock outstanding during any applicable
accounting period.
. The denominator of the fraction is the notional number of shares
of Class H common stock which, if issued and outstanding, would
represent 100% of the tracking stock interest in the earnings of
Hughes. This denominator is also referred to in the GM restated
certificate of incorporation as the "Class H dividend base."
. The Class H dividend base was initially established by the GM
board in connection with the 1985 acquisition of Hughes Aircraft
Company and the initial issuance of Class H common stock. The
Class H dividend base was determined by negotiation between GM and
the seller of Hughes Aircraft Company based on the value of Hughes
immediately after the acquisition and the amount of Class H common
stock the seller was to receive in the transaction. It has since
been adjusted by the GM board in accordance with the GM restated
certificate of incorporation to reflect various events, including
a stock split in 1988 and contributions by GM of Class H common
stock to Hughes from time to time for use in connection with
employee benefit plans. The amount of the Class H dividend base
was continued when the Class H common stock was recapitalized as
part of the 1997 restructuring of Hughes. The Class H dividend
base was adjusted in connection with Hughes' acquisition of
PRIMESTAR/Tempo Satellite and U.S. Satellite Broadcasting Company
as described elsewhere in this prospectus. The Class H dividend
base will be adjusted in connection with this offering and the
related equity contribution by GM and is subject to future
adjustment, as described below.
. For the quarter ended March 31, 1999, the numerator of the
fraction was approximately 106.3 million and the denominator was
approximately 400.2 million. The resulting fraction, approximately
26.6%, represents the current tracking stock interest in the
earnings of Hughes allocated to the holders of the Class H common
stock. The remaining 73.4% of the tracking stock interest is
currently allocated to the holders of $1 2/3 common stock.
. The currently outstanding shares of Class H common stock do not
represent a 100% tracking stock interest in the earnings of Hughes
because GM has not yet issued the full number of shares of Class H
common stock which can be issued under GM's restated certificate
of incorporation, as determined by the Class H dividend base. To
the
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extent GM issues more Class H common stock, the percentage of the
earnings of Hughes allocated to Class H common stockholders would
increase and the remaining tracking stock interest in the earnings
of Hughes that would be allocated to the holders of $1 2/3 common
stock would proportionately decrease. Such percentage will also be
affected by any related adjustments to the Class H dividend base.
At such time, if any, as GM has issued a number of shares of Class
H common stock which causes the fraction to be equal to one, the
holders of Class H common stock would have a 100% tracking stock
interest in the earnings of Hughes and the holders of $1 2/3
common stock would have no tracking stock interest in Hughes'
earnings.
. All determinations of the available separate consolidated net
income of Hughes are in the discretion of the GM board and are
final and binding on all GM stockholders.
You may calculate the approximate earnings per share attributable to
Class H common stock by dividing the quarterly earnings allocated to Class H
common stock, i.e., the available separate consolidated net income of Hughes,
by the weighted average number of these shares outstanding during the quarter.
The weighted average number of shares of Class H common stock outstanding is
also the numerator of the fraction used to determine the available separate
consolidated net income of Hughes. You may also calculate approximately the
same amount by dividing the quarterly earnings, i.e., net income, of Hughes
used in computing the available separate consolidated net income of Hughes by
the Class H dividend base.
Calculation of Fraction Following the Offering
The fraction is generally determined at the end of each quarter. As of
March 31, 1999, the portion of Hughes' earnings allocable to the Class H common
stock was about 26.6%, calculated as follows:
<TABLE>
<S> <C> <C> <C>
Average number of
shares of
Class H common stock
outstanding 106.3 million = 26.6%
-------------------- -------------
Average Class H
dividend base 400.2 million
</TABLE>
Since March 31, 1999, an additional shares of Class H common
stock were issued in the PRIMESTAR/Tempo Satellite and U.S. Satellite
Broadcasting Company acquisitions. In connection with these acquisitions, the
Class H dividend base was also adjusted. Giving effect to these additional
issuances and adjustments for a full quarter, the fraction would be calculated
as follows:
<TABLE>
<S> <C> <C> <C>
Average number of shares
of
Class H common stock
outstanding + = %
-------------------- ---------------
Average Class H dividend
base +
</TABLE>
Similarly, this offering will affect the fraction. The numerator, the
number of shares of Class H common stock outstanding, will be increased by the
number of shares sold in the offering. Because GM will contribute the proceeds
of this offering to Hughes, the denominator of this fraction, the Class H
dividend base, will also be increased by the number of shares sold in the
offering. In addition, the Class H dividend base will be further increased to
reflect the contribution to Hughes by GM of an additional $500 million
substantially simultaneously with the closing of the offering. The actual
increase to the dividend base associated with the additional GM contribution
will be determined based on the price for shares of Class H common stock in
this offering. For purposes of the below, we have assumed that this price is
$ per share, the closing sale price set forth on the cover of this
prospectus. Accordingly, giving effect to the offering and these adjustments
for a full quarter, the fraction would be calculated as follows:
<TABLE>
<S> <C> <C> <C>
Average number of shares
of
Class H common stock
outstanding = %
-------------------------- ------------
Average Class H dividend
base
</TABLE>
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Thus, after this offering and the contribution by GM, about % of Hughes'
earnings will be allocated to the Class H common stock for earnings per share
and dividend purposes. The balance, about %, will be allocated to GM's
other class of common stock, its $1 2/3 common stock.
Dividend Policy
GM's board has adopted a policy statement which, among other things,
provides that the GM board's quarterly dividend policy regarding the Class H
common stock is to declare and pay quarterly dividends on the Class H common
stock in an amount that will equal the product of the aggregate amount of each
quarterly dividend GM receives as a stockholder of Hughes, if any, multiplied
by the fraction used to determine the available separate consolidated net
income of Hughes at the time the dividend is declared by Hughes. The policy
statement expressly provides that GM will pay the quarterly dividend on the
Class H common stock as soon as practicable after receipt of the corresponding
dividend payment from Hughes. For the text of the GM board policy statement,
see "Overview of GM Capital Stock--GM Board Policy Statement."
Delaware law and the GM restated certificate of incorporation do not
require the GM board to declare dividends on any class of GM common stock. The
declaration of any dividend on either class is a matter to be acted upon by the
GM board upon the recommendation of GM management. If and to the extent the GM
board chooses to declare dividends on either or both of the classes of GM
common stock, neither Delaware law nor the GM restated certificate of
incorporation requires any proportionate or other fixed relationship between
the amount of the dividends declared on the different classes of common stock.
The GM board reserves the right to reconsider from time to time its policies
and practices regarding dividends on GM common stock and to increase or
decrease the dividends paid on GM common stock. The GM board may reconsider
such matters on the basis of GM's consolidated financial position, which
includes liquidity and other factors, and, with regard to Class H common stock,
the earnings and consolidated financial position of Hughes. You many find
information regarding GM and its consolidated financial performance, including
management's discussion and analysis, in the documents incorporated into this
prospectus by reference.
Since the completion of the restructuring of Hughes in late 1997, GM has
not paid dividends on the Class H common stock and does not expect to do so in
the foreseeable future. Future earnings of Hughes are expected to be retained
for the development of the business of Hughes.
Voting Rights
GM's restated certificate of incorporation entitles holders of Class H
common stock and $1 2/3 common stock to a fixed number of votes per share on
all matters submitted to GM's common stockholders for a vote. Except as
described below, holders of Class H common stock vote together as a single
class with the holders of $1 2/3 common stock based on their respective voting
rights described in the GM restated certificate of incorporation. The GM
restated certificate of incorporation entitles each share of Class H common
stock to 0.60 vote per share and each share of $1 2/3 common stock to one vote
per share. The number of votes for each share of Class H common stock and $1
2/3 common stock is subject to adjustment as described below under "--
Subdivision or Combination." Class H common stock votes separately as a class
only on any amendment to the GM restated certificate of incorporation which
adversely affects the rights, powers or privileges of the Class H common stock
or increases in the number of authorized shares of Class H common stock.
Neither holders of Class H common stock nor holders of $1 2/3 common stock
vote, either as a separate class or together, on any adjustment of the Class H
dividend base or any other determination made in the calculation of the
available separate consolidated net income of Hughes.
Liquidation Rights
In the event of the liquidation, dissolution or winding up of the
business of GM, whether voluntary or involuntary, GM's restated certificate of
incorporation provides that, after the holders of GM
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preferred stock and GM preference stock receive their full preferential
amounts, holders of Class H common stock and holders of $1 2/3 common stock
will receive the assets remaining for distribution to GM's stockholders on a
per share basis in proportion to their respective per share liquidation units.
Subject to adjustment as described below under "--Subdivision or Combination,"
each share of Class H common stock has liquidation units equal to its number of
votes, i.e., 0.60 liquidation unit, as described above under "--Voting Rights."
Similarly, each share of $1 2/3 common stock has one liquidation unit. Holders
of the 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 include
100% of the stock of Hughes.
Subdivision or Combination
If GM subdivides or combines the outstanding shares of the $1 2/3 common
stock or the Class H common stock, GM will appropriately adjust the voting and
liquidation rights of shares of Class H common stock relative to $1 2/3 common
stock. In the event that GM issues shares of Class H common stock as a dividend
on shares of $1 2/3 common stock, GM will adjust the liquidation rights of the
applicable class of common stock so that the relative aggregate liquidation
rights of each stockholder would not change as a result of the dividend.
Recapitalization and Certain Other Transactions
Under GM's restated certificate of incorporation, the GM board may
recapitalize all outstanding shares of Class H common stock as shares of $1 2/3
common stock at any time after December 31, 2002 in the sole discretion of the
GM board or automatically, if at any time GM, in one transaction or a series of
related transactions, disposes of substantially all of the business of Hughes
to a person, entity or group of which GM is not a majority owner. For purposes
of the recapitalization provisions of GM's restated certificate of
incorporation, substantially all of the business of Hughes means at least 80%
of the business of Hughes, based on the fair market value of the assets, both
tangible and intangible, of Hughes as of the time of the proposed transaction.
No automatic recapitalization will occur on a disposition in connection with
the dissolution, liquidation and winding up of GM and the distribution of the
net assets of GM to GM's common stockholders. In the event of any
recapitalization, each holder of Class H common stock would receive shares of
$1 2/3 common stock having a market value as of the date provided in GM's
restated certificate of incorporation equal to 120% of the market value of the
holder's Class H common stock. Notwithstanding this provision of GM's restated
certificate of incorporation or the policy statement adopted by GM's board, the
GM board may propose to GM's common stockholders for their approval one or more
transactions on terms different than those provided by this provision or by the
GM board policy statement. See "Risk Factors--Risk Factors Relating to GM's
Dual-Class Common Stock Capital Structure--GM Board Policies and Practices
Relating to Class H Common Stock Can Be Changed Without Stockholder Approval"
and "Overview of GM Capital Stock--GM Board Policy Statement."
GM would not issue any fractional shares of $1 2/3 common stock in an
exchange. In lieu of fractional shares, a holder of Class H common stock would
receive cash equal to the product of the fraction of a share of $1 2/3 common
stock which the holder would otherwise receive multiplied by the average market
price per share of the $1 2/3 common stock on the valuation date, determined as
provided in GM's restated certificate of incorporation.
The GM board policy statement provides, among other things, that, subject
to various exceptions, in the event that Hughes transfers any material assets
to GM, the GM board shall declare and pay a dividend or make a distribution to
holders of Class H common stock. In this event, these holders would receive a
portion of the assets or cash or other assets having an equivalent fair value
that is not less at the time of the transfer than the fraction used to
determine the available separate consolidated net income of Hughes. The policy
statement also provides that, subject to various exceptions, in the event that
Hughes transfers any material assets to GM's stockholders, the portion of the
assets transferred to the holders of Class H common stock will not be less at
the time of the transfer than the fraction used to determine the available
separate consolidated net income of Hughes. The exceptions to the provisions
above include an exception for any transfer for which Hughes receives fair
compensation. However, the
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policy statement provides that GM will not acquire in one transaction or a
series of transactions a significant portion, i.e., more than 33%, of the
business of Hughes for compensation without receiving the consent of the
holders of a majority of the outstanding shares of Class H common stock, voting
as a separate class, and $1 2/3 common stock, voting as a separate class. See
"Overview of GM Capital Stock--GM Board Policy Statement."
Stock Exchange Listing
The Class H common stock is listed on the New York Stock Exchange under
the symbol "GMH." Application has been made to list on the New York Stock
Exchange the shares of Class H common stock offered hereby.
Transfer Agent and Registrar; Direct Registration System
BankBoston, N.A. serves as the transfer agent and registrar for the Class
H common stock. Class H common stock is registered in book-entry form through
the direct registration system. Under this system, unless a Class H stockholder
requests a stock certificate, ownership of Class H common stock is reflected in
account statements periodically distributed to Class H common stockholders by
BankBoston, who holds the book-entry shares on behalf of Class H common
stockholders.
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS H COMMON STOCK
The following is a general discussion of material U.S. federal income and
estate tax consequences of the ownership and disposition of Class H common
stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" means any
holder that is, for United States federal income tax purposes:
. nonresident alien individual;
. foreign corporation;
. nonresident alien fiduciary of a foreign estate or trust; or
. foreign partnership, one or more of the members of which is a
nonresident alien individual, a foreign corporation or a
nonresident alien fiduciary of a foreign estate or trust.
This discussion is based on currently existing provisions of the Internal
Revenue Code, existing, temporary and proposed Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect or proposed on the date hereof and all of which are subject to change,
possibly with retroactive effect. This discussion is limited to Non-U.S.
Holders who hold their shares of Class H common stock as capital assets within
the meaning of Section 1221 of the Code. Moreover, this discussion is for
general information only and does not address all of the tax consequences that
may be relevant to particular Non-U.S. Holders in light of their personal
circumstances, nor does it discuss certain tax provisions which may apply to
individuals who relinquish their U.S. citizenship or residence.
An individual may, subject to certain exceptions, be deemed to be a
resident alien, as opposed to a non-resident alien, by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the current
calendar year; counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year. In addition to
the "substantial presence test" described in the immediately preceding
sentence, an alien may be treated as a resident alien if he
. meets a lawful permanent residence test (a so-called "green card"
test); or
. elects to be treated as a U.S. resident and meets the "substantial
presence test" in the immediately following year. Resident aliens
are subject to U.S. federal income tax as if they were U.S.
citizens.
Each prospective purchaser of common stock is advised to consult a tax
advisor with respect to current and possible future tax consequences of
purchasing, owning and disposing of Class H common stock as well as any tax
consequences that may arise under the laws of any U.S. state, municipality or
other taxing jurisdiction.
Dividends
In general, dividends paid to a Non-U.S. Holder of Class H common stock
will be subject to withholding of U.S. federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. To claim the
benefit of a lower rate under an income tax treaty, a Non-U.S. Holder of common
stock must properly file with the payer an IRS Form 1001, or successor form,
claiming an exemption from or reduction in withholding under such tax treaty.
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Any dividends paid on shares of Class H common stock to a Non-U.S. Holder
will not be subject to withholding tax, but instead are subject to U.S. federal
income tax on a net basis at applicable graduated individual or corporate rates
if:
. dividends are effectively connected with the conduct of a trade or
business by the Non-U.S. Holder within the United States; and
. an IRS Form 4224, or successor form, is filed with the payer.
Any such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional "branch profits tax"
at a rate of 30% or such lower rate as may be specified by an applicable income
tax treaty.
Unless the payer has knowledge to the contrary, dividends paid prior to
January 1, 2001 to an address outside the United States are presumed to be paid
to a resident of such country for purposes of the withholding discussed above
and for purposes of determining the applicability of a tax treaty rate.
However, recently finalized Treasury Regulations pertaining to U.S. federal
withholding tax (the "Final Withholding Tax Regulations") provide that a Non-
U.S. Holder must comply with certification procedures (or, in the case of
payments made outside the United States with respect to an offshore account,
certain documentary evidence procedures) directly or under certain
circumstances through an intermediary, to obtain the benefits of a reduced rate
under an income tax treaty with respect to dividends paid after December 31,
2000. In addition, the Final Withholding Tax Regulations will require a Non-
U.S. Holder who provides an IRS Form 4224 or successor form, as discussed
above, also to provide its U.S. taxpayer identification number.
A Non-U.S. Holder of common stock eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the IRS.
Sale of Class H Common Stock
In general, a Non-U.S. Holder will not be subject to U.S. federal income
tax on any gain realized upon the disposition of that holder's shares of Class
H common stock unless:
. the gain either
. is effectively connected with a trade or business carried on
by the Non-U.S. Holder within the United States, or
. if certain tax treaties apply, is attributable to a permanent
establishment in the United States maintained by the Non-U.S.
Holder, and, in either case, the branch profits tax discussed
above may also apply if the Non-U.S. Holder is a corporation;
. the Non-U.S. Holder is an individual who holds shares of Class H
common stock as a capital asset and is present in the United
States for 183 days or more in the taxable year of disposition,
and either
. that individual has a "tax home" (as defined for U.S. federal
income tax purposes) in the United States, unless the gain
from the disposition is attributable to an office or other
fixed place of business maintained by such Non-U.S. Holder in
a foreign country and such gain has been subject to a foreign
income tax equal to at least 10% of the gain derived from such
disposition, or
. the gain is attributable to an office or other fixed place of
business maintained by that individual in the United States;
or
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<PAGE>
. General Motors is or has been a U.S. real property holding
corporation (a "USRPHC") for U.S. federal income tax purposes, as
discussed below.
If a Non-U.S. Holder who is an individual is subject to the rules
described in the first bullet point above, he or she will, unless an applicable
tax treaty provides otherwise, be taxed on the net gain derived from the sale
at regular graduated U.S. federal income tax rates. If an individual Non-U.S.
Holder falls under the second bullet point (i.e., holders with 183 days or more
of presence in the U.S.) above, he or she will be subject to a flat 30% tax on
the gain derived from the sale. If a Non-U.S. Holder that is a corporation
falls under the first bullet point above, it will be taxed on the net gain from
the sale at regular graduated U.S. federal income tax rates and may be subject
to an additional branch profits tax at a rate of 30%, or such lower rate as may
be specified by an applicable tax treaty, on the repatriation from the United
States of its "effectively connected earnings and profits," subject to certain
adjustments.
A corporation is a USRPHC if the fair market value of the U.S. real
property interests held by the corporation is 50% or more of the aggregate fair
market value of its U.S. and foreign real property interests and any other
assets used or held for use by the corporation in a trade or business. Based on
its current and anticipated assets, General Motors believes that it is not
currently, and is not likely to become, a USRPHC. However, since the
determination of USRPHC status is based upon the composition of the assets of
General Motors from time to time, and because there are uncertainties in the
application of certain relevant rules, there can be no assurance that General
Motors will not become a USRPHC. If General Motors were to become a USRPHC,
then gain on the sale or other disposition of Class H common stock by a Non-
U.S. Holder generally would be subject to U.S. federal income tax unless both:
. the common stock was "regularly traded" on an established
securities market within the meaning of applicable Treasury
regulations; and
. the Non-U.S. Holder actually or constructively owned 5% or less of
Class H common stock during the shorter of the five-year period
preceding such disposition or the Non-U.S. Holder's holding
period.
Non-U.S. Holders should consult their tax advisors concerning any U.S. tax
consequences that may arise if General Motors were to become a USRPHC.
Federal Estate Tax
Unless an applicable estate tax treaty provides otherwise, any shares of
Class H common stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for U.S. federal estate tax purposes) of the
United States at the time of death will be includable in the individual's gross
estate for U.S. federal estate tax purposes, and therefore may be subject to
U.S. federal estate tax.
Backup Withholding, Information Reporting and Other Reporting Requirements
General Motors must report annually to the IRS and to each Non-U.S.
Holder the amount of dividends paid to such holder and the tax withheld with
respect to such dividends, regardless of whether withholding was required.
Copies of the information returns reporting such dividends and withholding may
also be made available to the tax authorities in the country in which the Non-
U.S. Holder resides under the provisions of an applicable income tax treaty or
certain other agreements.
Backup withholding is imposed at the rate of 31% on certain payments to
persons that fail to furnish certain identifying information to the payer.
Backup withholding generally will not apply to dividends paid prior to January
1, 2001 to a Non-U.S. Holder at an address outside the United States, unless
the payer has knowledge that the payee is a U.S. person. In the case of
dividends paid on shares of Class H common stock after December 31, 2000, the
Final Withholding Tax Regulations provide that a Non-U.S. Holder generally will
be subject to withholding tax at a 31% rate unless certain certification
procedures, or, in the case of payments made outside the United States with
respect to an offshore account, certain documentary evidence procedures, are
complied with, directly or under certain
84
<PAGE>
circumstances through an intermediary. Backup withholding and information
reporting generally will also apply to dividends paid on Class H common stock
at addresses inside the United States to Non-U.S. Holders that fail to provide
certain identifying information in the manner required. The Final Withholding
Tax Regulations provide certain presumptions under which a Non-U.S. Holder
would be subject to backup withholding and information reporting unless
certification from the holder of the holder's Non-U.S. status is provided.
The payment of proceeds from the disposition of Class H common stock by
or through a U.S. office of a broker will be subject to information reporting
and backup withholding unless the beneficial owner provides the payer with its
name and address and certifies, under penalties of perjury, that it is a Non-
U.S. Holder, or otherwise establishes an exemption. The payment of proceeds
from the disposition of Class H common stock to or through a non-U.S. office of
a non-U.S. broker generally will not be subject to backup withholding and
information reporting except as noted below. Unless a broker has documentary
evidence in its files that the owner of Class H common stock is a Non-U.S.
Holder and has no actual knowledge to the contrary, the non-U.S. broker will be
subject to information reporting, but not backup withholding, if those proceeds
are paid to or through a non-U.S. office and that broker is:
. a U.S. person;
. a "controlled foreign corporation" for U.S. federal income tax
purposes;
. a foreign person 50% or more of whose gross income from certain
periods is effectively connected with a U.S. trade or business; or
. in the case of payments made after December 31, 2000, a foreign
partnership with certain connections to the United States, a U.S.
branch of a foreign bank or a foreign insurance company, as more
completely described in the recently finalized Treasury
regulations.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against the Non-U.S. Holder's U.S. federal
income tax liability provided the required information is furnished in a timely
manner to the IRS.
85
<PAGE>
UNDERWRITING
General
The Class H common stock will be offered in the United States and Canada
through a number of U.S. underwriters as well as elsewhere through
international managers. Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Salomon Smith Barney
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, ING Baring Furman
Selz LLC, J.P. Morgan Securities Inc. and SG Cowen Securities Corporation, are
U.S. representatives of each of the U.S. underwriters named below. Subject to
the terms and conditions set forth in a purchase agreement among GM and the
U.S. underwriters, and concurrently with the sale of shares of Class H
common stock to the international managers, GM has agreed to sell to the U.S.
underwriters, and each of the U.S. underwriters severally and not jointly has
agreed to purchase from GM, the number of shares of Class H common stock set
forth opposite its name below.
<TABLE>
<CAPTION>
Number
of
U.S. Underwriter Shares
---------------- --------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Goldman, Sachs & Co...............................................
Morgan Stanley & Co. Incorporated.................................
Salomon Smith Barney Inc..........................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
ING Baring Furman Selz LLC........................................
J.P. Morgan Securities Inc........................................
SG Cowen Securities Corporation...................................
--------
Total.........................................................
========
</TABLE>
GM has also agreed with certain international managers outside the United
States and Canada, for whom Merrill Lynch International, Goldman Sachs
International, Morgan Stanley & Co. International Limited, Salomon Brothers
International Limited, Donaldson, Lufkin & Jenrette International, ING Barings
Limited as agent for ING Bank N.V., London branch, J.P. Morgan Securities Ltd.
and SG Cowen Securities International L.P. are acting as managers, that,
subject to the terms and conditions set forth in the purchase agreement, and
concurrently with the sale of shares of Class H common stock to the U.S.
underwriters pursuant to the purchase agreement, to sell to the international
managers, and the international managers severally have agreed to purchase from
GM, an aggregate of shares of Class H common stock. The public
offering price per share and the total underwriting discount per share of Class
H common stock are identical for the U.S. shares and the international shares.
In the purchase agreement, the several U.S. underwriters and the several
international managers, respectively, have agreed, subject to the terms and
conditions set forth therein, to purchase all of the shares of Class H common
stock being sold under the terms of the purchase agreement if any of the shares
of Class H common stock being sold under the purchase agreement are purchased.
In the event of a default by an underwriter, the purchase agreement provides
that, in certain circumstances, the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreement may be terminated. The
closings with respect to the sale of shares of Class H common stock to be
purchased by the U.S. underwriters and the international managers are
conditioned upon one another.
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<PAGE>
GM has agreed to indemnify the U.S. underwriters and the international
managers against some liabilities, including some liabilities under the
Securities Act, or to contribute to payments the U.S. underwriters and the
international managers may be required to make in respect of those liabilities.
The shares of Class H common stock are being offered by the several
underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
underwriters and certain other conditions. The underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part.
Commissions and Discounts
The U.S. representatives have advised us that the U.S. underwriters
propose initially to offer the shares of Class H common stock to the public at
the public offering price set forth on the cover page of this prospectus, and
to certain dealers at such price less a concession not in excess of $ per
share of Class H common stock. The U.S. underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share of Class H
common stock to certain other dealers. After the initial public offering, the
public offering price, concession and discount may change.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the U.S. underwriters and the
international managers and the proceeds before expenses to GM. This information
is presented assuming either no exercise or full exercise by the U.S.
underwriters and the international managers of their over-allotment options.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price............................ $ $ $
Underwriting discount............................ $ $ $
Proceeds, before expenses, to GM................. $ $ $
</TABLE>
The underwriters have agreed to reimburse GM for certain of its expenses
in connection with the offering.
Intersyndicate Agreement
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the terms of the intersyndicate agreement, the U.S.
underwriters and the international managers are permitted to sell shares of
Class H common stock to each other for purposes of resale at the public
offering price, less an amount not greater than the selling concession. Under
the terms of the intersyndicate agreement, the U.S. underwriters and any dealer
to whom they sell shares of Class H common stock will not offer to sell or sell
shares of Class H common stock to persons who are non-U.S. or non-Canadian
persons or to persons they believe intend to resell to persons who are non-U.S.
or non-Canadian persons, and the international managers and any dealer to whom
they sell shares of Class H common stock will not offer to sell or sell shares
of Class H common stock to U.S. persons or to Canadian persons or to persons
they believe intend to resell to U.S. or Canadian persons, except in the case
of transactions under the terms of the intersyndicate agreement.
Over-allotment Option
GM has granted an option to the U.S. underwriters, exercisable for 30
days after the date of this prospectus, to purchase up to an aggregate of
additional shares of Class H common stock at the public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
U.S. underwriters may exercise this option solely to cover over-allotments, if
any, made on the sale of the Class H common stock offered hereby. To the extent
that the U.S. underwriters exercise this option, each U.S. underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares of Class H common stock proportionate to such U.S. underwriter's initial
amount reflected in the foregoing table.
87
<PAGE>
GM has also granted an option to the international managers, exercisable
for 30 days after the date of this prospectus, to purchase up to an aggregate
of additional shares of Class H common stock to cover over-allotments,
if any, on terms similar to those granted to the U.S. underwriters.
No Sales of Similar Securities
GM has agreed, with certain exceptions, without the prior written consent
of Merrill Lynch and Goldman Sachs on behalf of the underwriters, for a period
of 90 days after the date of this prospectus, not to directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, lend or otherwise
dispose of or transfer any shares of Class H common stock or
securities convertible into or exchangeable or exercisable for or
repayable with Class H common stock, whether now owned or later
acquired by the person executing the agreement or with respect to
which the person executing the agreement later acquires the power
of disposition, or file a registration statement under the
Securities Act relating to any shares of Class H common stock; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of Class H common
stock whether any such swap or transaction is to be settled by
delivery of Class H common stock or other securities, in cash or
otherwise.
In addition, persons that received million shares of Class H common stock
in connection with the merger of U.S. Satellite Broadcasting Company and Hughes
have entered into agreements containing the same restrictions on transfer of
their Class H common stock described above.
New York Stock Exchange Listing
The Class H common stock is listed on the New York Stock Exchange under
the symbol "GMH."
Price Stabilization and Short Positions
Until the distribution of the Class H common stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the
underwriters and certain selling group members to bid for and purchase shares
of Class H common stock. As an exception to these rules, the U.S.
representatives are permitted to engage in transactions that stabilize the
price of the Class H common stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Class H common stock.
If the underwriters create a short position in the Class H common stock
in connection with the offering, i.e., if they sell more shares of Class H
common stock than are set forth on the cover page of this prospectus, the U.S.
representatives may reduce that short position by purchasing Class H common
stock in the open market. The U.S. representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither GM, Hughes nor any of the underwriters makes any representation
or prediction as to the direction or magnitude or any effect that the
transactions described above may have on the price of the Class H common stock.
In addition, neither GM, Hughes nor any of the underwriters makes any
representation that the U.S. representatives or the lead managers will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
88
<PAGE>
Other Relationships
Some of the underwriters or their affiliates have provided investment
banking, financial advisory and banking services to GM, Hughes and their
respective affiliates, for which they have received customary compensation. The
underwriters may continue to render these services in the future.
The net proceeds from the offering will be contributed by GM to Hughes.
Hughes will use these funds, together with an additional $500 million
contributed to it by GM, to repay loans which were made to Hughes by affiliates
of some of the underwriters. Because more than 10% of the proceeds of the
offering are intended to be directed to affiliates of some of the underwriters,
the offering is being made pursuant to the provisions of section (c)(8) of Rule
2710 of the NASD Conduct Rules.
LEGAL MATTERS
The legality of shares of the Class H common stock offered hereby will be
passed upon for General Motors by Warren G. Andersen, Attorney, Legal Staff of
General Motors. Mr. Andersen beneficially owns shares of each class of General
Motors common stock, including shares subject to options.
The legality of the shares offered hereby will be passed upon for the
underwriters by Davis Polk & Wardwell. Davis Polk & Wardwell acts as counsel to
the Executive Compensation Committee of the Board of Directors of GM and has
acted as counsel for GM and its subsidiaries in various matters.
EXPERTS
The consolidated financial statements and the related financial statement
schedule of GM as of December 31, 1998 and 1997 and for each of the three years
in the period ended December 31, 1998 incorporated in this prospectus by
reference from GM's Current Report on Form 8-K dated April 12, 1999 and filed
April 15, 1999 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The financial statements of Hughes as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998, included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of U.S. Satellite Broadcasting
Company as of December 31, 1998 and 1997, and for each of the three years in
the period ended December 31, 1998, incorporated by reference herein have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are incorporated by reference herein in
reliance on the authority of said firm as experts in giving said report.
The consolidated financial statements and schedules of PRIMESTAR, Inc.
and subsidiaries as of December 31, 1998 and 1997, and for each of the years in
the three-year period ended December 31, 1998, have been incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The consolidated financial statements and schedule of TCI Satellite and
subsidiaries as of December 31, 1998 and 1997, and for each of the years in the
three-period ended December 31, 1998, have been incorporated by reference
herein and in the registration statement in reliance upon the report of
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<PAGE>
KPMG LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements which may constitute
"forward-looking statements" within the meaning of various provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934. All statements,
other than statements of historical facts, included in this prospectus that
address activities, events or developments that we expect or anticipate will or
may occur in the future, references to future success and other matters are
forward-looking statements including statements preceded by, followed by or
that include the words "believes," "expects," "intends" or "anticipates," or
similar expressions. These statements are based on certain assumptions and
analyses made in light of our experience and perception of historical trends,
current conditions and expected future developments as well as other factors we
believe are appropriate in the circumstances. However, whether actual future
results and developments will conform with our expectations and predictions is
subject to a number of risks and uncertainties, including the risk factors
discussed in this prospectus; general economic, market or business conditions;
the opportunities that may be presented to and pursued by us and our respective
subsidiaries; competitive actions in the industry; changes in laws or
regulations; and other factors, many of which are beyond our and our
subsidiaries' control. Consequently, all of the forward-looking statements made
in this prospectus are qualified by these cautionary statements and there can
be no assurance that the actual results or developments we anticipate will be
realized or, even if realized, that they will have the expected consequences to
or effects on us and our respective subsidiaries or their business or
operations. The cautionary statements contained or referred to in this section
should be considered in connection with any subsequent written or oral forward-
looking statements that we or persons acting on our behalf may issue.
WHERE YOU CAN FIND MORE INFORMATION
GM files annual, quarterly and current reports, proxy statements and
other information with the SEC. GM's filings include information relating to
Hughes. You may read and copy any reports, statements or other information that
the companies file at the SEC's public reference rooms in Washington, D.C., New
York, New York, and Chicago, Illinois. Please call the SEC at (800) SEC-0330
for further information on the public reference rooms. GM public filings are
also available to the public from commercial document retrieval services and at
the Internet World Wide Web site maintained by the SEC at "http://www.sec.gov".
Reports, proxy statements and other information filed by GM is also available
for inspection at the offices of the New York Stock Exchange, Inc., 120 Broad
Street, New York, New York 10005.
GM has filed a registration statement on Form S-3 to register with the
SEC the Class H common stock offered in this offering. This prospectus is part
of this registration statement. As allowed by the SEC rules, however, this
prospectus does not contain all of the information you can find in the
registration statement or the exhibits to the registration statement.
The SEC allows GM to incorporate by reference information into this
prospectus, which means that GM can disclose information to you by referring
you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information contained directly in the prospectus
or in later filed documents incorporated by reference in the prospectus. This
prospectus incorporates by reference the documents set forth below that each of
GM, Hughes, U.S. Satellite Broadcasting Company, PRIMESTAR and TCI Satellite
have previously filed with the SEC. These documents contain important
information about GM, Hughes, U.S. Satellite Broadcasting Company, PRIMESTAR
and TCI Satellite and their respective financial condition.
90
<PAGE>
<TABLE>
<CAPTION>
GM Filings (File No. 1-143) Period
- ---------------------------------------------------- --------------------------------------------
<S> <C>
Annual Report on Form 10-K, except for Item 6, Item Fiscal Year ended December 31, 1998
7, Item 8, Item 14(a)(2), and Item 14, Exhibit 12
Current Reports on Form 8-K Date filed: January 15, 1999; January 20,
1999; January 22, 1999; January 27, 1999;
February 5, 1999; April 9, 1999 (2 reports);
April 15, 1999 (2 reports); and April 21,
1999
Description of the Class H common stock set forth in
Article Fourth of GM's Restated Certificate of
Incorporation as amended, filed as Exhibit 3(i) to
the Current Report on Form 8-K dated June 8, 1998
<CAPTION>
U.S. Satellite Broadcasting Company, Inc. Filings
(File No. 0-27492) Period
- ---------------------------------------------------- --------------------------------------------
<S> <C>
Consolidated financial statements (including the Fiscal Year ended December 31, 1998
notes thereto), included in the Annual Report on
Form 10-K
<CAPTION>
PRIMESTAR Filings (File No. 0-23883) Period
- ---------------------------------------------------- --------------------------------------------
<S> <C>
Consolidated financial statements (including the Fiscal Year ended December 31, 1998
notes thereto), included in the Annual Report on
Form 10-K
<CAPTION>
TCI Satellite Entertainment, Inc. Filings (File No.
0-21317) Period
- ---------------------------------------------------- --------------------------------------------
<S> <C>
Consolidated financial statements (including the Fiscal Year ended December 31, 1998
notes thereto), included in the Annual Report on
Form 10-K
</TABLE>
GM hereby incorporates by reference into this prospectus additional
documents that it may file with the SEC between the date of this prospectus and
the termination of the offering of the shares offered hereby. These include
periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, as well as proxy statements.
You may have received some of the documents incorporated by reference,
but you can obtain any of them through GM or the SEC or the SEC's Internet site
described above. Documents incorporated by reference are available from GM
without charge, excluding all exhibits unless specifically incorporated by
reference as exhibits in this prospectus. You may obtain documents incorporated
by reference in this prospectus by requesting them in writing or by telephone
from the appropriate party at the following address:
General Motors Corporation
100 Renaissance Center
Detroit, Michigan 48243-7301
Attention: Hughes Electronics Investor Relations
(310) 662-9688
If you request any incorporated documents from us, we will mail them to
you by first class mail, or other equally prompt means, within one business day
of receipt of your request.
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<PAGE>
APPENDIX A
FINANCIAL STATEMENTS OF HUGHES
<TABLE>
<CAPTION>
Index Page
- ----- ----
<S> <C>
Hughes Unaudited Supplemental Pro Forma Financial Data:
Introduction............................................................. A-2
Condensed Statement of Income............................................ A-3
Condensed Balance Sheet.................................................. A-3
Selected Segment Data.................................................... A-4
Selected Financial Data.................................................. A-5
Hughes Financial Statements:
Independent Auditors' Report............................................. A-6
Statement of Income and Available Separate Consolidated Net Income....... A-7
Balance Sheet............................................................ A-8
Statement of Changes in Owner's Equity................................... A-9
Statement of Cash Flows for the three years ended December 31, 1998...... A-10
Notes to Financial Statements............................................ A-11
</TABLE>
A-1
<PAGE>
HUGHES UNAUDITED SUPPLEMENTAL PRO FORMA FINANCIAL DATA
Hughes' financial statements reflect the application of purchase
accounting adjustments as described in Note 1 to the financial statements,
which follow the unaudited supplemental pro forma financial data. However, as
provided in GM's restated certificate of incorporation, the earnings
attributable to Class H common stock for purposes of determining the amount
available for the payment of dividends on Class H common stock specifically
excludes such adjustments. More specifically, amortization of the intangible
assets associated with GM's 1985 purchase of Hughes Aircraft Company, a
predecessor of Hughes, amounted to $21.0 million in 1998, 1997 and 1996. Such
amounts are excluded from the earnings available for the payment of dividends
on Class H common stock and are charged against earnings available for the
payment of dividends on GM's $1 2/3 par value common stock. Unamortized
purchase accounting adjustments associated with GM's purchase of Hughes
Aircraft Company were $426.6 million, $447.6 million and $468.6 million at
December 31, 1998, 1997 and 1996, respectively.
A-2
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*
PRO FORMA CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Millions
Except Per Share Amounts)
<S> <C> <C> <C>
Total revenues................................... $5,963.9 $5,128.3 $4,008.7
Total costs and expenses......................... 5,693.8 4,821.9 3,798.6
-------- -------- --------
Operating profit................................. 270.1 306.4 210.1
Non-operating (expense) income................... (58.3) 332.8 33.0
Income taxes..................................... (44.7) 236.7 104.8
Minority interests in net losses of
subsidiaries.................................... 24.4 24.8 52.6
Income (loss) from discontinued operations....... 64.0 (7.4)
Extraordinary item............................... (20.6)
Cumulative effect of account change.............. (9.2)
-------- -------- --------
Earnings Used for Computation of Available
Separate Consolidated Net Income............... $ 271.7 $ 470.7 $ 183.5
======== ======== ========
Earnings Attributable to General Motors
Class H Common Stock on a Per Share Basis:
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change............................. $ 0.70 $ 1.07 $ 0.48
Discontinued operations........................ 0.16 (0.02)
Extraordinary item............................. (0.05)
Cumulative effect of accounting change......... (0.02)
-------- -------- --------
Earnings Attributable to General Motors
Class H Common Stock........................... $ 0.68 $ 1.18 $ 0.46
======== ======== ========
</TABLE>
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
ASSETS --------- ---------
(Dollars in
Millions)
<S> <C> <C>
Total Current Assets...................................... $ 3,846.4 $ 4,773.1
Satellites, net........................................... 3,197.5 2,643.4
Property, net............................................. 1,059.2 889.7
Net Investment in Sales-type Leases....................... 173.4 337.6
Intangible Assets, Investments and Other Assets, net...... 4,731.9 3,639.6
--------- ---------
Total Assets............................................ $13,008.4 $12,283.4
========= =========
LIABILITIES AND OWNER'S EQUITY
Total Current Liabilities................................. $ 2,009.5 $ 1,449.8
Long-Term Debt............................................ 778.7 637.6
Postretirement Benefits Other Than Pensions, Other
Liabilities and Deferred Credits......................... 1,783.2 1,724.1
Minority Interests........................................ 481.7 607.8
Total Owner's Equity (1).................................. 7,955.3 7,864.1
--------- ---------
Total Liabilities and Owner's Equity (1).................. $13,008.4 $12,283.4
========= =========
</TABLE>
- --------
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) General Motors' equity in its wholly-owned subsidiary, Hughes. Holders of
GM Class H common stock have no direct rights in the equity or assets of
Hughes, but rather have rights in the equity and assets of GM (which
includes 100% of the stock of Hughes).
A-3
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*--Continued
PRO FORMA SELECTED SEGMENT DATA
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
--------- --------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Direct-To-Home Broadcast
Total Revenues................................. $ 1,816.1 $ 1,276.9 $ 621.0
Operating Loss................................. (228.1) (254.6) (319.8)
Depreciation and Amortization.................. 102.3 86.1 67.3
Segment Assets................................. 2,190.4 1,408.7 1,023.4
Capital Expenditures (1)....................... 230.8 105.6 63.5
Satellite Services
Total Revenues................................. $ 767.3 $ 629.9 $ 482.8
Operating Profit............................... 321.6 296.2 242.4
Operating Profit Margin........................ 41.9% 47.0% 50.2%
Depreciation and Amortization.................. 231.7 141.9 55.2
Segment Assets................................. 5,824.2 5,612.8 1,202.6
Capital Expenditures (2)....................... 921.7 625.7 308.7
Satellite Systems
Total Revenues................................. $ 2,831.1 $ 2,491.9 $2,056.4
Operating Profit............................... 246.3 226.3 183.3
Operating Profit Margin........................ 8.7% 9.1% 8.9%
Depreciation and Amortization.................. 49.2 39.4 34.4
Segment Assets................................. 1,491.2 1,312.6 757.8
Capital Expenditures........................... 99.7 113.9 87.8
Network Systems
Total Revenues................................. $ 1,076.7 $ 1,011.3 $1,070.0
Operating Profit............................... 10.9 74.1 107.7
Operating Profit Margin........................ 1.0% 7.3% 10.1%
Depreciation and Amortization.................. 41.7 32.0 28.3
Segment Assets................................. 1,299.0 1,215.6 964.0
Capital Expenditures........................... 40.0 43.1 45.3
Eliminations and Other
Total Revenues................................. $ (527.3) $ (281.7) $ (221.5)
Operating (Loss)............................... (80.6) (35.6) (3.5)
Depreciation and Amortization.................. 8.9 (3.0) 9.4
Segment Assets................................. 2,203.6 2,733.7 (43.8)
Capital Expenditures........................... 136.3 (61.7) (55.9)
Total
Total Revenues................................. $ 5,963.9 $ 5,128.3 $4,008.7
Operating Profit............................... 270.1 306.4 210.1
Operating Profit Margin........................ 4.5% 6.0% 5.2%
Depreciation and Amortization.................. 433.8 296.4 194.6
Segment Assets................................. 13,008.4 12,283.4 3,904.0
Capital Expenditures........................... 1,428.5 826.6 449.4
</TABLE>
- --------
Certain 1997 and 1996 amounts have been reclassified to conform with 1998
classifications.
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) Includes expenditures related to satellites amounting to $70.2 million in
1998.
(2) Includes expenditures related to satellites amounting to $726.3 million,
$606.1 million and $259.2 million, respectively. Also included in the 1998
amount is $155.5 million related to the early buy-out of satellite sale-
leasebacks.
A-4
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*--Concluded
PRO FORMA SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Operating profit...................... $ 270 $ 306 $ 210 $ 172 $ 235
Income from continuing operations
before income taxes, minority
interests, extraordinary item and
cumulative effect of accounting
change............................... $ 212 $ 639 $ 243 $ 119 $ 174
Earnings used for computation of
available separate consolidated net
income............................... $ 272 $ 471 $ 184 $ 27 $ 62
Average number of GM Class H dividend
base shares (in millions) (1)........ 399.9 399.9 399.9 399.9 399.9
Owner's equity........................ $7,955 $7,864 $2,023 $2,119 $1,790
Working capital....................... $1,837 $3,323 $ 278 $ 312 $ 274
Operating profit as a percent of
revenues............................. 4.5% 6.0% 5.2% 5.4% 8.7%
Income from continuing operations
before income taxes, minority
interests, extraordinary item and
cumulative effect of accounting
change as a percent of revenues...... 3.6% 12.5% 6.1% 3.8% 6.5%
Net income as a percent of revenues... 4.6% 9.2% 4.6% 0.9% 2.3%
Return on equity (2).................. 3.4% 9.5% 8.9% 1.4% 3.8%
Income before interest expense and
income taxes as a percent of
capitalization (3)................... 3.2% 14.3% 16.3% 9.4% 14.0%
Pre-tax return on total assets (4).... 1.9% 8.2% 8.0% 3.8% 6.0%
</TABLE>
- --------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) Class H dividend base shares is used in calculating earnings attributable
to GM Class H common stock on a per share basis. This is not the same as
the average number of GM Class H shares outstanding, which was 105.3
million in 1998.
(2) Earnings used for computation of available separate consolidated net income
divided by average owner's equity (General Motors' equity in its wholly-
owned subsidiary, Hughes). Holders of GM Class H common stock have no
direct rights in the equity or assets of Hughes, but rather have rights in
the equity and assets of GM (which includes 100% of the stock of Hughes).
(3) Income from continuing operations before interest expense, income taxes,
extraordinary item and cumulative effect of accounting change divided by
average owner's equity plus average total debt.
(4) Income from continuing operations before income taxes, extraordinary item
and cumulative effect of accounting change divided by average total assets.
A-5
<PAGE>
HUGHES ELECTRONICS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Hughes Electronics Corporation:
We have audited the accompanying Balance Sheet of Hughes Electronics
Corporation (as more fully described in Note 1 to the financial statements) as
of December 31, 1998 and 1997 and the related Statement of Income and Available
Separate Consolidated Net Income, Statement of Changes in Owner's Equity and
Statement of Cash Flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of Hughes
Electronics Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hughes Electronics Corporation at December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the accompanying financial statements,
effective January 1, 1998, Hughes Electronics Corporation changed its method of
accounting for costs of start-up activities by adopting American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities.
/s/ Deloitte & Touche LLP
-----------------------------------
DELOITTE & TOUCHE LLP
Los Angeles, California
January 20, 1999
(March 1, 1999 as to Note 19)
A-6
<PAGE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF INCOME AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Millions
Except
Per Share Amounts)
<S> <C> <C> <C>
Revenues
Product sales................................. $3,360.3 $3,143.6 $3,009.0
Direct broadcast, leasing and other services.. 2,603.6 1,984.7 999.7
-------- -------- --------
Total Revenues.................................. 5,963.9 5,128.3 4,008.7
-------- -------- --------
Operating Costs and Expenses
Cost of products sold......................... 2,627.3 2,493.3 2,183.7
Broadcast programming and other costs......... 1,175.7 912.3 631.8
Selling, general and administrative expenses.. 1,457.0 1,119.9 788.5
Depreciation and amortization................. 433.8 296.4 194.6
Amortization of GM purchase accounting
adjustments.................................. 21.0 21.0 21.0
-------- -------- --------
Total Operating Costs and Expenses.............. 5,714.8 4,842.9 3,819.6
-------- -------- --------
Operating Profit................................ 249.1 285.4 189.1
Interest income................................. 112.3 33.1 6.8
Interest expense................................ (17.5) (91.0) (42.9)
Other, net...................................... (153.1) 390.7 69.1
-------- -------- --------
Income From Continuing Operations Before Income
Taxes, Minority Interests, Extraordinary Item
and Cumulative Effect of Accounting Change..... 190.8 618.2 222.1
Income taxes.................................... (44.7) 236.7 104.8
Minority interests in net losses of
subsidiaries................................... 24.4 24.8 52.6
-------- -------- --------
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change.............................. 259.9 406.3 169.9
Income (Loss) from discontinued operations, net
of taxes....................................... -- 1.2 (7.4)
Gain on sale of discontinued operations, net of
taxes.......................................... -- 62.8 --
-------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change.................... 259.9 470.3 162.5
Extraordinary item, net of taxes................ -- (20.6) --
Cumulative effect of accounting change, net of
taxes.......................................... (9.2) -- --
-------- -------- --------
Net Income...................................... 250.7 449.7 162.5
Adjustments to exclude the effect of GM purchase
accounting adjustments......................... 21.0 21.0 21.0
-------- -------- --------
Earnings Used for Computation of Available
Separate Consolidated Net Income............... $ 271.7 $ 470.7 $ 183.5
======== ======== ========
Available Separate Consolidated Net Income
Average number of shares of General Motors Class
H Common Stock outstanding (in millions)
(Numerator).................................... 105.3 101.5 98.4
Class H dividend base (in millions)
(Denominator).................................. 399.9 399.9 399.9
Available Separate Consolidated Net Income...... $ 71.5 $ 119.4 $ 45.2
======== ======== ========
Earnings Attributable to General Motors Class H
Common Stock on a Per Share Basis
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change.............................. $ 0.70 $ 1.07 $ 0.48
Discontinued operations....................... -- 0.16 (0.02)
Extraordinary item............................ -- (0.05) --
Cumulative effect of accounting change........ (0.02) -- --
-------- -------- --------
Earnings Attributable to General Motors Class H
Common Stock................................... $ 0.68 $ 1.18 $ 0.46
======== ======== ========
</TABLE>
- --------
Reference should be made to the Notes to Financial Statements.
A-7
<PAGE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
ASSETS --------- ---------
(Dollars in
Millions)
<S> <C> <C>
Current Assets
Cash and cash equivalents.............................. $ 1,342.1 $ 2,783.8
Accounts and notes receivable, net of allowances of
$23.9 and $15.2....................................... 922.4 630.0
Contracts in process, less advances and progress
payments of $27.0 and $50.2........................... 783.5 575.6
Inventories............................................ 471.5 486.4
Prepaid expenses and other, including deferred income
taxes of $33.6 and $93.2.............................. 326.9 297.3
--------- ---------
Total Current Assets..................................... 3,846.4 4,773.1
Satellites, net.......................................... 3,197.5 2,643.4
Property, net............................................ 1,059.2 889.7
Net Investment in Sales-type Leases...................... 173.4 337.6
Intangible Assets, net of accumulated amortization of
$413.2 and $318.3....................................... 3,552.2 2,954.8
Investments and Other Assets............................. 1,606.3 1,132.4
--------- ---------
Total Assets............................................. $13,435.0 $12,731.0
========= =========
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
Accounts payable....................................... $ 764.1 $ 472.8
Advances on contracts.................................. 291.8 209.8
Deferred revenues...................................... 43.8 77.8
Current portion of long-term debt...................... 156.1 --
Accrued liabilities.................................... 753.7 689.4
--------- ---------
Total Current Liabilities................................ 2,009.5 1,449.8
--------- ---------
Long-Term Debt........................................... 778.7 637.6
Deferred Gains on Sales and Leasebacks................... 121.5 191.9
Accrued Operating Leaseback Expense...................... 56.0 100.2
Postretirement Benefits Other Than Pensions.............. 150.7 154.8
Other Liabilities and Deferred Credits................... 811.1 706.4
Deferred Income Taxes.................................... 643.9 570.8
Commitments and Contingencies
Minority Interests....................................... 481.7 607.8
Owner's Equity
Capital stock and additional paid-in capital........... 8,146.1 8,322.8
Net income retained for use in the business............ 257.8 7.1
--------- ---------
Subtotal Owner's Equity.................................. 8,403.9 8,329.9
--------- ---------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment................. (37.1) (34.8)
Accumulated unrealized gains on securities........... 16.1 21.4
Accumulated foreign currency translation
adjustments......................................... (1.0) (4.8)
--------- ---------
Accumulated other comprehensive loss................... (22.0) (18.2)
--------- ---------
Total Owner's Equity..................................... 8,381.9 8,311.7
--------- ---------
Total Liabilities and Owner's Equity..................... $13,435.0 $12,731.0
========= =========
</TABLE>
- --------
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Reference should be made to the Notes to Financial Statements.
A-8
<PAGE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF CHANGES IN OWNER'S EQUITY
(Dollars in Millions)
<TABLE>
<CAPTION>
Net Accumulated
Capital Income Other
Parent Stock and Retained Compre-
Company's Additional for Use hensive Total Compre-
Net Paid-In in the Income Owner's hensive
Investment Capital Business (loss) Equity Income
---------- ---------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $ 2,615.1 $ (6.2) $2,608.9
Net distribution to
Parent Company......... (280.6) (280.6)
Net income.............. 162.5 162.5 $162.5
Foreign currency
translation
adjustments............ 0.8 0.8 0.8
------
Comprehensive income.... $163.3
--------- ------ -------- ======
Balance at December 31,
1996................... 2,497.0 (5.4) 2,491.6
Net contribution from
Parent Company......... 1,124.2 1,124.2
Transfer of capital from
Parent Company's net
investment............. (4,063.8) $4,063.8 --
Capital contribution
resulting from the
Hughes Transactions.... 4,259.0 4,259.0
Minimum pension
liability adjustment
resulting from the
Hughes Transactions.... (34.8) (34.8)
Unrealized gains on
securities resulting
from the Hughes
Transactions........... 21.4 21.4
Net income.............. 442.6 $ 7.1 449.7 $449.7
Foreign currency
translation
adjustments............ 0.6 0.6 0.6
------
Comprehensive income.... $450.3
--------- -------- ------ ------ -------- ======
Balance at December 31,
1997................... -- 8,322.8 7.1 (18.2) 8,311.7
Net income.............. 250.7 250.7 $250.7
Delco post-closing price
adjustment............. (199.7) (199.7)
Tax benefit from
exercise of GM Class H
common stock options... 23.0 23.0
Minimum pension
liability adjustment... (2.3) (2.3) (2.3)
Foreign currency
translation
adjustments............ 3.8 3.8 3.8
Unrealized gains on
securities:
Unrealized holding
gains................. 1.8 1.8 1.8
Less: reclassification
adjustment for gains
included in net
income................ (7.1) (7.1) (7.1)
------
Comprehensive income.... $246.9
--------- -------- ------ ------ -------- ======
Balance at December 31,
1998................... $ -- $8,146.1 $257.8 $(22.0) $8,381.9
========= ======== ====== ====== ========
</TABLE>
- --------
Reference should be made to the Notes to Financial Statements.
A-9
<PAGE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- ------
(Dollars in Millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income......................................... $ 250.7 $ 449.7 $162.5
Adjustments to reconcile net income to net cash
provided by continuing operations
(Income) Loss from discontinued operations, net
of taxes......................................... -- (1.2) 7.4
Gain on sale of discontinued operations, net of
taxes............................................ -- (62.8) --
Extraordinary item, net of taxes.................. -- 20.6 --
Cumulative effect of accounting change, net of
taxes............................................ 9.2 -- --
Depreciation and amortization..................... 433.8 296.4 194.6
Amortization of GM purchase accounting
adjustments...................................... 21.0 21.0 21.0
Net gain on sale of investments and businesses
sold............................................. (13.7) (489.7) (120.3)
Gross profit on sales-type leases................. -- (33.6) (51.8)
Deferred income taxes and other................... 153.2 285.5 91.9
Change in other operating assets and liabilities
Accounts and notes receivable................... (97.5) (239.0) (87.0)
Contracts in process............................ (230.9) (174.2) 54.1
Inventories..................................... 20.2 (60.7) (121.5)
Collections of principal on net investment in
sales-type leases.............................. 40.6 22.0 31.2
Accounts payable................................ 277.3 (184.1) 116.8
Advances on contracts........................... 82.0 (95.6) 97.6
Deferred revenues............................... (34.0) (21.2) 80.6
Accrued liabilities............................. 66.8 217.8 22.4
Deferred gains on sales and leasebacks.......... (36.2) (42.9) (41.6)
Other........................................... (67.3) 102.5 (90.5)
-------- -------- ------
Net Cash Provided by Continuing Operations........ 875.2 10.5 367.4
Net cash used by discontinued operations.......... -- (15.9) (8.0)
-------- -------- ------
Net Cash Provided by (Used in) Operating
Activities....................................... 875.2 (5.4) 359.4
-------- -------- ------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired...... (1,240.3) (1,798.8) (32.2)
Expenditures for property.......................... (343.6) (251.3) (261.5)
Increase in satellites............................. (945.2) (633.5) (191.6)
Proceeds from sale of investments.................. 12.4 242.0 --
Proceeds from the sale and leaseback of satellite
transponders with General Motors Acceptance
Corporation....................................... -- -- 252.0
Proceeds from the sale of minority interest in
subsidiary........................................ -- -- 137.5
Early buy-out of satellite under sale and
leaseback......................................... (155.5) -- --
Proceeds from sale of discontinued operations...... -- 155.0 --
Proceeds from disposal of property................. 20.0 55.1 15.3
Proceeds from insurance claims..................... 398.9 -- --
-------- -------- ------
Net Cash Used in Investing Activities............. (2,253.3) (2,231.5) (80.5)
-------- -------- ------
Cash Flows from Financing Activities
Long-term debt borrowings.......................... 1,165.2 2,383.3 --
Repayment of long-term debt........................ (1,024.1) (2,851.9) --
Premium paid to retire debt........................ -- (34.4) --
Contributions from (distributions to) Parent
Company........................................... -- 1,124.2 (279.8)
Payment to General Motors for Delco post-closing
price adjustment.................................. (204.7) -- --
Capital infusion resulting from Hughes
Transactions...................................... -- 4,392.8 --
-------- -------- ------
Net Cash (Used in) Provided by Financing
Activities....................................... (63.6) 5,014.0 (279.8)
-------- -------- ------
Net (decrease) increase in cash and cash
equivalents....................................... (1,441.7) 2,777.1 (0.9)
Cash and cash equivalents at beginning of the
year.............................................. 2,783.8 6.7 7.6
-------- -------- ------
Cash and cash equivalents at end of the year....... $1,342.1 $2,783.8 $ 6.7
======== ======== ======
</TABLE>
- --------
Certain 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation.
Reference should be made to the Notes to Financial Statements.
A-10
<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,
the transfer of Delco Electronics Corporation ("Delco"), the automotive
electronics business, to GM's Delphi Automotive Systems unit and the
recapitalization of GM Class H common stock into a new tracking stock, GM Class
H common stock, that is linked to the remaining telecommunications and space
business. The Hughes Transactions were followed immediately by the merger of
Hughes Defense with Raytheon Company ("Raytheon"). For the periods prior to the
consummation of the Hughes Transactions on December 17, 1997, Hughes
Electronics, consisting of its defense electronics, automotive electronics and
telecommunications and space businesses, is hereinafter referred to as former
Hughes or Parent Company.
In connection with the recapitalization of Hughes Electronics on December
17, 1997, the telecommunications and space business of former Hughes,
consisting principally of its direct-to-home broadcast, satellite services,
satellite systems and network systems businesses, was contributed to the
recapitalized Hughes Electronics. Such telecommunications and space business,
both before and after the recapitalization, is hereinafter referred to as
Hughes. The accompanying financial statements and footnotes pertain only to
Hughes and do not include balances of former Hughes related to Hughes Defense
or Delco.
Prior to the Hughes Transactions, the Hughes businesses were effectively
operated as divisions of former Hughes. For the period prior to December 18,
1997, these financial statements include allocations of corporate expenses from
former Hughes, including research and development, general management, human
resources, financial, legal, tax, quality, communications, marketing,
international, employee benefits and other miscellaneous services. These costs
and expenses have been charged to Hughes based either on usage or using
allocation methodologies primarily based upon total revenues, certain tangible
assets and payroll expenses. Management believes the allocations were made on a
reasonable basis; however, they may not necessarily reflect the financial
position, results of operations or cash flows of Hughes on a stand-alone basis
in the future. Also, prior to December 18, 1997, interest expense in the
Statement of Income and Available Separate Consolidated Net Income included an
allocated share of total former Hughes' interest expense.
The Hughes Transactions had a significant impact on the Hughes balance
sheet. Prior to the consummation of the Hughes Transactions, Hughes
participated in the centralized cash management system of former Hughes,
wherein cash receipts were transferred to and cash disbursements were funded by
former Hughes on a daily basis. Accordingly, Hughes' balance sheet included
only cash and cash equivalents held directly by the telecommunications and
space business. In conjunction with the completion of the Hughes Transactions,
certain assets and liabilities were contributed by former Hughes to Hughes. The
contributed assets and liabilities consisted principally of cash, pension
assets and liabilities, liabilities for other postretirement benefits, deferred
taxes, property and equipment, and other miscellaneous items. In addition,
Hughes received $4.0 billion of cash proceeds from the borrowings incurred by
Hughes Defense prior to its spin-off to GM.
The accompanying financial statements include the applicable portion of
intangible assets, including goodwill, and related amortization resulting from
purchase accounting adjustments associated with GM's purchase of Hughes in
1985.
A-11
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Note 2: Summary of Significant Accounting Policies
Principles of Combination and Consolidation
Prior to December 18, 1997, the financial statements present the
financial position, results of operations and cash flows of the
telecommunications and space business owned and operated by former Hughes on a
combined basis. Subsequent to the Hughes Transactions, the accompanying
financial statements are presented on a consolidated basis. The financial
statements include the accounts of Hughes and its domestic and foreign
subsidiaries that are more than 50% owned or controlled by Hughes, with
investments in associated companies in which Hughes owns at least 20% of the
voting securities or has significant influence accounted for under the equity
method of accounting.
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may be based upon amounts which differ from those estimates.
Revenue Recognition
Revenues are generated from sales of satellites and telecommunications
equipment, DTH broadcast subscriptions, and the sale of transponder capacity
and related services through outright sales, sales-type leases and operating
lease contracts.
Sales under long-term contracts are recognized primarily using the
percentage-of-completion (cost-to-cost) method of accounting. Under this
method, sales are recorded equivalent to costs incurred plus a portion of the
profit expected to be realized, determined based on the ratio of costs incurred
to estimated total costs at completion. Profits expected to be realized on
long-term contracts are based on estimates of total sales value and costs at
completion. These estimates are reviewed and revised periodically throughout
the lives of the contracts, and adjustments to profits resulting from such
revisions are recorded in the accounting period in which the revisions are
made. Estimated losses on contracts are recorded in the period in which they
are identified.
Certain contracts contain cost or performance incentives which provide
for increases in profits for surpassing stated objectives and decreases in
profits for failure to achieve such objectives. Amounts associated with
incentives are included in estimates of total sales values when there is
sufficient information to relate actual performance to the objectives.
A-12
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Sales which are not pursuant to long-term contracts are generally
recognized as products are shipped or services are rendered. DTH subscription
revenues are recognized when programming is viewed by subscribers. Programming
payments received from subscribers in advance of viewing are recorded as
deferred revenue until earned.
Satellite transponder lease contracts qualifying for capital lease
treatment (typically based on the term of the lease) are accounted for as
sales-type leases, with revenues recognized equal to the net present value of
the future minimum lease payments. Upon entering into a sales-type lease, the
cost basis of the transponder is removed and charged to cost of products sold.
The portion of each periodic lease payment deemed to be attributable to
interest income is recognized in each respective period. Contracts for sales of
transponders typically include telemetry, tracking and control ("TT&C") service
agreements. Revenues related to TT&C service agreements are recognized as the
services are performed.
Transponder and other lease contracts that do not qualify as sales-type
leases are accounted for as operating leases. Operating lease revenues are
recognized on a straight-line basis over the respective lease term. Differences
between operating lease payments received and revenues recognized are deferred
and included in accounts and notes receivable or investments and other assets.
Hughes has entered into agreements for the sale and leaseback of certain
of its satellite transponders. The leaseback transactions have been classified
as operating leases and, therefore, the capitalized cost and associated
depreciation related to satellite transponders sold are not included in the
accompanying financial statements. Gains resulting from such transactions are
deferred and amortized over the leaseback period. Leaseback expense is recorded
using the straight-line method over the term of the lease, net of amortization
of the deferred gains. Differences between operating leaseback payments made
and expense recognized are deferred and included in accrued operating leaseback
expense.
Cash Flows
Cash equivalents consist of highly liquid investments purchased with
original maturities of 90 days or less.
Net cash from operating activities includes cash payments made for
interest of $53.2 million, $156.8 million and $55.8 million in 1998, 1997 and
1996, respectively. Net cash refunds received by Hughes for prior year income
taxes amounted to $59.9 million in 1998. Cash payments for income taxes
amounted to $24.0 million and $36.5 million in 1997 and 1996, respectively.
Certain non-cash transactions occurred in connection with the
consummation of the Hughes Transactions on December 17, 1997, resulting in a
contribution of a net liability of $133.8 million.
In 1997, in a separate non-cash transaction, Hughes' subsidiary, PanAmSat
Corporation ("PanAmSat"), converted its outstanding preferred stock into debt
amounting to $438.5 million.
Contracts in Process
Contracts in process are stated at costs incurred plus estimated profit,
less amounts billed to customers and advances and progress payments applied.
Engineering, tooling, manufacturing, and applicable overhead costs, including
administrative, research and development and selling expenses, are charged to
costs and expenses when incurred. Contracts in process include amounts relating
to contracts with long production cycles, with $151.0 million of the 1998
amount expected to be billed after one year. Amounts billed under retainage
provisions of contracts are not significant, and substantially all amounts are
collectible within one year. Under certain contracts with the U.S. Government,
progress payments are received based on costs incurred on the respective
contracts. Title to the inventories related to such contracts (included in
contracts in process) vests with the U.S. Government.
A-13
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost or market principally using
the average cost method.
<TABLE>
<CAPTION>
1998 1997
------ ------
(Dollars in
Major Classes of Inventories Millions)
<S> <C> <C>
Productive material and supplies........................... $ 73.4 $ 57.5
Work in process............................................ 285.1 328.5
Finished goods............................................. 113.0 100.4
------ ------
Total.................................................... $471.5 $486.4
====== ======
</TABLE>
Property, Satellites and Depreciation
Property and satellites are carried at cost. Satellite costs include
construction costs, launch costs, launch insurance and capitalized interest.
Capitalized satellite costs represent the costs of successful satellite
launches. Satellite costs related to unsuccessful launches, net of insurance
proceeds, are recognized in the period of failure. Depreciation is computed
generally using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lesser of the life of the
asset or term of the lease.
Intangible Assets
Intangible assets, a majority of which is goodwill, are amortized using
the straight-line method over periods not exceeding 40 years.
Software Development Costs
Other assets include certain software development costs capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. Capitalized software development costs at December 31, 1998 and 1997,
net of accumulated amortization of $70.6 million and $107.7 million,
respectively, totaled $104.1 million and $99.0 million. The software is
amortized using the greater of the units of revenue method or the straight-line
method over its useful life, not in excess of five years. Software program
reviews are conducted to ensure that capitalized software development costs are
properly treated and costs associated with programs that are not generating
revenues are appropriately written off.
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.
A-14
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Research and Development
Expenditures for research and development are charged to costs and
expenses as incurred and amounted to $121.4 million in 1998, $120.4 million in
1997 and $94.6 million in 1996.
Foreign Currency
Substantially all of Hughes' foreign operations have determined the local
currency to be their functional currency. Accordingly, these foreign entities
translate assets and liabilities from their local currencies to U.S. dollars
using year-end exchange rates while income and expense accounts are translated
at the average rates in effect during the year. The resulting translation
adjustment is recorded as part of accumulated other comprehensive income
(loss), a separate component of owner's equity. Gains and losses resulting from
remeasurement into the functional currency of transactions denominated in non-
functional currencies are recognized in earnings. Net foreign currency
transaction gains and losses included in the operating results were not
material for all years presented.
Financial Instruments and Investments
Hughes maintains investments in equity securities of unaffiliated
companies. These investments are considered available-for-sale and carried at
current fair value with unrealized gains or losses, net of taxes, reported as
part of accumulated other comprehensive income (loss), a separate component of
owner's equity. Fair value is determined by market quotes, when available, or
by management estimate.
Market values of financial instruments, other than debt and derivative
instruments, are based upon management estimates. Market values of debt and
derivative instruments are determined by quotes from financial institutions.
The carrying value of cash and cash equivalents, accounts and notes
receivable, investments and other assets, accounts payable, amounts included in
accrued liabilities meeting the definition of a financial instrument and debt
approximated fair value at December 31, 1998.
Hughes' derivative contracts primarily consist of foreign exchange-
forward contracts. Hughes enters into these contracts to reduce its exposure to
fluctuations in foreign exchange rates. Foreign exchange-forward contracts are
accounted for as hedges to the extent they are designated as, and are effective
as, hedges of firm foreign currency commitments. Gains and losses on foreign
exchange-forward contracts designated as hedges of firm foreign currency
commitments are recognized in income in the same period as gains and losses on
the underlying transactions are recognized.
Stock Compensation
Hughes issues stock options to employees with grant prices equal to the
fair value of the underlying security at the date of grant. No compensation
cost has been recognized for options in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. See Note 10 for information regarding the pro forma effect on
earnings of recognizing compensation cost based on the estimated fair value of
the stock options granted, as required by SFAS No. 123, Accounting for Stock-
Based Compensation.
Compensation related to stock awards is recognized ratably over the
vesting period and, where required, periodically adjusted to reflect changes in
the stock price of the underlying security.
A-15
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Market Concentrations and Credit Risk
Sales under U.S. Government contracts were 12.4%, 15.3% and 22.5% of
total revenues in 1998, 1997 and 1996, respectively. Hughes provides services
and extends credit to a large number of customers in the commercial satellite
communications market and to a large number of residential consumers.
Management monitors its exposure to credit losses and maintains allowances for
anticipated losses.
Accounting Change
In 1998, Hughes adopted American Institute of Certified Pubic Accountants
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs previously capitalized be
written off and recognized as a cumulative effect of accounting change, net of
taxes, as of the beginning of the year of adoption. On a prospective basis,
these types of costs are required to be expensed as incurred. The unfavorable
cumulative effect of this accounting change at January 1, 1998 was $9.2 million
after-tax, or $0.02 per share of GM Class H common stock.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 requires all derivatives to be recorded as either assets or
liabilities and the instruments to be measured at fair value. Gains or losses
resulting from changes in the values of those derivatives are to be recognized
immediately or deferred depending on the use of the derivative and whether or
not it qualifies as a hedge. Hughes plans to adopt SFAS No. 133 by January 1,
2000, as required. Management is currently assessing the impact of this
statement on Hughes' results of operations and financial position.
Note 3: Property and Satellites, Net
<TABLE>
<CAPTION>
Estimated
Useful Lives
(years) 1998 1997
------------ -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Land and improvements.......................... 5-25 $ 51.7 $ 51.2
Buildings and unamortized leasehold
improvements.................................. 2-45 321.8 305.8
Machinery and equipment........................ 3-12 1,163.1 1,015.4
Furniture, fixtures and office machines........ 3-10 80.2 83.2
Construction in progress....................... -- 285.3 169.9
-------- --------
Total.......................................... 1,902.1 1,625.5
Less accumulated depreciation.................. 842.9 735.8
-------- --------
Property, net.................................. $1,059.2 $ 889.7
======== ========
Satellites..................................... 9-16 $3,783.2 $3,051.9
Less accumulated depreciation.................. 585.7 408.5
-------- --------
Satellites, net................................ $3,197.5 $2,643.4
======== ========
</TABLE>
Hughes capitalized interest of $55.3 million, $64.5 million and $12.9
million for 1998, 1997 and 1996, respectively, as part of the cost of its
satellites under construction.
A-16
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4: Leasing Activities
Future minimum lease payments due from customers under noncancelable
satellite transponder operating leases, exclusive of amounts due from subleases
reported below, are $550.5 million in 1999, $498.9 million in 2000, $477.6
million in 2001, $462.5 million in 2002, $440.7 million in 2003 and $2,031.7
million thereafter.
The components of the net investment in sales-type leases are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(Dollars in
Millions)
<S> <C> <C>
Total minimum lease payments.............................. $301.9 $662.5
Less unearned interest income and allowance for doubtful
accounts................................................. 106.0 297.1
------ ------
Total net investment in sales-type leases................. 195.9 365.4
Less current portion...................................... 22.5 27.8
------ ------
Total................................................... $173.4 $337.6
====== ======
</TABLE>
Future minimum payments due from customers under sales-type leases and
related service agreements as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Minimum Service
Lease Agreement
Payments Payments
-------- ---------
(Dollars in
Millions)
<S> <C> <C>
1999.................................................. $ 46.1 $ 4.5
2000.................................................. 44.7 5.7
2001.................................................. 45.8 5.7
2002.................................................. 44.9 5.7
2003.................................................. 43.4 5.7
Thereafter............................................ 77.0 10.4
------ -----
Total............................................... $301.9 $37.7
====== =====
</TABLE>
In February 1996, Hughes entered into a sale-leaseback agreement for
certain satellite transponders on Galaxy III-R with General Motors Acceptance
Corporation ("GMAC"), a subsidiary of GM. Proceeds from the sale were $252.0
million, and the sale resulted in a deferred gain of $108.8 million. In 1992
and 1991, Hughes entered into sale-leaseback agreements for certain
transponders on Galaxy VII and SBS-6, respectively, resulting in deferred gains
of $180.0 million in 1992 and $96.1 million in 1991. Deferred gains from sale-
leaseback agreements are amortized over the expected term of leaseback period.
In 1998, PanAmSat exercised certain early buy-out options on the SBS-6
transaction and repurchased the transponders for a total payment of $155.5
million. In January 1999, PanAmSat exercised early buy-out options for $141.3
million related to certain transponders on Galaxy VII, and has remaining early
buy-out options of approximately $227.0 million on Galaxy III-R and Galaxy VII
that can be exercised later in 1999.
A-17
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, the future minimum leaseback amounts payable to
lessors under the operating leasebacks and the future minimum sublease amounts
due from subleases under noncancelable subleases are as follows:
<TABLE>
<CAPTION>
Minimum
Leaseback Sublease
Payments Amounts
--------- --------
(Dollars in
Millions)
<S> <C> <C>
1999................................................... $ 90.9 $ 57.5
2000................................................... 120.3 58.2
2001................................................... 71.9 53.2
2002................................................... 110.9 49.5
2003................................................... 26.6 34.2
------ ------
Total................................................ $420.6 $252.6
====== ======
</TABLE>
Note 5: Accrued Liabilities
<TABLE>
<CAPTION>
1998 1997
------ ------
(Dollars in
Millions)
<S> <C> <C>
Payroll and other compensation................................... $196.5 $200.2
Contract-related provisions...................................... 138.0 76.0
Reserve for consumer finance and rebate programs................. 93.0 86.9
Other............................................................ 326.2 326.3
------ ------
Total.......................................................... $753.7 $689.4
====== ======
</TABLE>
Note 6: Long-Term Debt
<TABLE>
<CAPTION>
1998 1997
------ ------
(Dollars in
Millions)
<S> <C> <C>
Notes payable.................................................... $750.0 $ --
Revolving credit facilities...................................... 155.9 500.0
Bridge loan...................................................... -- 100.0
Other............................................................ 28.9 37.6
------ ------
Total debt....................................................... 934.8 637.6
Less current portion............................................. 156.1 --
------ ------
Total long-term debt........................................... $778.7 $637.6
====== ======
</TABLE>
Notes payable consisted of five, seven, ten and thirty-year notes
totaling $750.0 million issued by PanAmSat in January 1998. The proceeds
received were used by PanAmSat to repay the revolving credit facility of $500.0
million and bridge loan of $100.0 million outstanding at December 31, 1997. The
outstanding principal balances and interest rates for the five, seven, ten and
thirty-year notes as of December 31, 1998 were $200.0 million at 6.00%, $275.0
million at 6.13%, $150.0 million at 6.38% and $125.0 million at 6.88%,
respectively. Principal on the notes is payable at maturity, while interest is
payable semi-annually.
At December 31, 1998, Hughes' 59.1% owned subsidiary, SurFin Ltd.
("SurFin"), had a total of $155.9 million outstanding under two separate $150.0
million unsecured revolving credit facilities. The first matures on April 30,
1999 and the second matures on July 31, 1999. Both credit facilities, which are
expected to be renewed, are subject to a facility fee of 0.10% per annum.
Borrowings under these credit facilities bear interest at the Eurodollar Rate
plus 0.15% and were included in current portion of long-term debt.
A-18
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Other long-term debt at December 31, 1998 and 1997 consisted primarily of
notes bearing fixed rates of interest of 9.61% to 11.11%. Principal is payable
at maturity in April 2007 while interest is payable semi-annually. Also
included in other long-term debt at December 31, 1997 was $9.1 million of
PanAmSat Senior Notes which were repaid in 1998.
As part of a debt refinancing program undertaken by PanAmSat in 1997, an
extraordinary charge of $20.6 million ($34.4 million before taxes) was
recorded, related to the excess of the price paid for the debt over its
carrying value, net of deferred financing costs.
The aggregate maturities of long-term debt for the five years subsequent
to December 31, 1998 are $156.1 million in 1999, $200.0 million in 2003 and
$578.7 million thereafter.
Hughes has $1.0 billion of unused credit available under two unsecured
revolving credit facilities, consisting of a $750.0 million multi-year facility
and a $250.0 million 364-day facility. The multi-year credit facility provides
for a commitment of $750.0 million through December 5, 2002, subject to a
facility fee of 0.07% per annum. Borrowings bear interest at a rate which
approximates the London Interbank Offered Rate ("LIBOR") plus 0.155%. The 364-
day credit facility provides for a commitment of $250.0 million through
December 1, 1999, subject to a facility fee of 0.05% per annum. Borrowings bear
interest at a rate which approximates LIBOR plus 0.25%, with an additional
0.125% utilization fee when borrowings exceed 50% of the commitment. No amounts
were outstanding under either facility at December 31, 1998. These facilities
provide backup capacity for Hughes' $1.0 billion commercial paper program. No
amounts were outstanding under the commercial paper program at December 31,
1998.
PanAmSat maintains a $500.0 million multi-year revolving credit facility
that provides for short-term and long-term borrowings and a $500.0 million
commercial paper program that provides for short-term borrowings. The multi-
year revolving credit facility provides for a commitment through December 24,
2002, subject to a facility fee of 0.10% per annum. Borrowings bear interest at
a rate which approximates LIBOR plus 0.30%. Borrowings under the credit
facility and commercial paper program are limited to $500.0 million in the
aggregate. No amounts were outstanding under either agreement at December 31,
1998.
Note 7: Income Taxes
The provision for income taxes is based on reported income from
continuing operations before income taxes, minority interests, extraordinary
item and cumulative effect of accounting change. Deferred income tax assets and
liabilities reflect the impact of temporary differences between the amounts of
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes, as measured by applying currently enacted
tax laws.
Hughes and former Hughes (prior to December 18, 1997), and their domestic
subsidiaries join with General Motors in filing a consolidated U.S. Federal
income tax return. The portion of the consolidated income tax liability
recorded by Hughes is generally equivalent to the liability it would have
incurred on a separate return basis.
Prior to December 18, 1997, certain income tax assets and liabilities
were maintained by former Hughes. Income tax expense was allocated to Hughes as
if Hughes filed a separate income tax return. In connection with the Hughes
Transactions, certain income tax assets and liabilities were contributed to and
assumed by Hughes on December 17, 1997 and are included in the accompanying
balance sheet.
A-19
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
U.S. Federal, state and foreign taxes currently
(refundable) payable........................... $(177.3) $ 24.0 $ 36.5
U.S. Federal, state and foreign deferred tax
liabilities, net............................... 132.6 212.7 68.3
------- ------ ------
Total income tax (benefit) provision.......... $ (44.7) $236.7 $104.8
======= ====== ======
</TABLE>
Income from continuing operations before income taxes, minority
interests, extraordinary item and cumulative effect of accounting change
included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(Dollars in
Millions)
<S> <C> <C> <C>
U.S. income........................................ $283.8 $659.4 $218.4
Foreign (loss) income.............................. (93.0) (41.2) 3.7
------ ------ ------
Total............................................ $190.8 $618.2 $222.1
====== ====== ======
</TABLE>
The combined income tax provision was different than the amount computed
using the U.S. Federal statutory income tax rate for the reasons set forth in
the following table:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Expected tax at U.S. Federal statutory income
tax rate..................................... $ 66.8 $216.4 $ 77.7
Research and experimentation tax benefits..... (183.6) (39.3) --
Foreign sales corporation tax benefit......... (30.1) (25.5) (24.0)
U.S. state and local income taxes............. 13.7 24.8 9.4
Purchase accounting adjustments............... 7.3 7.3 7.3
Losses of equity method investees............. 36.7 18.7 14.8
Minority interests in losses of partnership... 19.3 17.5 17.7
Non-deductible goodwill amortization.......... 20.1 9.7 --
Other......................................... 5.1 7.1 1.9
------- ------ ------
Total income tax (benefit) provision........ $ (44.7) $236.7 $104.8
======= ====== ======
</TABLE>
A-20
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Profits on long-term contracts... $145.5 $ 155.5 $156.0 $ 142.8
Sales and leasebacks............. 65.4 -- 85.8 --
Employee benefit programs........ 68.3 101.3 64.3 114.0
Postretirement benefits other
than pensions................... 72.3 -- 72.9 --
Customer deposits and rebates.... 52.9 -- 61.9 --
State taxes...................... 38.8 -- 50.0 --
Gain on PanAmSat merger.......... -- 191.1 -- 195.0
Satellite launch insurance
costs........................... -- 103.1 -- 43.7
Depreciation..................... -- 470.9 -- 438.6
Net operating loss and tax credit
carryforwards................... 77.8 -- -- --
Sale of equity interest in
DIRECTV......................... -- 47.5 -- 48.7
Other............................ 32.8 30.5 63.9 35.4
------ -------- ------ --------
Subtotal......................... 553.8 1,099.9 554.8 1,018.2
Valuation allowance.............. (64.2) -- (14.2) --
------ -------- ------ --------
Total deferred taxes............. $489.6 $1,099.9 $540.6 $1,018.2
====== ======== ====== ========
</TABLE>
No income tax provision has been made for the portion of undistributed
earnings of foreign subsidiaries deemed permanently reinvested that amounted to
approximately $18.5 million and $18.2 million at December 31, 1998 and 1997,
respectively. Repatriation of all accumulated earnings would have resulted in
tax liabilities of $6.4 million in 1998 and $5.4 million in 1997.
At December 31, 1998, Hughes has $63.9 million of foreign operating loss
carryforwards expiring in varying amounts between 1999 and 2003. A valuation
allowance was provided for all of the foreign operating loss carryforwards.
Hughes has an agreement with Raytheon which governs Hughes' rights and
obligations with respect to U.S. Federal and state income taxes for all periods
prior to the merger of Hughes Defense with Raytheon. Hughes is responsible for
any income taxes pertaining to those periods prior to the merger, including any
additional income taxes resulting from U.S. Federal and state tax audits.
Hughes is also entitled to any U.S. Federal and state income tax refunds
relating to those years.
The U.S. Federal income tax returns of former Hughes have been examined
through 1990. All years prior to 1983 are closed. Issues relating to the years
1983 through 1990 are being contested through various stages of administrative
appeal. The Internal Revenue Service ("IRS") is currently examining former
Hughes' U.S. Federal tax returns for years 1991 through 1994. Management
believes that adequate provision has been made for any adjustment which might
be assessed for open years.
Hughes reached an agreement with the IRS regarding a claim for refund of
U.S. Federal income taxes related to the treatment of research and
experimentation costs for the years 1983 through 1995. Hughes recorded a total
of $183.6 million of research and experimentation tax benefits during 1998, a
substantial portion of which related to the above noted agreement with the IRS
and covered prior years.
A-21
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 8: Retirement Programs and Other Postretirement Benefits
Hughes adopted SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits. SFAS No. 132 required changes in disclosure of
certain information about pensions and other postretirement benefits.
Substantially all of Hughes' employees participate in Hughes'
contributory and non-contributory defined benefit retirement plans. Benefits
are based on years of service and compensation earned during a specified period
of time before retirement. Additionally, an unfunded, nonqualified pension plan
covers certain employees. Hughes also maintains a program for eligible retirees
to participate in health care and life insurance benefits generally until they
reach age 65. Qualified employees who elected to participate in the Hughes
contributory defined benefit pension plans may become eligible for these health
care and life insurance benefits if they retire from Hughes between the ages of
55 and 65.
Prior to December 18, 1997, the pension-related assets and liabilities
and the postretirement benefit plans were maintained by former Hughes for its
non-automotive businesses and were not included in the Hughes balance sheet. A
portion of former Hughes' net pension expense or income and postretirement
benefit cost was allocated to Hughes and is included in the Statement of Income
and Available Separate Consolidated Net Income. The net pension expense
allocation was $12.3 million and $12.2 million for 1997 and 1996, respectively.
For 1997 and 1996, the pension expense components including benefits earned
during the year, interest accrued on benefits earned in prior years, actual
return on assets and net amortization and deferral, were not determined
separately for the Hughes participants. The postretirement benefit cost
allocated to Hughes was $11.2 million and $10.4 million for 1997 and 1996,
respectively. For 1997 and 1996, the postretirement benefit cost components,
including benefits earned during the year, interest accrued on benefits earned
in prior years and net amortization, were not determined separately for the
Hughes employees. The 1997 information presented below is based on pro rata
allocations from former Hughes for each pension and postretirement benefit
component.
A-22
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the pension benefit obligation and the other
postretirement benefit obligation, as well as the net benefit obligation
recognized in the balance sheet, are shown below:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------ ----------------
1998 1997 1998 1997
-------- -------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Net benefit obligation at beginning of
year................................... $1,556.4 $1,490.5 $ 135.6 $ 132.3
Service cost............................ 57.5 47.9 3.6 3.6
Interest cost........................... 110.8 110.3 9.3 9.1
Plan participants' contributions........ 14.1 13.7 -- --
Actuarial loss.......................... 66.6 32.4 35.1 4.1
Acquisitions/divestitures............... -- (17.6) -- --
Benefits paid........................... (151.3) (120.8) (12.0) (13.5)
-------- -------- ------- -------
Net benefit obligation at end of year... 1,654.1 1,556.4 171.6 135.6
======== ======== ======= =======
Change in Plan Assets
Fair value of plan assets at beginning
of year................................ 1,906.1 1,716.4 -- --
Actual return on plan assets............ 165.0 302.4 -- --
Employer contributions.................. 20.3 12.0 12.0 13.5
Plan participants' contributions........ 14.1 13.7 -- --
Acquisitions/divestitures............... -- (17.6) -- --
Benefits paid........................... (151.3) (120.8) (12.0) (13.5)
Transfers............................... 4.7 -- -- --
-------- -------- ------- -------
Fair value of plan assets at end of
year................................... 1,958.9 1,906.1 -- --
-------- -------- ------- -------
Funded status at end of year.......... 304.8 349.7 (171.6) (135.6)
Unamortized asset at date of
adoption............................. -- (12.8) -- --
Unamortized amount resulting from
changes in plan provision............ 4.4 5.1 -- --
Unamortized net amount resulting from
changes in plan experience and
actuarial assumptions................ (80.8) (122.3) 4.9 (31.0)
-------- -------- ------- -------
Net amount recognized at end of year.... $ 228.4 $ 219.7 $(166.7) $(166.6)
======== ======== ======= =======
Amounts recognized in the balance sheet
consist of:
Prepaid benefit cost.................. $ 248.1 $ 227.0
Accrued benefit cost.................. (89.3) (83.8) $(166.7) $(166.6)
Intangible asset...................... 7.4 18.0 N/A N/A
Deferred tax assets................... 25.1 23.7 N/A N/A
Accumulated other comprehensive loss.. 37.1 34.8 N/A N/A
-------- -------- ------- -------
Net amount recognized at end of year.... $ 228.4 $ 219.7 $(166.7) $(166.6)
======== ======== ======= =======
</TABLE>
A-23
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Included in the pension plan assets at December 31, 1998 are GM Class H
common stock of $2.3 million, GM $1 2/3 common stock of $7.1 million and GMAC
bonds of $3.3 million.
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
----------- ----------------
1998 1997 1998 1997
----- ----- ------- -------
<S> <C> <C> <C> <C>
Weighted-average assumptions as of December
31
Discount rate............................... 6.75% 7.25% 6.50% 6.75%
Expected return on plan assets.............. 9.50% 9.50% N/A N/A
Rate of compensation increase............... 5.00% 5.00% N/A N/A
</TABLE>
For measurement purposes, a 9.5% annual rate of increase per capita cost
of covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually 0.5% per year to 6.0% in 2006.
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Components of net periodic benefit cost
Benefits earned during the year......... $ 57.5 $ 47.9 $ 3.6 $ 3.6
Interest accrued on benefits earned in
prior years............................ 110.8 110.3 9.3 9.1
Expected return on assets............... (144.5) (135.7) -- --
Amortization components
Unamortized asset at date of
adoption............................. (12.8) (14.2) -- --
Unamortized amount resulting from
changes in plan provisions........... 0.7 0.7 -- --
Unamortized net amount resulting from
changes in plan experience and
actuarial assumptions................ 4.6 3.3 (0.8) (1.5)
------- ------- ------- -------
Net periodic benefit cost............... $ 16.3 $ 12.3 $ 12.1 $ 11.2
======= ======= ======= =======
</TABLE>
The projected benefit obligation and accumulated benefit obligation for
the pension plans with accumulated benefit obligations in excess of plan assets
were $114.3 and $89.3, respectively, as of December 31, 1998, and $93.5 and
$83.8, respectively, as of December 31, 1997. The pension plans with
accumulated benefit obligations in excess of plan assets do not have any
underlying assets.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
(Dollars in Millions)
<S> <C> <C>
Effect on total of service and interest
cost components......................... $ 1.5 $ (1.2)
Effect on postretirement benefit
obligation.............................. 14.0 (12.2)
</TABLE>
Hughes maintains 401(k) plans for qualified employees. A portion of
employee contributions are matched by Hughes and amounted to $30.6 million,
$26.3 million and $16.7 million in 1998, 1997 and 1996, respectively.
A-24
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Hughes has disclosed in the financial statements certain amounts
associated with estimated future postretirement benefits other than pensions
and characterized such amounts as "other postretirement benefit obligation."
Notwithstanding the recording of such amounts and the use of these terms,
Hughes does not admit or otherwise acknowledge that such amounts or existing
postretirement benefit plans of Hughes (other than pensions) represent legally
enforceable liabilities of Hughes.
Note 9: Owner's Equity
In connection with the Hughes Transactions, Hughes was recapitalized on
December 17, 1997 at which time 1,000 shares of $1.00 par value common stock,
representing all of the authorized and outstanding common stock of Hughes, were
issued to GM. Prior to December 17, 1997, the equity of Hughes was comprised of
Parent Company's net investment in its telecommunications and space business.
The following represents changes in the components of accumulated other
comprehensive income (loss), net of income taxes, as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------- ---------------------
Pre- Tax Pre- Pre-
tax (Credit) Net tax Tax Net tax Tax Net
Amount Expense Amount Amount Expense Amount Amount Expense Amount
------ -------- ------ ------ ------- ------ ------ ------- ------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Minimum pension
liability adjustments.. $ (3.9) $(1.6) $(2.3) -- -- -- -- -- --
Foreign currency
translation
adjustments............ $ 6.4 $ 2.6 $ 3.8 $1.0 $0.4 $0.6 $1.3 $0.5 $0.8
Unrealized holding
losses................. $ 3.0 $ 1.2 $ 1.8 -- -- -- -- -- --
Reclassification
adjustment for gains
included in net
income................. $(11.8) $(4.7) $(7.1) -- -- -- -- -- --
</TABLE>
Note 10: Incentive Plans
Under the Hughes Electronics Corporation Incentive Plan ("the Plan"), as
approved by the GM Board of Directors in 1998, shares, rights or options to
acquire up to 35.6 million shares of GM Class H common stock on a cumulative
basis were available for grant through December 31, 1998.
The GM Executive Compensation Committee may grant options and other
rights to acquire shares of GM Class H common stock under the provisions of the
Plan. The option price is equal to 100% of the fair market value of GM Class H
common stock on the date the options are granted. These nonqualified options
generally vest over two to four years, expire ten years from date of grant and
are subject to earlier termination under certain conditions.
As part of the Hughes Transactions, the outstanding options of former
Hughes employees who continued as Hughes employees were converted on December
18, 1997 into options to purchase recapitalized GM Class H common stock.
Recognition of compensation expense was not required in connection with the
conversion.
A-25
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Changes in the status of outstanding options were as follows:
<TABLE>
<CAPTION>
Shares Under Weighted-Average
Option Exercise Price
------------ ----------------
<S> <C> <C>
GM Class H Common Stock
Outstanding at December 31, 1997.................. 13,961,615 $29.08
Granted........................................... 4,180,525 51.02
Exercised......................................... (1,506,241) 23.22
Terminated........................................ (937,179) 31.79
---------- ------
Outstanding at December 31, 1998.................. 15,698,720 $35.32
========== ======
</TABLE>
The following table summarizes information about the Plan stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$9.86 to $20.00 833,203 3.7 $14.70 833,203 $14.70
20.01 to 30.00 1,056,354 5.9 22.18 1,056,354 22.18
30.01 to 40.00 9,800,388 8.2 32.08 3,344,007 32.64
40.01 to 50.00 1,372,700 9.6 43.71 -- --
50.01 to 54.79 2,636,075 9.3 54.79 -- --
---------- --- ------ --------- ------
$9.86 to $54.79 15,698,720 8.1 $35.32 5,233,564 $27.67
========== === ====== ========= ======
</TABLE>
At December 31, 1998, 5,373,522 shares were available for grant under the
Plan subject to GM Executive Compensation Committee approval.
On May 5, 1997, PanAmSat adopted a stock option incentive plan with terms
similar to the Plan. As of December 31, 1998, PanAmSat had issued 1,493,319
options to purchase its common stock with exercise prices ranging from $29.00
per share to $59.75 per share. The options vest ratably over three years and
have a remaining life of approximately nine years on the 1998 options and eight
and one-half years on the 1997 options. At December 31, 1998, 113,590 options
were exercisable. The PanAmSat options have been considered in the following
pro forma analysis.
The following table presents pro forma information as if Hughes recorded
compensation cost using the fair value of issued options on their grant date:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(Dollars in Millions
Except Per Share
Amounts)
<S> <C> <C> <C>
Reported earnings used for computation of available
separate consolidated net income.................... $271.7 $470.7 $183.5
Assumed stock compensation cost, net of tax.......... 85.0 43.5 8.8
------ ------ ------
Adjusted earnings used for computation of available
separate consolidated net income.................... $186.7 $427.2 $174.7
====== ====== ======
Reported earnings per share attributable to GM Class
H common stock...................................... $ 0.68 $ 1.18 $ 0.46
Adjusted earnings per share attributable to GM Class
H common stock...................................... $ 0.47 $ 1.07 $ 0.44
====== ====== ======
</TABLE>
A-26
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
For stock options granted prior to the Hughes Transactions, the estimated
compensation cost was based upon an allocation from former Hughes which was
calculated using the Black-Scholes valuation model for estimation of the fair
value of its options. The following table presents the estimated weighted-
average fair value of options granted and the assumptions used for the 1998 and
1997 calculations (stock volatility has been estimated based upon a three-year
average derived from a study of a Hughes determined peer group and may not be
indicative of actual volatility for future periods):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Estimated fair value per option granted................... $22.78 $26.90
Average exercise price per option granted................. 51.02 31.71
Stock volatility.......................................... 32.8% 32.5%
Average risk-free interest rate........................... 5.63% 5.87%
Average option life in years.............................. 6.2 7.0
</TABLE>
Note 11: Other Income and Expenses
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Gain on PanAmSat merger................................ $489.7
Gain on sale of DIRECTV interest to AT&T............... -- $120.3
Equity losses from unconsolidated affiliates........... $(128.3) (72.2) (42.2)
Other.................................................. (24.8) (26.8) (9.0)
------- ------ ------
Total other, net..................................... $(153.1) $390.7 $ 69.1
======= ====== ======
</TABLE>
Equity losses from unconsolidated affiliates at December 31, 1998, are
primarily comprised of losses at DIRECTV Japan, of which Hughes owns 31.6%, and
American Mobile Satellite Corporation, of which Hughes owns 20.7%.
Note 12: Related-Party Transactions
In the ordinary course of its operations, Hughes provides
telecommunications services and sells electronic components to, and purchases
sub-components from, related parties. In addition, prior to December 18, 1997,
Hughes received allocations of corporate expenses and interest costs from
former Hughes and GM.
The following table summarizes significant related-party transactions:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(Dollars in
Millions)
<S> <C> <C> <C>
Revenues............................................... $40.5 $45.2 $50.8
Costs and expenses Purchases......................... 29.0 275.4 241.5
Allocation of corporate expenses..................... -- 77.5 75.6
Allocated interest................................... -- 55.6 53.2
</TABLE>
Note 13: Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income
Earnings per share attributable to GM Class H common stock is determined
based on the relative amounts available for the payment of dividends to holders
of GM Class H common stock. Holders of GM Class H common stock have no direct
rights in the equity or assets of Hughes, but rather have rights in the equity
and assets of GM (which includes 100% of the stock of Hughes).
A-27
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Amounts available for the payment of dividends on GM Class H common stock
are based on the Available Separate Consolidated Net Income ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the
separate consolidated net income of Hughes, excluding the effects of GM
purchase accounting adjustments arising from GM's acquisition of Hughes
(earnings used for computation of ASCNI), multiplied by a fraction, the
numerator of which is a number equal to the weighted-average number of shares
of GM Class H common stock outstanding during the period and the denominator of
which was 399.9 million during 1998, 1997 and 1996. The denominator used in
determining the ASCNI of Hughes may be adjusted from time-to-time as deemed
appropriate by the GM Board of Directors to reflect subdivisions or
combinations of the GM Class H common stock and to reflect certain transfers of
capital to or from Hughes. The GM Board's discretion to make such adjustments
is limited by criteria set forth in GM's Restated Certificate of Incorporation.
For 1997 and 1996, ASCNI and earnings attributable to GM Class H common
stock are presented on a pro forma basis. Prior to the Hughes Transactions,
such amounts were calculated based on the financial performance of former
Hughes. Since the 1997 and 1996 financial statements relate only to the
telecommunications and space business of former Hughes prior to the
consummation of the Hughes Transactions, they do not reflect the earnings
attributable to the GM Class H common stock on a historical basis. The pro
forma presentation is used, therefore, to present the financial results which
would have been achieved for 1997 and 1996 relative to the GM Class H common
stock had they been calculated based on the performance of the
telecommunication and space business of former Hughes.
Earnings per share represent basic earnings per share. The assumed
exercise of stock options does not have a dilutive effect since such exercises
do not currently result in a change to the GM Class H dividend base
(denominator) used in calculating earnings per share. As Hughes has no other
common stock equivalents that may impact the calculation, diluted earnings per
share are not presented.
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, 1998, the amount available for the payment of
dividends on GM Class H common stock was $3.8 billion. The GM Board does not
currently intend to pay cash dividends on the recapitalized GM Class H common
stock.
Note 14: Acquisitions
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provides DTH premium satellite programming in conjunction with DIRECTV's basic
programming service. USSB launched its service in June 1994 and, as of December
31, 1998, had more than two million subscribers nationwide. The acquisition
will be accounted for using the purchase method of accounting. The purchase
price, consisting of cash and GM Class H common stock, will be determined at
closing based upon an agreed-upon formula and will not exceed $1.6 billion in
the aggregate. Subject to certain limitations in the merger agreement, USSB
shareholders will be entitled to elect to receive cash or shares of GM Class H
common stock. The amount of cash to be paid in the merger cannot be less than
30% or greater than 50% of the aggregate purchase price with the remaining
consideration consisting of GM Class H common stock. The merger, which is
subject to USSB shareholder approval and the receipt of appropriate regulatory
approval, is expected to close in early to mid-1999.
A-28
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In October 1998, Hughes agreed to acquire, pending regulatory approval in
Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V.
("GGM"), a Galaxy Latin America, LLC ("GLA") local operating company located in
Mexico, from Grupo MVS, S.A. de C.V. ("MVS"). Hughes' equity ownership will
represent 49.0% of the voting equity and all of the non-voting equity of GGM.
The GGM transaction will be accounted for using the purchase method of
accounting. As part of the GGM transaction, in October 1998 Hughes acquired
from MVS an additional 10.0% interest in GLA, increasing its ownership interest
to 70.0%, as well as an additional 19.8% interest in SurFin, a company
providing financing of subscriber receiver equipment for certain GLA local
operating companies located in Latin America and Mexico, increasing its
ownership percentage from 39.3% to 59.1%. The GLA and SurFin transactions were
accounted for using the purchase method of accounting. The increased ownership
in SurFin resulted in its consolidation since the date of acquisition. The
aggregate purchase price for the transactions was $197.0 million in cash.
In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for
$851.4 million in cash, increasing Hughes' ownership interest in PanAmSat from
71.5% to 81.0%.
In December 1997, Hughes repurchased from AT&T, a 2.5% equity interest in
DIRECTV, ending AT&T's marketing agreement to distribute the DIRECTV direct
broadcast satellite television service and DIRECTV(TM) receiver equipment. The
$161.8 million repurchase resulted in goodwill of approximately $156.1 million.
In May 1997, Hughes and PanAmSat, a leading provider of international
satellite services, merged their respective satellite service operations into a
new publicly-held company, which retained the name PanAmSat Corporation. Hughes
contributed its Galaxy(R) satellite services business in exchange for a 71.5%
interest in the new company. PanAmSat stockholders received a 28.5% interest in
the new company and $1.5 billion in cash. Such cash consideration and other
funds required to consummate the merger were funded by new debt financing
totaling $1,725.0 million provided by Hughes, which borrowed such funds from
GM.
For accounting purposes, the merger was treated by Hughes as an
acquisition of 71.5% of PanAmSat and was accounted for using the purchase
method. Accordingly, the purchase price was allocated to the net assets
acquired, including intangible assets, based on estimated fair values at the
date of acquisition. The purchase price exceeded the fair value of net assets
acquired by $2.4 billion. In addition, the merger was treated as a partial sale
of the Galaxy business by Hughes and resulted in a one-time pre-tax gain of
$489.7 million ($318.3 million after-tax).
As the Hughes 1997 financial statements include only PanAmSat's results
of operations since the date of acquisition, the following selected unaudited
pro forma information is being provided to present a summary of the combined
results of Hughes and PanAmSat as if the acquisition had occurred as of the
beginning of the respective periods, giving effect to purchase accounting
adjustments. The pro forma data is presented for informational purposes only
and may not necessarily reflect the results of operations of Hughes had
PanAmSat operated as part of Hughes for the years ended December 31, 1997 and
1996, nor are they necessarily indicative of the results of future operations.
The pro forma information excludes the effect of non-recurring charges.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Dollars in
Millions Except
Per Share
Amounts)
<S> <C> <C>
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
</TABLE>
A-29
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 15: Derivative Financial Instruments and Risk Management
In the normal course of business, Hughes enters into transactions that
expose it to risks associated with foreign exchange rates. Hughes utilizes
derivative instruments in an effort to mitigate these risks. Hughes' policy
does not allow speculation in derivative instruments for profit or execution of
derivative instrument contracts for which there are no underlying exposures.
Instruments used as hedges must be effective at reducing the risk associated
with the exposure being hedged and designated as a hedge at the inception of
the contract. Accordingly, changes in market values of hedge instruments are
highly correlated with changes in market values of the underlying transactions,
both at the inception of the hedge and over the life of the hedge contract.
Hughes primarily uses foreign exchange-forward contracts to hedge firm
commitments denominated in foreign currencies. Foreign exchange-forward
contracts are legal agreements between two parties to purchase and sell a
foreign currency, for a price specified at the contract date, with delivery and
settlement in the future. The total notional amounts of contracts afforded
hedge accounting treatment at December 31, 1998 and 1997 were not significant.
Hughes is exposed to credit risk in the event of non-performance by the
counterparties to its foreign exchange-forward contracts. While Hughes believes
this risk is remote, credit risk is managed through the periodic monitoring and
approval of financially sound counterparties.
In connection with debt refinancing activities by PanAmSat in 1997,
PanAmSat entered into certain U.S. Treasury rate lock contracts to reduce its
exposure to fluctuations in interest rates. The aggregate notional value of
these contracts was $375.0 million and these contracts were accounted for as
hedges. The cost to settle these instruments in 1998 was $9.1 million and is
being amortized to interest expense over the term of the related debt
securities.
Note 16: Discontinued Operations
On December 15, 1997, Hughes sold substantially all of the assets and
liabilities of Hughes Avicom International, Inc. ("Hughes Avicom") to Rockwell
Collins, Inc. for cash. Hughes Avicom is a supplier of products and services to
the commercial airline market. Hughes recorded an after-tax gain of $62.8
million on the sale. The net operating results of Hughes Avicom have been
reported, net of applicable income taxes, as "Income (Loss) from discontinued
operations, net of taxes" and the net cash flows as "Net cash used by
discontinued operations."
Summarized financial information for Hughes Avicom follows:
<TABLE>
<CAPTION>
1997* 1996
------ -----
(Dollars in
Millions)
<S> <C> <C> <C>
Revenues................................................ $102.5 $89.9
Net income (loss)....................................... 1.2 (7.4)
</TABLE>
- --------
* Includes the results of Hughes Avicom through December 15, 1997.
Note 17: Segment Reporting
Hughes' segments, which are differentiated by their products and
services, include Direct-To-Home Broadcast, Satellite Services, Satellite
Systems and Network Systems. Direct-To-Home Broadcast is engaged in acquiring,
promoting, selling and/or distributing digital programming via satellite to
A-30
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
residential and commercial customers. Satellite Services is engaged in the
selling, leasing and operating of satellite transponders and providing services
for cable television systems, news companies, Internet service providers and
private business networks. Satellite Systems designs, manufactures and markets
satellites and satellite components. Network Systems products include
satellite-based business networks and Internet access service, cellular-based
fixed wireless telephone systems and mobile cellular digital packet data
systems. Other includes the corporate office and other entities.
<TABLE>
<CAPTION>
Direct-
To-Home Satellite Satellite Network
Broadcast Services Systems Systems Other Eliminations Total
--------- --------- --------- -------- -------- ------------ ---------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
External Revenues....... $1,813.7 $ 643.8 $2,493.4 $1,000.6 $ 12.4 $ 5,963.9
Intersegment Revenues... 2.4 123.5 337.7 76.1 0.8 $(540.5) --
-------- -------- -------- -------- -------- ------- ---------
Total Revenues.......... $1,816.1 $ 767.3 $2,831.1 $1,076.7 $ 13.2 $(540.5) $ 5,963.9
-------- -------- -------- -------- -------- ------- ---------
Operating Profit (1).... $ (228.1) $ 318.3 $ 246.3 $ 10.9 $ (68.2) $ (30.1) $ 249.1
Depreciation and
Amortization (1)....... 102.3 235.0 49.2 41.7 31.6 (5.0) 454.8
Intangibles, net........ -- 2,433.5 -- 53.6 1,065.1 -- 3,552.2
Segment Assets (2)...... 2,190.4 5,890.5 1,491.2 1,299.0 2,856.8 (292.9) 13,435.0
Capital Expenditures
(3).................... 230.8 921.7 99.7 40.0 3.3 133.0 1,428.5
-------- -------- -------- -------- -------- ------- ---------
1997
External Revenues....... $1,276.9 $ 537.3 $2,290.0 $ 998.3 $ 25.8 $ 5,128.3
Intersegment Revenues... -- 92.6 201.9 13.0 2.7 $(310.2) --
-------- -------- -------- -------- -------- ------- ---------
Total Revenues.......... $1,276.9 $ 629.9 $2,491.9 $1,011.3 $ 28.5 $(310.2) $ 5,128.3
-------- -------- -------- -------- -------- ------- ---------
Operating Profit (1).... $ (254.6) $ 292.9 $ 226.3 $ 74.1 $ (47.9) $ (5.4) $ 285.4
Depreciation and
Amortization (1)....... 86.1 145.2 39.4 32.0 14.7 -- 317.4
Intangibles, net........ -- 2,498.5 -- -- 456.3 -- 2,954.8
Segment Assets (2)...... 1,408.7 5,682.4 1,312.6 1,215.6 3,298.1 (186.4) 12,731.0
Capital Expenditures
(3).................... 105.6 625.7 113.9 43.1 0.4 (62.1) 826.6
-------- -------- -------- -------- -------- ------- ---------
1996
External Revenues....... $ 621.0 $ 381.7 $1,950.4 $1,049.6 $ 6.0 $ 4,008.7
Intersegment Revenues... -- 101.1 106.0 20.4 1.7 $(229.2) --
-------- -------- -------- -------- -------- ------- ---------
Total Revenues.......... $ 621.0 $ 482.8 $2,056.4 $1,070.0 $ 7.7 $(229.2) $ 4,008.7
-------- -------- -------- -------- -------- ------- ---------
Operating Profit (1).... $ (319.8) $ 239.1 $ 183.3 $ 107.7 $ (13.5) $ (7.7) $ 189.1
Depreciation and
Amortization (1)....... 67.3 58.5 34.4 28.3 27.1 -- 215.6
Intangibles, net........ -- 72.9 -- -- 395.1 -- 468.0
Segment Assets (2)...... 1,023.4 1,275.5 757.8 964.0 457.1 (105.2) 4,372.6
Capital Expenditures
(3).................... 63.5 308.7 87.8 45.3 - (55.9) 449.4
-------- -------- -------- -------- -------- ------- ---------
</TABLE>
- --------
See Notes on next page.
A-31
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Certain 1997 and 1996 amounts have been reclassified to conform with the
1998 presentation.
(1) Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes amounting to $3.3 million in each of the
years for the Satellite Services segment and $17.7 million in each of the
years in Other.
(2) Assets of the Satellite Services segment and Other include the unamortized
purchase accounting adjustments associated with GM's acquisition of Hughes.
Satellite Services includes unamortized purchase accounting adjustments of
$66.3 million in 1998, $69.6 million in 1997 and $72.9 million in 1996.
Other includes unamortized purchase accounting adjustments of $360.3
million in 1998, $378.0 million in 1997 and $395.7 million in 1996.
(3) Includes expenditures related to satellites in segments as follows: $70.2
million in 1998 for Direct-To-Home Broadcast segment and $726.3 million,
$606.1 million and $259.2 million in 1998, 1997 and 1996, respectively, for
Satellite Services segment. Satellite Services segment also includes $155.5
million in 1998 related to the early buy-out of satellite sale-leasebacks.
A reconciliation of operating profit to income from continuing operations
before income taxes, minority interests, extraordinary item and cumulative
effect of accounting change, as shown in the Statement of Income and Available
Separate Consolidated Net Income, follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Operating profit................................... $ 249.1 $285.4 $189.1
Interest income.................................... 112.3 33.1 6.8
Interest expense................................... (17.5) (91.0) (42.9)
Other, net......................................... (153.1) 390.7 69.1
------- ------ ------
Income from continuing operations before income
taxes, minority interests, extraordinary item and
cumulative effect of accounting change............ $ 190.8 $618.2 $222.1
======= ====== ======
</TABLE>
A-32
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Net Net Net
Total Property & Total Property & Total Property &
Revenues Satellites Revenues Satellites Revenues Satellites
-------- ---------- -------- ---------- -------- ----------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
North America
United States.......... $3,534.3 $4,206.3 $2,851.1 $3,507.1 $2,613.1 $1,725.1
Canada and Mexico...... 136.7 2.0 101.3 -- 27.4 --
-------- -------- -------- -------- -------- --------
Total North America..... 3,671.0 4,208.3 2,952.4 3,507.1 2,640.5 1,725.1
-------- -------- -------- -------- -------- --------
Europe
United Kingdom......... 842.4 14.1 583.3 10.4 336.2 8.0
Other.................. 275.5 0.6 419.0 0.4 290.0 0.3
-------- -------- -------- -------- -------- --------
Total Europe............ 1,117.9 14.7 1,002.3 10.8 626.2 8.3
-------- -------- -------- -------- -------- --------
Latin America
Brazil................. 184.9 4.6 131.2 -- 48.6 --
Other.................. 104.2 11.2 90.4 -- 23.1 --
-------- -------- -------- -------- -------- --------
Total Latin America..... 289.1 15.8 221.6 -- 71.7 --
-------- -------- -------- -------- -------- --------
Asia
Japan.................. 185.9 0.6 147.9 0.5 119.7 0.4
India.................. 83.4 14.7 46.5 12.7 8.0 11.7
China.................. 63.4 1.7 154.5 1.5 125.2 1.4
Other.................. 214.7 0.6 477.8 0.5 387.3 0.5
-------- -------- -------- -------- -------- --------
Total Asia.............. 547.4 17.6 826.7 15.2 640.2 14.0
-------- -------- -------- -------- -------- --------
Total Middle East....... 284.3 -- 77.7 -- 1.2 --
Total Africa............ 54.2 0.3 47.6 -- 28.9 --
-------- -------- -------- -------- -------- --------
Total.................. $5,963.9 $4,256.7 $5,128.3 $3,533.1 $4,008.7 $1,747.4
======== ======== ======== ======== ======== ========
</TABLE>
Note 18: Commitments and Contingencies
In connection with the 1997 spin-off of Hughes Defense and its subsequent
merger with Raytheon, a process was agreed to among GM, Hughes and Raytheon for
resolving disputes that might arise in connection with post-closing adjustments
called for by the terms of the merger agreement. Such adjustments might call
for a cash payment between Hughes and Raytheon. A dispute currently exists
regarding the post-closing adjustments which Hughes and Raytheon have proposed
to one another. In an attempt to resolve the dispute, Hughes gave notice to
Raytheon to commence the arbitration process. Raytheon responded by filing an
action in Delaware Chancery Court which seeks to enjoin the arbitration as
premature. It is possible that the ultimate resolution of the post-closing
financial adjustment provision of the merger agreement may result in Hughes
making a payment to Raytheon that could be material to Hughes. However, the
amount of any payment that either party might be required to make to the other
is not determinable at this time. Hughes intends to vigorously pursue
resolution of the dispute through the arbitration process, opposing the
adjustments Raytheon seeks and seeking the payment from Raytheon that it has
proposed.
Hughes has entered into agreements to procure commercial satellite
launches, a significant number of which are expected to be used in connection
with satellites ordered by outside customers. The agreements provide for
launches beginning in 1999 and also contain options for additional launch
vehicles. The total amount of the commitments, which is dependent upon the
number of options exercised, market conditions and other factors, could exceed
$2.0 billion.
A-33
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Hughes has a long-term agreement for multiple launch services aboard
expendable launch vehicles using the Sea Launch ocean-based commercial launch
system. Hughes plans to use options under this agreement to deliver
communications satellites in-orbit. Sea Launch is scheduled to demonstrate the
capabilities of its ocean-based commercial launch system with its first launch
in March 1999. The first launch will carry a demonstration payload having the
same mission and physical characteristics (weight, size, etc.) as an HS 702
commercial communications satellite. If the first launch is not successful or
delayed, Hughes could be required by customers to procure other launch vehicles
to satisfy its contractual obligations, which may lead to higher operating
costs.
DIRECTV has an agreement with General Electric Capital Corporation
("GECC") under which GECC agreed to provide an open-end revolving credit
program for consumer purchases of DIRECTV receiver equipment, installations and
ancillary items at selected retail establishments. Funding under this program
was discontinued effective September 10, 1996. The aggregate outstanding
balance under this agreement at December 31, 1998 was approximately $190.0
million. Hughes has certain rights regarding the administration of the program,
and the losses from qualifying accounts under this program accrue to Hughes,
subject to certain indemnity obligations of GECC. Hughes has established
allowances to provide for expected losses under the program. The allowances are
subject to periodic review based on information regarding the status of the
program. A complaint and counterclaim have been filed by the parties in the
U.S. District Court for the District of Connecticut concerning GECC's
performance and DIRECTV's obligation to act as a surety. GECC claims damages
from DIRECTV in excess of $140.0 million. DIRECTV seeks damages from GECC in
excess of $70.0 million. Hughes intends to vigorously contest GECC's
allegations and pursue its own contractual rights and remedies. Hughes does not
believe that the litigation will have a material adverse impact on Hughes'
results of operations or financial position. Discovery is not yet completed in
the case and no trial date has been set.
In December 1994, former Hughes entered into an agreement with Computer
Sciences Corporation ("CSC") whereby CSC provides a significant amount of data
processing services required by the non-automotive businesses of former Hughes.
Baseline service payments to CSC are expected to aggregate approximately $1.5
billion over the term of the eight-year agreement for former Hughes. Based on
historical usage, approximately 17% of the costs incurred under the agreement
are attributable to Hughes. The contract is cancelable by Hughes with early
termination penalties.
At December 31, 1998, minimum future commitments under noncancelable
operating leases having lease terms in excess of one year, exclusive of
satellite transponders leaseback payments disclosed in Note 4, are primarily
for real property and aggregated $323.8 million, payable as follows: $56.6
million in 1999, $53.3 million in 2000, $52.3 million in 2001, $50.3 million in
2002, $29.4 million in 2003 and $81.9 million thereafter. Certain of these
leases contain escalation clauses and renewal or purchase options. Rental
expenses under operating leases were $62.0 million in 1998, $72.2 million in
1997 and $52.7 million in 1996.
In conjunction with its performance on long-term contracts, Hughes is
contingently liable under standby letters of credit and bonds in the amount of
$294.3 million at December 31, 1998. In Hughes' past experience, no material
claims have been made against these financial instruments. In addition, Hughes
has guaranteed up to $204.6 million of bank debt, including $150.0 million
related to American Mobile Satellite Corporation, and up to $22.1 million of
capital lease obligations. $150.0 million of bank debt matures in March 2003;
the remaining $54.6 million of bank debt matures in September 2007. The capital
lease obligations are due in variable amounts over the next five years.
In connection with the DTH broadcast businesses, Hughes has commitments
related to certain programming agreements which are variable based upon the
number of underlying subscribers and market penetration rates. Minimum payments
over the terms of applicable contracts are anticipated to be approximately
$700.0 million to $800.0 million.
A-34
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Hughes is subject to potential liability under government regulations and
various claims and legal actions which are pending or may be asserted against
it. The aggregate ultimate liability of Hughes under these claims and actions
was not determinable at December 31, 1998. In the opinion of Hughes management,
such liability is not expected to have a material adverse effect on Hughes'
results of operations or financial position.
Note 19: Subsequent Events
Hughes entered into a contract with Asia-Pacific Mobile
Telecommunications Satellite Pte. Ltd. ("APMT") effective May 15, 1998, whereby
Hughes was to provide to APMT a satellite-based mobile telecommunications
system consisting of two satellites, a ground segment, user terminals and
associated equipment and software. As part of the contract, Hughes was required
to obtain all necessary U.S. Government export licenses for the APMT system by
February 15, 1999. On February 24, 1999, the Department of Commerce notified
Hughes that it intends to deny the export licenses required by Hughes to
fulfill its contractual obligation to APMT. Hughes has until March 16, 1999 to
request reconsideration of the decision. As a result of Hughes failing to
obtain the export licenses, APMT has the right to terminate the contract. At
this time, there are ongoing discussions between Hughes and APMT regarding the
contract, and between Hughes and the U.S. Government regarding the export
licenses. If the U.S. Government ultimately denies the required export licenses
or APMT terminates the contract, Hughes could be required to refund $45.0
million to APMT and record a pre-tax charge to earnings of approximately $100
million in 1999.
On January 22, 1999, Hughes agreed to acquire Primestar, Inc.'s
("Primestar") 2.3 million-subscriber medium-power DTH business. In a related
transaction, Hughes also agreed to acquire the high-power satellite assets and
direct broadcast satellite ("DBS") orbital frequencies of Tempo, a wholly-owned
subsidiary of TCI Satellite Entertainment, Inc. The acquisitions will be
accounted for using the purchase method of accounting. The purchase price for
the DTH business will be comprised of $1.1 billion in cash and 4,871,448 shares
of GM Class H common stock, for a total purchase price of $1,325.0 million. The
DTH transaction, pending regulatory and Primestar lender approval, is expected
to close in early to mid-1999. The purchase price for the Tempo assets consists
of $500.0 million in cash, $150.0 million of which is expected to be paid in
early to mid-1999 and $350.0 million of which is payable upon Federal
Communications Commission approval of the transfer of the DBS orbital
frequencies, which is expected in mid to late-1999.
Hughes has maintained a suit against the U.S. Government since September
1973 regarding the Government's infringement and use of a Hughes patent (the
"Williams Patent") covering "Velocity Control and Orientation of a Spin
Stabilized Body," principally satellites. On April 7, 1998, the U.S. Court of
Appeals for the Federal Circuit ("CAFC") reaffirmed earlier decisions in the
Williams case including the award of $114.0 million in damages. The CAFC ruled
that the conclusions previously reached in the Williams case were consistent
with the U.S. Supreme Court's findings in the Warner-Jenkinson case. The U.S.
Government petitioned the CAFC for a rehearing, was denied the request, and
thereafter applied for certiorari to the U.S. Supreme Court.
On March 1, 1999, the U.S. Supreme Court denied the U.S. Government's
petition for certiorari. The case will be remanded back to the trial court
(Court of Claims) for entry of the final judgment. While no amount has been
recorded in the financial statements of Hughes to reflect the $114.0 million
award or the interest accumulating thereon as of December 31, 1998, it is
expected that resolution of this matter will result in the recognition of a
pre-tax gain of approximately $150 million during 1999.
The GGM transaction (discussed in Note 14) received regulatory approval
and closed in February 1999.
A-35
<PAGE>
Inside Back Cover Page of Prospectus
[Logos for DIRECTV, PanAmSat, Spaceway, Hughes Network Systems, Hughes Space and
Communications and pictures of representative products]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares of General Motors Class H Common Stock
[LOGO]
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co. Goldman, Sachs & Co.
Morgan Stanley Dean Witter Salomon Smith Barney
Donaldson, Lufkin & Jenrette
ING Baring Furman Selz LLC
J.P. Morgan & Co.
SG Cowen
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Following is a list of expenses in connection with this offering. The
amounts set forth below, except for the Securities and Exchange Commission
registration fee, are estimated:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $159,850
New York Stock Exchange Listing Fee.............................. *
Printing and engraving expenses.................................. *
Legal fees....................................................... *
Auditors' fees................................................... *
Blue Sky fees and expenses....................................... *
Miscellaneous.................................................... *
--------
Total........................................................ $*
========
</TABLE>
--------
*To be completed by amendment.
Item 15. Indemnification of Directors and Officers of General Motors
Delaware General Corporation Law
Under Section 145 of the Delaware General Corporation Law, General Motors
is empowered to indemnify its directors and officers in the circumstances
therein provided. Certain portions of Section 145 are summarized below:
Section 145(a) of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful.
Section 145(b) of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of
the fact that such person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in
a manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the
Delaware Court of Chancery or such other court shall deem proper.
II-1
<PAGE>
Section 145(c) of the Delaware General Corporation Law provides that to
the extent that a director, officer, employee or agent of a corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 145(a) and (b), or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith.
Section 145(d) of the Delaware General Corporation Law provides that any
indemnification under Section 145(a) and (b) (unless ordered by a court) shall
be made by the corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because such person has met the applicable
standard of conduct set forth in Section 145(a) and (b). Such determination
shall be made (1) by a majority vote of the directors who were not parties to
such action, suit or proceeding, even though less than a quorum, or (2) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (3) by the stockholders.
Section 145(e) of the Delaware General Corporation Law provides that
expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
corporation as authorized in Section 145. Such expenses (including attorneys'
fees) incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
Section 145(f) of the Delaware General Corporation Law provides that the
indemnification and advancement of expenses provided by, or granted pursuant
to, Section 145 shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Section 145(g) of the Delaware General Corporation Law provides that a
corporation shall have the power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's capacity as such, whether or not the corporation would have the power
to indemnify such person against such liability under Section 145.
Amended and Restated Certificate of Incorporation
The GM restated certificate of incorporation, as amended, provides that
no director of General Motors shall be personally liable to General Motors or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to General Motors or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174, or any successor provision thereto, of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
By-Laws
Under Article V of the GM By-Laws, General Motors shall indemnify and
advance expenses to every director and officer (and to such person's heirs,
executors, administrators or other legal representatives) in the manner and to
the full extent permitted by applicable law as it presently exists, or may
hereafter be amended, against any and all amounts (including judgments, fines,
payments in settlement, attorneys' fees and other expenses) reasonably incurred
by or on behalf of such person in
II-2
<PAGE>
connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, in which
such director or officer was or is made or is threatened to be made a party or
is otherwise involved by reason of the fact that such person is or was a
director, officer, employee, fiduciary or member of any other corporation,
partnership, joint venture, trust, organization or other enterprise. General
Motors shall not be required to indemnify a person in connection with such
action, suit or proceeding initiated by such person if it was not authorized by
the GM Board of Directors. General Motors shall pay the expenses of directors
and officers incurred in defending any actions or proceeding in advance of its
final disposition; provided, however, that the payment of expenses incurred by
a director or officer in advance of the final disposition of the proceeding
shall be made only upon receipt of an undertaking by the director or officer to
repay all amounts advanced if it should be ultimately determined that the
director or officer is not entitled to be indemnified under Article V of the GM
By-Laws or otherwise. If a claim for indemnification or advancement of expenses
by an officer or director under Article V of the GM By-Laws is not paid in full
within ninety days after a written claim therefor has been received by General
Motors, the claimant may file suit to recover the unpaid amount of such claim
and, if successful in whole or in part, shall be entitled to be paid the
expense of prosecuting such claim, In any such action General Motors shall have
the burden of proving that the claimant was not entitled to the requested
indemnification or advancement of expenses under applicable law. The rights
conferred on any person by Article V of the GM. By-Laws shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the GM restated certificate of incorporation or the GM
By-Laws, agreement, vote of stockholders or disinterested directors or
otherwise.
Insurance
General Motors is insured against liabilities which it may incur by
reason of Article V of the GM By-Laws. In addition, directors and officers are
insured, at GM's expense, against liabilities which might arise out of their
employment and not be subject to indemnification under Article V of the GM By-
Laws.
Pursuant to a resolution adopted by the GM board on December 1, 1975,
General Motors to the fullest extent permissible under law will indemnify, and
has purchased insurance on behalf of, directors or officers of General Motors,
or any of them, who incur or are threatened with personal liability, including
expense, under ERISA or any amendatory or comparable legislation or regulation
thereunder.
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1(a) Form of Underwriting Agreement*
2(a) Agreement and Plan of Merger by and among General Motors Corporation,
Hughes Electronics Corporation and United States Satellite
Broadcasting Company, Inc., incorporated by reference to Exhibit 2(a)
to the Current Report on Form 8-K of General Motors dated December 11,
1998
2(b) Asset Purchase Agreement by and among PRIMESTAR, INC., PRIMESTAR
PARTNERS L.P., PRIMESTAR MDU, INC., the Stockholders of PRIMESTAR,
INC. and Hughes Electronics Corporation, incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of General Motors dated
January 22, 1999
2(c) Asset Purchase Agreement by and among Hughes Electronics Corporation,
PRIMESTAR, INC., PRIMESTAR PARTNERS L.P., Tempo Satellite Inc. and the
Stockholders of PRIMESTAR, INC. dated as of January 22, 1999,
incorporated by reference to Exhibit 99.2 to the Current Report on
Form 8-K of General Motors dated January 22, 1999
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
4(a) Restated certificate of incorporation, as amended, filed as Exhibit
3(i) to the Current Report on Form 8-K of General Motors Corporation
dated June 8, 1998, and Amendment to Article Fourth of the Certificate
of Incorporation--Division III--Preference Stock, by reason of the
Certificates of Designations filed with the Secretary of State of the
State of Delaware on September 14, 1987 and the Certificate of
Decrease filed with the Secretary of State of the State of Delaware on
September 29, 1987 (pertaining to the six series of Preference Stock
contributed to the General Motors pension trusts), incorporated by
reference to Exhibit 19 to the Quarterly Report on Form 10-Q of
General Motors Corporation for the quarter ended June 30, 1990 in the
Form SE of General Motors Corporation dated August 6, 1990; as further
amended by the Certificate of Designations filed with the Secretary of
State of the State of Delaware on June 28, 1991 (pertaining to Series
A Conversion Preference Stock), incorporated by reference to Exhibit
4(a) to Form S-8 Registration Statement No. 33-43744 in the Form SE of
General Motors Corporation dated November 1, 1991; as further amended
by the Certificate of Designations filed with the Secretary of State
of the State of Delaware on December 9, 1991 (pertaining to Series B
9- 1/8% Preference Stock), incorporated by reference to Exhibit 4(a)
to Form S-3 Registration Statement No. 33-45216 in the Form SE of
General Motors Corporation dated January 27, 1992; as further amended
by the Certificate of Designations filed with the Secretary of State
of the State of Delaware on February 14, 1992 (pertaining to Series C
Convertible Preference Stock), incorporated by reference to Exhibit
3(a) to the Annual Report on Form 10-K of General Motors Corporation
for the year ended December 31, 1991 in the Form SE of General Motor
Corporation dated March 20, 1992; as further amended by the
Certificate of Designations filed with the Secretary of State of the
State of Delaware July 15, 1992 (pertaining to Series D 7.92%
Preference Stock), incorporated by reference to Exhibit 3(a)(2) to the
Quarterly Report on Form 10-Q of General Motors Corporation for the
quarter ended June 30, 1992 in the Form SE of General Motors
Corporation dated August 10, 1992; and as further amended by the
Certificate of Designations filed with the Secretary of State of the
State of Delaware on December 15, 1992 (pertaining to Series G 9.12%
Preference Stock), incorporated by reference to Exhibit 4(a) to Form
S-3 Registration Statement No. 33-49309 in the Form SE of General
Motors Corporation dated January 25, 1993.
4(b) By-Laws of General Motors Corporation, as amended, incorporated by
reference to Exhibit 3(ii) to the Current Report on Form 8-K of
General Motors dated March 2, 1998
4(c) Specimen Certificate for shares of Class H common stock*
5 Opinion of Warren G. Andersen, Esq.*
23(a) Consent of Deloitte & Touche LLP, independent auditors, with respect
to GM and Hughes
23(b) Consent of Arthur Andersen LLP, independent public accountants, with
respect to U.S. Satellite Broadcasting Company
23(c) Consent of KPMG LLP, independent public accountants, with respect to
PRIMESTAR
23(d) Consent of KPMG LLP, independent public accountants, with respect to
TCI Satellite
23(e) Consent of Warren G. Andersen--included in Exhibit 5*
27 Financial Data Schedules, incorporated by reference to the Current
Report on Form 8-K of General Motors Corporation dated April 12, 1999
</TABLE>
- --------
*To be filed by amendment.
II-4
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act
of 1933, such post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Detroit,
State of Michigan, on May 5, 1999.
General Motors Corporation
/s/ Warren G. Andersen
By: _______________________________
Warren G. Andersen
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on May 5, 1999
in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S> <C> <C>
* Chairman of
___________________________________________ the Board of
(John F. Smith, Jr.) Directors,
Chief
Executive
Officer, and
President
* Vice Chairman
___________________________________________ of the Board
(Harry J. Pearce) of Directors
* President,
___________________________________________ Chief
(G. Richard Wagoner, Jr.) Operating
Officer and
Director
* Executive Vice Principal
___________________________________________ President Financial
(J. Michael Losh) and Chief Officers
Financial
Officer
* Vice President
___________________________________________ and
(Eric A. Feldstein) Treasurer
* Comptroller Principal
___________________________________________ Accounting
(Wallace W. Creek) Officers
* Chief
___________________________________________ Accounting
(Peter R. Bible) Officer
* Director
___________________________________________
(Percy N. Barnevik)
* Director
___________________________________________
(John H. Bryan)
* Director
___________________________________________
(Thomas E. Everhart)
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
* Director
___________________________________________
(Charles T. Fisher, III)
* Director
___________________________________________
(George M.C. Fisher)
* Director
___________________________________________
(Karen Katen)
* Director
___________________________________________
(J. Willard Marriott, Jr.)
* Director
___________________________________________
(Ann D. McLaughlin)
* Director
___________________________________________
(Eckhard Pfeiffer)
* Director
___________________________________________
(John G. Smale)
* Director
___________________________________________
(Louis W. Sullivan)
* Director
___________________________________________
(Dennis Weatherstone)
</TABLE>
- --------
*Signed on behalf of each of the above-named individuals by their attorney-in-
fact.
/s/ Warren G. Andersen
Warren G. Andersen
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1(a) Form of Underwriting Agreement*
2(a) Agreement and Plan of Merger by and among General Motors Corporation,
Hughes Electronics Corporation and United States Satellite
Broadcasting Company, Inc., incorporated by reference to Exhibit 2(a)
to the Current Report on Form 8-K of General Motors dated December 11,
1998
2(b) Asset Purchase Agreement by and among PRIMESTAR, INC., PRIMESTAR
PARTNERS L.P., PRIMESTAR MDU, INC., the Stockholders of PRIMESTAR,
INC. and Hughes Electronics Corporation, incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of General Motors dated
January 22, 1999
2(c) Asset Purchase Agreement by and among Hughes Electronics Corporation,
PRIMESTAR, INC., PRIMESTAR PARTNERS L.P., Tempo Satellite Inc. and the
Stockholders of PRIMESTAR, INC. dated as of January 22, 1999,
incorporated by reference to Exhibit 99.2 to the Current Report on
Form 8-K of General Motors dated January 22, 1999
4(a) Restated certificate of incorporation, as amended, filed as Exhibit
3(i) to the Current Report on Form 8-K of General Motors Corporation
dated June 8, 1998, and Amendment to Article Fourth of the Certificate
of Incorporation--Division III--Preference Stock, by reason of the
Certificates of Designations filed with the Secretary of State of the
State of Delaware on September 14, 1987 and the Certificate of
Decrease filed with the Secretary of State of the State of Delaware on
September 29, 1987 (pertaining to the six series of Preference Stock
contributed to the General Motors pension trusts), incorporated by
reference to Exhibit 19 to the Quarterly Report on Form 10-Q of
General Motors Corporation for the quarter ended June 30, 1990 in the
Form SE of General Motors Corporation dated August 6, 1990; as further
amended by the Certificate of Designations filed with the Secretary of
State of the State of Delaware on June 28, 1991 (pertaining to Series
A Conversion Preference Stock), incorporated by reference to Exhibit
4(a) to Form S-8 Registration Statement No. 33-43744 in the Form SE of
General Motors Corporation dated November 1, 1991; as further amended
by the Certificate of Designations filed with the Secretary of State
of the State of Delaware on December 9, 1991 (pertaining to Series B
9- 1/8% Preference Stock), incorporated by reference to Exhibit 4(a)
to Form S-3 Registration Statement No. 33-45216 in the Form SE of
General Motors Corporation dated January 27, 1992; as further amended
by the Certificate of Designations filed with the Secretary of State
of the State of Delaware on February 14, 1992 (pertaining to Series C
Convertible Preference Stock), incorporated by reference to Exhibit
3(a) to the Annual Report on Form 10-K of General Motors Corporation
for the year ended December 31, 1991 in the Form SE of General Motors
Corporation dated March 20, 1992; as further amended by the
Certificate of Designations filed with the Secretary of State of the
State of Delaware July 15, 1992 (pertaining to Series D 7.92%
Preference Stock), incorporated by reference to Exhibit 3(a)(2) to the
Quarterly Report on Form 10-Q of General Motors Corporation for the
quarter ended June 30, 1992 in the Form SE of General Motors
Corporation dated August 10, 1992; and as further amended by the
Certificate of Designations filed with the Secretary of State of the
State of Delaware on December 15, 1992 (pertaining to Series G 9.12%
Preference Stock), incorporated by reference to Exhibit 4(a) to Form
S-3 Registration Statement No. 33-49309 in the Form SE of General
Motors Corporation dated January 25, 1993.
4(b) By-Laws of General Motors Corporation, as amended, incorporated by
reference to Exhibit 3(ii) to the Current Report on Form 8-K of
General Motors dated March 2, 1998
4(c) Specimen Certificate for shares of Class H common stock*
5 Opinion of Warren G. Andersen, Esq.*
23(a) Consent of Deloitte & Touche LLP, independent auditors, with respect
to GM and Hughes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
23(b) Consent of Arthur Andersen LLP, independent public accountants, with
respect to U.S. Satellite Broadcasting Company
23(c) Consent of KPMG LLP, independent public accountants, with respect to
PRIMESTAR
23(d) Consent of KPMG LLP, independent public accountants, with respect to
TCI Satellite
23(e) Consent of Warren G. Andersen--included in Exhibit 5*
27 Financial Data Schedules, incorporated by reference to the Current
Report on Form 8-K of General Motors Corporation dated April 12, 1999.
</TABLE>
- --------
*To be filed by amendment.
Exhibit 99.2
HUGHES COMPLETES ACQUISITION OF PRIMESTAR MEDIUM-POWER DBS BUSINESS
DIRECTV SIGNS AGREEMENTS WITH MASTER AGENTS
EL SEGUNDO, CA, April 28, 1999 - Hughes Electronics
Corporation today announced it has completed its acquisition of the PRIMESTAR
medium-power direct broadcast satellite (DBS) business.
The acquisition of PRIMESTAR gives DIRECTV(R) -- a unit of
Hughes Electronics and the nation's leading DBS service - the broadest
distribution network in the DBS industry, combining DIRECTV's national network
of consumer electronics retail store with PRIMESTAR's powerful rural and small
urban-based distribution network. DIRECTV also immediately adds the increased
revenues from PRIMESTAR's approximately 2.3 million subscribers to revenues from
its existing 4.8 million subscribers.
As previously announced, the consideration Hughes is paying
for PRIMESTAR's medium-power DBS business is comprised of 4,871,000 shares of
General Motors Class H (GMH) common stock and $1.1 billion in cash.
PRIMESTAR subscribers will be seamlessly transitioned to
DIRECTV's high-power service via PRIMESTAR's former national distribution
network of agents, master agents and full-service providers.
"DIRECTV is a significant growth driver for Hughes and our
acquisition of PRIMESTAR will increase DIRECTV's market share, and create value
for all GMH Class H stockholders," said Michael T. Smith, chairman and CEO of
Hughes. "We were the first to launch a high-power DBS business and this
acquisition makes DIRECTV the nation's third-largest multichannel video
distributor, putting us on par with the nation's largest cable operators."
"The closing of the PRIMESTAR acquisition gives us more than 7
million subscribers and significantly extends our industry leadership position,"
said Eddy W. Hartenstein, president of DIRECTV. "The completion of the PRIMESTAR
acquisition makes it easier than ever before for consumers to get DIRECTV
regardless of where they live. As DIRECTV service becomes more readily
accessible to cable subscribers everywhere, we expect even more of them to
switch to our service."
In a separate transaction, DIRECTV reached an agreement with
Tele-Communications, Inc. (TCI) to acquire from TCI a customer call center in
Boise, Idaho. The call center houses approximately 1,100 employees who provide
customer care in support of PRIMESTAR's medium-power business. The transaction,
which is subject to receipt of antitrust approval, is expected to close by
mid-year.
In addition to completing the PRIMESTAR acquisition, DIRECTV
has reached agreements with the four former master agents for PRIMESTAR to serve
<PAGE>
as master agents for DIRECTV. As master agents for DIRECTV, Metron Digital of
Knoxville, Tenn., CVS of Marion, Ind., Resource Electronics Office of Columbia,
S.C. and RS&I of Idaho Falls, Idaho, are now distributing DIRECTV System
equipment to PRIMESTAR's former national distribution network. Dealers have
already begun selling and installing equipment and taking orders for DIRECTV
programming from new subscribers.
DIRECTV will operate the PRIMESTAR medium-power business from
PRIMESTAR's headquarters in Denver for approximately 24 months, during which
time it will transition PRIMESTAR subscribers to DIRECTV. During this transition
period, PRIMESTAR's former distribution and service network will continue to
provide service to PRIMESTAR subscribers.
More than 870 PRIMESTAR employees have accepted employment
with DIRECTV. "We welcome the PRIMESTAR management and employees to the DIRECTV
family," commented Hartenstein. "PRIMESTAR employees have built a successful
business, and they will now play an integral role in transitioning PRIMESTAR
subscribers to DIRECTV and ensuring the continued growth of our industry."
Hughes announced in January 1999 an agreement with PRIMESTAR
to acquire its medium-power DBS business and related Tempo high-power satellite
assets. DIRECTV completed the first phase of the Tempo transaction in March when
it acquired the Tempo I satellite. The second phase of the transaction - the
acquisition of the in-orbit Tempo II satellite and 11 frequencies at the 119
degrees West Longitude orbital slot - remains subject to Federal Communications
Commission (FCC) approval. DIRECTV will introduce new programming services from
the in-orbit Tempo satellite upon completion of the transaction. FCC approval of
the Tempo transaction is expected by mid-year.
The earnings of Hughes Electronics are used to calculate the earnings per share
attributable to GMH (NYSE symbol) common stock. DIRECTV is the nation's leading
direct broadcast satellite service with 4.8 million subscribers. DIRECTV is a
registered trademark of DIRECTV, Inc., a unit of Hughes Electronics Corporation.
Visit Hughes on the World Wide Web at www.hughes.com.
###
