UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 1-143
GENERAL MOTORS CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 38-0572515
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Renaissance Center, Detroit, Michigan 48243-7301
3044 West Grand Boulevard, Detroit, Michigan 48202-3091
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (313) 556-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
As of March 31, 1999, there were outstanding 648,389,984 shares of the
issuer's $1-2/3 par value common stock and 106,534,001 shares of Class H $0.10
par value common stock.
- 1 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
--------
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheets as of March 31, 1999,
December 31, 1998 and March 31, 1998 5
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 33
Signature 33
Exhibit 99 Hughes Electronics Corporation Financial Statements
and Management's Discussion and Analysis of
Financial Condition and Results of Operations 34
Exhibit 27 Financial Data Schedule (for SEC information only)
- 2 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions
Except Per Share Amounts)
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
<S> <C> <C>
Manufactured products sales and revenues $36,620 $34,893
Financing revenues 3,509 3,310
Other income (Note 10) 2,306 1,821
------- -------
Total net sales and revenues 42,435 40,024
------ ------
Cost of sales and other operating expenses,
exclusive of items listed below 30,666 29,605
Selling, general and administrative expenses 3,822 3,510
Depreciation and amortization expense 2,724 2,707
Interest expense 1,845 1,570
Other expenses (Note 10) 438 549
-------- --------
Total costs and expenses 39,495 37,941
Income from continuing operations before income taxes
and minority interests 2,940 2,083
Income tax expense 1,029 695
Minority interests (14) (10)
Losses of nonconsolidated associates (77) (10)
------ -------
Income from continuing operations 1,820 1,368
Income from discontinued operations (Note 2) 242 236
------ ------
Net income 2,062 1,604
Dividends on preference stocks (16) (16)
------- ------
Earnings on common stocks $2,046 $1,588
===== =====
Basic earnings per share attributable to common stocks (Note 9)
$1-2/3 par value common stock
Continuing operations $2.73 $1.96
Discontinued operations 0.37 0.35
---- ----
Earnings per share attributable to $1-2/3 par value $3.10 $2.31
==== ====
Earnings per share attributable to Class H $0.20 $0.13
==== ====
Diluted earnings per share attributable to common stocks (Note 9)
$1-2/3 par value common stock
Continuing operations $2.68 $1.93
Discontinued operations 0.36 0.34
---- ----
Earnings per share attributable to $1-2/3 par value $3.04 $2.27
==== ====
Earnings per share attributable to Class H $0.19 $0.13
==== ====
</TABLE>
Reference should be made to the notes to consolidated financial statements.
- 3 -
CONSOLIDATED STATEMENTS OF INCOME - Concluded
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions)
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS
<S> <C> <C>
Manufactured products sales and revenues $36,620 $34,893
Other income 903 677
-------- --------
Total net sales and revenues 37,523 35,570
------ ------
Cost of sales and other operating expenses,
exclusive of items listed below 30,666 29,605
Selling, general and administrative expenses 2,741 2,569
Depreciation and amortization expense 1,452 1,483
------- -------
Total operating costs and expenses 34,859 33,657
Interest expense 194 195
Other expenses 58 190
Net expense (income) from transactions with Financing and
Insurance Operations 94 (18)
-------- -------
Income from continuing operations before income taxes
and minority interests 2,318 1,546
Income tax expense 788 528
Minority interests (6) (4)
Losses of nonconsolidated associates (77) (10)
------- ------
Income from continuing operations 1,447 1,004
Income from discontinued operations (Note 2) 242 236
------ -----
Net income - Automotive, Electronics
and Other Operations $1,689 $1,240
===== =====
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions)
FINANCING AND INSURANCE OPERATIONS
Financing revenues $3,509 $3,310
Insurance, mortgage and other income 1,403 1,144
----- -----
Total revenues and other income 4,912 4,454
----- -----
Interest expense 1,651 1,375
Depreciation and amortization expense 1,272 1,224
Operating and other expenses 1,081 941
Provisions for financing losses 119 101
Insurance losses and loss adjustment expenses 261 258
------ ------
Total costs and expenses 4,384 3,899
Net (income) expense from transactions with Automotive,
Electronics and Other Operations (94) 18
----- -----
Income before income taxes 622 537
Income tax expense 241 167
Minority interests (8) (6)
----- -----
Net income - Financing and Insurance Operations $373 $364
=== ===
</TABLE>
The above supplemental consolidating information is explained in Note 1.
Reference should be made to the notes to consolidated financial statements.
.
- 4 -
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Mar. 31, Mar. 31
1999 Dec. 31, 1998
GENERAL MOTORS CORPORATION AND SUBSIDIARIES (Unaudited) 1998 (Unaudited)
--------- -------- ---------
ASSETS (Dollars in Millions)
Automotive, Electronics and Other Operations
<S> <C> <C> <C>
Cash and cash equivalents $12,081 $9,728 $10,030
Marketable securities 1,137 402 2,386
------- ------- -------
Total cash and marketable securities 13,218 10,130 12,416
Accounts and notes receivable
(less allowances) 4,686 4,750 4,426
Inventories (less allowances) (Note 3) 11,566 10,437 11,149
Net assets of discontinued operations (Note 2) 3,191 77 219
Equipment on operating leases (less
accumulated depreciation) 6,048 4,954 4,554
Deferred income taxes and other current assets 9,537 10,051 6,125
Net receivable from Financing and Insurance
Operations - - 840
Total current assets 48,246 40,399 39,729
Equity in net assets of nonconsolidated
associates 1,659 950 936
Property - net (Note 4) 31,636 32,222 29,903
Intangible assets - net 10,170 9,994 10,639
Deferred income taxes 15,410 14,967 18,172
Other assets 13,565 16,062 15,379
------ ------ ------
Total Automotive, Electronics and
Other Operations assets 120,686 114,594 114,758
Financing and Insurance Operations
Cash and cash equivalents 502 146 483
Investments in securities 8,703 8,748 7,815
Finance receivables - net 73,839 70,436 62,748
Investment in leases and other receivables 32,707 32,798 30,935
Other assets 14,959 18,807 12,794
Net receivable from Automotive, Electronics
and Other Operations 339 816 -
------ ------ ------
Total Financing and Insurance Operations
assets 131,049 131,751 114,775
------- ------- -------
Total assets $251,735 $246,345 $229,533
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive, Electronics and Other Operations
Accounts payable (principally trade) $16,162 $13,542 $12,721
Loans payable 869 1,204 1,276
Accrued expenses 33,210 30,548 31,424
Net payable to Financing and
Insurance Operations 339 816 -
------ ------ -------
Total current liabilities 50,580 46,110 45,421
Long-term debt 7,011 7,118 5,796
Postretirement benefits other than pensions
(Note 5) 34,416 33,503 34,027
Pensions 3,761 4,410 3,341
Other liabilities and deferred income taxes 17,768 17,807 17,805
------ ------ ------
Total Automotive, Electronics and Other
Operations liabilities 113,536 108,948 106,390
Financing and Insurance Operations
Accounts payable 4,405 4,148 3,501
Debt 106,379 107,753 91,500
Deferred income taxes and other liabilities 9,954 9,661 9,520
Net payable to Automotive, Electronics and
Other Operations - - 840
------ ------ ------
Total Financing and Insurance
Operations liabilities 120,738 121,562 105,361
Minority interests 580 563 678
General Motors - obligated mandatorily
redeemable preferred securities of
subsidiary trusts holding solely junior
subordinated debentures of General Motor
(Note 6)
Series D 79 79 79
Series G 141 141 143
Stockholders' equity
Preference stocks 1 1 1
$1-2/3 par value common stock (Note 7;
issued, 649,568,145, 655,008,344
and 669,314,625 shares) 1,083 1,092 1,116
Class H common stock (issued,
106,641,918, 106,159,776 and
104,769,861 shares) 11 11 10
Capital surplus (principally additional
paid-in capital) 13,276 12,661 13,786
Retained earnings 8,703 6,984 6,664
------- ------- -------
Subtotal 23,074 20,749 21,577
Accumulated foreign currency translation
adjustments (1,782 (1,089) (1,172)
Net unrealized gains on securities 458 481 539
Minimum pension liability adjustment (5,089) (5,089) (4,062)
Accumulated other comprehensive loss (6,413) (5,697) (4,695)
----- ----- -----
Total stockholders' equity 16,661 15,052 16,882
-------- -------- --------
Total liabilities and stockholders' equity $251,735 $246,345 $229,533
======== ======== ========
</TABLE>
Reference should be made to the notes to consolidated financial statements.
- 5 -
CONSOLIDATED BALANCE SHEETS - Concluded
<TABLE>
<CAPTION>
Mar. 31, Mar. 31,
1999 Dec. 31, 1998
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS (Unaudited) 1998 (Unaudited)
--------- ---- ---------
(Dollars in Millions)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $12,081 $9,728 $10,030
Marketable securities 1,137 402 2,386
------- -------- -------
Total cash and marketable securities 13,218 10,130 12,416
Accounts and notes receivable (less allowances) 4,686 4,750 4,426
Inventories (less allowances) (Note 3) 11,566 10,437 11,149
Net assets of discontinued operations (Note 2) 3,191 77 219
Equipment on operating leases (less
accumulated depreciation) 6,048 4,954 4,554
Deferred income taxes and other current assets 9,537 10,051 6,125
Net receivable from Financing and
Insurance Operations - - 840
------- -------- -------
Total current assets 48,246 40,399 39,729
Equity in net assets of nonconsolidated
associates 1,659 950 936
Property - net (Note 4) 31,636 32,222 29,903
Intangible assets - net 10,170 9,994 10,639
Deferred income taxes 15,410 14,967 18,172
Other assets 13,565 16,062 15,379
------ ------ ------
Total Automotive, Electronics and
Other Operations assets $120,686 $114,594 $114,758
======== ======== ========
LIABILITIES AND GM INVESTMENT
Accounts payable (principally trade) $16,162 $13,542 $12,721
Loans payable 869 1,204 1,276
Accrued expenses 33,210 30,548 31,424
Net payable to Financing and
Insurance Operations 339 816 -
------ ------ ------
Total current liabilities 50,580 46,110 45,421
Long-term debt 7,011 7,118 5,796
Postretirement benefits other than pensions
(Note 5) 34,416 33,503 34,027
Pensions 3,761 4,410 3,341
Other liabilities and deferred income taxes 17,768 17,807 17,805
Total Automotive, Electronics and Other
Operations liabilities 113,536 108,948 106,390
Minority interests 520 511 636
GM investment in Automotive, Electronics
and Other Operations 6,630 5,135 7,732
----- ----- -----
Total Automotive, Electronics and
Other Operations liabilities
and GM investment $120,686 $114,594 $114,758
======== ======== ========
Mar. 31, Mar. 31,
1999 Dec. 31, 1998
FINANCING AND INSURANCE OPERATIONS (Unaudited) 1998 (Unaudited)
--------- ---- ---------
(Dollars in Millions)
ASSETS
Cash and cash equivalents $502 $146 $483
Investments in securities 8,703 8,748 7,815
Finance receivables - net 73,839 70,436 62,748
Investment in leases and other receivables 32,707 32,798 30,935
Other assets 14,959 18,807 12,794
Net receivable from Automotive,
Electronics and Other Operations 339 816 -
----- ----- -----
Total Financing and Insurance
Operations assets $131,049 $131,751 $114,775
======== ======== ========
LIABILITIES AND GM INVESTMENT
Accounts payable $4,405 $4,148 $3,501
Debt 106,379 107,753 91,500
Deferred income taxes and other liabilities 9,954 9,661 9,520
Net payable to Automotive, Electronics
and Other Operations - - 840
----- ----- -----
Total Financing and Insurance
Operations liabilities 120,738 121,562 105,361
Minority interests 60 52 42
GM investment in Financing and
Insurance Operations 10,251 10,137 9,372
------ ------ -----
Total Financing and Insurance Operations
liabilities and GM investment $131,049 $131,751 $114,775
======== ======== ========
</TABLE>
The above supplemental consolidating information is explained in Note 1.
Reference should be made to the notes to consolidated financial statements.
- 6 -
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1999 1998
-------- ------
(Dollars in Millions)
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
<S> <C> <C>
Net cash provided by operating activities $15,094 $5,324
Cash flows from investing activities
Expenditures for property (1,384) (1,996)
Investments in other marketable securities
- acquisitions (7,553) (5,545)
Investments in other marketable securities
- liquidations 6,344 7,141
Mortgage servicing rights - acquisitions (327) (153)
Mortgage servicing rights - liquidations - 29
Finance receivables - acquisitions (42,969) (41,800)
Finance receivables - liquidations 31,921 32,556
Proceeds from sales of finance receivables 7,375 5,143
Operating leases - acquisitions (5,898) (5,127)
Operating leases - liquidations 3,129 3,462
Investments in companies, net of cash acquired (514) (211)
Other (170) (711)
---- ----
Net cash used in investing activities (10,046) (7,212)
------ -----
Cash flows from financing activities
Net (decrease) increase in loans payable (5,231) 2,019
Increase in long-term debt 7,970 6,428
Decrease in long-term debt (3,980) (4,143)
Repurchases of common and preference stocks (979) (1,911)
Proceeds from issuing common stocks 284 233
Cash dividends paid to stockholders (343) (357)
----- -----
Net cash (used in) provided by
financing activities (2,279) 2,269
----- -----
Effect of exchange rate changes on cash and
cash equivalents (188) (85)
------- ---------
Net cash provided by continuing operations 2,581 296
Net cash provided by (used in)
discontinued operations 128 (56)
------- ---------
Net increase in cash and cash equivalents 2,709 240
Cash and cash equivalents at beginning
of the period 9,874 10,273
----- ------
Cash and cash equivalents at end of
the period $12,583 $10,513
======= =======
</TABLE>
Reference should be made to the notes to consolidated financial statements.
- 7 -
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1999 1998
----------------------- ------------------------
Automotive, Financing Automotive, Financing
Electronics and Electronics and
and Other Insurance and Other Insurance
--------- --------- --------- ---------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Net cash provided by operating activities $9,188 $5,906 $3,014 $2,310
Cash flows from investing activities
Expenditures for property (1,345) (39) (1,967) (29)
Investments in other marketable securities
- acquisitions (1,813) (5,740) (2,007) (3,538)
Investments in other marketable securities
- liquidations 1,077 5,267 3,281 3,860
Mortgage servicing rights - acquisitions - (327) - (153)
Mortgage servicing rights - liquidations - - - 29
Finance receivables - acquisitions - (42,969) - (41,800)
Finance receivables - liquidations - 31,921 - 32,556
Proceeds from sales of finance receivables - 7,375 - 5,143
Operating leases - acquisitions (2,465) (3,433) (1,413) (3,714)
Operating leases - liquidations 1,281 1,848 1,384 2,078
Investments in companies, net of
cash acquired (514) - (211) -
Net investing activity with Financing and
Insurance Operations 75 - 75 -
Other (1,162) 992 (236) (475)
------ --- ---- ----
Net cash used in investing activities (4,866) (5,105) (1,094) (6,043)
----- ----- ----- ------
Cash flows from financing activities
Net (decrease) increase in loans payable (485) (4,746) 835 1,184
Increase in long-term debt 411 7,559 913 5,515
Decrease in long-term debt (320) (3,660) (635) (3,508)
Net financing activity with Automotive,
Electronics and Other Operations - (75) - (75)
Repurchases of common and preference stocks (979) - (1,911) -
Proceeds from issuing common stocks 284 - 233 -
Cash dividends paid to stockholders (343) - (357) -
------ ------ ------ -------
Net cash (used in) provided by
financing activities (1,432) (922) (922) 3,116
------ ---- ---- -----
Effect of exchange rate changes on cash and
cash equivalents (188) - (87) 2
Net transactions with Automotive/
Financing Operations (477) 477 (521) 521
---- --- ---- ---
Net cash provided by (used in)
continuing operations 2,225 356 390 (94)
Net cash provided by (used in)
discontinued operations 128 - (56) -
----- --- ---- -----
Net increase (decrease) in cash
and cash equivalents 2,353 356 334 (94)
Cash and cash equivalents at beginning
of the period 9,728 146 9,696 577
----- --- ----- ---
Cash and cash equivalents at end
of the period $12,081 $502 $10,030 $483
======= ==== ======= ====
</TABLE>
The above supplemental consolidating information is explained in Note 1.
Reference should be made to the notes to consolidated financial statements.
.
- 8 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. The consolidated financial statements include the
accounts of General Motors Corporation (hereinafter referred to as the
"Corporation") and domestic and foreign subsidiaries that are more than 50%
owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC)
and Hughes Electronics Corporation, ("Hughes") (collectively referred to as
"General Motors" or "GM"). The financial data related to Delphi Automotive
Systems Corporation (Delphi) is presented as discontinued operations for all
periods presented. In the opinion of management, all adjustments (consisting of
only normal recurring items), which are necessary for a fair presentation have
been included. The results for interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
For further information, refer to the December 31, 1998 consolidated financial
statements and notes thereto included in GM's Current Report on Form 8-K, dated
April 12, 1999 and filed with the Securities and Exchange Commission on April
15, 1999.
GM presents separate supplemental consolidating financial information for the
following businesses: (1) Automotive, Electronics and Other Operations which
consists of the design, manufacturing and marketing of cars, trucks, locomotives
and heavy duty transmissions and related parts and accessories, as well as the
operations of Hughes; and (2) Financing and Insurance Operations which consists
primarily of GMAC, which provides a broad range of financial services, including
consumer vehicle financing, full-service leasing and fleet leasing, dealer
financing, car and truck extended service contracts, residential and commercial
mortgage services, and vehicle and homeowners insurance. Transactions between
businesses have been eliminated in the Corporation's consolidated statements of
income.
Certain amounts for 1998 were reclassified to conform with the 1999
classifications.
Note 2. Discontinued Operations
Delphi is a diverse supplier of automotive systems and components. Delphi
offers products and services in the areas of electronics and mobile
communication; safety, thermal and electrical architecture; and dynamics and
propulsion. In February 1999, Delphi completed an initial public offering (IPO)
of 100 million shares of its common stock, which represented 17.7% of its
outstanding common shares. On April 12, 1999, the GM Board of Directors approved
the complete separation of Delphi from GM by means of a tax-free spin-off in
which 80.1 percent of the ownership of Delphi, 452.6 million shares of Delphi
common stock now owned by GM, will be distributed on a pro-rata basis to owners
of GM $1-2/3 par value common stock on May 28, 1999, based on a record date of
May 25, 1999. In addition, since GM received a favorable ruling from the
Internal Revenue Service on May 3, 1999, GM will contribute the other 2.2% of
Delphi shares it owns, 12.4 million shares, to a Voluntary Employee Beneficiary
Association (VEBA) trust to fund benefits to hourly retirees.
The financial data related to GM's investment in Delphi prior to the approved
May, 1999 spin-off is classified as discontinued operations for all periods
presented. The financial data of Delphi reflect the historical results of
operations and cash flows of the businesses that were considered part of the
Delphi business segment of GM during each respective period; they do not reflect
many significant changes that will occur in the operations and funding of Delphi
as a result of the separation from GM and the IPO. The Delphi financial data
classified as discontinued operations reflect the assets and liabilities
transferred to Delphi in accordance with the terms of a master separation
agreement to which Delphi and GM are parties (the "Separation Agreement").
Delphi and Delco Electronics Corporation ("Delco Electronics"), the electronics
and mobile communication business that was transferred to Delphi in December
1997, were under the common control of GM during such periods; therefore, the
Delphi financial data include amounts relating to Delco Electronics for all
periods presented, although Delco Electronics was not integrated with Delphi
until December 1997.
Delphi net sales (including sales to GM) included in discontinued operations
totaled $7.5 billion and $7.6 billion for the three months ended March 31, 1999
and 1998, respectively. Income from Delphi discontinued operations of $242
million and $236 million for the three months ended March 31, 1999 and 1998 is
reported net of income tax expense of $174 million and $113 million,
respectively.
- 9 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 2. Discontinued Operations (concluded)
The net assets of Delphi were as follows (in millions):
March 31, Dec. 31, March 31,
1999 1998 1998
---- ---- ----
Current assets $8,730 $6,405 $6,594
Property and equipment - net 4,907 4,965 4,696
Deferred income taxes and other assets 4,442 4,136 3,560
Current liabilities (4,518) (4,057) (3,498)
Long-term debt (1,667) (3,141) (3,344)
Other liabilities (8,543) (8,299) (7,881)
Accumulated translation adjustments 172 68 92
Minority interest related to Delphi (332) - -
------ ---- -----
Net assets of discontinued operations $3,191 $77 $219
===== == ===
As a result of the IPO of 17.7% of Delphi's outstanding common shares, GM
recorded an increase to stockholders' equity of $1.2 billion in the first
quarter of 1999. This amount reflects the IPO proceeds of $1.7 billion, less the
cost of GM's investment in Delphi sold in the IPO and the costs of the IPO and
establishing Delphi as an independent entity. GM's investment in Delphi was
based on GM's investment balance at December 31, 1998 ($77 million), increased
for the $1.5 billion net forgiveness of intercompany receivables and Delphi's
net income for the period prior to the IPO.
For financial reporting purposes, the complete separation of Delphi from GM
will also be recorded as an equity transaction in the second quarter of 1999. It
is estimated that the impact of the IPO and the subsequent complete separation
of Delphi will result in a reduction to stockholders' equity of $1.7 billion to
$1.9 billion.
Note 3. Inventories
Inventories included the following for Automotive, Electronics and Other
Operations (in millions):
March 31, Dec. 31, March 31,
1999 1998 1998
---- ---- ----
Productive material, work in process,
and supplie $6,180 $5,377 $5,689
Finished product, service parts, etc. 7,288 6,962 7,297
Total inventories at FIFO 13,468 12,339 12,986
Less LIFO allowance 1,902 1,902 1,837
------ ------- -------
Total inventories (less allowances) $11,566 $10,437 $11,149
====== ====== ======
Note 4. Property - Net
Property - net included the following for Automotive, Electronics and Other
Operations (in millions):
March 31, Dec. 31, March 31,
1999 1998 1998
---- ---- ----
Real estate, plants, and equipment 58,585 59,565 $56,213
Less accumulated depreciation (33,988) (34,641) (32,982)
------ ------ ------
Real estate, plants, and equipment - net 24,597 24,924 23,231
Special tools - net 7,039 7,298 6,672
----- ------- -------
Total property - net $31,636 $32,222 $29,903
====== ====== ======
Financing and Insurance Operations had net property of $365 million, $386
million, and $251 million recorded in other assets at March 31, 1999, December
31, 1998, and March 31, 1998, respectively.
Note 5. Postretirement Benefits Other Than Pensions
GM has disclosed in the consolidated financial statements certain amounts
associated with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities," or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, GM does not admit or otherwise acknowledge that such
amounts or existing postretirement benefit plans of GM (other than pensions)
represent legally enforceable liabilities of GM.
- 10 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 6. Preferred Securities of Subsidiary Trusts
General Motors - Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts
In July 1997, the General Motors Capital Trust D (Series D Trust) issued
approximately $79 million of its 8.67% Trust Originated Preferred Securitiessm
(TOPrSsm) Series D, (Series D Preferred Securities), in a one-for-one exchange
for 3,055,255 of the outstanding GM Series D 7.92% Depositary Shares, each
representing one-fourth of a share of GM Series D Preference Stock, $0.10 par
value per share. In addition, the General Motors Capital Trust G (Series G
Trust) issued approximately $143 million of its 9.87% TOPrS, Series G (Series G
Preferred Securities), in a one-for-one exchange for 5,064,489 of the
outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of
a share of GM Series G Preference Stock, $0.10 par value per share.
Concurrently with the exchanges and the related purchases by GM from the
Series D and Series G Trusts (Trusts) of the common securities of such Trusts,
which represent approximately 3 percent of the total assets of such Trusts, GM
issued to the wholly-owned Trusts, as the Series D Trust's sole assets its 8.67%
Junior Subordinated Deferrable Interest Debentures, Series D, due July 1, 2012
and as the Series G Trust's sole assets, its 9.87% Junior Subordinated
Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series D
Debentures" and "Series G Debentures" or collectively the "Debentures"), having
aggregate principal amounts equal to the aggregate stated liquidation amounts of
the Series D and Series G Preferred Securities and the related common
securities, respectively ($79 million with respect to the Series D Debentures
and $131 million with respect to the Series G Debentures).
The Series D Debentures are redeemable, in whole or in part, at GM's option
on or after August 1, 1999, at a redemption price equal to 100% of the
outstanding principal amount of the Series D Debentures plus accrued and unpaid
interest, or, under certain circumstances, prior to August 1, 1999, at a
redemption price equal to 105% of the outstanding principal of the Series D
Debentures from the Series D expiration date through July 31, 1998, declining
ratably on each August 1 thereafter to 100% on August 1, 1999, plus accrued and
unpaid interest. The Series D Preferred Securities will be redeemed upon the
maturity or earlier redemption of the Series D Debentures.
The Series G Debentures are redeemable, in whole or in part, at GM's option
on or after January 1, 2001, at a redemption price equal to 100% of the
outstanding principal amount of the Series G Debentures plus accrued and unpaid
interest, or, under certain circumstances, prior to January 1, 2001, at a
redemption price equal to 114% of the outstanding principal of the Series G
Debentures from the Series G expiration date through December 31, 1997,
declining ratably on each January 1 thereafter to 100% on January 1, 2001, plus
accrued and unpaid interest. The Series G Preferred Securities will be redeemed
upon the maturity or earlier redemption of the Series G Debentures.
GM has guaranteed the payment in full to the holders of the Series D and
Series G Preferred Securities (collectively the "Preferred Securities") of all
distributions and other payments on the Preferred Securities to the extent not
paid by the Trusts only if and to the extent that the Trusts have assets
therefore, GM has made payments of interest or principal on the related
Debentures. These guarantees, when taken together with GM's obligations under
the Preferred Securities Guarantees, the Debentures, and the Indentures relating
thereto and the obligations under the Declaration of Trust of the Trusts,
including the obligations to pay certain costs and expenses of the Trusts,
constitute full and unconditional guarantees by GM of each Trust's obligations
under its Preferred Securities.
- ---------------------------
sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of
Merrill Lynch & Co.
Note 7. Common Stock Repurchases
During the three months ended March 31, 1999, GM used $480 million to acquire
approximately 5 million shares of $1-2/3 par value common stock under the
Corporation's $4 billion stock repurchase program announced in February 1998. GM
also used approximately $499 million to repurchase shares of $1-2/3 par value
common stock for certain employee benefit plans during the three months ended
March 31, 1999.
- 11 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 8. Comprehensive Income
GM's total comprehensive income was as follows (in millions):
Three Months Ended
March 31,
1999 1998
---- ----
Net income $2,062 $1,604
Other comprehensive loss:
Foreign currency translation adjustments (693) (1) (362)
Unrealized (losses) gains on securities (23) 35
---- ----
Other comprehensive loss (716) (327)
---- -----
Total comprehensive income $1,346 $1,277
===== =====
(1)Includes approximately $450 million of translation adjustments associated
with the devaluation of the Brazilian Real in the first quarter of 1999.
Note 9. Earnings Per Share Attributable to Common Stocks
Earnings per share attributable to each class of GM common stock was
determined based on the attribution of earnings to each such class of common
stock for the period divided by the weighted-average number of common shares for
each such class outstanding during the period. Diluted earnings per share
attributable to each class of GM common stock considers the impact of potential
common shares, unless the inclusion of the potential common shares would have an
antidilutive effect.
The attribution of earnings to each class of common stock was as follows (in
millions):
Three Months Ended
March 31,
1999 1998
---- ----
Earnings attributable to common stocks
$1-2/3 par value
Continuing operations $1,783 $1,338
Discontinued operations 242 236
------ ------
Earnings attributable to $1-2/3 par value $2,025 $1,574
Earnings attributable to Class H $21 $14
Earnings attributable to $1-2/3 par value common stock for the period
represent the earnings attributable to all GM common stocks for the period,
reduced by the ASCNI of Hughes for the respective period.
Earnings attributable to Class H common stock for the three months ended
March 31, 1999 and 1998 represent the ASCNI of Hughes, excluding the effects of
purchase accounting adjustments arising at the time of the Corporation's
acquisition of Hughes Aircraft Company (HAC) which remains after the spin-off of
Hughes Defense, calculated for such period and multiplied by a fraction, the
numerator of which was a number equal to the weighted-average number of shares
of Class H common stock outstanding during the quarter (106 million) in 1999 and
(104 million) in 1998, and the denominator of which was 400 million in 1999 and
1998.
The denominator used in determining the ASCNI of Hughes may be adjusted from
time-to-time as deemed appropriate by the GM Board of Directors (GM Board) to
reflect subdivisions or combinations of the Class H common stock and to reflect
certain transfers of capital to or from Hughes, the contribution of shares of
capital stock of GM to or for the benefit of Hughes employees and the retirement
of GM Class H common stock purchased by Hughes. The GM Board's discretion to
make such adjustments is limited by criteria set forth in the Corporation's
Restated Certificate of Incorporation.
Prior to January 1, 1999, the assumed exercise of stock options had no
effect on Class H common stock earnings per share, because to the extent that
shares of Class H common stock deemed to be outstanding would increase, such
increased shares would also increase the numerator of the fraction used to
determine Available Separate Consolidated Net Income (ASCNI).
Effective January 1, 1999, shares of Class H common stock delivered by GM in
connection with the award of such shares to and the exercise of stock options by
employees of Hughes will increase the denominator of the fraction referred to
above. As a result, the earnings per share attributable to Class H common stock
will be calculable on both a basic and dilutive basis.
- 12 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Note 9. Earnings Per Share Attributable to Common Stocks (concluded)
The reconciliation of the amounts used in the basic and diluted earnings per
share computations for income from continuing operations was as follows (in
millions except per share amounts):
<TABLE>
<CAPTION>
$1-2/3 Par Value Common Stock Class H Common Stock
----------------------------- --------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Three Months Ended March 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations $1,799 $21
Less:Dividends on preference stocks 16 -
---- ----
Basic EPS
Income from continuing operations
available to common stockholders 1,783 654 $2.73 21 106 $0.20
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options (1) 13 1 6
--- -- --- ---
Diluted EPS
Adjusted income from
continuing operations
available to common stockholders $1,782 667 $2.68 $22 112 $0.19
===== === ==== == === ====
Three Months Ended March 31, 1998
Income from continuing operations $1,354 $14
Less:Dividends on preference stocks 16 -
----- ---
Basic EPS
Income from continuing operations
available to common stockholders 1,338 682 $1.96 14 104 $0.13
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - 11 - 5
------ ----- --- ----
Diluted EPS
Adjusted income from
continuing operations
available to common stockholders $1,338 693 $1.93 $14 109 $0.13
====== === ===== === === =====
</TABLE>
- 13 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 10. Other Income and Other Expenses
Other income and other expenses consisted of the following (in millions):
Three Months Ended
March 31,
1999 1998
---- ----
Other income
Interest income $544 $576
Insurance premiums 340 369
Rental car lease revenue 448 337
Mortgage operations investment
income and servicing fees 684 444
Other 290 95
------- -------
Total other income $2,306 $1,821
===== =====
Other expenses
Provision for financing losses $119 $101
Insurance losses and loss adjustment expenses 261 257
Other 58 191
---- ---
Total other expenses $438 $549
=== ===
- 14 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 11. Segment Reporting
GM's reportable operating segments within its Automotive, Electronics and
Other Operations business consist of General Motors Automotive (GMA), which is
comprised of four regions: GM North America (GMNA), GM Europe (GME), GM
Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM), Hughes, and
Other. GM's reportable operating segments within its Financing and Insurance
Operations business consist of GMAC and Other. Selected information regarding
GM's reportable operating segments and regions are as follows:
<TABLE>
<CAPTION>
Elimin- Total Other Total
GMNA GME GMLAAM GMAP ations GMA Hughes Other Automotive GMAC Financing Financing
---- --- ------ ---- ------ --- ------ ----- ----------- ---- --------- ---------
(in millions)
For the Three Months Ended March 31, 1999
Manufactured products sales &
revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External customers $26,816 $6,066 $967 $583 $ - $34,432 $1,443 $745 $36,620 $ - $ - $ -
Intersegment 502 68 55 37 (662) - 9 (9) - - - -
-------- ------ ------ ---- --- ------- ------ ---- ------ ----- ---- ----
Total manufactured
products 27,318 6,134 1,022 620 (662) 34,432 1,452 736 36,620 - - -
Financing revenues - - - - - - - - - 3,277 232 3,509
Other income 750 143 11 27 - 931 183 (211) 903 1,550 (147) 1,403
-------- ------ ------ ---- --- ------- ------ ---- ------ ----- ---- ----
Total net sales
and revenues $28,068 $6,277 $1,033 $647 $(662)$35,363 $1,635 $525 $37,523 $4,827 $85 $4,912
====== ===== ===== === === ====== ===== === ====== ===== == =====
Interest income (a) $195 $102 $16 $3 $- $316 $14 $(160) $170 $413 $(39) $374
Interest expense $306 $77 $15 $4 $- $402 $7 $(215) $194 $1,513 $138 $1,651
Net income (loss)(b)(c) $1,408 $174 $(25) $(60) $13 $1,510 $78 $101 $1,689 $392 $(19) $373
Segment assets (d) $71,825$17,869 $4,173 $1,259 $(870)$94,256 $12,990 $13,440 $120,686$131,648 $(599)$131,049
For the Three Months Ended March 31, 1998
Manufactured products sales &
revenues:
External customers $25,085 $5,212 $1,995 $728 $- $33,020 $1,285 $588 $34,893 $ - $ - $ -
Intersegment 804 185 29 - (1,018) - 6 (6) - - - -
-------- ------ ------ ---- --- ------- ------ ---- ------ ----- ---- ----
Total manufactured
products 25,889 5,397 2,024 728 (1,018) 33,020 1,291 582 34,893 - - -
Financing revenues - - - - - - - - - 3,107 203 3,310
Other income 538 136 64 26 - 764 48 (135) 677 1,213 (69) 1,144
-------- ------ ------ ---- --- ------- ------ ---- ------ ----- ---- ----
Total net sales
and revenues $26,427 $5,533 $2,088 $754$(1,018)$33,784 $1,339 $447 $35,570 $4,320 $134 $4,454
====== ===== ===== === ===== ====== ===== === ====== ===== === =====
Interest income (a) $117 $136 $28 $1 $- $282 $38 $(124) $196 $351 $29 $380
Interest expense $149 $104 $26 $2 $- $281 $3 $(89) $195 $1,384 $(9) $1,375
Net income (loss) (b) (c) $841 $99 $53 $6 $(7) $992 $54 $194 $1,240 $349 15 $364
Segment assets (d) $68,661$16,976 $5,809 $1,554 $(633)$92,367 $12,461 $9,930 $114,758$114,700 $75 $114,775
</TABLE>
(a) Interest income is included in other income.
(b)The amount for Other includes income from discontinued operations of $242
million and $236 million for the three months ended March 31, 1999 and 1998,
respectively.
(c)The amount reported for Hughes excludes amortization of GM purchase
accounting adjustments of approximately $5 million for both 1999 and 1998,
related to GM's acquisition of Hughes Aircraft Company. Such amortization was
allocated to GM's Other segment which is consistent with the basis upon which
the segments are evaluated.
(d)The amount reported for Hughes excludes the unamortized GM purchase
accounting adjustments of approximately $421 million and $442 million, for
1999 and 1998, respectively, related to GM's acquisition of Hughes Aircraft
Company. These adjustments were allocated to GM's Other segment which is
consistent with the basis upon which the segments are evaluated.
- 15 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Note 12. Contingent Matters
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 a process 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.
On April 28, 1999, Hughes acquired PRIMESTAR's medium-power direct-to-home
business (See Note 13 below). 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, a wholly owned subsidiary of
TCI Satellite Entertainment, Inc. The transactions will be accounted for using
the purchase method of accounting. The purchase price for the Tempo Satellite
assets consists of $500 million in cash. Of this purchase price, $150 million
was paid on March 10, 1999 for a satellite that has not yet been launched. The
remaining $350 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 transaction will be
consummated.
On February 24, 1999, the Department of Commerce notified Hughes that it
intended to deny a U.S. government export license Hughes was required to obtain
in connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile
telecommunications system. As a result, APMT and Hughes terminated the contract
on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92
million in the first quarter of 1999.
Hughes had maintained a suit against the U.S. government since September 1973
regarding the U.S. government's infringement and use of a Hughes patent covering
"Velocity Control and Orientation of a Spin Stabilized Body," principally
satellites (the "Williams Patent"). In April 1998, the U.S. Court of Appeals for
the Federal Circuit reaffirmed earlier decisions in the Williams Patent case
including the award of $114 million in damages, plus interest. In March 1999,
Hughes received and recognized as income a $155 million payment from the U.S.
government as a final disposition of the suit.
GM is subject to potential liability under government regulations and various
claims and legal actions which are pending or may be asserted against them. Some
of the pending actions purport to be class actions. The aggregate ultimate
liability of GM under these government regulations and under these claims and
actions, was not determinable at December 31, 1998. After discussion with
counsel, it is the opinion of management that such liability is not expected to
have a material adverse effect on the Corporation's consolidated financial
statements.
Note 13. Subsequent Events
On April 5, 1999, GM redeemed, at face value, its Series B 9-1/8% Preference
Stock. The approximately 20 million outstanding depositary shares had a face
value of approximately $500 million.
On April 28, 1999, Hughes acquired PRIMESTAR's medium-power direct-to-home
business. This transaction 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 $1.3 billion, based on the average market price of $47.87 per
share of Class H common stock at the time the acquisition agreement was signed.
* * * * * *
- 16 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the consolidated
financial statements and notes thereto along with the MD&A included in GM's
Current Reports on Form 8-K, dated April 12, 1999 and filed with the Securities
and Exchange Commission on April 15, 1999 and April 21, 1999, respectively,
Hughes Electronics Corporation (Hughes) financial statements and MD&A for the
period ended December 31, 1998, included as Exhibit 99 to GM's 1998 Annual
Report on Form 10-K, the General Motors Acceptance Corporation (GMAC) Annual
Report on Form 10-K for the period ended December 31, 1998, the Hughes financial
statements and MD&A for the period ended March 31, 1999, included as Exhibit 99
to this GM Quarterly Report on Form 10-Q for the period ended March 31, 1999,
and the GMAC Quarterly Report on Form 10-Q for the period ended March 31, 1999,
filed with the Securities and Exchange Commission. All earnings per share
amounts included in the MD&A are reported as basic.
GM presents separate supplemental consolidating financial information for the
following businesses: Automotive, Electronics and Other Operations and Financing
and Insurance Operations.
GM's reportable operating segments within its Automotive, Electronics and
Other Operations business consist of:
. General Motors Automotive (GMA), is comprised of four regions: GM North
America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin
America/Africa/Mid-East (GMLAAM). GMNA designs, manufactures, and markets
vehicles primarily in North America under the following nameplates:
Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME,
GMAP and GMLAAM meet the demands of customers outside North America with
vehicles designed, manufactured and marketed under the following
nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Chevrolet, GMC, and
Cadillac.
. Hughes includes activities relating to designing, manufacturing, and
marketing advanced technology electronic systems, products, and services
for the satellite & wireless communications industries.
. The Other segment includes the design, manufacturing and marketing of
locomotives and heavy-duty transmissions and the elimination of
intersegment transactions.
GM's reportable operating segments within its Financing and Insurance
Operations business consist of GMAC and Other. GMAC provides a broad range of
financial services, including consumer vehicle financing, full-service leasing
and fleet leasing, dealer financing, car and truck extended service contracts,
residential and commercial mortgage services, and vehicle and homeowners
insurance. The Financing and Insurance Operations' Other segment includes
financing entities operating in Canada, Germany and Brazil.
The disaggregated financial results for GMA have been prepared using a
management approach, which is consistent with the basis and manner in which GM
management internally disaggregates financial information for the purposes of
assisting in making internal operating decisions. In this regard, certain common
expenses were allocated among regions less precisely than would be required for
standalone financial information prepared in accordance with generally accepted
accounting principles (GAAP) and certain expenses (primarily certain U.S. taxes
related to non-U.S. operations) were included in the Automotive, Electronics and
Other Operations' Other segment. The financial results represent the historical
information used by management for internal decision making purposes; therefore,
other data prepared to represent the way in which the business will operate in
the future, or data prepared on a GAAP basis, may be materially different.
- 17 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
In the first quarter of 1999, GM's consolidated income from continuing
operations totaled $1.8 billion or $2.73 per share of $1-2/3 par value common
stock, which represents an increase of $452 million compared with $1.4 billion
or $1.96 per share of $1-2/3 par value common stock in the first quarter of
1998.
On April 12, 1999, the GM Board of Directors approved the complete separation
of Delphi from GM by means of a tax-free spin-off and, accordingly, the
financial results related to Delphi for all periods presented are reported as
discontinued operations. GM's net income for the first quarter of 1999,
including the income from discontinued operations totaled $2.1 billion or $3.10
per share of $1-2/3 par value common stock compared with $1.6 billion or $2.31
per share of $1-2/3 par value common stock in the first quarter of 1998.
Additional information regarding the spin-off of Delphi is contained in Note 2
to the GM consolidated financial statements.
Automotive, Electronics and Other Operations
Highlights of financial performance by GM's Automotive, Electronics and Other
Operations business were as follows for the three months ended March 31, (in
millions):
1999 1998
---- ----
Manufactured products sales and revenues
GMA $34,432 $33,020
Hughes 1,452 1,291
Other 736 582
-------- --------
Manufactured products sales and revenues $36,620 $34,893
Net income (loss)
GMA $1,510 $992
Hughes 78 54
Other (141) (42)
------ ------
Income from continuing operations 1,447 1,004
Discontinued operations 242 236
------ ------
Net income $1,689 $1,240
===== =====
- 18-
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Highlights
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions)
GMNA
Manufactured products sales and revenues $27,318 $25,889
Pre-tax income 2,097 1,224
Income tax expense 665 386
Earnings of nonconsolidated associates
and minority interests (24) 3
------ -----
GMNA income $1,408 $841
===== ===
GME
Manufactured products sales and revenues $6,134 $5,397
----- -----
Pre-tax income 281 203
Income tax expense 105 91
Earnings of nonconsolidated associates
and minority interests (2) (13)
----- ---
GME income $174 $99
=== ==
GMLAAM
Manufactured products sales and revenues $1,022 $2,024
----- -----
Pre-tax (loss) income (58) 16
Income tax benefit (36) (19)
Earnings of nonconsolidated associates
and minority interests (3) 18
---- --
GMLAAM (loss) income $(25) $53
==== ==
GMAP
Manufactured products sales and revenues $620 $728
--- ---
Pre-tax loss (25) (8)
Income tax benefit (6) -
Earnings of nonconsolidated associates
and minority interests (41) 14
--- --
GMAP (loss) income $(60) $6
=== =
GMA (1)
Manufactured products sales and revenues $34,432 $33,020
Pre-tax income 2,315 1,422
Income tax expense 735 452
Earnings of nonconsolidated associates
and minority interests (70) 22
------- -----
GMA income $1,510 $992
===== ===
(1) GMA's results include eliminations of transactions among GMNA, GME, GMLAAM,
and GMAP.
- 19 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Vehicle Unit Deliveries of Cars and Trucks - GMA
Three Months Ended March 31,
1999 1998
------------------------ ------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(Units in Thousands)
GMNA
United States
Cars 2,019 628 31.1% 1,873 571 30.5%
Trucks 2,011 533 26.5% 1,750 523 29.9%
----- --- ----- ---
Total United States 4,030 1,161 28.8% 3,623 1,094 30.2%
Canada and Mexico 463 144 31.1% 450 129 28.7%
--- --- --- ---
Total GMNA 4,493 1,305 29.0% 4,073 1,223 30.0%
GME 5,282 509 9.6% 5,020 492 9.8%
GMLAAM 800 125 15.6% 1,070 173 16.1%
GMAP 3,065 98 3.2% 2,993 124 4.2%
----- -- ----- ---
Total Worldwide 13,640 2,037 14.9% 13,156 2,012 15.3%
====== ===== ====== =====
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
(Units in Thousands)
Wholesale Sales
GMNA
Cars 780 662
Trucks 714 675
--- ---
Total GMNA 1,494 1,337
----- -----
GME
Cars 433 384
Trucks 37 37
-- --
Total GME 470 421
--- ---
GMLAAM
Cars 75 108
Trucks 47 70
-- --
Total GMLAAM 122 178
--- ---
GMAP
Cars 38 46
Trucks 54 69
-- --
Total GMAP 92 115
-- ---
Total Worldwide 2,178 2,051
===== =====
- 20 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Review
GMA reported income of $1.5 billion for the 1999 first quarter compared with
income of $992 million for the prior year quarter. The increase in income from
the prior year quarter was primarily due to higher wholesale sales volume,
continued improvement in the profitability of new vehicles, and lower material
and engineering costs. These factors also contributed to the strong improvement
in GMA's net margin to 4.4% for the first quarter of 1999 from 3.0% for the
first quarter of 1998.
Manufactured products sales and revenues for GMA in the first quarter of 1999
were $34.4 billion compared with $33.0 billion in the first quarter of 1998. The
increase in manufactured products sales and revenues from the prior year quarter
was primarily due to a 127,000 unit increase in wholesale sales volumes.
Pre-tax income for the first quarter of 1999 was $2.3 billion compared with
$1.4 billion for the first quarter of 1998. The increase in pre-tax income from
the prior year quarter was primarily due to higher wholesale sales volumes,
continued improvement in the profitability of new vehicles, and lower material
and engineering costs.
GMA's worldwide vehicle deliveries were 2,037,000 for the first quarter of
1999, which represented a market share of 14.9% compared with 2,012,000 for the
first quarter of 1998, which represented a market share of 15.3%. GMNA's market
share for the first quarter of 1999 was 29.0% compared with 30.0% for the first
quarter of 1998.
GMNA reported income of $1.4 billion for the 1999 first quarter compared with
$841 million for the prior year quarter. The improvement in GMNA's 1999 first
quarter income was primarily due to higher wholesale sales volumes, continued
improvement in the cost and profitability of new vehicles, and lower material
and engineering costs, partially offset by lower net price. Net price
comprehends the percent increase/decrease a customer pays in the current period
for the same comparably equipped vehicle produced in the previous year's period.
GME reported income of $174 million for the 1999 first quarter compared with
$99 million in the prior year quarter. The improvement in GME's 1999 first
quarter income was primarily due to higher wholesale sales volumes and improved
pricing, partially offset by increased design cost associated with the Astra.
GMLAAM reported a loss of $25 million for the 1999 first quarter compared
with income of $53 million for the prior year quarter. The decrease in 1999
first quarter earnings compared to 1998 first quarter results was primarily due
to lower vehicle deliveries and wholesale sales due to the ongoing economic
crisis throughout Latin America.
GMAP reported a loss of $60 million for the 1999 first quarter compared with
income of $6 million for the prior year quarter. The decrease in 1999 first
quarter earnings compared to 1998 first quarter results was primarily due to
decreased equity earnings at Isuzu due to the economic downturn in Asia and
continued spending associated with GMAP's growth strategy.
- 21 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Hughes Financial Highlights
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions Except
Per Share Amounts)
Revenues $1,452 $1,291
----- -----
Pre-tax income 133 107
Income tax expense 36 31
Minority interests 7 1
Losses in nonconsolidated associates (31) (29)
---- ----
Net income $ 73 $ 48
=== ===
Earnings used for computation of Available
Separate Consolidated Net Income (1) (2) $78 $54
Earnings per share attributable
to Class H common stock (2) $0.20 $0.13
- ------------
(1)Excludes amortization of GM purchase accounting adjustments of $5 million in
both periods related to GM's acquisition of Hughes Aircraft Company (HAC) in
1985.
(2)1998 results exclude the cumulative effect of accounting change of $9
million, after tax, due to Hughes' adoption of SOP 98-5, Reporting on the
Costs of Start-Up Activities. GM has reported the $9 million charge in fourth
quarter 1998 results and Hughes reported the change as a restatement of first
quarter 1998 results.
Hughes Financial Review
Revenues increased to $1.5 billion in the first quarter of 1999, compared
with $1.3 billion in the first quarter of 1998. The first quarter 1999 revenue
growth was primarily attributable to continued strong subscriber growth and
higher average monthly revenues per subscriber at the DIRECTV(R) businesses.
Hughes experienced an operating loss, excluding amortization of purchase
accounting adjustments related to GM's acquisition of HAC, of $37 million in the
first quarter of 1999 compared with operating profit and operating profit
margin, on the same basis, of $84 million and 6.5%, respectively, in the first
quarter of 1998. The first quarter 1999 operating loss was principally a result
of a one-time pre-tax charge of $92 million resulting from the termination of
the Asia-Pacific Mobile Telecommunications satellite system (APMT) contract due
to export licenses not being issued. Excluding the APMT one-time pre-tax charge,
operating profit was $55 million, a decrease of $29 million compared to the
prior year that is primarily attributable to higher depreciation due to
additions to PanAmSat's satellite fleet and increased goodwill amortization
primarily related to the purchase of an additional 9.5% interest in PanAmSat.
Pre-tax income was $133 million in the first quarter of 1999, compared with
$107 million in the same period of 1998. The increase in the first quarter of
1999 primarily resulted from a $155 million pre-tax gain related to the
settlement of the Williams Patent infringement case (as discussed below). The
gain was offset in part by the pre-tax charge to earnings of $92 million
resulting from the termination of the APMT contract, the increase in
depreciation and amortization expense discussed above and a decrease in interest
income of $24 million. The decrease in interest income was due to a decrease in
cash and cash equivalents as a result of additional equity investments,
acquisitions, capital expenditures and working capital requirements. Also
affecting the year to year comparison was a $10 million charge in 1998 for
uncollectible amounts due from certain customers.
The effective income tax rate for the first quarter of 1999 was 27.1%,
compared with 29.0% for the first quarter of 1998. The effective income tax rate
in 1999 benefited from the favorable resolution of tax contingencies related to
prior years.
Excluding amortization of purchase accounting adjustments related to GM's
acquisition of HAC, Hughes' earnings used for computation of available separate
consolidated net income for the first quarter of 1999 were $78 million compared
with $54 million in the first quarter of 1998.
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 APMT for the provision of a satellite-based
mobile telecommunications system. As a result, APMT and Hughes terminated the
contract on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of
$92 million in the first quarter of 1999.
- 22 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Hughes Financial Review (concluded)
Hughes had maintained a suit against the U.S. government since September 1973
regarding the U.S. government's infringement and use of a Hughes patent covering
"Velocity Control and Orientation of a Spin Stabilized Body," principally
satellites (the "Williams Patent"). In April 1998, the U.S. Court of Appeals for
the Federal Circuit reaffirmed earlier decisions in the Williams Patent case
including the award of $114 million in damages, plus interest. In March 1999,
Hughes received and recognized as income a $155 million payment from the U.S.
government as a final disposition of the suit.
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The
transactions will be accounted for using the purchase method of accounting. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4,871,448
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of Class H common stock at
the time the acquisition agreement was signed. The purchase price for the Tempo
Satellite assets consists of $500 million in cash. Of this purchase price,
$150 million was paid on March 10, 1999 for a satellite that has not yet been
launched. The remaining $350 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.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. (USSB). USSB
provides direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. USSB launched its service in June 1994 and,
as of March 31, 1999, had more than 2.2 million subscribers nationwide, over 90%
of whom are also DIRECTV subscribers. 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, is expected to close in the second quarter of 1999.
In 1998, PanAmSat adopted a comprehensive satellite expansion and
restoration plan pursuant to which PanAmSat would expand its fleet of satellites
in 1999 and 2000. The additional satellites are intended to meet the expected
demand for additional satellite capacity, replace capacity affected by satellite
anomalies, and provide added backup to existing capacity. In connection with the
plan, seven satellites are under construction by Hughes Space and Communications
Company ("HSC"). As a result of manufacturing delays being experienced by HSC,
however, it is expected that there will be delays in the launch of these
satellites. PanAmSat now expects to launch one additional satellite in 1999,
followed by five satellites in 2000 and one in 2001. It is expected that these
delays will result in 1999 revenues and earnings at PanAmSat that are
significantly lower than previously anticipated. A substantial portion of these
revenues and earnings previously anticipated in 1999 are expected to be
recognized in future years after the satellites commence commercial service.
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance of debt securities from time to
time. Hughes expects to issue between $500 million and $1 billion of these
securities in the third and fourth quarters of 1999. GM filed on May 5, 1999, a
registration statement on Form S-3 with the Commission with respect to a
proposed issuance of $500 million of Class H common stock plus a customary
over-allotment option. GM will contribute to Hughes the net proceeds from the
Class H offering, together with an additional $500 million on or about the
closing of the equity offering which is expected to be completed by mid 1999.
Hughes will use these funds principally to repay debt Hughes incurred in
connection with the PRIMESTAR/Tempo Satellite and USSB transactions.
On March 17, 1999, Hughes announced its intent to make an initial investment
of $1.4 billion in the Spaceway(TM) satellite system. The Spaceway system, when
completed, will provide for high speed, two-way communications of video, voice
and data direct to companies and individual consumers. Hughes expects that the
initial investment will allow it to build three high-powered satellites to
provide broadband network services "on demand" for video-conferencing, data
transfer and other purposes in North America in 2002. Hughes is currently
investigating subsequent phases in which Hughes would provide Spaceway services
to most of the world using high-orbit satellites as well as complementary
services from a low-orbit system. These subsequent phases would require
significant additional investment.
Financing and Insurance Operations
Highlights of financial performance by GM's Financing and Insurance Operations
business were as follows for the three months ended March 31, (in millions):
1999 1998
Financing revenues
GMAC $3,277 $3,107
Other 232 203
------ ------
Total $3,509 $3,310
===== =====
Net income
GMAC $392 $349
Other (19) 15
---- ----
Total $373 $364
=== ===
- 23 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMAC Financial Highlights
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions)
Financing revenues
Retail and lease financing $1,006 $902
Operating leases 1,795 1,785
Wholesale and term loans 476 420
----- -----
Total financing revenues 3,277 3,107
Interest and discount 1,513 1,385
Depreciation on operating leases 1,188 1,178
----- -----
Net financing revenue 576 544
Insurance premiums earned 447 471
Mortgage revenue 728 417
Other income 374 331
----- -----
Net financing revenue and other 2,125 1,763
Expenses 1,484 1,248
----- -----
Pre-tax income 641 515
Income tax expense 249 166
--- ---
Net income $392 $349
=== ===
Net income from automotive financing operations $229 $246
Net income from mortgage operations 98 23
Net income from insurance operations 65 80
---- ----
Net income $392 $349
=== ===
GMAC Financial Review
GMAC's consolidated first quarter net income for 1999 totaled $392 million, a
12% increase from the first quarter of 1998. Net income from automotive
financing operations was down 7% from the same period in 1998 primarily as a
result of a significantly lower effective tax rate in the first quarter of 1998.
Earnings from insurance operations decreased by 19% during the first quarter
of 1999, compared to the same period during 1998. Earnings were lower
principally from reduced investment income and lower underwriting results from
personal lines coverages. Investment income was reduced as a result of declining
interest rates and a shift in asset mix toward equity securities.
Net income from mortgage operations during the first quarter of 1999
increased to a record level, posting a $75 million increase over results from
the comparable period in 1998. Earnings increased as a result of improved
liquidity and tighter credit spreads in the capital markets and the benefits of
certain asset positions carried over from the fourth quarter of 1998. The strong
period-over-period comparison also reflects unusually low earnings in the first
quarter of 1998, which were negatively impacted by accelerated prepayment
experience on mortgage assets.
During the first quarter of 1999, GMAC financed 40.2% of new GM vehicle
retail deliveries in the United States, down from 43.4% compared to the same
period last year. The decline in financing penetration was primarily the result
of competitive market conditions.
In the United States, inventory financing was provided for 868,000 and
725,000 new GM vehicles, representing 66.9% and 62.8% of all GM sales to dealers
during the first quarter of 1999 and 1998, respectively. The increase in
wholesale penetration levels was a result of competitive pricing strategies by
GMAC.
GMAC's automotive financing revenue for the first quarter of 1999 totaled
$3.3 billion, an increase of $170 million compared to the first quarter of 1998.
The increase was mainly due to higher average retail and wholesale receivable
balances which resulted from aggressive retail financing incentives sponsored by
GM and competitive wholesale pricing by GMAC.
Net automotive financing revenue combined with mortgage revenue, insurance
premiums, and other income totaled $2.1 billion for the three months ended March
31, 1999, a $362 million increase over the comparable 1998 period. The increase
was primarily the result of continued growth at GMACMG and the higher automotive
financing revenues mentioned above, partially offset by lower insurance premiums
earned.
- 24 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMAC Financial Review (concluded)
GMAC's worldwide cost of borrowing, including the effects of derivatives,
for the first quarter of 1999 averaged 5.52% compared to 6.11% for the same
period in 1998. Total borrowing costs for U.S. operations averaged 5.44% for the
first quarter of 1999, compared to 6.11% for the same period in 1998. The
decrease in average borrowing costs was largely the result of lower U.S.
interest rates and a greater proportion of floating rate debt compared to fixed
rate debt.
Expenses in the first quarter of 1999 increased by $236 million over the
comparable period a year ago. The increase was mainly attributable to continued
growth at GMACMG.
GMAC's effective income tax rate was 38.9% and 32.2% for the three months
ended March 31, 1999 and March 31, 1998, respectively. The comparative increase
in the effective tax rate can be attributed to a significantly lower effective
tax rate for the first quarter of 1998 due to a decrease in U.S. and foreign
taxes assessed on foreign source income.
Year 2000
Many computerized systems and microprocessors that are embedded in a variety
of products either made or used by GM have the potential for operational
problems if they lack the ability to handle the transition to the Year 2000.
Because this issue has the potential to cause disruption of GM's business
operations, GM has developed a comprehensive worldwide program to identify and
remediate potential Year 2000 problems in its business information systems and
other systems embedded in its engineering and manufacturing operations.
Additionally, GM has initiated communications and site assessments with its
suppliers, its dealers and other third parties in order to assess and reduce the
risk that GM's operations could be adversely affected by the failure of these
third parties to adequately address the Year 2000 issue.
One of GM's first priorities was the analysis of microprocessors used in GM
passenger cars and trucks. This review included all current and planned models
as well as the electronics in older cars and trucks produced during the period
of approximately the last 15 years. GM began installing microchips capable of
processing date information approximately 15 years ago. Most of the processors
reviewed have no date-related functionality, and accordingly have no Year 2000
issues. Of the vehicles with processors that perform date-related functions,
none have any Year 2000 issues.
GM's Year 2000 program teams are responsible for remediating all of GM's
information technology and embedded systems. Information technology principally
consists of business information systems (such as mainframe and other shared
computers and associated business application software) and infrastructure (such
as personal computers, operating systems, networks and devices like switches and
routers). Embedded systems include microprocessors used in factory automation
and in systems such as elevators, security and facility management. GM's Year
2000 program includes assessment and remediation services provided by Electronic
Data Systems Corporation (EDS) pursuant to a Master Service Agreement with GM.
The Year 2000 program is being implemented in seven phases, some of which are
being conducted concurrently:
Inventory -- identification and validation of an inventory of all systems
that could be affected by the Year 2000 issue. The inventory phase commenced
in earnest in 1996 and is substantially complete. It has identified
approximately 7,600 business information systems and about 1.7 million
infrastructure items and embedded systems.
Assessment -- initial testing, code scanning, and supplier contacts to
determine whether remediation is needed and developing a remediation plan,
if applicable. The assessment of business information systems is
substantially complete and included a determination that about one quarter
of such systems should be regarded as "critical" based on criteria such as
the potential for business disruption. The assessment of infrastructure
items and embedded systems was substantially completed by the end of 1998.
Remediation -- design and execution of a remediation plan, followed by
testing for adherence to the design. GM has substantially completed the
remediation of its critical and non-critical systems. A small number of
systems will be remediated or replaced in 1999. Unimportant systems have
been and will continue to be removed from GM's Year 2000 inventory and will
not be remediated. GM believes that it will meet its targets for Year 2000
readiness. In the normal course of its business plans, GM's Delphi
Automotive Systems unit is incrementally implementing enterprise software
that will replace and thereby eliminate the need to remediate certain
existing systems. Implementation of this software at several Delphi sites is
scheduled for completion in the first quarter of 1999, and another Delphi
site implementation is not expected to be complete until July 1999.
- 25 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (continued)
System Test -- testing of remediated items to ensure that they function
normally after being replaced in their original operating environment. This
phase is closely related to the remediation phase and follows essentially
the same schedule.
Implementation -- return of items to normal operation after satisfactory
performance in system testing. This phase follows essentially the same
schedule as remediation and system testing.
Readiness Testing -- planning for and testing of integrated systems in a
Year 2000 ready environment, including ongoing auditing and follow-up.
Readiness testing is currently underway. This phase commenced during the
fourth quarter of 1998 and is expected to be the major focus of the Year
2000 program throughout 1999.
Contingency Planning -- development and execution of plans that narrow the
focus on specific areas of significant concern and concentrate resources to
address them. GM currently believes that the most reasonably likely worst
case scenario is that there will be some localized disruptions of systems
that will affect individual business processes, facilities or suppliers for
a short time rather than systemic or long-term problems affecting its
business operations as a whole. GM contingency planning will continue to
identify systems or other aspects of GM's business or that of its suppliers
that it believes would be most likely to experience Year 2000 problems. GM
contingency planning will also address those business operations in which a
localized disruption could have the potential for causing a wider problem by
interrupting the flow of products, materials or data to other operations.
Because there is uncertainty as to which activities may be affected and the
exact nature of the problems that may arise, GM's contingency planning will
focus on minimizing the scope and duration of any disruptions by having
sufficient personnel, inventory and other resources in place to permit a
flexible, real-time response to specific problems as they may arise at
individual locations around the world. Some of the actions that GM may
consider include the deployment of emergency response teams on a regional or
local basis and the development of plans for the allocation, stockpiling or
re-sourcing of components and materials that may be critical to our
continued production. Specific contingency plans and resources for
permitting the necessary flexibility of response are expected to be
identified and put into place commencing in mid-1999.
GM's communication with its suppliers is a focused element of the assessment
and remediation phases described above. GM is a leading participant in an
industry trade association, the Automotive Industry Action Group, which has
distributed Year 2000 compliance questionnaires as well as numerous awareness
and assistance mailings to about half of the 100,000 supplier sites that supply
GM throughout the world. Responses to these questionnaires, which were generally
sent to GM's principal suppliers, have been received from about half of the
supplier sites to which they were sent. Many of the non-responding suppliers are
communicating directly with GM on an informal basis. Additionally, GM has
initiated its own review of suppliers considered to be critical to GM's
operations, including more than 2,400 on-site assessments to date. These
assessment efforts have been substantially completed with respect to the
critical supplier sites. Based on its assessment activity to date, GM believes
that a substantial majority of its suppliers are making acceptable progress
toward Year 2000 readiness. GM has established a program to provide further
assistance to suppliers that desire more input or that are believed to be at
high risk of noncompliance as a result of the foregoing assessment efforts. This
supplier assistance program currently includes providing compliance workshops
and remediation consultants to work with suppliers on developing and
implementing their own remediation programs. GM's contingency planning efforts
described above are also expected to address any critical suppliers that GM
identifies as being at high risk of encountering Year 2000 problems.
GM is not relying entirely on the receipt of written assurances from
suppliers with respect to their Year 2000 compliance. GM is also evaluating
certain suppliers on a first-hand basis and seeking to enhance their likelihood
of full Year 2000 readiness by actively assisting them with training and
consultation regarding Year 2000 remediation projects. GM expects that
information from our suppliers, written responses and interactions with them,
will provide GM with a basis for further contingency planning and risk
management.
GM also has a program to work with its independent dealers on their Year 2000
readiness. This program includes distributing materials that assist dealers in
designing and executing their own assessment and remediation efforts. GM has
also included Year 2000 compliance criteria as part of its established program
for certifying that third-party business information systems properly interface
with other systems provided to dealers by GM.
GM's direct Year 2000 program cost is being expensed as incurred with the
exception of capitalizable replacement hardware and, beginning in 1999,
internal-use software. Total incremental spending by GM is not expected to be
material to the Corporation's operations, liquidity or capital resources.
- 26 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (concluded)
In addition to the work for which GM has direct financial responsibility, EDS
is providing Year 2000-related services to GM, as required under the Master
Service Agreement. These services are being provided by EDS as part of normal
fixed price services and other on-going payments to EDS. GM's current forecast
is that its total direct expenditures, and the value of services performed by
EDS attributable to GM's Year 2000 program, will be between approximately $710
million and $780 million for its entire Year 2000 program. Of this amount, GM
currently expects its total Year 2000 direct spending to be between
approximately $450 million and $520 million, with peak spending occurring in the
last quarter of 1998, and early in 1999. This total direct spending estimate
includes an additional payment of $75 million that GM has agreed to pay to EDS
at the end of the first quarter of 2000 if systems remediated by EDS under the
Master Service Agreement do not cause a significant business disruption that
results in a material financial loss to GM due to the millennium change. The
estimated value of the services that EDS is required to provide to GM under the
Master Service Agreement, attributable to work being performed in connection
with GM's Year 2000 program, is approximately $335 million.
GM incurred approximately $55 million of Year 2000 expense during the first
three months of 1999, approximately $145 million of Year 2000 expense during
1998 and approximately $40 million in 1997, of which, about $14 million, $40
million and $7 million was incurred on behalf of Delphi for first quarter 1999
and for the years ending 1998 and 1997, respectively. Also, the estimated value
of services provided to GM by EDS during the first three months ending March 31,
1999 and for the years ending 1998 and 1997 under the Master Service Agreement
attributable to work performed in connection with GM's Year 2000 program was
approximately $280 million. Thus, the total direct expenditures by GM, and value
of Year 2000-related services performed by EDS during the first three months
ending March 31, 1999 and for the years ending 1998 and 1997, attributable to
GM's Year 2000 program, amounted to approximately $520 million.
Despite the incremental Year 2000 spending expected to be incurred throughout
the Corporation, GM's current business plan projects continued declining
information technology expenses. GM's total Year 2000 costs noted above do not
include information technology projects that have been accelerated due to Year
2000, which are estimated to be approximately $30 million.
In view of the foregoing, GM 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 GM and third parties that are critical to GM's
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, government agencies or other providers of general
infrastructure could, in some geographic areas, pose significant impediments to
GM's ability to carry on its normal operations in the area or areas so affected.
In the event that GM is unable to complete its remedial actions as described
above and is unable to implement adequate contingency plans in the event that
problems are encountered, there could be a material adverse effect on GM's
business, results of operations or financial condition.
The foregoing discussion describes the Year 2000 program being implemented by
GM and its consolidated subsidiaries other than Hughes. Information about the
Year 2000 efforts of Hughes can be found in Exhibit 99.
Statements made herein about the implementation of various phases of GM's
Year 2000 program, the costs expected to be associated with that program and the
results that GM expects to achieve constitute forward-looking information. As
noted above, there are many uncertainties involved in the Year 2000 issue,
including the extent to which GM will be able to successfully remediate systems
and adequately provide for contingencies that may arise, as well as the broader
scope of the Year 2000 issue as it may affect third parties that are not
controlled by GM. Accordingly, the costs and results of GM's Year 2000 program
and the extent of any impact on GM's operations could vary materially from those
stated herein.
- 27 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
Automotive, Electronics and Other Operations
Cash, marketable securities, and $3.0 billion of assets of the Voluntary
Employees' Beneficiary Association (VEBA) trust invested in fixed-income
securities, at March 31, 1999 totaled $16.2 billion compared with $15.4 billion
at March 31, 1998 and $13.1 billion at December 31, 1998. During 1997, GM
elected to pre-fund part of its other postretirement benefits liability, which
is primarily related to postretirement health care expenses, by creating a VEBA
trust. The total VEBA assets, which approximated $4.6 billion at March 31, 1999
compared to $4.6 billion at December 31, 1998 and $3.0 billion at March 31,
1998, had the effect of reducing GM's postretirement benefits liability on the
consolidated balance sheet.
Net liquidity, calculated as cash and marketable securities less the total of
loans payable and long-term debt, was $5.3 billion at March 31, 1999, compared
with $1.8 billion at December 31, 1998 and $5.3 billion at March 31, 1998. GM
previously indicated that it had a goal of maintaining $13.0 billion of cash and
marketable securities in order to continue funding product development programs
throughout the next downturn in the business cycle. This $13.0 billion target
includes cash to pay certain costs that were pre-funded in part by VEBA
contributions.
Long-term debt was $7.0 billion at March 31, 1999, compared to $7.1 billion
at December 31, 1998 and $5.8 billion at March 31, 1998. The ratio of long-term
debt to long-term debt and GM investment in Automotive, Electronics and Other
Operations was 51.4% at March 31, 1999, compared to 58.1% at December 31, 1998
and 42.8% at March 31, 1998. The ratio of long-term debt and short-term loans
payable to the total of this debt and GM investment was 54.3% at March 31, 1999,
compared to 61.8% at December 31, 1998 and 47.8% at March 31, 1998.
Financing and Insurance Operations
GM's Financing and Insurance Operations primarily consist of GMAC. At March
31, 1999, GMAC owned assets and serviced automotive receivables totaling $140.7
billion, $2.0 billion above year-end 1998, and $15.1 billion above March 31,
1998. Earning assets totaled $124.7 billion at March 31, 1999, compared to
$125.1 billion and $109.1 billion at December 31 and March 31, 1998,
respectively. The higher balances compared to the first quarter of last year
primarily reflects increases in on-balance sheet finance receivables as well as
higher operating lease assets, partially offset by a decline in sold wholesale
receivables.
GMAC's finance receivables, including sold receivables, totaled $85.1 billion
at March 31, 1999, $5.2 billion above December 31, 1998 levels and $9.6 billion
above March 31, 1998 levels. The change since December 31, 1998 can be
attributed to a $3.4 billion increase in on-balance sheet wholesale receivables
and a $1.8 billion increase in serviced retail receivables. The year-to-year
change primarily resulted from increases of $4.7 billion, $4.3 billion and $2.4
billion in the on-balance sheet retail, wholesale and term loans receivable
portfolios, respectively. Also contributing to the year-to-year increase, sold
retail receivables (including the retained subordinated interest portion)
increased by $800 million. Offsetting these increases, sold wholesale
receivables decreased $2.6 billion, primarily attributable to the scheduled wind
down of a revolving wholesale trust.
GMAC's liquidity, as well as its ability to profit from ongoing acquisition
activity, is in large part dependent on its access to capital and the costs
associated with raising funds in different segments of the capital markets. In
this regard, GMAC regularly accesses the short-, medium-, and long-term debt
markets, principally through commercial paper, term notes, and underwritten
issuances. GMAC's borrowings outstanding at March 31, 1999 totaled $105.3
billion, compared with $106.2 billion at December 31, 1998 and $90.1 billion at
March 31, 1998. GMAC's ratio of debt to total stockholder's equity at March 31,
1999 was 10.5:1, down from 10.8:1 at December 31, 1998 and up from 9.9:1 at
March 31, 1998. The higher borrowings, as compared to March 31, 1998, were
principally used to fund increased earning asset levels.
GMAC and its subsidiaries maintain substantial bank lines of credit which
totaled $42.0 billion at March 31, 1999, compared to $42.9 billion at year-end
1998 and $40.0 billion at March 31, 1998. The unused portion of these credit
lines totaled $32.4 billion at March 31, 1999, $800 million lower and $1.3
billion higher than December 31 and March 31, 1998, respectively.
Book Value Per Share
Book value per share of $1-2/3 par value common stock was $22.40 at March 31,
1999, compared with $20.00 at December 31, 1998 and $22.13 at March 31, 1998.
Book value per share of Class H common stock was $13.44 at March 31, 1999,
compared with $12.00 at December 31, 1998 and $13.28 at March 31, 1998. Book
value per share was determined based on the liquidation rights of the various
classes of common stock.
- 28 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Return on Net Assets (RONA)
As part of its shareholder value initiatives, GM has adopted RONA as a
performance measure to heighten management's focus on balance sheet investments
and the return on those investments. GM's RONA calculation is based on
principles established by management and approved by the Board of Directors.
Annualized RONA for the three months ended March 31, 1999 was 15.6%.
CASH FLOWS
Automotive, Electronics and Other Operations
Net cash provided by operating activities was $9.2 billion for the first
quarter of 1999 compared with $3.0 billion for the first quarter of 1998. The
increase in net cash provided by operating activities for the first quarter 1999
compared to the first quarter 1998 was primarily the result of increases in
operating liabilities. These were primarily related to increases in accounts
payable resulting from an extension of payment terms and increases in accrued
and other liabilities.
Net cash used in investing activities amounted to $4.9 billion for the first
quarter of 1999 compared with $1.1 billion in the prior year quarter. The
increase in net cash used in investing activities during the 1999 first quarter
was primarily attributable to the level of investments in marketable securities
and operating leases.
Net cash used in financing activities was $1.4 billion for the first quarter
of 1999 compared with $922 million in the prior year quarter. The increase in
cash used for financing activities for the first quarter 1999 was primarily due
to net decreases in loans payable and long-term debt, partially offset by
reduced stock repurchases.
Financing and Insurance Operations
Cash provided by operating activities totaled $5.9 billion and $2.3 billion
during the three months ended March 31, 1999 and 1998, respectively. The
additional operating cash flow was primarily the result of a net decrease in
mortgage loan originations and higher proceeds from sales of mortgage securities
held for trading, partially offset by a decline in the payables due to GM.
Cash used for investing activities during the first quarter of 1999 totaled
$5.1 billion, a $938 million decrease compared to the same period last year.
Cash usage decreased primarily as a result of higher sales of retail receivables
proceeds and a reduction in notes due from GM, partially offset by net increases
in acquisitions of finance receivables and available for sale securities.
Cash used in financing activities during the three months ended March 31,
1999 totaled $922 million, compared with cash provided of $3.1 billion during
the comparable 1998 period. The change was primarily the result of reductions in
short-term debt and notes payable to GM, partially offset by an increase in
long-term debt.
Dividends
Dividends may be paid on common stocks only when, as and if declared by the
GM Board in its sole discretion. GM's policy is to distribute dividends on its
$1-2/3 par value common stock based on the outlook and indicated capital needs
of the business. On May 3, 1999, the GM Board declared a quarterly cash dividend
of $0.50 per share on $1-2/3 par value common stock, payable June 10, 1999. The
GM Board also declared quarterly dividends on the Series D and Series G
Depositary Shares of $0.495 and $0.57 per share, respectively, payable August 2,
1999. The Series B preference stock was redeemed on April 5, 1999, and as a
result, the amount paid out on that date to the Series B shareholders of record
included accrued and unpaid dividends as part of the total redemption price.
With respect to Class H common stock, the GM Board determined that it will not
pay any cash dividends at this time in order to allow the earnings of Hughes to
be retained for investment in its telecommunications and space businesses.
- 29 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Employment and Payrolls
Worldwide employment at March 31, (in thousands) 1999 1998
---- ----
GMNA 222 233
GME 81 78
GMLAAM 23 28
GMAP 10 10
GMAC 24 22
Hughes 16 15
Other 11 10
---- ----
Total employees 387 396
Worldwide payrolls - (in billions) $5.4 $5.3
PART II
ITEM 1. LEGAL PROCEEDING
(a) Material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Corporation became, or was, a party
during the quarter ended March 31, 1999 or subsequent thereto, but before the
filing of this report are summarized below.
Environmental Matters
On March 18, 1999, the Powertrain Plant in Massena, New York entered into an
Administrative Order on Consent with the New York Department of Environmental
Conservation and agreed to pay an administrative fine of $200,000 to resolve
alleged violations of federal and state air regulations. The alleged violations
involved the lack of proper documentation and certain formal approvals and are
not related to any degradation to the environment.
***
Other Matters
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.
***
- 30 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Other Matters (continued)
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.
***
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.
***
There is a pending grand jury investigation into whether Hughes should be
accused of criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the crash 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 participating 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.
***
- 31 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Other Matters (concluded)
On June 11, 1998, Afro-Asian Satellite Communications (Gibraltar) Ltd.
requested formal arbitration with the London Court of International Arbitration
regarding a contractual dispute with Hughes Space and Communications
International, Inc. Afro-Asian Satellite Communications and Hughes Space and
Communications entered into a contract on May 22, 1995 whereby Hughes Space and
Communications was to design and provide a geomobile telecommunications system,
known as the Agrani System, consisting of two satellites, associated ground
stations and other related hardware and software. The value of the contract was
$671,145,000. In its request to the London Court, Afro-Asian Satellite
Communications is claiming that Hughes Space and Communications failed to
perform its obligations under the contract and that Afro-Asian Satellite
Communications was therefore entitled to terminate the contract, which it
purported to do by letter dated January 25, 1996. Afro-Asian Satellite
Communications is now seeking from Hughes Space and Communications approximately
$45,000,000 (representing repayment of monies paid to Hughes Space and
Communications, interest, and limited reprocurement costs). Hughes Space and
Communications' position is that it performed its obligations under the contract
and that it was not fully paid by Afro-Asian Satellite Communications. As a
result, Hughes Space and Communications terminated its contract with Afro-Asian
Satellite Communications in January 1996, and is seeking to recover its
additional costs of $38,774,400 through the arbitration which is now underway.
***
In connection with the two previously reported suits relating to the 1996
split-off of EDS from General Motors which purport to be class actions brought
on behalf of certain holders of General Motors Class E common stock, Stephen A.
Solomon v. General Motors Corporation, et al. and TRV Holding Company v. General
Motors Corporation, et al., as to which defendants filed a motion to dismiss the
complaint on December 11, 1997, the Delaware Court of Chancery signed an order
on April 27, 1999 dismissing the complaint with prejudice. Plaintiffs have filed
a Notice of Appeal in the Supreme Court of the State of Delaware.
***
In connection with the previously reported suits purporting to be class
actions, all of which claim that the Type II door latches used in approximately
40 million 1978 to 1986 model GM passenger cars and light trucks are defective,
the Judicial Panel on Multidistrict Litigation has granted GM's motion to
consolidate such actions for coordinated pretrial proceedings and transferred
the cases to a federal court in Chicago.
***
(b) Previously reported legal proceedings which have been terminated, either
during the quarter ended March 31, 1999, or subsequent thereto, but before the
filing of this report are summarized below:
In connection with nine previously reported lawsuits in the Delaware Court
of Chancery: Jules Levine v. General Motors Corporation, et al., Steven
Verkouteren v. General Motors Corporation, et al., Malcolm Rosenwald v. General
Motors Corporation, et al., Richard Strauss v. General Motors Corporation, et
al., Jeanette Whited, et al. v. General Motors Corporation, et al., Andrew
Carlucci, I.R.A. v. General Motors Corporation, et al., Dr. Joseph Mantel v.
General Motors Corporation, et al., John P.McCarthy Profit Sharing Plan v.
General Motors Corporation, et al., and Patinkin v. General Motors Corporation,
et al, of which lawsuits have been consolidated under the caption, In Re General
Motors Class H Shareholders Litigation, purporting to be class actions
challenging General Motors spin-off of the Hughes defense business in 1997, the
Delaware Chancery Court signed an order on March 31, 1999 dismissing the
complaint with prejudice. Plaintiffs did not file an appeal during the period in
which they were permitted.
***
- 32 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Other Matters (concluded)
In connection with the previously reported matter involving a suit which
Hughes has maintained 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, the U.S. Supreme Court on March 1,
1999, denied the U.S. Government's petition for certiorari relating to the
denial of a rehearing which the government had sought from the U.S. Court of
Appeals for the Federal Circuit relating to a decision by that court 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 case was
remanded back to the Court of Appeals where final judgment was entered in favor
of Hughes as a result of which Hughes collected $155 million from the U.S.
Government on March 30, 1999.
***
In connection with the previously reported eleven suits which purport to be
class actions alleging that certain antilock braking systems on 1989 to 1996
light-duty GM trucks are defective, the United States Court of Appeals for the
Eighth Circuit on April 14, 1999, affirmed the dismissal of all such actions.
* * * * * *
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit Number Exhibit Name Page No.
99 Hughes Electronics Corporation Financial Statements
and Management's Discussion and Analysis of
Financial Condition and Results of Operations 34
27 Financial Data Schedule (for SEC information only)
(b) REPORTS ON FORM 8-K.
Five reports on Form 8-K, dated January 14, 1999, January 20, 1999, January
22, 1999 (2), January 27, 1999, were filed during the quarter ended March 31,
1999 reporting matters under Item 5, Other Events, and reporting certain
agreements under Item 7, Financial Statements, Pro Forma Financial Information,
and Exhibits.
* * * * * *
SIGNATURE
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
(Registrant)
By
Date May 17, 1999 /s/Peter R. Bible
- ----------------- -----------------
(Peter R. Bible, Chief Accounting Officer)
- 33 -
EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENT OF INCOME AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME
(Unaudited)
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions
Except Per Share Amounts)
Revenues
Product sales $716.1 $692.1
Direct broadcast, leasing and other services 735.7 598.9
-------- --------
Total Revenues 1,451.8 1,291.0
------- -------
Operating Costs and Expenses
Cost of products sold 669.2 542.3
Broadcast programming and other costs 291.6 264.8
Selling, general and administrative expenses 404.8 302.6
Depreciation and amortization 123.0 97.7
Amortization of GM purchase accounting adjustments 5.3 5.3
---------- ----------
Total Operating Costs and Expenses 1,493.9 1,212.7
------- -------
Operating (Loss) Profit (42.1) 78.3
Interest income 13.6 37.5
Interest expense (6.9) (3.0)
Other, net 137.7 (34.3)
------- --------
Income Before Income Taxes, Minority Interests and
Cumulative Effect of Accounting Change 102.3 78.5
Income taxes 35.8 31.4
Minority interests in net losses of subsidiaries 6.5 1.3
--------- ---------
Income before cumulative effect of accounting change 73.0 48.4
Cumulative effect of accounting change, net of taxes - (9.2)
----------- ----------
Net Income 73.0 39.2
Adjustments to exclude the effect of
GM purchase accounting adjustments 5.3 5.3
--------- ---------
Earnings Used for Computation of Available
Separate Consolidated Net Income $ 78.3 $ 44.5
======== ========
Available Separate Consolidated Net Income
Average number of shares of General Motors Class H
Common Stock outstanding (in millions) (Numerator) 106.3 104.1
Class H dividend base (in millions) (Denominator) 400.2 399.9
Available Separate Consolidated Net Income $ 20.8 $ 11.5
======== ========
Earnings Attributable to General Motors
Class H Common Stock on a Per Share Basis
Basic $0.20 $0.11
==== ====
Diluted $0.19 $0.11
==== ====
Reference should be made to the Notes to Financial Statements.
- 34 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
March 31,
1999 December 31,
ASSETS (Unaudited) 1998
----------- ----
(Dollars in Millions)
Current Assets
Cash and cash equivalents $780.0 $1,342.1
Accounts and notes receivable (less allowances) 849.3 922.4
Contracts in process, less advances and progress
payments of $25.2 and $27.0 713.2 783.5
Inventories 578.8 471.5
Prepaid expenses and other, including deferred income
taxes of $17.3 and $33.6 295.4 326.9
-------- --------
Total Current Assets 3,216.7 3,846.4
Satellites, net 3,580.5 3,197.5
Property, net 1,061.2 1,059.2
Net Investment in Sales-type Leases 167.9 173.4
Intangible Assets, net of accumulated amortization
of $441.6 and $413.2 3,732.9 3,552.2
Investments and Other Assets 1,652.5 1,606.3
--------- ---------
Total Assets $13,411.7 $13,435.0
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $710.2 $764.1
Advances on contracts 302.0 291.8
Deferred revenues 51.7 43.8
Current portion of long-term debt 170.3 156.1
Accrued liabilities 664.0 753.7
------- -------
Total Current Liabilities 1,898.2 2,009.5
------- -------
Long-Term Debt 856.6 778.7
Deferred Gains on Sales and Leasebacks 65.0 121.5
Accrued Operating Leaseback Expense 6.1 56.0
Postretirement Benefits Other Than Pensions 151.2 150.7
Other Liabilities and Deferred Credits 846.0 811.1
Deferred Income Taxes 651.9 643.9
Commitments and Contingencies
Minority Interests 485.6 481.7
Stockholder's Equity
Capital stock and additional paid-in capital 8,150.4 8,146.1
Net income retained for use in the business 330.8 257.8
Subtotal Stockholder's Equity 8,481.2 8,403.9
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment (37.1) (37.1)
Accumulated unrealized gains on securities 11.5 16.1
Accumulated foreign currency translation adjustments (4.5) (1.0)
Accumulated other comprehensive loss (30.1) (22.0)
---------- ---------
Total Stockholder's Equity 8,451.1 8,381.9
-------- --------
Total Liabilities and Stockholder's Equity $13,411.7 $13,435.0
======== ========
Reference should be made to the Notes to Financial Statements.
- 35 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions)
Cash Flows from Operating Activities
Net Cash Provided by (Used in) Operating Activities $6.5 $(38.7)
--- ------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired (242.1) (8.4)
Expenditures for property (47.1) (38.1)
Increase in satellites (230.2) (270.1)
Early buy-out of satellite under sale and leaseback (141.3) (96.6)
Proceeds from disposal of property - 17.6
--------- ------
Net Cash Used in Investing Activities (660.7) (395.6)
----- -----
Cash Flows from Financing Activities
Net increase in notes and loans payable 14.2 -
Long-term debt borrowings 405.0 875.0
Repayment of long-term debt (327.1) (725.0)
----- -----
Net Cash Provided by Financing Activities 92.1 150.0
------ -----
Net decrease in cash and cash equivalents (562.1) (284.3)
Cash and cash equivalents at beginning of the period 1,342.1 2,783.8
------- -------
Cash and cash equivalents at end of the period $ 780.0 $2,499.5
======== =======
Reference should be made to the Notes to Financial Statements.
- 36 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting. In the opinion of management, all adjustments (consisting only of
normal recurring items) which are necessary for a fair presentation have been
included. The results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for the full year.
For further information, refer to the financial statements and notes thereto
included in the General Motors ("GM") 1998 Annual Report on Form 10-K.
The financial statements include the applicable portion of intangible assets,
including goodwill, and related amortization resulting from purchase accounting
adjustments associated with GM's purchase of Hughes in 1985.
In 1998, Hughes adopted American Institute of Certified Public Accountants
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs previously capitalized be
written off and recognized as a cumulative effect of accounting change, net of
taxes, as of the beginning of the year of adoption. On a prospective basis,
these types of costs are required to be expensed as incurred. The unfavorable
cumulative effect of this accounting change was $9.2 million after-tax, or $0.02
per share of GM Class H common stock in the first quarter of 1998.
Note 2. Inventories
Major Classes of Inventories
March 31, December 31,
(Dollars in Millions) 1999 1998
---- ----
Productive material and supplies $72.2 $73.4
Work in process 390.0 285.1
Finished goods 116.6 113.0
----- -----
Total $578.8 $471.5
===== =====
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
Three Months Ended
March 31,
(Dollars in Millions) 1999 1998
---- ----
Net income $73.0 $39.2
Other comprehensive loss:
Foreign currency translation adjustments (3.5) (0.3)
Unrealized loss on securities (4.6) (0.6)
----- -----
Other comprehensive loss (8.1) (0.9)
----- -----
Total comprehensive income $64.9 $38.3
==== ====
Note 4. Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income
Earnings per share attributable to GM Class H common stock is determined
based on the relative amounts available for the payment of dividends to holders
of GM Class H common stock. Holders of GM Class H common stock have no direct
rights in the equity or assets of Hughes, but rather have rights in the equity
and assets of GM (which includes 100% of the stock of Hughes).
- 37 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 4. Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income - Concluded
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 (106.3 million and 104.1 million during the first
quarters of 1999 and 1998, respectively) and the denominator of which was 400.2
and 399.9 million during the first quarters of 1999 and 1998, respectively. The
denominator used in determining the ASCNI of Hughes may be adjusted from
time-to-time as deemed appropriate by the GM Board of Directors ("GM Board") to
reflect subdivisions or combinations of the GM Class H common stock, certain
transfers of capital to or from Hughes, the contribution of shares of capital
stock of GM to or for the benefit of Hughes employees and the retirement of GM
Class H common stock purchased by Hughes. The GM Board's discretion to make such
adjustments is limited by criteria set forth in GM's Restated Certificate of
Incorporation.
Effective January 1, 1999, shares of Class H common stock delivered by GM
in connection with the award of such shares to and the exercise of stock options
by employees of Hughes will increase the denominator of the fraction referred
to above. The basic and diluted earnings per share for Class H stock for the
period ended March 31, 1999 (in million except per share amounts) is as follows:
Per Share
ASCNI Shares Amount
Period Ended March 31, 1999
Basic EPS $20.8 106.3 $0.20
Effect of Dilutive Securities 0.8 5.9 0.01
--- --- ----
Diluted EPS $21.6 112.2 $0.19
===== ===== =====
Basic and diluted earnings attributable to Class H common stock on a per
share basis were $0.11 at March 31, 1998.
Note 5. Other Postretirement Benefits
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities" or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, Hughes does not admit or otherwise acknowledge that
such amounts or existing postretirement benefit plans of Hughes (other than
pensions) represent legally enforceable liabilities of Hughes.
Note 6. Acquisitions
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The
transactions will be accounted for using the purchase method of accounting. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4,871,448
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.
- 38 -
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 6. Acquisitions (concluded)
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provides direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. USSB launched its service in June 1994 and,
as of March 31, 1999, had more than 2.2 million subscribers nationwide, 90% of
whom are also DIRECTV subscribers. 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 $1.62 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, is expected to
close in the second quarter of 1999.
In October 1998, Hughes agreed to acquire, pending regulatory approval in
Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V.
("GGM"), a Galaxy Latin America, LLC local operating company located in Mexico,
from Grupo MVS, S.A. de C.V. The GGM transaction was completed in February 1999
upon receipt of government regulatory approval in Mexico. Hughes' equity
ownership represents 49.0% of the voting equity and all of the non-voting equity
of GGM. The GGM transaction was accounted for using the purchase method of
accounting. The increased ownership resulted in GGM's consolidation since the
date of acquisition.
Note 7. Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, Satellite Systems and
Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting,
selling and/or distributing digital programming via satellite to residential and
commercial customers. Satellite Services is engaged in the selling, leasing and
operating of satellite transponders and providing services for cable television
systems, news companies, Internet service providers and private business
networks. Satellite Systems designs, manufactures and markets satellites and
satellite components. Network Systems products include satellite-based business
networks and Internet access service, cellular-based fixed wireless telephony
systems, mobile cellular digital packet data systems and DIRECTV(TM) receiver
equipment. Other includes the corporate office and other entities.
<TABLE>
Operating Segments:
<CAPTION>
Direct-To-
Home Satellite Satellite Network Elimi-
Broadcast Services Systems Systems Other nations Total
------------------ ------- ------- ----- ------- -----
(Dollars in Millions)
For the Three Months Ended:
March 31, 1999
<S> <C> <C> <C> <C> <C> <C> <C>
External Revenues $556.0 $159.7 $535.6 $200.5 - - $1,451.8
Intersegment
Revenues 0.6 33.8 94.7 30.4 $0.2 $(159.7) -
- -------------------------------------------------------------------------------
Total Revenues $556.6 $193.5 $630.3 $230.9 $0.2 $(159.7)$1,451.8
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(23.4) $78.3 $(14.4) $(17.8) $(13.4) $(51.4) $(42.1)
- --------------------------------------------------------------------------------
March 31, 1998
External Revenues $387.9 $167.1 $553.7 $179.1 $3.2 - $1,291.0
Intersegment
Revenues - 25.9 70.6 5.6 0.3 $(102.4) -
- --------------------------------------------------------------------------------
Total Revenues $387.9 $193.0 $624.3 $184.7 $3.5 $(102.4)$1,291.0
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(31.6) $84.9 $55.1 $(11.9) $(10.8) $(7.4 $78.3
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes amounting to $0.8 million in each of the
three-month periods for the Satellite Services segment and $4.5 million in
each of the three-month periods for Other.
- 39 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Concluded
(Unaudited)
Note 8. Contingencies
In connection with the 1997 spin-off of the defense electronics business of
Hughes' predecessor and the subsequent merger of that business with Raytheon
Company, the terms of the merger agreement provided a process 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.
On February 24, 1999, the Department of Commerce notified Hughes that it
intended to deny a U.S. government export license Hughes was required to obtain
in connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile
telecommunications system. As a result, APMT and Hughes terminated the contract
on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92
million in the first quarter of 1999.
Hughes had maintained a suit against the U.S. government since September 1973
regarding the U.S. government's infringement and use of a Hughes patent covering
"Velocity Control and Orientation of a Spin Stabilized Body," principally
satellites (the "Williams Patent"). In April 1998, the U.S. Court of Appeals for
the Federal Circuit reaffirmed earlier decisions in the Williams Patent case
including the award of $114.0 million in damages, plus interest. In March 1999,
Hughes received and recognized as income a $154.6 million payment from the U.S.
government as a final disposition of the suit.
- 40 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis should be read in
conjunction with the Hughes management's discussion and analysis included in the
General Motors ("GM") 1998 Annual Report to the Securities and Exchange
Commission ("SEC") on Form 10-K. In addition, the following discussion excludes
purchase accounting adjustments related to GM's acquisition of Hughes (see
Supplemental Data beginning on page 55).
Statements made concerning expected financial performance, ongoing financial
performance strategies, and possible future action which Hughes intends to
pursue to achieve strategic objectives for each of its four principal business
segments constitute forward-looking information. The implementation of these
strategies and of such future actions and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors, and, accordingly, no assurance can be given that Hughes will be able to
successfully accomplish its strategic objectives or achieve such financial
performance. The principal important risk factors which could cause actual
performance and future actions to differ materially from forward-looking
statements made herein include economic conditions, product demand and market
acceptance, government action, ability to obtain export licenses, competition,
ability to achieve cost reductions, technological risk, ability to address the
year 2000 issue, interruptions to production attributable to causes outside of
Hughes' control, the success and timeliness of satellite launches, in-orbit
performance of satellites and Hughes' ability to access capital to maintain its
financial flexibility.
General
During 1998, four Hughes-built satellites experienced the failure of a
primary spacecraft control processor ("SCP"). Three of these satellites were
owned and operated by PanAmSat and the fourth was owned by DIRECTV. With the
exception of the Galaxy(R) IV satellite, operated by PanAmSat, control of the
satellites was automatically switched to the spare SCP and the spacecraft are
operating normally. The spare SCP on the Galaxy IV satellite had 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 SCP
failures. The failure of the second SCP on Galaxy IV appears to be unrelated and
is being treated as an isolated anomaly. Although there exists the possibility
of failure of other currently operating SCP's, Hughes believes the probability
of a primary and spare SCP failing in any one in-orbit HS-601 satellite is low.
Hughes believes 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.
During April 1999, the primary SCP failed on a satellite built by Hughes for
an unaffiliated customer. While the investigation into the cause of the failure
is still in process, it is possible that the failure was caused by the same
factors that caused the SCP failures described above.
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 addition, following the launch of a 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.
In 1998, PanAmSat adopted a comprehensive satellite expansion and
restoration plan pursuant to which PanAmSat would expand its fleet of satellites
in 1999 and 2000. The additional satellites are intended to meet the expected
demand for additional satellite capacity, replace capacity affected by satellite
anomalies, and provide added backup to existing capacity. In connection with the
plan, seven satellites are under construction by Hughes Space and Communications
Company ("HSC"). As a result of manufacturing delays being experienced by HSC,
however, it is expected that there will be delays in the launch of these
satellites. PanAmSat now expects to launch one additional satellite in 1999,
followed by five satellites in 2000 and one in 2001. It is expected that these
delays will result in 1999 revenues and earnings at PanAmSat that are
significantly lower than previously anticipated. A substantial portion of these
revenues and earnings previously anticipated in 1999 are expected to be
recognized in future years after the satellites commence commercial service.
- 41-
<PAGE>
HUGHES ELECTRONICS CORPORATION
On February 24, 1999, the Department of Commerce notified Hughes that it
intended to deny a U.S. government export license Hughes was required to obtain
in connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile
telecommunications system. As a result, APMT and Hughes terminated the contract
on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92
million in the first quarter of 1999.
Hughes had maintained a suit against the U.S. government since September 1973
regarding the U.S. government's infringement and use of a Hughes patent covering
"Velocity Control and Orientation of a Spin Stabilized Body," principally
satellites (the "Williams Patent"). In April 1998, the U.S. Court of Appeals for
the Federal Circuit reaffirmed earlier decisions in the Williams Patent case
including the award of $114.0 million in damages, plus interest. In March 1999,
Hughes received and recognized as income a $154.6 million payment from the U.S.
government as a final settlement of the suit.
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 the 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 export control laws.
On March 17, 1999, Hughes announced its intent to make an initial investment
of $1.4 billion in the Spaceway(TM) satellite system. The Spaceway system, when
completed, will provide for high speed, two-way communications of video, voice
and data direct to companies and individual consumers. Hughes expects that the
initial investment will allow it to build three high-powered satellites to
provide broadband network services "on demand" for video-conferencing, data
transfer and other purposes in North America in 2002. Hughes is currently
investigating subsequent phases in which Hughes would provide Spaceway services
to most of the world using high-orbit satellites as well as complementary
services from a low-orbit system. These subsequent phases would require
significant additional investment.
On May 5, 1999, DIRECTV announced plans for delivering local broadcast
network channels by satellite to DIRECTV customers in major metropolitan areas
across the United States. The delivery of local network channels into DIRECTV's
domestic local markets, also referred to as local-into-local, is contingent upon
Federal Communications Commission approval of the acquisition of the remaining
Tempo high-power satellite assets (see discussion of the Tempo transaction in
Acquisitions and Divestitures, below) and the passage by Congress of legislation
that has been introduced that will allow satellite companies to provide the
local-into-local service. DIRECTV plans to utilize its existing satellites to
deliver the local-into-local service to New York and Los Angeles markets, and
utilize the Tempo frequencies to deliver the local-into-local service to
DIRECTV's other major metropolitan markets. To receive local channels, outside
the Los Angeles and New York markets, consumers will have to purchase a small
elliptical-shaped dish, which will be available later this year. There can be no
assurance that the Federal Communications Commission will approve the transfer
of the Tempo satellite assets or that the Tempo transaction will be consummated.
Additionally, there can be no assurance that the necessary legislation will be
passed by Congress.
On May 11, 1999, it was announced that DIRECTV and Hughes Network Systems
will collaborate with America Online ("AOL") on a new service that will combine
digital satellite television programming from DIRECTV with AOL 's new
interactive television Internet service. Hughes Network Systems will design and
build dual-purpose DIRECTV/AOL receiver equipment. The new service will be
suited for both frequent Internet users and the mass market consumer who wants
to connect to the Internet through their television.
Results of Operations
Revenues. First quarter 1999 revenues increased 12.5% to $1,451.8 million
compared with $1,291.0 million in the first quarter of 1998. The increase in
first quarter 1999 revenues reflects continued growth in the DIRECTV(R)
businesses.
Direct-To-Home Broadcast segment first quarter 1999 revenues increased 43.5%
to $556.6 million from $387.9 million in the first quarter of 1998. The increase
resulted from continued record subscriber growth, higher average monthly revenue
per subscriber and low subscriber churn rates. Domestic DIRECTV contributed
significantly to this growth with quarterly revenues of $474 million, a 34%
increase over last year's first quarter revenues of $353 million. With its
best-ever first quarter of 304,000 net new subscribers in the United States,
total DIRECTV(R) subscribers grew to 4,762,000 as of March 31, 1999. Hughes'
Latin American DIRECTV subsidiary, Galaxy Latin America ("GLA") nearly doubled
its revenues to $61 million from $31 million in the first quarter of 1998. With
the addition of 70,000 net new subscribers in the first quarter, an 84% increase
over the 38,000 net new subscribers acquired in the same period last year,
cumulative DIRECTV subscribers in Latin America were 554,000 as of March 31,
1999.
- 42-
<PAGE>
HUGHES ELECTRONICS CORPORATION
The Satellite Services segment's first quarter 1999 revenues increased to
$193.5 million compared with $193.0 million in the prior year. The slight change
in revenues resulted primarily from an increase in telecommunication services
revenue, primarily due to growth in data and Internet-related service
agreements.
For the first quarter of 1999, revenues for the Satellite Systems segment
increased to $630.3 million from revenues of $624.3 million for the same period
in 1998. Increased sales to commercial customers of $31 million, including
Thuraya Satellite Telecommunications, ICO Global Communications and PanAmSat
were largely offset by $25 million of lower sales on government contracts such
as UHF Follow-on and Tracking and Data Relay Satellites ("TDRS").
First quarter 1999 revenues for the Network Systems segment were $230.9
million compared with $184.7 million in the same period last year, an increase
of 25.0%. This increase in revenues was primarily due to a higher sales of
DIRECTV(TM) receiver equipment and satellite-based mobile telephony systems.
Costs and Expenses. Selling, general and administrative expenses increased to
$404.8 million in the first quarter of 1999 from $302.6 million in the same
period of 1998. The increase resulted primarily from higher programming,
marketing and subscriber acquisition costs in the Direct-To-Home Broadcast
segment. The increase in depreciation and amortization expense to $123.0 million
in the first quarter of 1999 from $97.7 million in the same period of 1998,
resulted primarily from higher depreciation due to additions to PanAmSat's
satellite fleet and increased goodwill amortization related to the purchase of
an additional 9.5% interest in PanAmSat.
Operating Profit/(Loss). Hughes incurred an operating loss of $36.8 million
in the first quarter of 1999 compared with operating profit and operating profit
margin, on the same basis, of $83.6 million and 6.5%, respectively, in the first
quarter of 1998. The operating loss in the first quarter of 1999 was principally
a result of a one-time pre-tax charge of $92.0 million resulting from the
termination of the APMT contract and $25.3 million of higher depreciation and
amortization expense discussed above.
The operating loss in the Direct-To-Home Broadcast segment for the first
quarter of 1999 was $23.4 million compared with an operating loss of $31.6
million in the first quarter of 1998. The lower operating loss in 1999 was
principally due to increased subscriber revenues that more than offset increased
programming, marketing and subscriber acquisition costs. Domestic DIRECTV
reported operating profit for the first quarter of 1999 of $5 million compared
with an operating loss of $10 million in the first quarter of 1998. GLA's first
quarter operating loss for 1999 was $28 million compared with $22 million in the
same period of 1998. The higher operating loss for GLA in the first quarter of
1999 was primarily due to the increased cost of its new higher-capacity Galaxy
VIII-i satellite and increased advertising expenditures.
In 1999, domestic DIRECTV's cost of acquiring new subscribers is expected to
increase due to, among other things, incentives granted by United States
Satellite Broadcasting Company, Inc. ("USSB") to manufacturers of DIRECTV
receiving equipment which will be assumed upon the successful completion of the
USSB acquisition. 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. Additionally,
the international DIRECTV businesses, due to competition, may also have to incur
increased subscriber acquisition costs through competitive offers in the future
to maintain or improve their market positions.
The Satellite Services segment operating profit in the first quarter of 1999
decreased 7.7% to $79.1 million from $85.7 million in the same period of 1998.
The decrease in operating profit was due to increased depreciation related to
additions to PanAmSat's satellite fleet. As a result, operating profit margin
for the first quarter of 1999 declined to 40.9% from 44.4% in the same period
last year.
The Satellite Systems segment reported an operating loss in the first quarter
of 1999 of $14.4 million compared to operating profit of $55.1 million and
operating profit margin of 8.8% in the first quarter of 1998. The operating loss
in the first quarter of 1999 resulted from the one-time pre-tax charge of $81.0
million resulting from the termination of the APMT contract. Excluding the
one-time charge, operating profit increased $11.5 million or 20.9% over 1998,
primarily due to earnings adjustments in the first quarter of 1999 on several
commercial satellite contracts.
The Network Systems segment operating loss in the first quarter of 1999 was
$17.8 million compared with an operating loss of $11.9 million in the first
quarter of 1998. The higher operating loss in the first quarter of 1999 was
primarily due to a one-time pre-tax charge of $11.0 million resulting from the
termination of the APMT contract. Excluding the one-time pre-tax charge, the
segment's operating loss for the first quarter was $6.8 million. The decrease in
operating loss was primarily due to higher sales of DIRECTV receiver equipment
and satellite-based mobile telephony systems.
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<PAGE>
HUGHES ELECTRONICS CORPORATION
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").
EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with generally
accepted accounting principles. Hughes management believes it is a meaningful
measure of performance and is commonly used by other large communications,
entertainment and media service providers. 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. EBITDA margin is calculated by dividing
EBITDA by total revenues.
For the first quarter of 1999, EBITDA, excluding a one-time charge of $92.0
million in 1999 related to the termination of the APMT contract, was $178.2
million versus $181.3 million for the same period in 1998. EBITDA margin on the
same basis was 12.3% for the first quarter of 1999 compared to 14.0% in the
first quarter of 1998.
Direct-To-Home Broadcast had positive EBITDA in the first quarter of 1999 of
$3.9 million compared with negative EBITDA of $9.1 million in the first quarter
of 1998. Domestic DIRECTV contributed significantly to this growth with EBITDA
of $25 million in the first quarter of 1999 compared to $8 million in last
year's quarter as strong revenue growth outpaced increased programming,
marketing and subscriber acquisition costs. As a result, EBITDA margin in the
first quarter of 1999 increased to 5.2% from 2.3% in the same period of 1998.
This gain was partially offset by GLA's larger negative EBITDA in the first
quarter of 1999 of $20 million compared to $13 million in the same period of
1998, primarily due to the increased cost of the new higher-capacity Galaxy
VIII-i satellite and increased advertising expenditures.
For Satellite Services, EBITDA in the first quarter of 1999 was $145.9
million compared with $140.2 million in the same period of last year. EBITDA
margin increased to 75.4% versus 72.6% in last year's first quarter. The
increases in EBITDA and EBITDA margin were principally due to lower satellite
leaseback expenses resulting from the exercise of certain early buy-out options
under sale-leaseback agreements during the first quarter of 1999.
Excluding the 1999 first quarter pre-tax charge of $81.0 million related to
the termination of the APMT contract, EBITDA for the Satellite Systems segment
increased to $79.6 million from $65.8 million in the first quarter of 1998. The
increase included earnings adjustments in the current quarter on several
commercial satellite contracts. As a result, EBITDA margin, on the same basis,
was 12.6% for the first quarter of 1999 compared to 10.5% for the first quarter
of 1998.
Network Systems' EBITDA, excluding a pre-tax charge of $11.0 million
resulting from the termination of the APMT contract under which Hughes Network
Systems was providing ground network equipment and handsets, grew to $5.1
million in the first quarter of 1999, compared to a negative EBITDA of $3.4
million in the first quarter of 1998. EBITDA margin on the same basis was 2.2%
compared to a negative EBITDA margin in the first quarter of 1998. The increase
in EBITDA was primarily due to the higher sales discussed above.
Interest Income and Expense. Interest income decreased to $13.6 million in
the first quarter of 1999 compared with $37.5 million in the first quarter of
1998. The decrease in interest income was due to lower cash balances in the
first quarter of 1999 compared to 1998 which resulted from the purchase of an
additional 9.5% interest in PanAmSat, additional capital expenditures for
satellites, payment to GM for the Delco post-closing price adjustment, a payment
for certain of the Tempo assets in March 1999, and the early buy-out of a
satellite sale-leaseback at PanAmSat. Interest expense increased $3.9 million in
the first quarter of 1999 from the same period in 1998 due to the increase in
PanAmSat's borrowings to finance the early buy-out of a satellite sale-leaseback
and from an additional $170.1 million of borrowings related to SurFin Ltd.
("Surfin").
Other, net. Other, net in the first quarter of 1999 reflects the $154.6
million pre-tax gain related to the settlement of the Williams Patent
infringement case offset by losses from unconsolidated subsidiaries of $30.6
million attributable principally to equity investments in American Mobile
Satellite Corporation ("AMSC") and DIRECTV Japan. The first quarter 1998 amount
includes losses from unconsolidated subsidiaries of $28.9 million, primarily
related to AMSC, DIRECTV Japan and SurFin.
Income Taxes. The effective income tax rate was 33.3% in the first quarter of
1999 and 37.5% in the first quarter of 1998. The decrease in the first quarter
1999 effective tax rate compared to the same period of 1998 reflects the
favorable resolution of tax contingencies related to prior years.
Accounting Change. In 1998, Hughes adopted American Institute of Certified
Public Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs previously
capitalized be written off and recognized as a cumulative effect of accounting
change, net of taxes, as of the beginning of the year of adoption. On a
prospective basis, these types of costs are required to be expensed as incurred.
The unfavorable cumulative effect of this accounting change was $9.2 million
after-tax, or $0.02 per share of GM Class H common stock in the first quarter of
1998.
Earnings. 1999 first quarter earnings increased to $78.3 million from $44.5
million in the first quarter of 1998. Basic earnings per share for the first
quarter were $0.20 per share versus earnings per share of $0.11 in the first
quarter of 1998.
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<PAGE>
HUGHES ELECTRONICS CORPORATION
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $780.0 million at
March 31, 1999 compared to $1,342.1 million at December 31, 1998. The $562.1
million decline during the quarter was due to additional capital expenditures
for satellites, a payment for certain of the Tempo Satellite assets (see
"Acquisitions and Divestitures"), the early buy-out of a satellite
sale-leaseback at PanAmSat and general working capital requirements.
Cash provided by operating activities for the first quarter of 1999 was $6.5
million, compared to cash used by operating activities of $38.7 million in the
first quarter of 1998. This change was due primarily to the increase in net
income, which included the Williams Patent settlement.
Net cash used in investing activities was $660.7 million for the three months
ended March 31, 1999 and $395.6 million for the same period in 1998. The
substantial increase in 1999 compared to 1998 resulted from increased
investments in companies, net of cash acquired, which included the acquisition
of the Tempo Satellite assets (see "Acquisitions and Divestitures") and
the early buy-out of a satellite sales-leaseback at PanAmSat.
Net cash provided by financing activities was $92.1 million for the first
quarter of 1999, compared with $150.0 million for first quarter 1998. The 1999
financing activities reflect lower net borrowings compared to 1998.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at March 31, 1999 and December 31, 1998
was 1.69 and 1.91, respectively. Working capital decreased by $518.4 million to
$1,318.5 million at March 31, 1999 from $1,836.9 million at December 31, 1998.
Dividend Policy and Use of Cash. Since the completion of the recapitalization
of Hughes in late 1997, the GM Board has not paid, and does not currently intend
to pay in the foreseeable future, cash dividends on its GM Class H common stock.
Similarly, since such time, Hughes has not paid dividends 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 for the remainder of 1999 relate to capital
expenditures for property and equipment and expenditures for additional
satellites of approximately $1.6 billion, the early buy-out of satellite
sale-leasebacks, the funding of business acquisitions, including the
acquisitions discussed below and additional equity investments. These cash
requirements are expected to be funded from a combination of existing cash
balances, amounts available under existing credit facilities, additional
borrowings and equity offerings, as needed. Also, although Hughes may be
required to make a cash payment to or receive a cash payment from Raytheon, the
amount of a cash payment to or from Raytheon, if any, is not determinable at
this time.
Debt and Credit Facilities. At March 31, 1999, Hughes' 59.1% owned
subsidiary, SurFin, had a total of $170.1 million outstanding under two separate
$150.0 million unsecured revolving credit facilities. These facilities are
expected to be replaced in May 1999 with a single $400.0 million unsecured
revolving credit facility.
In January 1998, PanAmSat issued five, seven, ten and thirty-year notes
totaling $750.0 million. The proceeds received were used by PanAmSat to repay
$600.0 million of outstanding borrowings.
PanAmSat maintains a $500.0 million multi-year revolving credit facility and
a $500.0 million commercial paper program. The multi-year revolving credit
facility provides for a commitment through December 24, 2002. Borrowings under
the credit facility and commercial paper program are limited to $500.0 million
in the aggregate and are expected to be used to fund PanAmSat's satellite
expansion program. No amounts were outstanding under the credit facility at
March 31, 1999. $85.0 million was outstanding under the commercial paper program
at March 31, 1999.
At March 31, 1999, other long-term debt of $21.6 million was outstanding.
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 and the 364-day
credit facility provides for a commitment of $250.0 million through December 1,
1999. No amounts were outstanding under either facility at March 31, 1999. These
facilities provide backup capacity for Hughes' $1.0 billion commercial paper
program. No amounts were outstanding under the commercial paper program at March
31, 1999.
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<PAGE>
HUGHES ELECTRONICS CORPORATION
In order to fund the purchase price of PRIMESTAR, on April 28, 1999, Hughes
borrowed $500.0 million under a term-loan which is expected to be repaid from
the proceeds of the equity offering and related GM contribution (as discussed
below).
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance of debt securities from time to
time. Hughes expects to issue between $500 million and $1 billion of these
securities in the third and fourth quarters of 1999. GM filed on May 5, 1999, a
registration statement on Form S-3 with the Commission with respect to a
proposed issuance of $500.0 million of Class H common stock plus a customary
over-allotment option . GM will contribute to Hughes the net proceeds from the
Class H offering, together with an additional $500.0 million on or about the
closing of the equity offering which is expected to be completed by mid 1999.
Hughes will use these funds principally to repay debt Hughes incurred in
connection with the PRIMESTAR/Tempo Satellite and USSB transactions.
Acquisitions and Divestitures. On January 22, 1999, Hughes agreed to acquire
PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite
business and the high-power satellite assets and direct-broadcast satellite
orbital frequencies of Tempo Satellite, a wholly-owned subsidiary of TCI
Satellite Entertainment, Inc. The transactions will be accounted for using the
purchase method of accounting. On April 28, 1999, the acquisition of PRIMESTAR's
direct-to-home business was completed. The purchase price consisted of $1.1
billion in cash and 4,871,448 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.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of USSB. USSB provides direct-to-home premium satellite programming in
conjunction with DIRECTV's basic programming service. USSB launched its service
in June 1994 and, as of March 31, 1999, had more than 2.2 million subscribers
nationwide, over 90% of whom are also DIRECTV subscribers. 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 $1.62 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, is expected to close in the second quarter
of 1999.
In October 1998, Hughes agreed to acquire, pending regulatory approval in
Mexico, an additional ownership interest in Grupo GalAXY mEXICANA, s.a. DE
c.v.("GGM"), a GLA local operating company located in Mexico, from Grupo MVS,
S.A. de C.V. The GGM transaction was completed in February 1999 upon receipt of
government regulatory approval in Mexico. Hughes' equity ownership represents
49.0% of the voting equity and all of the non-voting equity of GGM. The GGM
transaction was accounted for using the purchase method of accounting. The
increased ownership resulted in GGM's consolidation since the date of
acquisition.
The PRIMESTAR and USSB transactions and the equity offering will result in
an increase to the total shares of GM Class H common stock outstanding. Those
transations, along with GM capital contribution will also cause an increse in
the Class H dividend base. These increases will result in a change to the
fraction used to calculate the Available Separate Consolidated Net Income
("ASCNI") of Hughes. See further discussion of ASCNI in Note 4 to the Notes to
the Financial Statements.
New Accounting Standards. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires all derivatives to be recorded as either assets or liabilities and the
instruments to be measured at fair value. Gains or losses resulting from changes
in the values of those derivatives are to be recognized immediately or deferred
depending on the use of the derivative and whether or not it qualifies as a
hedge. Hughes plans to adopt SFAS No. 133 by January 1, 2000, as required.
Management is currently assessing the impact of this statement on Hughes'
results of operations and financial position.
Year 2000
Many computer technologies made or used by Hughes throughout its business
have the potential for operational problems if they lack the ability to handle
the transition to the Year 2000. Computer technologies include both information
technology ("IT") in the form of hardware and software, as well as
non-information technology ("Non-IT") which includes embedded technology such as
microprocessors.
- 46 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Because of the potential disruption that this issue could cause to Hughes'
business operations and its customers, a comprehensive, company-wide, Year 2000
program was initiated in 1996 to identify and remediate potential Year 2000
problems. The Year 2000 program addresses both IT and Non-IT systems related to
internal systems and Hughes' products and services.
Hughes' Year 2000 program is being implemented in seven phases, some of which
are being conducted concurrently:
(1)Awareness - establish project teams made up of project leaders from each
Hughes operating company, assign responsibilities and establish awareness
of Year 2000 issues. The awareness phase has been completed.
(2)Inventory - identify all systems within Hughes, determine if they are
critical and identify responsible personnel for compliance. The inventory
phase has been completed. Many of Hughes' systems are already Year 2000
compliant, or had already been scheduled for replacement as part of
Hughes' ongoing systems plans.
(3)Assessment - categorize all systems and determine activities that are
required to achieve compliance, including contacting and assessing the
Year 2000 readiness of material third party vendors and suppliers of
hardware and software. The assessment phase is substantially complete. A
detailed assessment of the ground stations is in progress and final plans
are being prepared. All critical systems have been identified in this
phase and are the primary focus of the project teams. Critical systems
identified requiring remediation include satellite control and
communication software, broadcast systems, systems utilized in customer
service/billing, engineering and manufacturing operations. Hughes has also
identified the need to upgrade network control software for customers who
have maintenance agreements with Hughes. Hughes' in-orbit satellites do
not have date-dependent processing.
(4)Remediation - modify, repair or replace categorized systems. Remediation
has begun on many systems and is targeted for completion by the end of the
second quarter of 1999, with the exception of satellite control software ,
which is expected to be completed early in the fourth quarter of 1999. The
remediation tasks for the satellite ground 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 on-going review and
follow-up.
(6)Implementation - once a remediated system and its interfaces have been
successfully tested, the system will be put into its operating
environment. A number of remediated systems have already been put back
into operations. The remaining remediated systems will be put into
operations during 1999.
(7)Contingency Planning - development and execution of plans that narrow the
focus on specific areas of significant concern and concentrate resources
to address them. All Year 2000 critical systems are expected to be Year
2000 compliant by the end of 1999. However, Hughes is in the process of
developing contingency plans to address the risk of any system not being
Year 2000 compliant and expects to complete such plans in the third
quarter of 1999. Hughes currently believes that the most reasonably likely
worst case scenario is a temporary loss of functionality in satellite
control and communication software. The loss of real-time satellite
control software functionality would be addressed through the use of
back-dated processors or through manual procedures but could result in
slightly higher operating costs until the Year 2000 problems are
corrected.
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 generally on schedule, with the exception of the satellite
control software which is expected to be completed early in the fourth quarter
of 1999. Hughes has incurred and expensed approximately $4.0 million during the
first quarter of 1999 and approximately $7.0 million during 1998, related to the
assessment of, and on-going efforts in connection with, its Year 2000 program.
Future spending for system remediation and testing are currently estimated to be
from $13 million to $17 million, with the majority of the expense expected to be
incurred by mid-1999. Each Hughes operating company is funding its respective
Year 2000 efforts with current and future operating cash flows.
- 47 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Hughes has mailed Year 2000 verification request letters to its suppliers and
other third parties and is coordinating efforts to assess and reduce the risk
that Hughes' operations could be adversely affected by the failure of these
third parties to adequately address the Year 2000 issue. A high percentage of
the third parties have replied and a large number of Hughes' third parties'
systems are Year 2000 compliant or are expected to be Year 2000 compliant in a
timely manner. For those third party systems that are not yet Year 2000
compliant, Hughes will continue to identify action plans or alternatives to meet
Hughes' requirements.
In view of the foregoing, Hughes does not currently anticipate that it will
experience a significant disruption of its business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect Hughes and third parties that are critical to
Hughes' operations. For example, lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure could pose significant impediments to Hughes' ability to
carry on its normal operations. If the modifications and conversions required to
make Hughes Year 2000 ready are not made or are not completed on a timely basis
and in the event that Hughes is unable to implement adequate contingency plans
in the event that problems are encountered internally or externally by third
parties, the resulting problems could have a material adverse effect on Hughes'
results of operations and financial condition.
Security Ratings
In March 1999, Standard and Poor's Rating Services ("S&P") lowered the
long-term debt rating of Hughes from A- to BBB. The S&P BBB credit rating
indicates the issuer has adequate capacity to pay interest and repay principal.
Additionally, S&P affirmed its A-2 rating on Hughes' commercial paper. The A-2
commercial paper rating is the third highest category available and indicates a
strong degree of safety regarding timely payment. S&P's ratings outlook for
Hughes remains developing.
In April 1999, Moody's Investors Service ("Moody's") 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's 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 PRIMESTAR/Tempo Satellite
and USSB 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.
Supplemental Data
The financial statements reflect the application of purchase accounting
adjustments as previously discussed. However, as provided in GM's Restated
Certificate of Incorporation, the earnings attributable to GM Class H common
stock for purposes of determining the amount available for the payment of
dividends on GM Class H common stock specifically excludes such adjustments.
More specifically, amortization of the intangible assets associated with GM's
purchase of Hughes amounted to $5.3 million for the first quarters of 1999 and
1998. Such amounts are excluded from the earnings available for the payment of
dividends on GM Class H common stock and are charged against earnings available
for the payment of dividends on GM's $1-2/3 par value common stock. Unamortized
purchase accounting adjustments associated with GM's purchase of Hughes were
$421.3 million at March 31, 1999 and $426.6 million at December 31, 1998.
In order to provide additional analytical data to the users of Hughes'
financial information, supplemental data in the form of unaudited summary pro
forma financial data are provided. Consistent with the basis on which earnings
of Hughes available for the payment of dividends on the GM Class H common stock
is determined, the pro forma data exclude purchase accounting adjustments
related to GM's acquisition of Hughes. Included in the supplemental data are
certain financial ratios which provide measures of financial returns excluding
the impact of purchase accounting adjustments. The pro forma data are not
presented as a measure of GM's total return on its investment in Hughes.
- 48
<PAGE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data*
Pro Forma Condensed Statement of Income
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions
Except per Share Amounts)
Total revenues $1,451.8 $1,291.0
Total operating costs and expenses 1,488.6 1,207.4
------- -------
Operating (loss) profit (36.8) 83.6
Non-operating income 144.4 0.2
Income taxes 35.8 31.4
Minority interests in net losses of subsidiaries 6.5 1.3
Cumulative effect of accounting change - (9.2)
------ -----
Earnings Used for Computation of Available
Separate Consolidated Net Income $78.3 $44.5
==== ====
Earnings Attributable to General Motors Class H
Common Stock on a Per Share Basis
Basic $0.20 $0.11
==== ====
Diluted $0.19 $0.11
==== ====
Earnings Attributable
Pro Forma Condensed Balance Sheet
March 31, December 31,
Assets 1999 1998
---- ----
(Dollars in Millions)
Total Current Assets $3,216.7 $3,846.4
Satellites, net 3,580.5 3,197.5
Property, net 1,061.2 1,059.2
Net Investment in Sales-type Leases 167.9 173.4
Intangible Assets, Investments and Other Assets, net 4,964.1 4,731.9
Total Assets $12,990.4 $13,008.4
Liabilities and Stockholder's Equity
Total Current Liabilities $1,898.2 $2,009.5
Long-Term Debt 856.6 778.7
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 1,720.2 1,783.2
Minority Interests 485.6 481.7
Total Stockholder's Equity (1) 8,029.8 7,955.3
------- ---------
Total Liabilities and Stockholder's Equity (1) $12,990.4 $13,008.4
======== ========
* 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).
- 49
<PAGE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Continued
Pro Forma Selected Segment Data
Direct-To-
Home Satellite Satellite Network Eliminations
Broadcast Services Systems Systems and Other Total
--------- -------- ------- ------- --------- -----
(Dollars in Millions)
For the Three Months Ended:
March 31, 1999
Total Revenues $556.6 $193.5 $630.3 $230.9 $(159.5) $1,451.8
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(3) $(23.4) $79.1 $(14.4) $(17.8) $(60.3) $(36.8)
Operating Profit
Margin - 40.9% - - - -
EBITDA(3) (4) $3.9 $145.9 $(1.4) $(5.9) $(56.3) $86.2
EBITDA Margin(4) 0.7% 75.4% - - - 5.9%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $27.3 $66.8 $13.0 $11.9 $4.0 $123.0
Capital
Expenditures $77.6(1)$339.8(2) $12.3 $2.2 $(32.2) $399.7
- --------------------------------------------------------------------------------
March 31, 1998
Total Revenues $387.9 $193.0 $624.3 $184.7 $(98.9) $1,291.0
- --------------------------------------------------------------------------------
Operating (Loss)
Profit $(31.6) 85.7 $55.1 $(11.9) $(13.7 $83.6
Operating Profit
Margin - 44.4% 8.8% - - 6.5%
EBITDA(4) $(9.1) $140.2 $65.8 $(3.4) $(12.2) $181.3
EBITDA Margin(4) - 72.6% 10.5% - - 14.0%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $22.5 $54.5 $10.7 $8.5 $1.5 $97.7
Capital
Expenditures $13.7 $249.6(2) $10.7 $4.8 $125.9 $404.7
- --------------------------------------------------------------------------------
* The Financial Statements reflect the application of purchase accounting
adjustments related to GM's acquisition of Hughes. However, as provided in the
General Motors' Restated Certificate of Incorporation, the earnings
attributable to GM Class H common stock for purposes of determining the amount
available for the payment of dividends on GM Class H common stock specifically
excludes such adjustments. In order to provide additional analytical data, the
above unaudited pro forma selected segment data, which exclude the purchase
accounting adjustments related to GM's acquisition of Hughes, are presented.
(1)Includes expenditures related to satellites amounting to $53.0 million in
the first quarter of 1999.
(2)Includes expenditures related to satellites amounting to $189.7 million and
$145.6 million in 1999 and 1998, respectively. Also included in the 1999 and
1998 amount are $141.3 million and $96.6 million, respectively, related to
the early buy-out of satellite sale-leasebacks.
(3)First quarter 1999 includes a charge of $81.0 million and $11.0 million at
Satellite Systems and Network Systems, respectively, for the termination of
the Asia-Pacific Mobile Telecommunications satellite systems contract due to
export licenses not being issued.
(4)EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
generally accepted accounting principles. See discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
* * * * * * *
- 50-
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Concluded
Pro Forma Selected Financial Data
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Millions)
Operating (loss) profit $(37) $84
EBITDA (1) $86 $181
EBITDA margin (2) 5.9% 14.0%
Income before income taxes,
minority interests
and cumulative effect of
accounting change $108 $84
Earnings used for computation of
available separate consolidated
net income $78 $45
Average number of GM Class H
dividend base shares (3) 400.2 399.9
Stockholder's equity $8,030 $7,911
Working capital $1,319 $3,258
Operating profit as a percent of revenues N/A 6.5%
Income from continuing operations before
income taxes, minority interests and
cumulative effect of accounting change
as a percent of revenues 7.4% 6.5%
Net income as a percent of revenues 5.4% 3.4%
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes .
(1)EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
generally accepted accounting principles. See discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(2) EBITDA margin is calculated by dividing EBITDA by total revenues. (3) 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 106.3
million for the first quarter of 1999 and 104.1 million for the first quarter
of 1998.
* * * * * * *
- 51-
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This schedule contains summary financial information extracted from
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