EXHIBIT 99
HUGHES ELETRONICS CORPORATION
FINANCIAL STATEMENTS AND
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended September Nine Months Ended
30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Revenues
Direct broadcast, leasing and other
services............................ $1,485.5 $1,345.0 $4,523.3 $3,147.0
Product sales........................ 203.0 282.8 705.3 715.3
-------- -------- -------- --------
Total Revenues..................... 1,688.5 1,627.8 5,228.6 3,862.3
-------- -------- -------- --------
Operating Costs and Expenses
Broadcast programming and other
costs............................... 681.4 596.4 2,035.9 1,374.4
Cost of products sold................ 152.1 273.2 585.1 631.4
Selling, general and administrative
expenses............................ 747.1 556.1 2,167.4 1,419.1
Depreciation and amortization........ 238.3 208.8 673.1 480.1
-------- -------- -------- --------
Total Operating Costs and
Expenses.......................... 1,818.9 1,634.5 5,461.5 3,905.0
-------- -------- -------- --------
Operating Loss......................... (130.4) (6.7) (232.9) (42.7)
Interest income........................ 7.1 2.6 15.3 20.8
Interest expense....................... (66.5) (51.7) (169.2) (71.0)
Other, net............................. (11.9) (31.6) (294.4) (96.3)
-------- -------- -------- --------
Loss From Continuing Operations Before
Income Taxes and Minority Interests... (201.7) (87.4) (681.2) (189.2)
Income tax benefit..................... (77.8) (36.8) (354.4) (59.7)
Minority interests in net losses of
subsidiaries.......................... 19.6 8.8 31.7 22.1
-------- -------- -------- --------
Loss from continuing operations........ (104.3) (41.8) (295.1) (107.4)
Income from discontinued operations,
net of taxes.......................... 10.5 6.9 50.3 47.9
-------- -------- -------- --------
Net Loss............................... (93.8) (34.9) (244.8) (59.5)
Adjustments to exclude the effect of GM
purchase accounting adjustments....... 5.3 5.3 15.9 15.9
-------- -------- -------- --------
Loss excluding the effect of GM
purchase accounting adjustments....... (88.5) (29.6) (228.9) (43.6)
Preferred stock dividends.............. (24.1) (24.7) (72.9) (26.3)
-------- -------- -------- --------
Loss Used for Computation of Available
Separate Consolidated Net Income
(Loss)................................ $ (112.6) $ (54.3) $ (301.8) $ (69.9)
======== ======== ======== ========
Available Separate Consolidated Net
Income (Loss)
Average number of shares of General
Motors Class H Common Stock
outstanding (in millions)
(Numerator)........................... 873.9 405.3 616.7 362.4
Average Class H dividend base (in
millions) (Denominator)............... 1,297.8 1,286.7 1,296.5 1,244.1
Available Separate Consolidated Net
Income (Loss)......................... $ (75.8) $ (17.1) $ (143.6) $ (20.4)
======== ======== ======== ========
</TABLE>
--------
Reference should be made to the Notes to Financial Statements.
24
<PAGE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $ 178.4 $ 238.2
Accounts and notes receivable (less allowances)... 1,145.8 960.9
Contracts in process.............................. 130.1 155.8
Inventories....................................... 346.0 236.1
Net assets of discontinued operations............. 1,128.8 1,224.6
Deferred income taxes............................. 537.8 254.3
Prepaid expenses and other........................ 931.4 788.1
--------- ---------
Total Current Assets.......................... 4,398.3 3,858.0
Satellites, net..................................... 4,229.6 3,907.3
Property, net....................................... 1,588.1 1,223.0
Net Investment in Sales-type Leases................. 227.5 146.1
Intangible Assets, net.............................. 7,207.7 7,406.0
Investments and Other Assets........................ 2,533.6 2,056.6
--------- ---------
Total Assets.................................. $20,184.8 $18,597.0
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable.................................. $ 1,149.5 $ 1,062.2
Deferred revenues................................. 153.6 130.5
Short-term borrowings and current portion of long-
term debt........................................ 1,133.9 555.4
Accrued liabilities and other..................... 1,113.6 894.0
--------- ---------
Total Current Liabilities..................... 3,550.6 2,642.1
Long-Term Debt...................................... 1,956.9 1,586.0
Other Liabilities and Deferred Credits.............. 1,414.5 1,454.2
Deferred Income Taxes............................... 1,081.7 689.1
Commitments and Contingencies
Minority Interests.................................. 574.3 544.3
Stockholder's Equity
Capital stock and additional paid-in capital...... 9,939.7 9,809.5
Preferred stock................................... 1,495.1 1,487.5
Accumulated deficit............................... (402.1) (84.4)
--------- ---------
Subtotal Stockholder's Equity....................... 11,032.7 11,212.6
--------- ---------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment............ (7.3) (7.3)
Accumulated unrealized gains on securities...... 592.4 466.0
Accumulated foreign currency translation
adjustments.................................... (11.0) 10.0
--------- ---------
Accumulated other comprehensive income............ 574.1 468.7
--------- ---------
Total Stockholder's Equity.................... 11,606.8 11,681.3
--------- ---------
Total Liabilities and Stockholder's Equity.... $20,184.8 $18,597.0
========= =========
</TABLE>
--------
Reference should be made to the Notes to Financial Statements.
25
<PAGE>
HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
--------- ---------
(Dollars in
Millions)
<S> <C> <C>
Cash Flows from Operating Activities
Net Cash Provided by (Used in) Continuing Operating
Activities.......................................... $ 316.0 $ (106.1)
Cash Flows from Investing Activities
Investment in companies, net of cash acquired.......... (347.3) (2,314.4)
Investment in convertible bonds........................ -- (238.1)
Expenditures for property.............................. (654.3) (258.1)
Increase in satellites................................. (551.1) (517.8)
Early buy-out of satellite under sale and leaseback.... -- (245.4)
Proceeds from disposal of property..................... 12.8 5.1
Proceeds from sale of investments...................... 41.5 --
Proceeds from insurance claims......................... 36.2 10.7
--------- ---------
Net Cash Used in Investing Activities................ (1,462.2) (3,558.0)
--------- ---------
Cash Flows from Financing Activities
Net increase in short-term borrowings and current
portion of long-term debt............................. 578.5 85.7
Long-term debt borrowings.............................. 3,973.3 5,221.6
Repayment of long-term debt............................ (3,602.4) (4,171.0)
Stock options exercised................................ 63.7 47.3
Purchase and retirement of GM Class H common stock..... -- (8.9)
Net proceeds from issuance of preferred stock.......... -- 1,485.0
Preferred stock dividends paid to General Motors....... (72.9) (1.6)
--------- ---------
Net Cash Provided by Financing Activities............ 940.2 2,658.1
--------- ---------
Net cash used in continuing operations................... (206.0) (1,006.0)
Net cash provided by (used in) discontinued operations... 146.2 (177.8)
--------- ---------
Net decrease in cash and cash equivalents................ (59.8) (1,183.8)
Cash and cash equivalents at beginning of the period..... 238.2 1,342.0
--------- ---------
Cash and cash equivalents at end of the period........... $ 178.4 $ 158.2
========= =========
</TABLE>
--------
Reference should be made to the Notes to Financial Statements.
26
<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 footnotes thereto
included in the Hughes Electronics Corporation Annual Report on Form 10-K for
the year ended December 31, 1999 and the Hughes Electronics Corporation
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000 and June
30, 2000, filed with the Securities and Exchange Commission ("SEC") on March 10,
2000, May 15, 2000 and August 14, 2000, respectively, and the Hughes Electronics
Corporation Current Reports on Form 8-K, filed with the SEC through the date of
this report.
Certain prior period amounts have been reclassified to conform to the
September 30, 2000 presentation.
Revenues, operating costs and expenses, and other non-operating results for
the discontinued operations of the satellite systems manufacturing businesses
are excluded from Hughes' results from continuing operations for all periods
presented herein. As a result, the financial results of the satellite systems
manufacturing businesses are presented in Hughes' Statements of Operations and
Available Separate Consolidated Net Income (Loss) in a single line item entitled
"Income from discontinued operations, net of taxes," the related assets and
liabilities are presented in the balance sheets in a single line item entitled
"Net assets of discontinued operations" and the net cash flows as "Net cash
provided by (used in) discontinued operations." See further discussion in Note
7.
The accompanying financial statements include the applicable portion of
intangible assets, including goodwill, and related amortization resulting from
purchase accounting adjustments associated with General Motors Corporation's
("GM") purchase of Hughes in 1985, with certain amounts allocated to the
satellite systems manufacturing businesses.
Note 2. Inventories
Major Classes of Inventories
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Dollars in Millions)
<S> <C> <C>
Productive material and supplies..................... $ 68.7 $ 59.1
Work in process...................................... 132.9 67.0
Finished goods....................................... 144.4 110.0
------ ------
Total.............................................. $346.0 $236.1
====== ======
</TABLE>
27
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3. Comprehensive Income (Loss)
Hughes' total comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- ---------------
2000 1999 2000 1999
------ ------ ------- ------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Net loss....................................... $(93.8) $(34.9) $(244.8) $(59.5)
Other comprehensive income (loss):
Unrealized gains on securities............... 144.6 138.2 126.4 138.6
Foreign currency translation adjustments..... (1.9) 17.8 (21.0) 13.2
------ ------ ------- ------
Other comprehensive income................... 142.7 156.0 105.4 151.8
------ ------ ------- ------
Total comprehensive income (loss).......... $ 48.9 $121.1 $(139.4) $ 92.3
====== ====== ======= ======
</TABLE>
Note 4. Available Separate Consolidated Net Income (Loss)
GM Class H common stock is a "tracking stock" of GM designed to provide
holders with financial returns based on the financial performance of 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).
Amounts available for the payment of dividends on GM Class H common stock are
based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the separate
consolidated net income (loss) of Hughes, excluding the effects of GM purchase
accounting adjustments arising from GM's acquisition of Hughes and including the
effects of preferred stock dividends paid and/or payable to GM (earnings (loss)
used for computation of ASCNI), multiplied by a fraction, the numerator of which
is equal to the weighted-average number of shares of GM Class H common stock
outstanding during the period (873.9 million and 405.3 million during the third
quarters of 2000 and 1999, respectively) and the denominator of which is a
number equal to the weighted-average number of shares of GM Class H common stock
which, if issued and outstanding, would represent 100% of the tracking stock
interest in the earnings of Hughes (Average Class H dividend base). The Average
Class H dividend base was 1,297.8 million and 1,286.7 million during the third
quarters of 2000 and 1999, respectively.
Under the GM Restated Certificate of Incorporation, the GM Board of Directors
("GM Board") may adjust the denominator of the Class H fraction that determines
the net income of Hughes attributable to the GM Class H common stock--that is,
the Class H dividend base, from time to time as the GM Board deems appropriate
to reflect the following: (a) subdivisions and combinations of the GM Class H
common stock and stock dividends payable in shares of GM Class H common stock to
holders of GM Class H common stock; (b) the fair market value of contributions
of cash or property by GM to Hughes, or of cash or property of GM to or for the
benefit of employees of Hughes for employee benefit plans or arrangements of GM,
Hughes or other GM subsidiaries; (c) the contribution of shares of capital stock
of GM to or for the benefit of employees of Hughes or its subsidiaries for
benefit plans or arrangements of GM, Hughes or other GM subsidiaries; (d)
payments made by Hughes to GM of amounts applied to the repurchase by GM of
shares of GM Class H common stock, so long as the GM Board has approved the
repurchase and GM applied the payment to the repurchase; and (e) the repurchase
by Hughes of shares of GM Class H common stock that are no longer outstanding,
so long as the GM Board approved the repurchase. Additionally, upon conversion
of the General
28
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Motors Series H 6.25% Automatically Convertible Preference Stock ("GM Series H
preference stock") into GM Class H common stock, both the numerator and the
denominator used in the computation of ASCNI will increase by the number of
shares of the GM Class H common stock issued (see further discussion in Note 5).
As part of GM's previously announced plans for a broad restructuring of its
economic interest in Hughes, during the second quarter of 2000, GM completed an
exchange offer in which GM repurchased 86 million shares of GM $1-2/3 par value
common stock and issued 92 million shares of GM Class H common stock. In
addition, on June 12, 2000, GM contributed approximately 54 million shares and
approximately 7 million shares of GM Class H common stock to its U.S. Hourly-
Rate Employees Pension Plan and VEBA trust, respectively. The GM Class H common
stock issued as part of the exchange offer and employee benefit plan
contributions have been included as part of the numerator for the computation of
ASCNI since their date of issuance.
On June 6, 2000, the GM Board declared a three-for-one stock split of the GM
Class H common stock. The stock split was in the form of a 200% stock dividend,
paid on June 30, 2000 to GM Class H common stockholders of record on June 13,
2000. As a result, the numbers of shares of GM Class H common stock presented
for all periods have been adjusted to reflect the stock split.
Note 5. Hughes Series A Preferred Stock
On June 24, 1999, as part of a strategic alliance with Hughes, America Online
("AOL") invested $1.5 billion in shares of GM Series H preference stock. The GM
Series H preference stock will automatically convert on June 24, 2002 into GM
Class H common stock based upon a variable conversion factor linked to the GM
Class H common stock price at the time of conversion, and accrues quarterly
dividends at a rate of 6.25% per year. It may be converted earlier in certain
limited circumstances. GM immediately invested the $1.5 billion received from
AOL in shares of Hughes Series A Preferred Stock designed to correspond to the
financial terms of the GM Series H preference stock. Dividends on the Hughes
Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%.
These preferred stock dividends payable to GM will reduce Hughes' earnings used
for computation of the ASCNI of Hughes, which will have an effect equivalent to
the payment of dividends on the GM Series H preference stock as if those
dividends were paid by Hughes. Upon conversion of the GM Series H preference
stock into GM Class H common stock, Hughes will redeem the Hughes Series A
Preferred Stock through a cash payment to GM equal to the fair market value of
the GM Class H common stock issuable upon the conversion. Simultaneous with GM's
receipt of the cash redemption proceeds, GM will make a capital contribution to
Hughes of the same amount. In connection with this capital contribution, the
denominator of the fraction used in the computation of the ASCNI of Hughes will
be increased by the corresponding number of shares of GM Class H common stock
issued. Accordingly, upon conversion of the GM Series H preference stock into GM
Class H common stock, both the numerator and denominator used in the computation
of ASCNI will increase by the amount of the GM Class H common stock issued.
29
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6. Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings and Current Portion of Long-Term Debt
<TABLE>
<CAPTION>
Interest
Rates at
September 30, September 30, December 31,
2000 2000 1999
------------- ------------- ------------
(Dollars in Millions)
<S> <C> <C> <C>
Floating rate notes, net of
unamortized discount................ 7.96% $ 499.9 $498.9
364-day revolving credit facility.... 7.55% 250.0 --
Commercial paper..................... 7.00%--7.47% 339.4 --
Other debt........................... 7.00%--10.00% 23.4 --
Current portion of long-term debt.... 6.88% 21.2 56.5
-------- ------
Total short-term borrowings and
current portion of long-term debt... $1,133.9 $555.4
======== ======
</TABLE>
Long-Term Debt
<TABLE>
<CAPTION>
Interest
Rates at
September 30, September 30, December 31,
2000 2000 1999
------------- ------------- ------------
(Dollars in Millions)
<S> <C> <C> <C>
Notes payable.......................... 6.00%--6.88% $ 817.7 $ 874.1
Revolving credit facilities............ 7.49%--7.53% 1,127.6 727.9
Other debt............................. 9.61%--11.90% 32.8 40.5
-------- --------
Total debt........................... 1,978.1 1,642.5
Less current portion................... 21.2 56.5
-------- --------
Total long-term debt................. $1,956.9 $1,586.0
======== ========
</TABLE>
Note 7. Acquisitions, Investments and Divestitures
Acquisitions and Investments
On May 20, 1999, Hughes acquired by merger all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"), a provider
of premium subscription television programming via the digital broadcasting
system that it shared with DIRECTV. The total consideration of approximately
$1.6 billion, paid in July 1999, consisted of approximately $0.4 billion in cash
and 67.8 million shares of GM Class H common stock.
On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3
million subscriber medium-power direct-to-home satellite business. The purchase
price consisted of $1.1 billion in cash and 14.7 million shares of GM Class H
common stock, for a total purchase price of $1.3 billion. As part of the
agreement to acquire PRIMESTAR, Hughes agreed to purchase the high-power
satellite assets, which consisted of an in-orbit satellite and a satellite which
has not yet been launched, and related orbital frequencies of Tempo Satellite
Inc., a wholly owned subsidiary of TCI Satellite Entertainment Inc. The purchase
price for the Tempo Satellite assets consisted of $500 million in cash, $150
million paid on March 10, 1999 and the remaining $350 million paid on June 4,
1999.
30
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Hughes agreed, in connection with its acquisition of PRIMESTAR, to exit the
medium-power business prior to May 1, 2001. Hughes formulated a detailed exit
plan during the second quarter of 1999 and immediately began to migrate the
medium-power customers to DIRECTV's high-power platform. Accordingly, Hughes
accrued exit costs of $150 million in determining the purchase price allocated
to the net assets acquired. The principal components of such exit costs include
penalties to terminate assumed contracts and costs to remove medium-power
equipment from customer premises. Since DIRECTV's acquisition of PRIMESTAR,
DIRECTV converted a total of approximately 1.5 million customers to its high
power service. The PRIMESTAR By DIRECTV service ceased operations, as planned,
on September 30, 2000. The amount of accrued exit costs remaining at September
30, 2000 was $50 million, which primarily represents the remaining obligation on
certain contracts.
The following selected unaudited pro forma information is being provided to
present a summary of the combined results of Hughes and USSB and PRIMESTAR for
the nine months ended September 30, 1999 as if the acquisitions had occurred as
of the beginning of the period, giving effect to purchase accounting
adjustments. The pro forma data presents only these significant transactions, is
presented for informational purposes only and may not necessarily reflect the
results of operations of Hughes had these companies operated as part of Hughes
for the period presented, nor are they necessarily indicative of the results of
future operations. The pro forma information excludes the effect of
non-recurring charges.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
------------------
(Dollars in Millions)
<S> <C>
Total Revenues.............................................. $4,652.3
Net Loss.................................................... (65.2)
Available Separate Consolidated Net Income (Loss)........... (23.7)
</TABLE>
Divestitures
On March 1, 2000, Hughes announced that the operations of DIRECTV Japan,
Hughes' affiliate that provides DIRECTV services in Japan, would be discontinued
and that its subscribers would have the opportunity to migrate during 2000 to
SkyPerfecTV!, a publicly traded company in Japan that provides direct-to-home
satellite broadcast services. In connection with the agreement, Hughes acquired
an approximate 6.6% interest in SkyPerfecTV!. As a result of the transaction, in
the first quarter of 2000 Hughes wrote off its investment and accrued for the
estimated costs to exit the DIRECTV Japan business. The principal components of
the accrued exit costs include estimated subscriber migration and termination
costs and costs to terminate certain leases, programming agreements and other
long-term contractual commitments. These one- time charges were offset by the
estimated fair value of the SkyPerfecTV! interest acquired. The fair value of
the SkyPerfecTV! interest recorded was estimated based upon an independent
appraisal. The total loss related to DIRECTV Japan for the third quarter of 2000
and the nine months ended September 30, 2000, including Hughes' share of DIRECTV
Japan's operating losses, was approximately $3 million and $258 million,
respectively, and was recorded in "other, net." The after-tax impact for the
same periods was approximately $2 million and $69 million, respectively. DIRECTV
Japan ceased broadcasting on September 30, 2000 and is completing the migration
of customers to SkyPerfectTV!.
31
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 7. Acquisitions, Investments and Divestitures--Concluded
On January 13, 2000, Hughes announced that it had reached an agreement to
sell its satellite systems manufacturing businesses to The Boeing Company
("Boeing") for $3.75 billion in cash. The financial results for the satellite
systems manufacturing businesses are treated as discontinued operations for all
periods presented herein. See further discussion in Note 10.
Note 8. Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, and Network Systems.
Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or
distributing digital entertainment 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. The Network Systems segment is a provider of satellite-based private
business networks and broadband Internet access, and a supplier of DIRECTV
receiving equipment (set-top boxes and dishes). Other includes the corporate
office and other entities.
Selected information for Hughes' operating segments follows:
<TABLE>
<CAPTION>
Direct-
To- Home Satellite Network
Broadcast Services Systems Other Eliminations Total
--------- --------- -------- ------ ------------ --------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
For the Three Months
Ended:
September 30, 2000
External Revenues....... $1,284.7 $164.8 $ 234.3 $ 4.7 -- $1,688.5
Intersegment Revenues... 6.8 34.5 49.7 2.0 $ (93.0) --
-------- ------ -------- ------ ------- --------
Total Revenues.......... $1,291.5 $199.3 $ 284.0 $ 6.7 $ (93.0) $1,688.5
-------- ------ -------- ------ ------- --------
Operating Profit
(Loss)................. $ (150.1) $ 52.0 $ 1.6 $(18.3) $ (15.6) $ (130.4)
September 30, 1999
External Revenues....... $1,143.7 $176.3 $ 305.8 $ 2.0 -- $1,627.8
Intersegment Revenues... 0.9 34.4 120.4 0.3 $(156.0) --
-------- ------ -------- ------ ------- --------
Total Revenues.......... $1,144.6 $210.7 $ 426.2 $ 2.3 $(156.0) $1,627.8
-------- ------ -------- ------ ------- --------
Operating Profit
(Loss)................. $ (60.2) $ 98.2 $ 31.3 $(37.4) $ (38.6) $ (6.7)
For the Nine Months
Ended:
September 30, 2000
External Revenues....... $3,692.7 $715.3 $ 808.1 $ 12.5 -- $5,228.6
Intersegment Revenues... 24.8 105.4 212.2 4.8 $(347.2) --
-------- ------ -------- ------ ------- --------
Total Revenues.......... $3,717.5 $820.7 $1,020.3 $ 17.3 $(347.2) $5,228.6
-------- ------ -------- ------ ------- --------
Operating Profit
(Loss)................. $ (410.9) $319.1 $ (15.4) $(79.0) $ (46.7) $ (232.9)
September 30, 1999
External Revenues....... $2,569.0 $503.3 $ 783.3 $ 6.7 -- $3,862.3
Intersegment Revenues... 2.4 101.3 214.9 1.1 $(319.7) --
-------- ------ -------- ------ ------- --------
Total Revenues.......... $2,571.4 $604.6 $ 998.2 $ 7.8 $(319.7) $3,862.3
-------- ------ -------- ------ ------- --------
Operating Profit
(Loss)................. $ (158.2) $258.9 $ 23.1 $(84.5) $ (82.0) $ (42.7)
</TABLE>
32
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 9. Contingencies
In connection with the 1997 spin-off of the defense electronics business of
Hughes' predecessor as part of the Hughes restructuring transactions and the
subsequent merger of that business with Raytheon Company ("Raytheon"), 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. These 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. Hughes and Raytheon are proceeding with the dispute
resolution process. It is possible that the ultimate resolution of the post-
closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the dispute through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that
Hughes has proposed.
On June 3, 1999, the National Rural Telecommunications Cooperative ("NRTC")
filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc.,
which Hughes refers to together in this description as "DIRECTV", in the U.S.
District Court for the Central District of California, alleging that DIRECTV has
breached the DBS Distribution Agreement with the NRTC. The DBS Distribution
Agreement provides the NRTC with certain rights, in certain specified portions
of the United States, with respect to DIRECTV programming delivered over 27 of
the 32 frequencies at the 101 west longitude orbital location. The NRTC claims
that DIRECTV has wrongfully deprived it of the exclusive right to distribute
programming formerly provided by USSB over the other five frequencies at 101.
DIRECTV denies that the NRTC is entitled to exclusive distribution rights to the
former USSB programming because, among other things, the NRTC's exclusive
distribution rights are limited to programming distributed over 27 of the 32
frequencies at 101. The NRTC's complaint seeks, in the alternative, the right to
distribute former USSB programming on a non-exclusive basis and the recovery of
related revenues from the date USSB was acquired by Hughes. On August 25, 2000,
the NRTC stipulated to dismiss without prejudice its claim seeking the right to
distribute former USSB programming services on a non-exclusive basis, however,
the NRTC continues to pursue its claim for the right to distribute former USSB
programming services on an exclusive basis and to recover revenues related
thereto. DIRECTV maintains that the NRTC's right under the DBS Distribution
Agreement is to market and sell the former USSB programming as its agent and the
NRTC is not entitled to the claimed revenues. DIRECTV intends to vigorously
defend against the NRTC claims. DIRECTV has also filed a counterclaim against
the NRTC seeking a declaration of the parties' rights under the DBS Distribution
Agreement.
On August 26, 1999, the NRTC filed a second lawsuit against DIRECTV alleging
that DIRECTV has breached the agreement it has with the NRTC. In this lawsuit,
the NRTC is asking the court to require DIRECTV to pay the NRTC a proportionate
share of unspecified financial benefits that DIRECTV derives from programming
providers and other third parties. DIRECTV denies that it owes any sums to the
NRTC on account of the allegations in these matters and plans to vigorously
defend itself against these claims.
A class action suit was filed against DIRECTV on behalf of the NRTC's
participating members on February 29, 2000. The members assert claims identical
to the claims that were asserted by Pegasus Satellite Television, Inc. and
Golden Sky Systems, Inc. in their lawsuit against DIRECTV described in the
following paragraph.
33
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pegasus Satellite Television, Inc. and Golden Sky Systems, Inc., the two
largest NRTC affiliates, filed an action on January 11, 2000 against DIRECTV in
the U.S. District Court in Los Angeles. The plaintiffs allege, among other
things, that DIRECTV has interfered with their contractual relationship with the
NRTC. The plaintiffs plead that their rights and damages are derivative of the
rights and claims asserted by the NRTC in its two cases against DIRECTV. The
plaintiffs also allege that DIRECTV has interfered with their contractual
relationships with manufacturers and distributors by preventing those parties
from selling receiving equipment to the plaintiffs' dealers. DIRECTV denies that
it has wrongfully interfered with any of the plaintiffs' business relationships
and will vigorously defend the lawsuit. Although an amount of loss, if any,
cannot be estimated at this time, an unfavorable outcome could be reached in the
NRTC and Pegasus litigation that could be material to Hughes' results of
operations or financial position.
General Electric Capital Corporation ("GECC") and DIRECTV, Inc. entered into
a contract on July 31, 1995, in which GECC agreed to establish and manage a
private label consumer credit program for consumer purchases of hardware and
related DIRECTV programming. Under the contract, GECC also agreed to provide
certain related services to DIRECTV, including credit risk scoring, billing and
collections services. DIRECTV agreed to act as a surety for loans complying with
the terms of the contract. Hughes guaranteed DIRECTV's performance under the
contract. A complaint and counterclaim were filed by the parties in the U.S.
District Court for the District of Connecticut concerning GECC's performance and
DIRECTV's obligation to act as a surety. A trial commenced on June 12, 2000 with
GECC presenting evidence to the jury for damages of $157 million. DIRECTV sought
damages from GECC of $45 million. On July 21, 2000, the jury returned a verdict
in favor of GECC and awarded contract damages in the amount of $133 million. The
trial judge issued an order granting GECC $48.5 million in interest under
Connecticut's offer-of-judgment statute. With this order, the total judgment to
be entered in GECC's favor is $181.5 million. Hughes and DIRECTV will appeal the
jury verdict. As a result, Hughes and DIRECTV believe that it is reasonably
possible that the jury verdict will be overturned and a new trial granted.
Although it is not possible to predict the result of any eventual appeal in this
case, Hughes does not believe that the litigation will ultimately have a
material adverse impact on Hughes.
There is a pending grand jury investigation into whether Hughes should be
accused of criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the failure of a Long March rocket in
China in 1996. Hughes is also subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participating in government
contracts. On October 6, 2000, Hughes completed the sale of its satellite
manufacturing business to Boeing. In that transaction, Hughes retained limited
liability for certain possible fines and penalties and the financial
consequences of debarment related to the business now owned by Boeing, should
such sanctions be imposed by either the Department of Justice or State
Department against the satellite manufacturing businesses. Hughes does not
expect any sanctions imposed by the Department of Justice or State Department to
have a material adverse effect on Hughes.
EchoStar Communications Corporation ("EchoStar") and others commenced an
action in the U.S. District Court in Colorado on February 1, 2000 against
DIRECTV, Hughes Network Systems and Thomson Consumer Electronics, Inc. seeking,
among other things, injunctive relief and unspecified damages, including treble
damages, in connection with allegations that the defendants have entered into
agreements with retailers and program providers and engaged in other conduct
that violates the antitrust laws and constitutes unfair competition. DIRECTV
believes that the complaint is without merit and intends to vigorously defend
against the allegations raised. Although an amount of loss, if any, cannot be
estimated at this time, an unfavorable outcome could be reached that could be
material to Hughes' results of operations or financial position.
34
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Hughes and DIRECTV filed counterclaims against EchoStar on March 13, 2000,
alleging that EchoStar tortiously interfered with DIRECTV's relationship with
Kelly Broadcasting System, a provider of foreign-language programming; engaged
in unfair business practices in connection with improper sales of network
programming, misleading advertisements for National Football League games and
EchoStar's "PRIMESTAR bounty program"; and infringed on PRIMESTAR trademarks.
On September 7, 2000, a putative class action was commenced against DIRECTV,
Inc., Thomson Consumer Electronics, Inc., Best Buy Co., Inc., Circuit City
Stores, Inc. and Tandy Corporation, Inc. in federal court in Los Angeles. The
named plaintiffs purport to represent a class of all consumers who purchased
DIRECTV equipment and services at any time from March 1996 to September 1, 2000.
The plaintiffs allege that the defendants have violated federal and California
antitrust statutes by entering into agreements to exclude competition and force
retailers to boycott competitors' products and services. The plaintiffs seek
declaratory and injunctive relief, as well as unspecified damages, including
treble damages. DIRECTV believes that the complaint is without merit and intends
to vigorously defend against the allegations raised. Although an amount of loss,
if any, cannot be estimated at this time, an unfavorable outcome could be
reached that could be material to Hughes' results of operations or financial
position.
Hughes Communications Galaxy, Inc. ("HCGI") filed a lawsuit on March 22, 1991
against the U.S. Government based upon the National Aeronautics and Space
Administration's breach of contract to launch ten satellites on the Space
Shuttle. The U.S. Court of Federal Claims granted HCGI's Motion for Summary
Judgment on the issue of liability on November 30, 1995. A trial was held on May
1, 1998 on the issue of damages. On June 30, 2000, a final judgment was entered
in favor of HCGI in the amount of $103 million. Both Hughes and the U.S.
Government have the ability to appeal the final judgment. As a result of the
uncertainty regarding the outcome of this matter, no amount has been recorded in
the financial statements of Hughes to reflect the award. On July 13, 2000, HCGI
filed a notice to appeal the judgment with the U.S. Court of Appeals for the
Federal Circuit. HCGI is appealing for a greater amount than was awarded. Final
resolution of this issue could result in a gain that would be material to
Hughes.
Hughes is subject to various claims and legal actions which are pending or
may be asserted against it. The aggregate ultimate liability of Hughes under
these claims and actions was not determinable at September 30, 2000. In the
opinion of Hughes management, such liability is not expected to have a material
adverse effect on Hughes' results of operations or financial position.
Note 10. Subsequent Event
On October 6, 2000, Hughes completed the sale of its satellite systems
manufacturing businesses to Boeing for $3.75 billion in cash, which will result
in a fourth quarter 2000 after-tax gain in excess of $1 billion. The purchase
price is subject to adjustment based upon the final closing net assets of the
satellite manufacturing businesses compared to a target amount, which could
require amounts to be paid to or received from Boeing. In October of 2000,
Hughes utilized a portion of the proceeds to repay about $1.8 billion of
borrowings, which represented all amounts outstanding on the floating rate
notes, the commercial paper program and 364-day and multi-year revolving credit
facilities.
35
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY DATA
<TABLE>
<CAPTION>
Three Months
Ended September Nine Months Ended
30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues........................ $1,688.5 $1,627.8 $5,228.6 $3,862.3
Total operating costs and expenses.... 1,818.9 1,634.5 5,461.5 3,905.0
-------- -------- -------- --------
Operating loss........................ (130.4) (6.7) (232.9) (42.7)
Interest, net......................... (59.4) (49.1) (153.9) (50.2)
Other, net............................ (11.9) (31.6) (294.4) (96.3)
Income tax benefit.................... (77.8) (36.8) (354.4) (59.7)
Minority interests in net losses of
subsidiaries......................... 19.6 8.8 31.7 22.1
-------- -------- -------- --------
Loss from continuing operations....... (104.3) (41.8) (295.1) (107.4)
Income from discontinued operations,
net of taxes......................... 10.5 6.9 50.3 47.9
-------- -------- -------- --------
Net loss............................ $ (93.8) $ (34.9) $ (244.8) $ (59.5)
======== ======== ======== ========
Other Data:
EBITDA................................ $ 107.9 $ 202.1 $ 440.2 $ 437.4
EBITDA Margin......................... 6.4% 12.4% 8.4% 11.3%
Depreciation and amortization......... $ 238.3 $ 208.8 $ 673.1 $ 480.1
Capital expenditures.................. $ 426.0 $ 492.2 $1,205.4 $1,145.4
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Dollars in Millions)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $ 178.4 $ 238.2
Total current assets................................. 4,398.3 3,858.0
Total assets......................................... 20,184.8 18,597.0
Total current liabilities............................ 3,550.6 2,642.1
Long-term debt....................................... 1,956.9 1,586.0
Minority interests................................... 574.3 544.3
Total stockholder's equity........................... $11,606.8 $11,681.3
</TABLE>
--------
Certain prior period amounts have been reclassified to conform to the September
30, 2000 presentation.
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 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.
EBITDA margin is calculated by dividing EBITDA by total revenues. In addition,
EBITDA and EBITDA margin as presented herein may not be comparable to similarly
titled measures reported by other companies.
36
<PAGE>
SUMMARY DATA--Concluded
Selected Segment Data
<TABLE>
<CAPTION>
Direct-
To- Home Satellite Network Eliminations
Broadcast Services Systems and Other Total
--------- --------- -------- ------------ --------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
For the Three Months
Ended:
September 30, 2000
Total Revenues.......... $1,291.5 $199.3 $ 284.0 $ (86.3) $1,688.5
-------- ------ -------- ------- --------
Operating Profit
(Loss)................. $ (150.1) $ 52.0 $ 1.6 $ (33.9) $ (130.4)
Operating Profit
Margin................. N/A 26.1% 0.6% N/A N/A
EBITDA.................. $ (17.7) $135.5 $ 16.8 $ (26.7) $ 107.9
EBITDA Margin........... N/A 68.0% 5.9% N/A 6.4%
-------- ------ -------- ------- --------
Depreciation and
Amortization........... $ 132.4 $ 83.5 $ 15.2 $ 7.2 $ 238.3
Capital Expenditures.... 262.0 (1) 109.4 (2) 79.2 (3) (24.6) 426.0
-------- ------ -------- ------- --------
September 30, 1999
Total Revenues.......... $1,144.6 $210.7 $ 426.2 $(153.7) $1,627.8
-------- ------ -------- ------- --------
Operating Profit
(Loss)................. $ (60.2) $ 98.2 $ 31.3 $ (76.0) $ (6.7)
Operating Profit
Margin................. N/A 46.6% 7.3% N/A N/A
EBITDA.................. $ 55.1 $169.0 $ 49.8 $ (71.8) $ 202.1
EBITDA Margin........... 4.8% 80.2% 11.7% N/A 12.4%
-------- ------ -------- ------- --------
Depreciation and
Amortization........... $ 115.3 $ 70.8 $ 18.5 $ 4.2 $ 208.8
Capital Expenditures.... 97.6 (1) 347.8 (2) 38.4 (3) 8.4 492.2
-------- ------ -------- ------- --------
For the Nine Months
Ended:
September 30, 2000
Total Revenues.......... $3,717.5 $820.7 $1,020.3 $(329.9) $5,228.6
-------- ------ -------- ------- --------
Operating Profit
(Loss)................. $ (410.9) $319.1 $ (15.4) $(125.7) $ (232.9)
Operating Profit
Margin................. N/A 38.9% N/A N/A N/A
EBITDA.................. $ (40.9) $557.9 $ 34.4 $(111.2) $ 440.2
EBITDA Margin........... N/A 68.0% 3.4% N/A 8.4%
-------- ------ -------- ------- --------
Depreciation and
Amortization........... $ 370.0 $238.8 $ 49.8 $ 14.5 $ 673.1
Capital Expenditures.... 649.1 (1) 317.6 (2) 241.0 (3) (2.3) 1,205.4
-------- ------ -------- ------- --------
September 30, 1999
Total Revenues.......... $2,571.4 $604.6 $ 998.2 $(311.9) $3,862.3
-------- ------ -------- ------- --------
Operating Profit
(Loss)................. $ (158.2) $258.9 $ 23.1 $(166.5) $ (42.7)
Operating Profit
Margin................. N/A 42.8% 2.3% N/A N/A
EBITDA.................. $ 46.0 $465.9 $ 80.5 $(155.0) $ 437.4
EBITDA Margin........... 1.8% 77.1% 8.1% N/A 11.3%
-------- ------ -------- ------- --------
Depreciation and
Amortization........... $ 204.2 $207.0 $ 57.4 $ 11.5 $ 480.1
Capital Expenditures.... 253.4 (1) 823.0 (2) 111.2 (3) (42.2) 1,145.4
-------- ------ -------- ------- --------
</TABLE>
--------
Certain prior period amounts have been reclassified to conform to the September
30, 2000 presentation.
(1) Includes expenditures related to satellites amounting to $37.5 million,
$13.6 million, $73.2 million and $89.1 million, respectively.
(2) Includes expenditures related to satellites amounting to $81.7 million,
$93.2 million, $258.8 million and $408.8 million, respectively. Also
included in the third quarter and first nine months of 1999 are $228.2
million and $369.5 million, respectively, related to the early buy-out of
satellite sale-leasebacks.
(3) Includes expenditures related to satellites amounting to $68.7 million,
$28.0 million, $193.2 million and $74.9 million, respectively.
37
<PAGE>
The following management's discussion and analysis should be read in
conjunction with the Hughes management's discussion and analysis included in the
Hughes Electronics Corporation Annual Report on Form 10-K for the year ended
December 31, 1999 and the Hughes Electronics Corporation Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2000 and June 30, 2000, filed with
the Securities and Exchange Commission ("SEC") on March 10, 2000, May 15, 2000
and August 14, 2000, respectively, and the Hughes Electronics Corporation
Current Reports on Form 8-K, filed with the SEC through the date of this report.
In addition, the following discussion excludes the purchase accounting
adjustments related to General Motor's acquisition of Hughes.
This Quarterly Report may contain certain statements that Hughes believes
are, or may be considered to be, "forward-looking statements," within the
meaning of various provisions of the Securities Act of 1933 and of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. All of these forward-looking statements are
subject to certain risks and uncertainties that could cause Hughes' actual
results to differ materially from those contemplated by the relevant forward-
looking statement. The principal important risk factors which could cause actual
performance and future actions to differ materially from forward-looking
statements made herein include economic conditions, product demand and market
acceptance, government action, local political or economic developments in or
affecting countries where Hughes has operations, ability to obtain export
licenses, competition, ability to achieve cost reductions, technological risk,
limitations on access to distribution channels, the success and timeliness of
satellite launches, in-orbit performance of satellites, ability of customers to
obtain financing and Hughes' ability to access capital to maintain its financial
flexibility.
Additionally, the in-orbit satellites of Hughes and its 81% owned subsidiary,
PanAmSat Corporation ("PanAmSat"), are subject to the risk of failing
prematurely due to, among other things, mechanical failure, collision with
objects in space or an inability to maintain proper orbit. Satellites are
subject to the risk of launch delay and failure, destruction and damage while on
the ground or during launch and failure to become fully operational once
launched. Delays in the production or launch of a satellite or the complete or
partial loss of a satellite, in-orbit or during launch, could have a material
adverse impact on the operation of Hughes' businesses. With respect to both in-
orbit and launch problems, insurance carried by Hughes and PanAmSat generally
does not compensate for business interruption or loss of future revenues or
customers. Hughes has, in the past, experienced technical anomalies on some of
its satellites. Service interruptions caused by these anomalies, depending on
their severity, could result in claims by affected customers for termination of
their transponder agreements, cancellation of other service contracts or the
loss of other customers. Readers are urged to consider these factors carefully
in evaluating the forward-looking statements. The forward-looking statements
included in this Quarterly Report are made only as of the date of this Quarterly
Report and Hughes undertakes no obligation to publicly update these
forward-looking statements to reflect subsequent events or circumstances.
General
Business Overview
The continuing operations of Hughes are comprised of the following segments:
Direct-To-Home Broadcast, Satellite Services and Network Systems. The
discontinued operations of Hughes consist of its satellite systems manufacturing
businesses, which on January 13, 2000, Hughes agreed to sell to The Boeing
Company ("Boeing"). The transaction closed on October 6, 2000. This transaction
is discussed more fully below in "Liquidity and Capital Resources--
Acquisitions, Investments and Divestitures."
The Direct-To-Home Broadcast segment consists primarily of the United States
and Latin America DIRECTV businesses, which provide digital multi-channel
entertainment. The DIRECTV U.S. operations were significantly affected during
1999 by Hughes' acquisition of the direct broadcast satellite medium-power
business of PRIMESTAR in April 1999 and Hughes' acquisition of United States
Satellite Broadcasting
38
<PAGE>
Company, Inc. ("USSB"), a provider of premium subscription programming services,
in May 1999. The USSB acquisition provided DIRECTV with 25 channels of video
programming, including premium networks such as HBO(R), Showtime(R), Cinemax(R)
and The Movie Channel(R), which are now being offered to DIRECTV's subscribers.
The results of operations for PRIMESTAR and USSB have been included in Hughes'
financial information since their dates of acquisition. See Note 7 to the
financial statements and "Liquidity and Capital Resources-- Acquisitions,
Investments and Divestitures," below, for further discussion of these
transactions.
In the fourth quarter of 1999, DIRECTV U.S. began providing local broadcast
network services and as of September 30, 2000 was providing those services to
35 U.S. markets. DIRECTV U.S. expects to add an additional 6 markets by the end
of the year, bringing the total to 41 markets representing over 60 million
households or 60% of television households.
The Latin America DIRECTV businesses are comprised of Galaxy Latin America,
LLC ("GLA"), Hughes' 77.8% owned subsidiary that provides DIRECTV services to 27
countries in Latin America and the Caribbean Basin; SurFin Ltd. ("SurFin"), a
company 75% owned by Hughes, that provides financing of subscriber receiver
equipment to certain GLA operating companies; Grupo Galaxy Mexicana, S.R.L. de
C.V. ("GGM"), the exclusive distributor of DIRECTV in Mexico which was acquired
by Hughes in February 1999; and Galaxy Brasil, Ltda. ("GLB"), the exclusive
distributor of DIRECTV in Brazil, which was acquired by GLA in July 1999. The
results of operations for SurFin, GGM, and GLB have been included in Hughes'
financial information since their dates of acquisition. See "Liquidity and
Capital Resources--Acquisitions, Investments and Divestitures," below, for
further discussion of these transactions.
Also included as part of the non-operating results of the Direct-To-Home
Broadcast segment is DIRECTV Japan, Hughes' affiliate that provides DIRECTV
services in Japan. On March 1, 2000, Hughes announced that DIRECTV Japan's
operations would be discontinued and that its subscribers would have the
opportunity to migrate during 2000 to SkyPerfecTV!, a publicly traded company in
Japan that provides direct-to-home satellite broadcast services. In connection
with the agreement, Hughes acquired an ownership interest in SkyPerfecTV!.
DIRECTV Japan ceased broadcasting on September 30, 2000, and is completing the
migration of customers to SkyPerfecTV!. See Note 7 to the financial statements
and "Liquidity and Capital Resources--Acquisitions, Investments and
Divestitures," below, for further discussion.
The Satellite Services segment consists of PanAmSat, Hughes' 81% owned
subsidiary. PanAmSat provides satellite services to its customers primarily
through long-term operating lease contracts for the full or partial use of
satellite transponder capacity. During the first quarter of 2000, PanAmSat
announced the introduction of NET-36(TM), a high-speed, bandwidth-intensive
network that will deliver popular video, audio and data content with high
clarity to thousands of digital subscriber line providers, cable headends,
Internet service providers and broadband wireless providers worldwide. PanAmSat
introduced the NET-36 service in the United States in October of 2000 and
expects to begin generating revenues from the service in 2001.
The Network Systems segment consists of Hughes Network Systems ("HNS"), which
is a provider of satellite-based private business networks and broadband
Internet access, and a supplier of DIRECTV(TM) receiving equipment (set-top
boxes and dishes). In April of 2000, HNS announced plans to market a two-way
broadband satellite service to consumers. HNS will add two-way capabilities to
its nationwide high-speed satellite Internet service, DirecPC(R) in the fourth
quarter of 2000. Offering always-on capability, the new two-way high-speed
satellite service will allow consumers to completely bypass the dial-up
telephone network when accessing the Internet. Two-way DirecPC will also be
offered with a DirecDuo(TM) antenna system, allowing consumers to receive both
DirecPC and DIRECTV using the same antenna.
The Network Systems segment was affected in February 1999 by a notification
received by Hughes from the Department of Commerce that it intended to deny a
U.S. government export license that Hughes was required to obtain in connection
with its 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
39
<PAGE>
$92.0 million in the first quarter of 1999. Of the $92.0 million charge, $11.0
million was attributable to the Network Systems segment and the remainder to
Hughes Space and Communications, which is included in discontinued operations.
The charge represented the write-off of receivables and inventory, with no
alternative use, related to the contract.
Satellite Fleet
During the first quarter of 2000, PanAmSat successfully launched and
commenced service of the Galaxy XR satellite for Alaska's General
Communications, Inc., Disney and other customers. In April of 2000, PanAmSat
commenced service of the Galaxy XI satellite, which provides expansion and
backup services for PanAmSat's Galaxy(R) cable neighborhood customers, and
successfully launched Galaxy IVR, a replacement satellite for Galaxy IV. Also
during the second quarter of 2000, PanAmSat completed the planned retirement of
the SBS 4 satellite. On July 28, 2000, PanAmSat successfully launched PAS-9,
which will deliver premium broadcast, Internet and data services throughout
North and South America, the Caribbean and Europe. These activities brought
Hughes' total fleet of satellites to 26, five owned by DIRECTV and 21 owned and
operated by PanAmSat. Both PanAmSat and DIRECTV expect to launch additional
satellites during 2000 and 2001.
During the third quarter of 2000, PanAmSat's Galaxy VIII-i satellite
experienced a failure of its primary propulsion system, and is now operating on
its back-up system, which shortened the satellites projected remaining
operational life from 12 years to about 24 months. The decrease in useful life
will result in about $5 million per month of additional depreciation beginning
in the fourth quarter of 2000. PanAmSat expects to replace Galaxy VIII-i in 2001
with Galaxy IIIC, which is currently under construction, a full year before the
end of Galaxy VIII-i's operational life.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues. Revenues for the third quarter of 2000 increased 3.7% to $1,688.5
million, compared with $1,627.8 million in the third quarter of 1999. The
Direct-To-Home Broadcast segment contributed to the overall change with an
increase in revenues of $146.9 million over the third quarter of 1999 that
resulted from an increase in the number of subscribers in the United States and
Latin America partially offset by lower revenues from the PRIMESTAR By DIRECTV
medium-power service. The increased revenues at the Direct-To-Home segment was
offset by decreased revenues at the Network Systems and Satellite Services
segments. The Network Systems segment reported decreased revenues of $142.2
million primarily due to lower sales of DIRECTV receiver equipment associated
with the completion of the transition of PRIMESTAR By DIRECTV subscribers to the
high-power DIRECTV service. The Network Systems segment shipped about 470,000
DIRECTV receiver systems during the third quarter of 2000 compared to about
730,000 units shipped in the same period last year. The Satellite Services
segment reported decreased revenues of $11.4 million primarily due to the 1999
third quarter revenues including a one-time customer payment of about $15
million associated with the termination of a direct-to-home video services
agreement in India.
Operating Costs and Expenses. Operating costs and expenses grew to $1,818.9
million in 2000 from $1,634.5 million in 1999. Broadcast programming and other
costs increased by $85.0 million in the third quarter of 2000 from the same
period of 1999 due to increased costs for the new high-power DIRECTV
subscribers. Costs of products sold decreased by $121.1 million in the third
quarter of 2000 from the third quarter of 1999 primarily due to the decreased
sales of DIRECTV receiver systems. Selling, general and administrative expenses
increased by $191.0 million during the third quarter of 2000 compared to the
same period of 1999 due primarily to higher marketing costs at the Direct-To-
Home Broadcast segment resulting from increased subscriber growth. Depreciation
and amortization increased by $29.5 million during the third quarter of 2000
compared to the third quarter of 1999 due primarily to additional capital
expenditures since September 30, 1999.
40
<PAGE>
EBITDA. EBITDA decreased 46.6% for the third quarter of 2000 to $107.9
million and EBITDA margin was 6.4%, compared to EBITDA of $202.1 million and
EBITDA margin of 12.4% in the third quarter of 1999. The decrease in EBITDA
resulted primarily from higher marketing costs associated with the record
Direct-To-Home Broadcast segment subscriber growth in both the United States and
Latin America and lower revenues from the PRIMESTAR By DIRECTV medium-power
service, decreased revenues and higher operating costs at the Satellite Services
segment and decreased EBITDA at the Network Systems segment resulting from
reduced revenues and increased expenses associated with the upcoming launch of
new DirecPC services.
Operating Loss. The operating loss for the third quarter of 2000 was $130.4
million compared to an operating loss of $6.7 million in 1999. The increased
operating loss resulted from the decrease in EBITDA and higher depreciation
expense.
Interest Income and Expense. Interest income increased to $7.1 million for
the third quarter of 2000 compared to interest income of $2.6 million for the
same period of 1999. Interest expense increased to $66.5 million for the third
quarter of 2000 from $51.7 million for the third quarter of 1999. The higher
interest expense resulted from increased borrowings. The changes in cash and
cash equivalents and debt are discussed in more detail below under "Liquidity
and Capital Resources."
Other, Net. Other, net decreased to an expense of $11.9 million for the third
quarter of 2000 from an expense of $31.6 million in the same period of 1999. The
decreased expense in 2000 resulted primarily from unexpected shareholder
contributions of about $22 million to help fund the costs to exit the DIRECTV
Japan business.
Income Taxes. Hughes recognized an income tax benefit of $77.8 million for
the 2000 third quarter, compared to $36.8 million in the 1999 third quarter. The
2000 tax benefit reflects the higher pre-tax losses compared to 1999.
Loss From Continuing Operations. Hughes reported a loss from continuing
operations of $104.3 million for the 2000 third quarter, compared to $41.8
million for the same period of 1999.
Discontinued Operations. Revenues for the satellite systems manufacturing
businesses decreased to $499.5 million for the third quarter of 2000 from
revenues of $508.6 million for the same period of 1999. Revenues, excluding
intercompany transactions, were $378.4 million for the third quarter of 2000 and
$362.8 million for the same period of 1999.
The satellite systems manufacturing businesses reported operating income of
$29.4 million for the third quarter of 2000 compared to operating income of
$30.4 million for the third quarter of 1999. Operating income, excluding
intercompany transactions, amounted to $16.7 million for the third quarter of
2000, compared to operating income of $5.7 million for 1999.
Income from discontinued operations, net of taxes was $10.5 million for the
third quarter of 2000 compared to income from discontinued operations of $6.9
million in the same period of 1999.
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment third quarter 2000 revenues increased 12.8%
to $1,291.5 million from $1,144.6 million in the third quarter of 1999. The
Direct-To-Home Broadcast segment had negative EBITDA of $17.7 million in the
third quarter of 2000 compared with positive EBITDA of $55.1 million in the
third quarter of 1999. The operating loss for the segment increased to $150.1
million in the third quarter of 2000 from an operating loss of $60.2 million in
the third quarter of 1999.
United States. The DIRECTV U.S. businesses were the biggest contributors to
the segment's revenue growth with revenues of $1,154 million for the third
quarter of 2000, a 9.7% increase over last year's third
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quarter revenues of $1,052 million. The increase in revenues resulted primarily
from an increased number of high-power DIRECTV subscribers partially offset by
lower revenues from the PRIMESTAR By DIRECTV medium-power service. In the third
quarter of 1999, DIRECTV U.S. benefited from revenues on the entire Primestar By
DIRECTV subscriber base; however, in the third quarter of 2000, revenues
resulting from the Primestar By DIRECTV service were lower due to subscriber
churn and those subscribers located in National Rural Telecommunications
Cooperative ("NRTC") territories that converted to the high-power DIRECTV
service. The DIRECTV businesses receive only a small percentage of revenues from
customers in NRTC territories.
As of September 30, 2000, the DIRECTV U.S. businesses had approximately 9.0
million subscribers compared to about 7.7 million at September 30, 1999. DIRECTV
U.S. added 450,000 net new subscribers to its high-power DIRECTV service, a 6.4%
increase over the 423,000 net new subscribers added in the third quarter of
1999. In addition, about 300,000 subscribers were transitioned from the
PRIMESTAR By DIRECTV medium-power service to the high-power service during the
third quarter of 2000. Average monthly revenue per subscriber for the high-power
business was approximately $58 for the third quarters of 2000 and 1999.
In the third quarter of 2000, the DIRECTV U.S. businesses reported EBITDA of
$36 million compared to EBITDA of $86 million in the third quarter of 1999. The
third quarter 2000 operating loss for DIRECTV U.S. was $62 million compared with
an operating loss of $7 million in the third quarter of 1999. The decrease in
EBITDA and operating profit primarily resulted from higher marketing costs
associated with the record subscriber growth.
Latin America. Revenues for the Latin America DIRECTV businesses increased
78.9% to $136 million in the third quarter of 2000 from $76 million in the third
quarter of 1999. The increase in revenues reflects an increase in subscribers.
Subscribers grew to 1,136,000 at the end of the third quarter of 2000 compared
to 668,000 at the end of the third quarter of 1999. Latin America DIRECTV added
126,000 net new subscribers in the third quarter of 2000, an 88.1% increase over
the 67,000 net new subscribers added in the same period last year. Average
monthly programming revenue per subscriber increased to $36 in the third quarter
of 2000 from $35 in the third quarter of 1999.
EBITDA was negative $50 million for the third quarter of 2000 compared to
negative EBITDA of $24 million in the third quarter of 1999. The change in
EBITDA resulted primarily from additional losses from higher marketing costs
associated with the record subscriber growth. The Latin America DIRECTV
businesses incurred an operating loss of $85 million in the third quarter of
2000 compared to $47 million in the third quarter of 1999. The increased
operating loss resulted from the decline in EBITDA and higher depreciation
expense.
Satellite Services Segment
Revenues for the Satellite Services segment in the third quarter of 2000
decreased $11.4 million to $199.3 million from $210.7 million in the same period
in the prior year. This decrease was primarily due to the 1999 third quarter
revenue including a one time customer payment of about $15 million associated
with the termination of a direct-to-home video services agreement in India.
Total sales-type lease revenues were $8.5 million for the third quarter of 2000
as compared to $5.8 million for the same period in the prior year. Revenues from
operating leases of transponders, satellite services and other were 95.7% of
total revenues for the third quarter of 2000 and decreased by 6.9% to $190.8
million from $204.9 million for the same period in the prior year.
EBITDA was $135.5 million for the third quarter of 2000, a 19.8% decrease
over the third quarter 1999 EBITDA of $169.0 million. EBITDA margin in the third
quarter of 2000 was 68.0% compared to 80.2% in the same period in 1999. The
decrease in EBITDA and EBITDA margin was due to the decrease in revenues
discussed above, increased direct operating costs and selling, general and
administrative costs that resulted from the continued satellite fleet expansion
and expenses associated with the new NET-36 broadband Internet
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initiative. Operating profit was $52.0 million for the third quarter of 2000, a
decrease of $46.2 million from the third quarter of 1999. The decrease in
operating profit resulted from the decrease in EBITDA and higher depreciation
expense related to satellites placed into service since the third quarter of
1999.
Network Systems Segment
The Network Systems segment's third quarter 2000 revenues decreased by 33.4%
to $284.0 million, versus $426.2 million in the third quarter of 1999. The lower
revenues resulted from decreased shipments of DIRECTV receiver equipment
associated with the completion of the transition of PRIMESTAR By DIRECTV
subscribers to the high-power DIRECTV service and the elimination of DIRECTV
equipment subsidies. Shipments of DIRECTV receiver equipment totaled 470,000
units in the third quarter of 2000, compared to 730,000 units in the same period
last year. The decrease in revenues was also due to the discontinuation of
certain narrowband wireless businesses and lower revenues in the mobile
satellite product line.
The Network Systems segment reported EBITDA of $16.8 million for the third
quarter of 2000, compared to EBITDA of $49.8 million in the third quarter of
1999. The Network Systems segment had an operating profit of $1.6 million in the
third quarter of 2000, compared to an operating profit of $31.3 million in the
third quarter of 1999. The decreased EBITDA and operating profit resulted
primarily from the reduced revenues discussed above, and increased expenses
associated with the upcoming launch of new DirecPC services, including AOL Plus
Powered by DirecPC. These reductions were offset by a $21 million one-time
EBITDA gain that resulted from successful negotiations with certain narrowband
wireless customers for receivables previously written-off.
Eliminations and Other
The elimination of revenues decreased to $86.3 million in the third quarter
of 2000 from $153.7 million in the third quarter of 1999 due primarily to
decreased purchases of receiver equipment from the Network Systems segment by
DIRECTV due to the completion of the transition of PRIMESTAR By DIRECTV medium-
power subscribers to the high-power DIRECTV service and the elimination of
DIRECTV equipment subsidies from the Direct-To-Home Broadcast segment.
Operating losses for "eliminations and other" decreased to $33.9 million in
the third quarter of 2000 from $76.0 million for the third quarter of 1999
primarily due to the completion of the transition of PRIMESTAR By DIRECTV
medium-power subscribers to the high-power service, the elimination of DIRECTV
equipment subsidies and lower margins on intercompany sales.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
Revenues. Revenues for the nine months ended September 30, 2000 increased
35.4% to $5,228.6 million compared with $3,862.3 million for the nine months
ended September 30, 1999. The Direct-To-Home Broadcast segment contributed to
the overall change with an increase in revenues of $1,146.1 million over the
first nine months of 1999 that resulted from the addition of about 1,639,000 net
new subscribers in the United States and Latin America since December 31, 1999
and added revenues from the PRIMESTAR By DIRECTV and premium channel services.
The Satellite Services segment also reported an increase in revenues of $216.1
million due primarily to increased revenues from outright sales and sales-type
lease transactions executed during 2000.
Operating Costs and Expenses. Operating costs and expenses grew to $5,461.5
million in 2000 from $3,905.0 million in 1999. Broadcast programming and other
costs increased by $661.5 million in the first nine months of 2000 from the same
period in 1999 due to higher costs that result from increased high-power DIRECTV
subscribers, costs associated with the PRIMESTAR By DIRECTV and premium channel
services and increased costs associated with new outright sales and sales-type
leases of satellite transponders at the Satellite Services segment. Costs of
products sold decreased by $46.3 million for the first nine months of 2000 from
the
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first nine months of 1999 mainly due to the completion of several contracts at
the Network Systems segment. Selling, general and administrative expenses
increased by $748.3 million during the first nine months of 2000 compared to the
same period of 1999 due primarily to higher marketing costs at the Direct-
To-Home Broadcast segment resulting from increased subscriber growth in both the
United States and Latin America. Depreciation and amortization increased by
$193.0 million during the first nine months of 2000 compared to the first nine
months of 1999 primarily due to 1999 acquisitions, discussed more fully in
"Liquidity and Capital Resources--Acquisitions, Investments and Divestitures."
EBITDA. EBITDA for the first nine months of 2000 was $440.2 million and
EBITDA margin was 8.4%, compared to EBITDA of $437.4 million and EBITDA margin
of 11.3% in the same period of 1999. The slight increase in EBITDA was primarily
attributable to the increased outright sales and sales-type leases at the
Satellite Service segment offset by increased losses at the Direct-To-Home
Broadcast segment due to higher subscriber acquisition costs. The lower EBITDA
margin was mainly attributable to increased losses at the Direct-To-Home
Broadcast segment and the lower margins associated with the Satellite Service
segment's outright sales and sales-type leases.
Operating Loss. The operating loss for the first nine months of 2000 was
$232.9 million compared to an operating loss of $42.7 million in 1999. The
increased operating loss resulted from the higher depreciation and amortization,
which more than offset the slight improvement in EBITDA.
Interest Income and Expense. Interest income declined to $15.3 million for
the first nine months of 2000 compared to $20.8 million for the same period of
1999 due to a decrease in cash and cash equivalents. Interest expense increased
to $169.2 million for the first nine months of 2000 from $71.0 million for the
first nine months of 1999. The higher interest expense resulted from increased
borrowings and interest expense associated with liabilities for above-market
programming contracts assumed in the acquisitions of PRIMESTAR and USSB. Changes
in cash and cash equivalents and debt are discussed in more detail below under
"Liquidity and Capital Resources."
Other, Net. Other, net increased to an expense of $294.4 million for the
first nine months of 2000 from an expense of $96.3 million in the same period of
1999. The increased expense in 2000 resulted from the SkyPerfecTV! transaction,
discussed more fully in note 7 to the financial statements and below in
"Liquidity and Capital Resources--Acquisitions, Investments and Divestitures,"
and higher equity losses recorded for DIRECTV Japan that resulted from Hughes'
increased investment during the third quarter of 1999. The total loss related to
DIRECTV Japan for the first nine months of 2000, which includes the effects of
the SkyPerfecTV! transaction and Hughes' share of DIRECTV Japan's operating
losses, was about $258 million.
Income Taxes. Hughes recognized a tax benefit of $354.4 million for the first
nine months of 2000, compared to $59.7 million in the first nine months of 1999.
The 2000 tax benefit reflects the tax benefit associated with the write-off of
Hughes' historical investment in DIRECTV Japan and the higher pre- tax losses
compared to 1999.
Loss from Continuing Operations. Hughes reported a loss from continuing
operations of $295.1 million for the nine months ended September 30, 2000,
compared to $107.4 million for the same period of 1999.
Discontinued Operations. Revenues for the satellite systems manufacturing
businesses decreased to $1,571.1 million for the first nine months of 2000 from
revenues of $1,687.5 million for the same period of 1999. Revenues, excluding
intercompany transactions, were $1,179.6 million for the first nine months of
2000 and $1,356.1 million for the same period of 1999.
The satellite systems manufacturing businesses reported operating income of
$108.3 million for the first nine months of 2000 compared to operating income of
$73.0 million for the first nine months of 1999. Operating income, excluding
intercompany transactions, amounted to $80.2 million for the first nine months
of 2000, compared to operating income of $62.9 million for 1999. The 1999
results included a one-time pre-tax
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charge of $178.0 million before intercompany transactions and $125.0 million
after intercompany transactions, that resulted from increased development costs
and schedule delays on several new product lines, partially offset by a $154.6
million pre-tax gain related to the settlement of a patent infringement case.
Income from discontinued operations, net of taxes, was $50.3 million for the
first nine months of 2000, compared to $47.9 million in the same period of 1999.
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment revenues for the first nine months of 2000
increased 44.6% to $3,717.5 million from $2,571.4 million for the first nine
months of 1999. The Direct-To-Home Broadcast segment had negative EBITDA of
$40.9 million in the first nine months of 2000 compared with positive EBITDA of
$46.0 million in the first nine months of 1999. The operating loss for the
segment increased to $410.9 million in the first nine months of 2000 from an
operating loss of $158.2 million in the first nine months of 1999.
United States. The DIRECTV U.S. businesses were the biggest contributors to
the segment's revenue growth with revenues of $3,342 million for the first nine
months of 2000, a 45.1% increase over last year's revenues for the first nine
months of 1999 of $2,304 million. The large increase in revenues resulted
primarily from an increased number of high-power DIRECTV subscribers and added
revenues from the PRIMESTAR By DIRECTV and premium channel services. As of
September 30, 2000 the DIRECTV U.S. businesses, including the Primestar By
DIRECTV service, had approximately 9.0 million subscribers compared to about 7.7
million at September 30, 1999. DIRECTV U.S. added 1,307,000 net new subscribers
to its high-power DIRECTV service in the first nine months of 2000, a 19.8%
increase over the 1,091,000 net new subscribers added in the first nine months
of 1999. In addition, about 1 million subscribers were transitioned from the
PRIMESTAR By DIRECTV medium-power service to the high-power service during the
first nine months of 2000. Average monthly revenue per subscriber for the
high-power business was $58 for the nine months ended September 30, 2000 and $51
for the same period in the prior year. The increase in the average monthly
revenue per subscriber resulted primarily from the premium channel services
acquired in May 1999.
For the first nine months of 2000, the DIRECTV U.S. businesses reported
EBITDA of $93 million compared to EBITDA of $123 million for the first nine
months of 1999. The operating loss for the first nine months of 2000 for DIRECTV
U.S. was $195 million compared with $41 million for the same period in 1999. The
decrease in EBITDA resulted from increased losses due to subscriber acquisition
costs associated with the record subscriber growth. The increased operating loss
was principally due to the decrease in EBITDA discussed above and increased
amortization of goodwill and intangibles that resulted from the PRIMESTAR and
USSB acquisitions.
Latin America. Revenues for the Latin America DIRECTV businesses increased
73.8% to $372 million in the first nine months of 2000 from $214 million in the
first nine months of 1999. The increase in revenues reflects an increase in
subscribers and the consolidation of the GLB business. Subscribers grew to
1,136,000 at September 30, 2000, compared to 668,000 at September 30, 1999.
Latin America DIRECTV added 332,000 net new subscribers in the first nine months
of 2000, an 80.4% increase over the 184,000 net new subscribers added in the
first nine months of 1999. Average monthly programming revenue per subscriber
increased to $36 in the first nine months of 2000 from $35 in the first nine
months of 1999.
EBITDA was a negative $128 million for the first nine months of 2000 compared
to negative EDITDA of $64 million for the first nine months of 1999. The change
in EBITDA resulted primarily from additional losses from the consolidation of
GGM and GLB and higher marketing costs associated with the record subscriber
growth. The Latin America DIRECTV businesses incurred an operating loss of $212
million in the first nine months of 2000 compared to $104 million in the first
nine months of 1999. The increased operating loss resulted from the decline in
EBITDA and higher depreciation of fixed assets and amortization of goodwill that
resulted from the GGM and GLB transactions.
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Satellite Services Segment
Revenues for the Satellite Services segment in the first nine months of 2000
increased 35.7% to $820.7 million from $604.6 million in the same period in the
prior year. This increase was primarily due to increased revenues associated
with outright sales and sales-type lease transactions executed during the first
nine months of 2000. Revenues associated with outright sales and sales-type
leases of transponders were $237.2 million for the first nine months of 2000 as
compared to $17.9 million for the same period in the prior year. Revenues from
operating leases of transponders, satellite services and other were 71.1% of
total revenues for the first nine months of 2000 and decreased by 0.6% to $583.5
million from $586.7 million for the same period in the prior year.
EBITDA was $557.9 million for the first nine months of 2000, a 19.8% increase
over EBITDA of $465.9 million for the first nine months of 1999. The higher
EBITDA was due to the increased revenues discussed above. EBITDA margin for the
first nine months of 2000 was 68.0% compared to 77.1% in the same period in
1999. The decline in EBITDA margin was due to lower margins associated with
increased outright sales and sales-type lease transactions executed during the
first nine months of 2000 and higher operating costs resulting from PanAmSat's
continued satellite fleet expansion and costs associated with the NET-36
initiative. Excluding the outright sales and sales- type lease transactions,
EBITDA for the first nine months of 2000 was $425 million or 71% of
corresponding revenues. Operating profit was $319.1 million for the first nine
months of 2000, an increase of $60.2 million over the first nine months of 1999.
The increase in operating profit resulted from the increase in EBITDA partially
offset by higher depreciation expense related to additional satellites placed
into service since the third quarter of 1999.
Network Systems Segment
The Network Systems segment grew revenues for the first nine months of 2000
by 2.2% to $1,020.3 million, versus $998.2 million in the first nine months of
1999. The slight increase in revenues resulted from greater shipments of DIRECTV
receiver equipment. Shipments of DIRECTV receiver equipment totaled 2,363,000
units for the first nine months of 2000, compared to 1,415,000 units in the same
period last year. This increase in revenues was partially offset by lower
revenues from the discontinuation of certain narrowband wireless product lines.
The Network Systems segment reported EBITDA of $34.4 million for the first
nine months of 2000, compared to EBITDA of $80.5 million for the first nine
months of 1999. The Network Systems segment had an operating loss of $15.4
million in the first nine months of 2000, compared to an operating profit of
$23.1 million in the first nine months of 1999. The decrease in EBITDA and
operating profit resulted primarily from increased costs associated with the
upcoming launch of new DirecPC services, including AOL Plus Powered by DirecPC
and lower revenues due to the discontinuation of certain narrowband wireless
businesses, partially offset by the $11.0 million charge in 1999 that resulted
from the termination of the APMT contract.
Eliminations and Other
The elimination of revenues increased to $329.9 million in the first nine
months of 2000 from $311.9 million in the first nine months of 1999 due
primarily to increased purchases of receiver equipment from the Network Systems
segment by DIRECTV for the conversion of the PRIMESTAR By DIRECTV medium-power
subscribers to the high-power service.
Operating losses from "eliminations and other" decreased to $125.7 million in
the first nine months of 2000 from $166.5 million in the first nine months of
1999 due primarily to lower margins on intercompany sales.
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Liquidity and Capital Resources
Cash and cash equivalents were $178.4 million at September 30, 2000 compared
to $238.2 million at December 31, 1999.
Cash provided by operating activities was $316.0 million for the first nine
months of 2000, compared to cash used in operating activities of $106.1 million
for the first nine months of 1999. The increase in 2000 resulted from higher
income from continuing operations excluding non-cash adjustments, such as
depreciation and amortization, the loss resulting from the write-off of Hughes'
investment in DIRECTV Japan and deferred taxes, offset by increased working
capital requirements for continuing operations.
Cash used in investing activities was $1,462.2 million in the nine months
ended September 30, 2000, and $3,558.0 million for the same period in 1999. The
higher investing activities in 1999 resulted from increased investments in
companies, net of cash acquired, which included the acquisitions of PRIMESTAR,
USSB, the Tempo Satellite assets and GLB.
Cash provided by financing activities was $940.2 million in the first nine
months of 2000, compared to $2,658.1 million in the first nine months of 1999.
The decrease is primarily due to the 1999 net proceeds from the issuance of
preferred stock related to the AOL investment in Hughes.
Cash provided by discontinued operations was $146.2 million in the first nine
months of 2000, compared to cash used in discontinued operations of $177.8
million in the first nine months of 1999. The change in 2000 from 1999 resulted
primarily from decreased cash requirements for working capital.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at September 30, 2000 and December 31,
1999 was 1.24 and 1.46, respectively. Working capital decreased by $368.2
million to $847.7 million at September 30, 2000 from $1,215.9 million at
December 31, 1999.
Common Stock Dividend Policy and Use of Cash. Since the completion of the
recapitalization of Hughes in late 1997, the GM Board has not paid, and does not
currently intend to pay in the foreseeable future, cash dividends on its GM
Class H common stock. Similarly, since such time, Hughes has not paid dividends
on its common stock to GM and does not currently intend to do so in the
foreseeable future. Future Hughes earnings, if any, are expected to be retained
for the development of the businesses of Hughes. Hughes expects to have
significant cash requirements in the remainder of 2000 primarily due to capital
expenditures of as much as $800 million for satellites and property and planned
increases in subscriber acquisition costs for the Direct-To-Home businesses. In
addition, Hughes expects to increase its investment in affiliated companies,
primarily related to its international DIRECTV businesses. These cash
requirements are expected to be funded from a combination of cash provided from
operations, cash received upon the completion of the Boeing transaction and
amounts available under credit facilities, as needed.
Debt and Credit Facilities. Short-Term Borrowings. In October 1999, Hughes
issued $500.0 million ($499.9 million net of unamortized discount at September
30, 2000), of floating rate notes to a group of institutional investors in a
private placement. The notes bear interest at a variable rate which was 7.96% at
September 30, 2000. The notes were repaid on October 23, 2000.
Notes Payable. PanAmSat issued five, seven, ten and thirty-year notes
totaling $750.0 million in January 1998. The outstanding principal balances and
interest rates for the five-, seven-, ten- and thirty-year notes as of September
30, 2000 were $200 million at 6.00%, $275 million at 6.13%, $150 million at
6.38% and $125 million at 6.88%, respectively. Principal on the notes is payable
at maturity, while interest is payable semi-annually.
In July 1999, in connection with the early buy-out of satellite sale-
leasebacks, PanAmSat assumed $124.1 million of variable rate notes, of which
$67.7 million was outstanding at September 30, 2000. The interest rate on the
notes was 6.88% at September 30, 2000. The notes mature on various dates through
January 2, 2002.
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Revolving Credit Facilities. As of September 30, 2000, Hughes had three
unsecured revolving credit facilities totaling $1.6 billion, consisting of a
$750.0 million multi-year facility, a $350.0 million 364-day facility, and a
$500.0 million bridge facility. Borrowings under the facilities bear interest at
various rates, based on a spread to the then-prevailing London Interbank Offer
Rate. The multi-year credit facility provides for a commitment of $750.0 million
through December 5, 2002. The 364-day facility provides for a commitment of
$350.0 million through November 22, 2000. In October 2000, Hughes elected to
terminate the bridge facility, as provided for under the terms of the agreement.
These facilities also provide backup liquidity for Hughes' $1.1 billion
commercial paper program. Commercial paper outstanding under the program bears
interest at various rates, based on market rates prevailing at the time each
commercial paper instrument is placed. $750.0 million was outstanding under the
multi-year facility as of September 30, 2000, with borrowings bearing an
interest rate of 7.53%. $250.0 million was outstanding under the 364-day
facility as of September 30, 2000, bearing an interest rate of 7.55%. $339.4
million was outstanding under the commercial paper program, with borrowings
bearing interest at rates ranging from 7.00% to 7.47%. No amounts were
outstanding under the bridge facility at September 30, 2000.
PanAmSat maintains a $500.0 million multi-year revolving credit facility that
provides for short-term and long-term borrowings and a $500.0 million commercial
paper program. 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. No
amounts were outstanding under either the multi-year revolving credit facility
or the commercial paper program at September 30, 2000.
At September 30, 2000, Hughes' 75% owned subsidiary, SurFin, had a total of
$377.6 million outstanding under a $400.0 million unsecured revolving credit
facility expiring in June 2002. The weighted average interest rate on these
borrowings was 7.49% at September 30, 2000.
Other. At September 30, 2000, GLB had a total of $16.8 million outstanding
under variable rate notes. The weighted average interest rate of the notes was
11.90% at September 30, 2000. Principal is payable in varying amounts at
maturity in April and May 2002, with interest payable monthly.
Other short-term and long-term debt outstanding at September 30, 2000
included $39.4 million of notes bearing fixed rates of interest of 7.00% to
11.11%. Principal on the notes is payable in varying amounts at maturity from
November 2000 to April 2007.
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance of up to $2.0 billion of debt
securities from time to time. No amounts have been issued as of September 30,
2000.
Acquisitions, Investments and Divestitures. Acquisitions and Investments. On
July 28, 1999, GLA acquired GLB, the exclusive distributor of DIRECTV services
in Brazil, from Tevecap S.A. for approximately $114.0 million plus the
assumption of debt. In connection with the transaction, Tevecap also sold its
10% equity interest in GLA to Hughes and Darlene Investments, LLC, which
increased Hughes' ownership interest in GLA to 77.8%. As part of the
transaction, Hughes also increased its ownership interest in SurFin from 59.1%
to 75%. The total consideration paid in the transactions amounted to
approximately $101.1 million.
On May 20, 1999, Hughes acquired by merger all of the outstanding capital
stock of USSB, a provider of premium subscription television programming via the
digital broadcasting system that it shared with DIRECTV. The total consideration
of approximately $1.6 billion paid in July 1999, consisted of approximately $0.4
billion in cash and 67.8 million shares of GM Class H common stock.
On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3
million subscriber medium-power direct-to-home satellite business. The purchase
price consisted of $1.1 billion in cash and 14.7 million shares of GM Class H
common stock, for a total purchase price of $1.3 billion. As part of the
agreement to acquire PRIMESTAR, Hughes agreed to purchase the high-power
satellite assets, which consisted of an in-orbit
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satellite and a satellite which has not yet been launched, and related orbital
frequencies of Tempo Satellite Inc., a wholly owned subsidiary of TCI Satellite
Entertainment Inc. The purchase price for the Tempo Satellite assets consisted
of $500 million in cash, $150 million paid on March 10, 1999 and the remaining
$350 million paid on June 4, 1999.
In February 1999, Hughes acquired an additional ownership interest in GGM, a
Latin America local operating company which is the exclusive distributor of
DIRECTV in Mexico, from Grupo MVS, S.R.L. de C.V. Hughes' equity ownership
represents 49.0% of the voting equity and all of the non-voting equity of GGM.
In October 1998, Hughes acquired from Grupo MVS an additional 10.0% interest in
GLA, increasing Hughes' ownership interest to 70.0%. Hughes also acquired an
additional 19.8% interest in SurFin, a company providing financing of subscriber
receiver equipment for certain local operating companies located in Latin
America and Mexico, increasing Hughes' ownership percentage from 39.3% to 59.1%.
The aggregate purchase price for these transactions was $197.0 million in cash.
The financial information included herein reflects the acquisitions discussed
above from their respective dates of acquisition. The acquisitions were
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based on the estimated fair values at the date of acquisition. The
excess of the purchase price over the estimated fair values of the net assets
acquired has been recorded as goodwill.
Divestitures. On March 1, 2000, Hughes announced that the operations of
DIRECTV Japan would be discontinued and that its subscribers would have the
opportunity to migrate during 2000 to SkyPerfecTV!. In connection with the
agreement, Hughes acquired an approximate 6.6% interest in SkyPerfecTV!. As a
result of the transaction, in the first quarter of 2000 Hughes wrote off its
investment and accrued for the estimated costs to exit the DIRECTV Japan
business. The principal components of the accrued exit costs include estimated
subscriber migration and termination costs and costs to terminate certain
leases, programming agreements and other long-term contractual commitments.
These one-time charges were offset by the estimated fair value of the
SkyPerfecTV! interest acquired. The fair value of the SkyPerfecTV! interest
recorded was estimated based upon an independent appraisal. DIRECTV Japan ceased
broadcasting on September 30, 2000 and is completing the migration of customers
to SkyPerfectTV!.
On October 6, 2000, Hughes completed the sale of its satellite systems
manufacturing businesses to Boeing for $3.75 billion in cash, which will result
in a fourth quarter 2000 after-tax gain in excess of $1 billion. The purchase
price is subject to adjustment based upon the final closing net assets of the
satellite manufacturing businesses compared to a target amount, which could
require amounts to be paid to or received from Boeing. In October of 2000,
Hughes utilized a portion of the proceeds to repay about $1.8 billion of
borrowings, which represented all amounts outstanding on the floating rate
notes, the commercial paper program and 364-day and multi-year revolving credit
facilities.
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. In June 2000, the
FASB issued SFAS No. 138, which amends certain provisions of SFAS No. 133 to
clarify four areas causing difficulties in implementation. The amendment
included expanding the normal purchase and sale exemption for supply contracts,
permitting the offsetting of certain intercompany foreign currency derivatives
and thus reducing the number of third party derivatives, permitting hedge
accounting for foreign-currency denominated assets and liabilities, and
redefining interest rate risk to reduce sources of ineffectiveness. Hughes has
appointed a team to implement SFAS No. 133. This team has been implementing
SFAS No. 133 policies and procedures for identifying and tracking derivatives,
educating both financial and non-financial personnel, inventorying embedded
derivatives and addressing various other SFAS No. 133 related issues. Hughes
will adopt SFAS No. 133 and the corresponding amendments under SFAS No. 138 on
January 1, 2001. Hughes is currently determining the impact of SFAS No. 133 on
Hughes' results of operations and financial position. This statement should
have no impact on Hughes' consolidated cash flows.
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In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. This SAB provides guidance in
applying generally accepted accounting principles to revenue recognition in
financial statements. Hughes will comply with SAB 101 by the fourth quarter of
2000, as required. The adoption of SAB No. 101 is not expected to have a
material impact on Hughes' financial statements.
Security Ratings
Hughes' current long-term credit ratings are Baa2 and BBB-, with its short-
term credit and commercial paper ratings at P-2 and A-3, as rated by Moody's
Investor Services ("Moody's") and Standard and Poor's Rating Services ("S&P"),
respectively. On September 21, 2000, subsequent to the announcement that GM was
exploring strategic alternatives involving Hughes, S&P re-affirmed its BBB- and
A-3 debt ratings for Hughes and revised its outlook from positive to developing.
Previously, in January 2000, subsequent to the announced sale of Hughes'
satellite systems operations to The Boeing Company, Moody's and S&P each
affirmed their respective debt ratings for Hughes. At that time, Moody's
maintained its negative outlook but ended its review for possible downgrade
while S&P revised its outlook to positive from negative.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations as they come due. With respect
to Moody's, the Baa2 rating for senior debt indicates adequate likelihood of
interest and principal payment and principal security. The P-2 commercial paper
rating, the second highest rating available, indicates that the issuer has a
strong ability for repayment relative to other issuers. For S&P, the BBB- rating
indicates the issuer has adequate capacity to pay interest and repay principal.
In general, lower ratings result in higher borrowing costs. A security rating is
not a recommendation to buy, sell, or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating organization. Each
rating should be evaluated independently of any other rating.
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